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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
Commission file number 0-10699
Hudson United Bancorp
(Exact name of registrant as specified in its Charter)
New Jersey 22-2405746
(State or other jurisdiction of Incorporation I.R.S. Employer Identification
or organization No.
1000 MacArthur Blvd.
Mahwah, New Jersey 07430
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(201)236-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value Series B Preferred Stock
(Title of Class) (Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 27, 2000 was $1,029,830,711.
The number of shares of Registrant's Common Stock, no par value, outstanding
as of March 27, 2000 was 51,652,951.
Hudson United Bancorp
Form l0-K Annual Report
For The Fiscal Year Ended December 31, 1999
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Hudson United Bancorp ("HUB" or "Registrant" or the "Company") is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (the
"Bank Holding Company Act"). The Company was organized under the laws of New
Jersey in 1982 by Hudson United Bank ("Hudson United" or the "Bank") for the
purpose of creating a bank holding company for Hudson United. The Company
directly owns Hudson United, HUBCO Capital Trust I, HUBCO Capital Trust II, JBI
Capital Trust I, Jefferson Delaware Inc., and AMFDCM, Inc. In March 1999, the
former Lafayette American Bank and Bank of the Hudson were merged into Hudson
United. In addition, the shareholders of the Company on April 21, 1999 approved
an amendment to the certificate of incorporation to change the name of the
Company from HUBCO, Inc. to Hudson United Bancorp. The Company is also the
indirect owner, through Hudson United, of 19 subsidiaries.
Merger Agreement with Dime Bancorp, Inc.
HUB and Dime Bancorp, Inc. ("Dime") have entered into an Agreement and Plan of
Merger, dated as of September 15, 1999, and amended and restated on December 27,
1999. The agreement provides for HUB and Dime to merge, with Dime as the
surviving corporation changing its name to Dime United Bancorp, Inc. ("Dime
United"). In the merger, each share of HUB stock is to be converted into one
share of Dime United stock, and each share of Dime stock is to be converted into
0.60255 of a share of Dime United stock. Based on that exchange ratio,
immediately after the merger, Dime shareholders would own 56% of the outstanding
Dime United stock and HUB shareholders would own 44%. The merger is structured
generally to be tax-free to both Dime and Hudson shareholders.
Completion of the merger is subject to a number of conditions, many of which are
outside the control of HUB. Among the conditions which have not yet been met are
the receipt of bank regulatory approval and approval of the merger agreement by
HUB and Dime shareholders. For HUB shareholders to approve the merger, a
majority of votes cast at a special meeting by holders of HUB stock outstanding
on the record date for that meeting must be voted in favor of the merger
agreement. For Dime shareholders to approve the merger, a majority of the shares
of Dime stock outstanding on the record date for the Dime special meeting must
be voted in favor of the merger agreement.
On March 5, 2000, North Fork Bancorporation ("North Fork") announced that it was
commencing a hostile, unsolicited bid to acquire Dime. On March 9, 2000, Dime
and HUB jointly announced that they would delay their special shareholder
meetings to vote on the merger from March 15 to March 24, 2000, in order to
provide additional time for dissemination to shareholders of information about
recent developments. On March 21, 2000, Dime and HUB jointly announced that they
would further delay their special shareholder meetings. HUB announced that it
would adjourn its meeting until Thursday, May 18, 2000 and that shareholders of
record as of February 7, 2000 would be eligible to vote at the meeting. Dime
announced that it would postpone its meeting until Wednesday, May 17, 2000 and
that shareholders of record as of March 30, 2000 would be eligible to vote at
the meeting. The actions that have been taken by North Fork since March 5, 2000
may make it difficult for Dime to obtain the requisite shareholder approval that
is needed under Delaware law for Dime to consummate the transaction with HUB as
contemplated by the merger agreement.
HUB and Dime have both reiterated their commitment to the proposed merger. If
the merger agreement with Dime is terminated, HUB expects to continue with its
acquisition strategy described below. HUB believes that the Company's adherence
to, and successful implementation of, this strategy have been among the primary
reasons for the increase in shareholder value which HUB experienced during the
past decade.
Stock Option Granted by Dime to HUB
As an inducement for HUB to enter into the merger agreement, Dime agreed
to grant HUB an option to purchase shares of Dime stock. As explained below,
there has been an initial triggering event under that option. The option
agreement was filed as an annex to our February 9th joint proxy
statement-prospectus, and the following description is qualified by reference to
the full agreement. Under the option, HUB can purchase up to 22,271,682 shares
of Dime stock. Although these numbers are subject to adjustment in certain
cases, including the issuance of additional shares, they will never exceed 19.9%
of the number of shares of Dime stock outstanding immediately before exercise of
the option. The exercise price of the option is $17.75 per share of Dime stock,
but the per share option price is subject to adjustment in certain cases,
including stock dividends, recapitalizations and other changes in
capitalization. The exercise price was determined by using the closing price for
Dime stock on September 14, 1999, the day before the merger was announced.
HUB issued a substantially identical option to Dime, which if it were to
be triggered would allow Dime to purchase up to 8,383,253 shares of HUB common
stock on similar terms, and with an exercise price of $29 1/4.
Exercise and Expiration. HUB can exercise its option if both an initial
triggering event and a subsequent triggering event occur prior to the occurrence
of an exercise termination event, as these terms are described below. The
purchase of any shares of Dime stock pursuant to the options is subject to
compliance with applicable law and cannot be made if HUB is in material breach
of obligations it has undertaken in the merger agreement.
The option agreement describes a number of different events as initial
triggering events. Generally, an initial triggering event will occur when Dime
enters into, proposes to enter into, or is the subject of an acquisition
transaction or a proposed acquisition transaction. North Fork's filing of its
official offer documents constituted an initial triggering event.
The stock option agreement generally defines the term subsequent
triggering event to mean any of the following events or transactions:
o the acquisition by a third party of beneficial ownership of 25% or more of
the outstanding common stock of Dime or
o Dime or any of its subsidiaries, without the prior written consent of HUB,
enters into an agreement to engage in certain types of acquisition
transactions with a third party, or the board of directors of Dime
recommends that its stockholders approve or accept any acquisition
transaction, other than the merger.
The stock option agreement defines the term exercise termination event to mean
any of the following:
o completion of the Dime-HUB merger;
o termination of the merger agreement in accordance with its terms if before
an initial triggering event, provided that this would not include a
termination of the merger agreement by HUB based on a willful breach by
Dime of a representation, warranty, covenant or other agreement contained
in the merger agreement; or
o the passage of 18 months, subject to extension in order to obtain required
regulatory approvals, after termination of the merger agreement if the
termination follows the occurrence of an initial triggering event or is a
termination of the merger agreement by HUB based on a willful breach by
Dime of a representation, warranty, covenant or other agreement contained
in the merger agreement.
Under these circumstances, an exercise termination event will occur either
upon consummation of the HUB-Dime merger or 18 months after termination of the
merger agreement, subject to extension to obtain required regulatory approval.
The option may be exercised in whole or in part within six months
following the subsequent triggering event. The right to exercise the option and
certain other rights under the stock option agreement is subject to an extension
in order to obtain required regulatory approvals and comply with applicable
regulatory waiting periods and to avoid liability under the short-swing trading
restrictions contained in Section 16(b) of the Securities Exchange Act. The
option price and the number of shares issuable under the option are subject to
adjustment in the event of specified changes in the capital stock of Dime.
Nevertheless, HUB may not exercise the option if it is in material breach of any
of certain covenants or agreements under the merger agreement.
Rights of the Grantee of the Option. At any time after a repurchase event,
as this term is described below, upon the request of HUB, Dime may be required
to repurchase the option and all or any part of the shares issued under the
option. The repurchase of the option will be at a price per share equal to the
amount by which the option repurchase price, as that term is defined in the
stock option agreement, exceeds the option price. The term repurchase event is
defined to mean:
o the acquisition by any third party of beneficial ownership of 50% or
more of the outstanding shares of Dime's common stock or
o the consummation of certain other acquisition transactions.
The stock option agreement also provides that HUB may, at any time within
90 days after a repurchase event, surrender the option and any shares issued
under the option for a cash fee equal to $50 million, adjusted if there have
been purchases of stock under the option and gains on sales of stock purchased
under the option. This cash fee establishes an effective minimum value of the
option. The actual value of the option to HUB may substantially exceed $50
million.
If prior to an exercise termination event Dime enters into certain
transactions in which it is not the surviving corporation, certain fundamental
changes in its capital stock occur, or Dime sells all or substantially all of
its or its significant subsidiaries' assets, the option will be converted into
or exchangeable for a substitute option, at HUB's election, of:
o the continuing or surviving person of a consolidation or merger,
o the acquiring person in a plan of exchange in which Dime is acquired,
o the issuer in a merger or plan of exchange in which Dime is the
acquiring person,
o the transferee of all or substantially all of the assets of Dime or its
significant subsidiary, or
o any person that controls any of these entities, as the case may be.
The substitute option will have the same terms and conditions as the
original option. However, if the terms of the substitute option cannot be the
same as those of the option by law, the terms of the substitute option will be
as similar as possible and at least as advantageous to the grantee.
Recent Growth of Hudson United Bancorp
The Company's acquisition philosophy is to seek in-market or contiguous market
opportunities which can be accomplished with little or no dilution to earnings.
From October 1990 through December 1999, the Company has acquired 31
institutions. During this time the company has grown from total assets of $550
million to $9.7 billion at December 31, 1999 and has expanded its branch network
from 15 branches to over 200 branches. Over $700 million of these assets and
liabilities were acquired through government assisted transactions which allowed
the Company to reprice deposits, review loans and purchase only those loans
which met its underwriting criteria. The balance of the acquisitions were
accomplished in traditional negotiated transactions.
The Company consummated six acquisitions in 1999. On March 26, 1999, the Company
completed its purchase of $151 million in deposits and a retail branch office in
Hartford, Connecticut from First International Bank.
On May 20, 1999, the Company acquired Little Falls Bancorp, Inc. ("LFB") which
had assets of approximately $341 million and operated six offices in the
Hunterdon and Passaic counties of New Jersey.
On October 22, 1999, the Company acquired the assets of Lyon Credit Corporation,
a $350 million asset finance company and subsidiary of Credit Lyonnais Americas.
On December 1, 1999, the Company completed its purchase of loans (approximately
$148 million) and other financial assets, as well as assumed the deposit
liabilities (approximately $112 million) of Advest Bank and Trust. In addition,
a strategic partnership with Advest, Inc. was consummated on October 1, 1999, in
which Hudson United Bank became the exclusive provider of banking products and
services to the clients of Advest, Inc.
The above 1999 acquisitions were accounted for under the purchase method of
accounting.
On November 30, 1999, the Company completed its acquisition of JeffBanks, Inc.
("Jeff"), a $1.8 billion bank holding company with 32 branches located
throughout the greater Philadelphia area of Pennsylvania and Southern New
Jersey.
On December 1, 1999, the Company completed its acquisition of Southern Jersey
Bancorp ("SJB"), a $425 million asset institution with 17 branches in Southern
New Jersey.
The above 1999 acquisitions were accounted for using the pooling-of-interests
method of accounting.
Summary of Acquisitions
The following chart summarizes the acquisitions undertaken by the Company since
October 1990. The amounts shown as "Purchase Price" represent either cash paid
or the market value of securities issued by Hudson United Bancorp to the
shareholders or owners of the acquired entity:
PURCHASE DEPOSITS LOANS
PRICE ASSUMED PURCHASED BRANCHES
INSTITUTION (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) ACQUIRED
- -----------------------------------------------------------------------------------------------------------------
Mountain Ridge State Bank $ 0.3 $ 47 $ 12 1
Meadowlands National Bank 0.4 36 22 3
Center Savings and Loan 0.1 90 79 1
Irving Federal Savings and Loan 0.1 160 62 5
Broadway Bank and Trust 3.4 346 10 8
Pilgrim State Bank 6.0 123 47 6
Polifly Federal Savings and Loan 6.2 105 1 4
Washington Savings Bank 40.5 238 169 8
Shoppers Charge Accounts 16.3 -- 56 --
Jefferson National Bank 9.7 85 42 4
Urban National Bank 38.22 204 90 9
Growth Financial Corp 25.6 110 102 3
CrossLand Federal Savings Branches 3.0 60 1 3
Lafayette American Bank & Trust 120.0 647 548 19
Hometown Bancorporation, Inc. 31.6 162 99 2
UST Bank, CT 13.7 95 70 4
Westport Bancorp, Inc. 67.8 259 183 7
The Bank of Southington 26.7 122 85 2
Security National Bank & Trust 11.0 77 48 4
Poughkeepsie Financial 136.0 611 648 16
MSB Bancorp 115.0 686 375 16
First Union Branches 32.0 320 1 23
Community Financial 29.6 137 87 8
Dime Financial 201.0 817 374 11
IBS Financial 227.0 560 218 10
FNB Branch Purchase 9.1 151 -- 1
Little Falls Bancorp, Inc. 55.0 234 153 6
Lyon Credit Corporation not disclosed -- 350 --
Advest Bank & Trust Assets/Liabilities 2.0 112 148 --
JeffBanks, Inc. 371.0 1,380 1,429 32
Southern Jersey Bancorp 54.0 382 213 17
The Company's profitability and its financial condition may be significantly
impacted by its acquisition strategy and by the consummation of its recent
acquisitions.
The Company intends to continue to seek acquisition opportunities. There can be
no assurance that the Company will be successful in acquiring additional
financial institutions or, if additional financial institutions are acquired,
that these acquisitions will enhance the profitability of the Company.
On November 8, 1993, the Company's Board of Directors approved a stock
repurchase plan and authorized management to repurchase up to 10% of its
outstanding common stock per year. There is no assurance that the Company will
purchase the full amount authorized in any year. The acquired shares are to be
held in treasury and to be used for stock option and other employee benefit
plans, stock dividends or in connection with the issuance of common stock in
pending or future acquisitions. During 1999, the Company purchased 3.7 million
shares at an aggregate cost of $121.4 million. During 1999, 3.7 million shares
were reissued for the stock dividend, stock options, other employee benefit
plans and acquisitions.
Other Subsidiaries
In 1983, HUB formed a directly owned subsidiary called HUB Financial Services,
Inc., which was a wholly owned data processing subsidiary. In 1995, HUB sold 50%
of the stock in HUB Financial Services, Inc. to United National Bank. HUB
simultaneously made a capital contribution of the remaining 50% to Hudson United
Bank. The joint venture was operated pursuant to the provisions of the Bank
Service Corporation Act. Simultaneously with the sale of 50% to United National
Bank, the name of HUB Financial Services, Inc. was changed to United Financial
Services, Inc.("UFS"). UFS ceased to provide data processing and imaged check
processing services to both of its owner banks in October 1999. UFS is in the
process of dissolution.
In 1997, Hudson United established a directly owned subsidiary called HUB
Mortgage Investments, Inc. At December 31, 1999, this wholly owned subsidiary
had $130 million of mortgage loans and $692 million in mortgage-related
investment securities and operates as a real estate investment trust.
As of December 31, 1999, $37 million and $109 million of Hudson United's
investment portfolio is being managed by Hendrick Hudson Corp. of New Jersey and
F&M Investment Company, respectively. Hendrick Hudson Corp. of New Jersey was
established in 1987 and F&M Investment Company was established in 1984.
In 1998, three additional investment companies were established - NJ Investments
of Delaware, Inc., LAB Investment Corp. of Delaware, Inc., and BOTH Investments
of Delaware, Inc. In 1999, in conjunction with the merger of Lafayette American
Bank and Bank of the Hudson into Hudson United, LAB Investment Corp. of
Delaware, Inc. and BOTH Investments of Delaware, Inc. were merged into NJ
Investments of Delaware, Inc. As of December 31, 1999, $1.2 billion of Hudson
United's investment portfolio was being managed by NJ Investments of Delaware,
Inc.
In 1995, the Company established a directly owned subsidiary called HUB
Investment Services, Inc. This wholly owned subsidiary provided brokerage
services through an agreement with BFP Financial Partners, Inc. which is a
subsidiary of Legg Mason, Inc. In August 1997, the Company made a capital
contribution of this subsidiary to Hudson United. In February of 1998, the
agreement with BFP Financial Partners, Inc. was terminated. The subsidiary
is currently inactive.
Hudson United owns 11 real estate holding companies that engage in
various aspects of the real estate business. They are: Fair Street
Associates, Inc., Markgard Realty, Inc., Maramet Apartments of West
Virginia, Inc., Plural Realty of Chappaqua, Inc., Riverdale Timber Ridge,
Inc., Plural Realty, Inc. Posabk, Inc., PSB Associates, PSB Building
Corp., Atlantic Company, Inc. and Woulf Asset Holdings.
Hudson United owns Hudson Trader Brokerage Services, which offers a full range
of investment, and insurance products and services.
Employee Relations
Hudson United Bank enjoys a good relationship with its employees and is
currently not party to any collective bargaining agreements.
Regulatory Matters
The banking industry is highly regulated. Statutory and regulatory controls
increase a bank holding company's cost of doing business and limit the options
of its management to deploy assets and maximize income. Proposals to change the
laws and regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on HUB cannot be determined at this time. The following discussion is
not intended to be a complete list of all the activities regulated by the
banking laws or of the impact of such laws and regulations on HUB or its banks.
It is intended only to briefly summarize some material provisions.
CAPITAL ADEQUACY GUIDELINES AND DEPOSIT INSURANCE
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
required each federal banking agency to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of non-traditional activities. In
addition, pursuant to FDICIA, each federal banking agency has promulgated
regulations, specifying the levels at which a financial institution would be
considered "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", or "critically undercapitalized", and to take
certain mandatory and discretionary supervisory actions based on the capital
level of the institution.
The regulations implementing these provisions of FDICIA provide that an
institution will be classified as "well capitalized" if it (i) has a total
risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based
capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at
least 5.0 percent, and (iv) meets certain other requirements. An institution
will be classified as "adequately capitalized" if it (i) has a total risk-based
capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital
ratio of at least 4.0 percent, (iii) has a Tier 1 leverage ratio of (a) at least
4.0 percent, or (b) at least 3.0 percent if the institution was rated 1 in its
most recent examination, and (iv) does not meet the definition of "well
capitalized". An institution will be classified as
"undercapitalized" if it (i)has a total risk-based capital ratio of less than
8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0
percent, or (iii) has a Tier 1 leverage ratio of (a) less than 4.0 percent, or
(b) less than 3.0 percent if the institution was rated 1 in its most recent
examination. An institution will be classified as "significantly
undercapitalized" if it (i) has a total risk-based capital ratio of less than
6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 3.0
percent, or (iii) has a Tier 1 leverage ratio of less than 3.0 percent. An
institution will be classified as "critically undercapitalized" if it has a
tangible equity to total assets ratio that is equal to or less than 2.0 percent.
An insured depository institution may be deemed to be in a lower capitalization
category if it receives an unsatisfactory examination.
As of December 31, 1999, the Bank's capital ratios exceed the requirements to be
considered a well capitalized institution under the FDIC regulations.
Bank holding companies must comply with the Federal Reserve Board's risk-based
capital guidelines. Under the guidelines, risk weighted assets are calculated by
assigning assets and certain off-balance sheet items to broad risk categories.
The total dollar value of each category is then weighted by the level of risk
associated with that category. A minimum risk-based capital to risk based assets
ratio of 8.00% must be attained. At least one half of an institution's total
risk-based capital must consist of Tier 1 capital, and the balance may consist
of Tier 2, or supplemental capital. Tier 1 capital consists primarily of common
stockholders' equity along with preferred or convertible preferred stock,
qualifying trust preferred securities, minus goodwill. Tier 2 capital consists
of an institution's allowance for loan and lease losses, subject to limitation,
hybrid capital instruments and certain subordinated debt. The allowance for loan
and lease losses which is considered Tier 2 capital is limited to 1.25% of an
institution's risk-based assets. As of December 31, 1999, HUB's total risk-based
capital ratio was 12.0%, consisting of a Tier 1 ratio of 8.7% and a Tier 2 ratio
of 3.3%. Both ratios exceed the requirements under these regulations.
In addition, the Federal Reserve Board has promulgated a leverage capital
standard, with which bank holding companies must comply. Bank holding companies
must maintain a minimum Tier 1 capital to total assets ratio of 3%. However,
institutions which are not among the most highly rated by federal regulators
must maintain a ratio 100-to-200 basis points above the 3% minimum. As of
December 31, 1999, HUB had a leverage capital ratio of 5.7%. HUB and its
subsidiary bank is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on HUB's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, HUB and its
subsidiary bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the regulators as
to components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require banks to maintain
minimum amounts and ratios of total and Tier 1 capital (as defined in the
regulations) to risk weighted assets (as defined) and of Tier 1 capital (as
defined) to
average assets (as defined). Management believes, as of December 31, 1999, that
HUB and its subsidiary bank meet all capital adequacy requirements to which they
are subject.
Hudson United is a member of the Bank Insurance Fund ("BIF") of the FDIC. The
FDIC also maintains another insurance fund, the Savings Association Insurance
Fund ("SAIF"), which primarily covers savings and loan association deposits but
also covers deposits that are acquired by a BIF-insured institution from a
savings and loan association ("Oakar deposits"). Hudson United has approximately
$112 million of deposits at December 31, 1999 with respect to which Hudson
United pays SAIF insurance premiums.
The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act")
included the Deposit Insurance Funds Act of 1996 (the "Funds Act") under which
the FDIC was required to impose a special assessment on SAIF assessable deposits
to recapitalize the SAIF. Under the Funds Act, the FDIC will also charge
assessments for SAIF and BIF deposits in a 5 to 1 ratio to pay Financing
Corporation ("FICO") bonds until January 1, 2000, at which time the assessment
will be equal. A FICO rate of approximately 1.29 basis points will be charged on
BIF deposits, and approximately 6.44 basis points will be charged on SAIF
deposits. The 1996 Act instituted a number of other regulatory relief
provisions.
RESTRICTIONS ON DIVIDEND PAYMENTS, LOANS, OR ADVANCES
The holders of HUB Common Stock are entitled to receive dividends, when, and if
declared by the Board of Directors of HUB out of funds legally available,
subject to the preferential dividend rights of any preferred stock that may be
outstanding from time to time.
The only statutory limitation is that such dividends may not be paid when HUB is
insolvent. Because funds for the payment of dividends by HUB come primarily from
the earnings of HUB's bank subsidiary, as a practical matter, restrictions on
the ability of Hudson United to pay dividends act as restrictions on the amount
of funds available for the payment of dividends by HUB.
Certain restrictions exist regarding the ability of Hudson United to transfer
funds to HUB in the form of cash dividends, loans or advances. New Jersey state
banking regulations allow for the payment of dividends in any amount provided
that capital stock will be unimpaired and there
remains an additional amount ofpaid-in capital of not less than 50 percent of
the capital stock amount. As of December 31, 1999, $614.0 million was available
for distribution to HUB from Hudson United.
HUB is also subject to Federal Reserve Bank ("FRB") policies which may, in
certain circumstances, limit its ability to pay dividends. The FRB policies
require, among other things, that a bank holding company maintain a minimum
capital base. The FRB would most likely seek to prohibit any dividend payment
which would reduce a holding company's capital below these minimum amounts.
Under Federal Reserve regulations, Hudson United is limited as to the amounts it
may loan to its affiliates, including HUB. All such loans are required to be
collateralized by specific obligations.
HOLDING COMPANY SUPERVISION
Under the Bank Holding Company Act, HUB may not acquire directly or indirectly
more than 5 percent of the voting shares of, or substantially all of the assets
of, any bank without the prior approval of the Federal Reserve Board.
In general, the Federal Reserve Board, under its regulations and the Bank
Holding Company Act, regulates the activities of bank holding companies and
non-bank subsidiaries of banks. The regulation of the activities of banks,
including bank subsidiaries of bank holding companies, generally has been left
to the authority of the supervisory government agency, which for Hudson United
is the FDIC and the New Jersey Department of Banking and Insurance (the
"NJDOBI").
INTERSTATE BANKING AUTHORITY
The Riegle-Neale Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking and Branching Act") significantly changed interstate banking
rules. Pursuant to the Interstate Banking and Branching Act, a bank holding
company is able to acquire banks in states other than its home state regardless
of applicable state law.
The Interstate Banking and Branching Act also authorizes banks to merge across
state lines, thereby creating interstate branches. Under such legislation, each
state has the opportunity to "opt out" of this provision, thereby prohibiting
interstate branching in such states. Furthermore, a state may "opt in" with
respect to de novo branching, thereby permitting a bank to open new branches in
a state in which the bank does not already have a branch. Without de novo
branching, an out-of-state bank can enter the state only by acquiring an
existing bank.
RECENT LEGISLATION
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will:
* allow bank holding companies meeting management, capital and Community
Reinvestment Act Standards to engage in a substantially broader range of
nonbanking activities than currently is permissible, including insurance
underwriting and making merchant banking investments in commercial and
financial companies; if a bank holding company elects to become a financial
holding company, it files a certification, effective in 30 days, and
thereafter may engage in certain financial activities without further
approvals;
* allow insurers and other financial service companies to acquire banks;
* remove various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
* establish the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
This part of the Modernization Act is effective March 13, 2000.
On January 19, 2000, the FRB adopted an interim rule allowing bank holding
companies to submit certifications by February 15 to become financial holding
companies on March 13, 2000. The FRB also provided regulations on procedures
which would be used against financial holding companies which have depository
institutions which fall out of compliance with the management or capital
criteria. Only financial holding companies can own insurance companies and
engage in merchant banking.
The Modernization Act also modifies other current financial laws, including laws
related to financial privacy and community reinvestment.
Additional proposals to change the laws and regulations governing the banking
and financial services industry are frequently introduced in Congress, in the
state legislatures and before the various bank regulatory agencies. The
likelihood and timing of any such changes and the impact such changes might have
on HUB cannot be determined at this time.
CROSS GUARANTEE PROVISIONS AND SOURCE OF STRENGTH DOCTRINE
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (I) the default of a commonly controlled FDIC-insured depository
institution in danger of default. "Default" is defined generally as the
appointment of a conservatory or receiver and "in danger of default" is defined
generally as the existence of certain conditions, including a failure to meet
minimum capital requirements, indicative that a "default" is likely to occur in
the absence of regulatory assistance. These provisions have commonly been
referred to as FIRREA's "cross guarantee" provisions. Further, under FIRREA the
failure to meet capital guidelines could subject a banking institution to a
variety
of enforcement remedies available to federal regulatory authorities, including
the termination of deposit insurance by the FDIC.
According to Federal Reserve Board policy, bank holding companies are expected
to act as a source of financial strength to each subsidiary bank and to commit
resources to support each such subsidiary. This support may be required at times
when a bank holding company may not be able to provide such support.
Furthermore, in the event of a loss suffered or anticipated by the FDIC - either
as a result of default of a bank subsidiary of the Company or related to FDIC
assistance provided to the subsidiary in danger of default - the other bank
subsidiaries of the Company may be assessed for the FDIC's loss, subject to
certain exceptions.
(b) Industry Segments
The Registrant has one industry segment -- commercial banking.
(c) Narrative Description of Business
HUB exists primarily to hold the stock of its subsidiaries. During most of 1999,
HUB had one directly-owned subsidiary--Hudson United. In addition, HUB, through
Hudson United, indirectly owns 19 additional subsidiaries. The historical growth
of, and regulations affecting, each of HUB's direct and indirect subsidiaries is
described in Item 1(a) above, which is incorporated herein by reference.
HUB is a legal entity separate from its subsidiaries. The stock of Hudson United
is HUB's principal asset. Dividends from Hudson United are the primary source of
income for HUB. As explained above in Item 1(a), legal and regulatory
limitations are imposed on the amount of dividends that may be paid by the Bank
to HUB.
Hudson United Bancorp and Hudson United Bank currently maintain their executive
offices in Mahwah, New Jersey. As of December 31, 1999, Hudson had 112 branch
offices in New Jersey, 26 branch offices in Pennsylvania, 42 branch offices in
Connecticut, and 33 branch offices in New York state. HUB owns a 64,350 square
foot building in Mahwah, New Jersey which houses the above-mentioned executive
offices and Hudson United's operations center.
At December 31, 1999, HUB, through its subsidiaries, had total deposits of $6.5
billion, total loans of $5.7 billion and total assets of $9.7 billion. HUB
ranked 2nd among commercial banks and bank holding companies headquartered in
New Jersey in terms of asset size.
Hudson United is a full service commercial bank and offers the services
generally performed by commercial banks of similar size and character, including
imaged checking, savings, and time deposit accounts, 24-hour telephone banking,
PC banking, trust services, cash management services, safe deposit boxes,
insurance, stock, bond, and mutual fund sales, secured and unsecured personal
and commercial loans, residential and commercial real estate loans, and
international services including import and export needs, foreign currency
purchases and letters
of credit. The Bank's deposit accounts are competitive and include money market
accounts and a variety of interest-bearing transaction accounts. In the lending
area, the Bank primarily engages in consumer lending, commercial lending, real
estate lending, and credit card programs.
Hudson United offers a variety of trust services. At December 31, 1999, Hudson
United's Trust Department had approximately $821.8 million of assets under
management or in its custodial control.
There are numerous commercial banks headquartered in New Jersey, Connecticut,
Pennsylvania and New York, which compete in the market areas serviced by the
Company. In addition, large out-of-state banks compete for the business of
residents and businesses located in the Company's primary market. A number of
other depository institutions compete for the business of individuals and
commercial enterprises including savings banks, savings and loan associations,
brokerage houses, financial subsidiaries of other companies and credit unions.
Other financial institutions, such as mutual funds, consumer finance companies,
factoring companies, and insurance companies, also compete with the Company for
both loans and deposits. Competition for depositors' funds, for creditworthy
loan customers and for trust business is intense.
Despite intense competition with institutions commanding greater financial
resources, the Bank has been able to attract deposits and extend loans. While
the Bank, by regulation, may not exceed fifteen percent of its capital in a loan
to a single borrower, the Bank has a "house limit" significantly below that
level.
Hudson United has focused on becoming an integral part of the community it
serves. Officers and employees are incented to meet the needs of their customers
and to meet the needs of the local communities served.
Hudson United Bancorp had 2,372 full-time equivalent employees as of December
31, 1999.
(d) Financial Information about foreign and
domestic operations and export sales.
Not Applicable
ITEM 2. PROPERTIES
The corporate headquarters of Hudson United Bancorp and Hudson United Bank are
located in a three story facility in Mahwah, New Jersey. The building is
approximately 64,350 square feet and houses the executive offices of the Company
and its subsidiaries. Hudson United occupies 213 branch offices, of which 107
are owned and 106 are leased.
ITEM 3. LEGAL PROCEEDINGS
On March 6, 2000, North Fork Bancorporation, Inc. filed a lawsuit in the
Delaware Court of Chancery against Dime Bancorp, Inc. ("Dime"), Dime's Board of
Directors and HUB. The complaint alleges that Dime's Board breached its
fiduciary duties, and that HUB participated in Dime Board's breach by insisting
upon and agreeing to certain provisions in the Merger Agreement. The complaint
also challenges a number of provisions in the Merger Agreement and seeks,
amongst other things, to invalidate these provisions. These provisions include:
o Dime's agreement not to engage in any discussions with, or provide
confidential information to, any person making an offer to merge with or
acquire Dime, until the completion of the merger with HUB;
o Dime's Board's agreement to recommend that Dime's stockholders adopt the
Dime-HUB Merger Agreement; and
o Dime's agreement not to terminate the Dime-HUB Merger Agreement before
June 30, 2000 even if Dime's stockholders fail to adopt its terms.
Dime, Dime's Board of Directors and HUB are the subject of at least 14
putative class action lawsuits filed on or after March 6, 2000, by Dime's
stockholders (twelve filed in the Delaware Court of Chancery, one filed in the
Supreme Court of the State of New York, County of Queens, and one filed in the
Supreme Court of New York , County of New York). These class actions allege,
among other things, that:
o HUB has knowingly aided and abetted the breaches of fiduciary duty
committed by the Dime's Board to the detriment of Dime's shareholders,
o HUB is a party to and beneficiary of an unenforceable Stock Option
Agreement; and
o HUB and its shareholders realize an unjust benefit absent the relief
sought by the Plaintiffs in the lawsuits.
The Plaintiffs in the class action lawsuits are seeking, among other
things, the following relief:
o rescinding the Stock Option Agreement;
o enjoining the merger agreement between Dime and HUB;
o directing that Dime, Dime's Board and HUB account for all damages caused
to Dime's stockholders and for all profits and any special benefits
obtained by Dime, Dime's Board and HUB.
HUB intends to defend the actions against it vigorously and believes that
they are without merit.
In the normal course of business, lawsuits and claims may be brought by,
and may arise against, HUB and its subsidiaries. In the opinion of management,
no other legal proceedings that have arisen in the normal course of HUB's
business and are presently pending or threatened against HUB or its
subsidiaries, when resolved, will have a material adverse effect on the business
or financial condition of HUB or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of HUB during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of December 31, 1999, Hudson United Bancorp had approximately 7,945
shareholders.
Hudson United Bancorp's common stock is listed on the New York Stock Exchange.
The following represents the high and low closing sale prices from each quarter
during the last two years. The numbers have been restated to reflect all stock
dividends.
1999
----
High Low
--------------------
1st Quarter $33.25 $28.88
2nd Quarter 34.95 29.73
3rd Quarter 32.77 27.49
4th Quarter 32.70 25.00
1998
----
High Low
--------------------
1st Quarter $36.76 $31.34
2nd Quarter 36.52 30.34
3rd Quarter 33.98 24.64
4th Quarter 29.25 21.00
The following table shows the per share quarterly cash dividends paid upon the
common stock over the last two years, restated to give retroactive effect to
stock dividends.
1999 1998
---- ----
March 1 $0.243 March 1 $0.188
June 1 0.243 June 1 0.188
September 1 0.243 September 0.236
December 1 0.243 December 1 0.243
Dividends are generally declared within 30 days prior to the payable date, to
stockholders of record 10-20 days after the declaration date.
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands Except For Per Share Amounts)
Reference should be made to footnote 2, Business Combinations, in the
consolidated financial statements set forth in Item 8 of this Report on Form
10-K for a discussion of recent acquisitions which affect the comparability of
the information contained in this table.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net Interest Income $ 343,066 $ 328,850 $ 326,544 $312,627 $298,172
Provision for Possible
Loan Losses 52,200 35,607 24,442 29,060 30,229
Net Income 69,338 26,751 83,995 47,304 58,479
Per Share Data(1)
Earnings Per Share:
Basic 1.33 0.50 1.55 0.86 1.09
Diluted 1.30 0.49 1.48 0.83 1.05
Cash Dividends - Common 0.97 0.85 0.71 0.62 0.53
Balance Sheet Totals
(at or for the year ended
December 31,):
Total Assets 9,686,286 8,897,775 8,649,847 8,262,962 7,385,378
Long Trem Debt 257,300 257,300 210,050 134,750 36,750
Average Equity 508,238 646,851 669,756 670,979 623,443
Average Assets 9,248,141 8,721,572 8,314,181 7,884,000 7,045,663
(1)Per share data is adjusted retroactively to reflect a 3% stock dividend paid
November 15, 1996 to stockholders of record on November 4, 1996, a 3% stock
dividend paid December 1, 1997 to stockholders of record on November 13, 1997, a
3% stock dividend paid September 1, 1998 to stockholders of record on August 14,
1998 and a 3% stock dividend paid December 1, 1999 to stockholders of record on
November 26, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements Regarding Forward-Looking Information
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements can
be identified by the use of words such as "believes", "expects" and similar
words or variations. Such statements are not historical facts and involve
certain risk and uncertainties. Actual results may differ materially from the
results discussed in these forward-looking statements. Factors that might cause
a difference include, but are not limited to, changes in interest rates,
economic conditions, deposit and loan growth, loan loss provisions, customer
retention, failure to realize expected cost savings or revenue enhancements from
acquisitions. The Company assumes no obligation for updating any such
forward-looking statements at any time.
As set forth in the joint proxy statement-prospectus of HUB and Dime with regard
to the merger, other risks and uncertainties in connection with HUB's merger
with Dime include, but are not limited to:
o there may be increases in competitive pressure among financial
institutions or from non-financial institutions;
o changes in the interest rate environment may reduce interest margins
or may adversely affect mortgage banking operations;
o changes in deposit flows, loan demand or real estate values may
adversely affect our business;
o changes in accounting principles, policies or guidelines may cause
our financial condition to be perceived differently;
o general economic conditions, either nationally or in some or all of
the states in which the combined company will be doing business, or
conditions in securities markets, the banking industry or the
mortgage banking industry, may be less favorable than we currently
anticipate;
o legislation or regulatory changes may adversely affect our business;
o technological changes may be more difficult or expensive than
anticipated;
o combining the businesses of Dime and HUB and retaining key personnel
may be more difficult or more costly than we expect;
o our revenues after the merger may be lower than we expect, or our
operating costs may be higher than we expect;
o expected cost savings from the merger may not be fully realized, may
not be realized at all or may not be realized within the expected
time frame; or
the timing and occurrence or non-occurrence of events may be subject to
circumstances beyond our control.
HUB, as part of its core business, regularly evaluates the potential acquisition
of, and holds discussions with, prospective acquisition candidates, which
candidates may conduct any type of businesses permissible for a bank holding
company or a financial holding company and its affiliates. HUB's discussions in
this document are subject to the changes that may result if any such acquisition
transaction is completed. HUB restates its policy that it will not comment on or
publicly announce any acquisition until after a binding and definitive
acquisition agreement has been reached. HUB specifically disclaims any
obligation to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
Management's Discussion and Analysis
Acquisition Summary
Hudson United Bancorp ("the Company") began its acquisition program in the fall
of 1990. Since that time, the company has completed 31 acquisitions. Through
these acquisitions, the company has grown from a $550 million asset banking
company to a community banking franchise which had assets of $9.7 billion at
December 31, 1999. The acquisition program has been utilized to achieve
efficiencies and to distribute the cost of new products and technologies over a
larger asset base. It is the Company's philosophy that acquisitions become
accretive to earnings within a short time frame, generally within one year. The
financial results of these acquisitions are difficult to measure other than on
an as-reported basis each quarter because pooling of interest transactions
change historical results from those actually reported by the Company.
The Company consummated eight acquisitions in 1998. On January 8, 1998, the
Company acquired the Bank of Southington ("BOS"). BOS was a $135 million asset
institution with 2 branch locations headquartered in Southington, Connecticut.
On April 24, 1998, the Company acquired Poughkeepsie Financial Corporation
("PFC"), an $880 million asset institution headquartered in Poughkeepsie, New
York with 16 branches in Rockland, Orange and Dutchess counties in New York.
On May 29, 1998, the Company acquired MSB Bancorp, Inc. ("MSB"), a $774 million
asset institution headquartered in Goshen, New York that operated 16 branches in
Orange, Putnam and Sullivan counties in New York.
On August 14, 1998, the Company acquired IBS Financial Corporation ("IBS"), a
$734 million asset institution headquartered in Cherry Hill, New Jersey that
operated 10 offices in New Jersey's suburban Philadelphia communities.
On August 14, 1998, the Company acquired Community Financial Holding Corporation
("CFHC"), a $150 million asset institution headquartered in Westmont, New Jersey
that operated 8 offices in Camden, Burlington and Gloucester counties in New
Jersey.
On August 21, 1998, the Company acquired Dime Financial Corporation ("DFC"), a
$961 million asset institution headquartered in Wallingford, Connecticut that
operated 11 offices in New Haven county.
The above 1998 acquisitions were all accounted for using the
poolings-of-interests accounting method and, accordingly, the statements for
periods prior to the mergers have been restated to include these institutions
and their results of operations.
On February 5, 1998, the Company acquired Security National Bank & Trust Company
of New Jersey ("SNB"), a $86 million asset bank and trust company headquartered
in Newark, New Jersey with 4 branches.
On June 26, 1998, the Company acquired 21 branches of First Union National Bank
located in New Jersey and Connecticut with total deposits of $242.9 million.
On July 24, 1998, the Company acquired two additional branches of First Union
National Bank located in Hyde Park and Woodstock, New York. The two branches had
total deposits of $25.2 million.
The SNB and First Union National Bank branch acquisitions were accounted for
under the purchase method of accounting and, as such, their assets and earnings
are included in the Company's consolidated results only from the date of
acquisition and thereafter.
The Company consummated six acquisitions in 1999. On March 26, 1999, the Company
completed its purchase of $151 million in deposits and a retail branch office in
Hartford, Connecticut from First International Bank.
On May 20, 1999, the Company acquired Little Falls Bancorp, Inc. ("LFB"), which
had assets of approximately $341 million and operated six offices in the
Hunterdon and Passaic counties of New Jersey.
On October 22, 1999, the Company acquired Lyon Credit Corporation, a $350
million asset finance company and subsidiary of Credit Lyonnais Americas.
On December 1, 1999, the Company completed a purchase and sale transaction, in
which Hudson United Bank acquired the loans (approximately $148 million) and
other financial assets, as well as assumed the deposit liabilities
(approximately $112 million) of Advest Bank and Trust. In addition, a strategic
partnership with Advest, Inc. was consummated on October 1, 1999, in which
Hudson United Bank became the exclusive provider of banking products and
services to the clients of Advest, Inc.
The above 1999 acquisitions were accounted for under the purchase method of
accounting and, as such, their assets and earnings are included in the Company's
consolidated results only from the date of acquisition and thereafter.
On November 30, 1999, the Company completed its acquisition of JeffBanks, Inc.
("Jeff"), a $1.8 billion bank holding company with 32 branches located
throughout the greater Philadelphia area of Pennsylvania and Southern Jersey.
On December 1, 1999, the Company completed its acquisition of Southern Jersey
Bancorp ("SJB"), a $425 million asset institution with 17 branches in Southern
Jersey.
The above 1999 acquisitions were accounted for using the pooling- of-interests
accounting method and, accordingly, the statements for periods prior to the
mergers have been restated to include these institutions and their results of
operations.
Special Charges Summary
In 1999 and 1998, the Company incurred one-time charges ("special charges") as
detailed below. Further details relative to the special charges are discussed in
the "Noninterest Income" and "Noninterest Expenses" sections that follow.
SPECIAL CHARGES
(IN THOUSANDS) 1999 1998 1997
- --------------- ------- ------- --------
Writedown of assets held for sale $ -- $23,303 $ --
Merger related and restructuring charges 32,031 69,086 $ --
Investment Security losses 5,162 663 --
Special provision for loan losses 33,000 -- --
------- ------- --------
Total special charges pre-tax $70,193 $93,052 $ --
======= ======= ========
Total special charges after-tax $47,854 $63,634 $ --
======= ======= ========
Results of Operations for the Years
Ended December 31, 1999, 1998 and 1997
Hudson United Bancorp reported net income of $69.3 million and fully diluted
earnings per share of $1.30 for the year ended December 31, 1999. Excluding
special charges, operating earnings were $117.2 million and fully diluted
earnings per share were $2.20 for the same 1999 period. In 1998, the Company had
net income of $26.8 million and fully diluted earnings per share of $0.49.
Excluding special charges, operating earnings and fully diluted earnings per
share were $90.4 million and $1.64, respectively, for the same 1998 period. In
1997, the Company had net income of $84.0 million and fully diluted earnings per
share of $1.48.
Return on average assets was 0.75% for 1999, 0.31% for 1998, and 1.01% for 1997.
Excluding special charges, return on average assets was 1.27% and 1.04% for 1999
and 1998, respectively. Return on average equity was 11.95% for 1999, 4.14% for
1998, and 12.54% for 1997. Excluding special charges, return on average equity
was 20.20% for 1999 and 13.97% for 1998.
The financial results in years in which acquisitions occur are difficult to
measure other than on an as-reported basis each quarter because pooling of
interest transactions change historical results from those actually reported by
the Company. On an as-reported basis each quarter, excluding special charges,
the average return on average assets was 1.41% and 1.46% and the average return
on average equity was 23.26% and 21.94% for 1999 and 1998, respectively.
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS, AND RATES
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------ ------------------------------------
ASSETS
Interest-bearing deposits with banks $ 17,441 $ 1,132 6.49% $ 34,475 $ 1,864 5.41%
Federal funds sold 76,672 4,980 6.50% 202,794 10,809 5.33%
Securities-taxable 3,328,654 204,937 6.16% 2,873,677 183,632 6.39%
Securities-tax exempt (1) 85,184 7,249 8.51% 112,716 9,448 8.38%
Loans (2) 5,136,467 432,041 8.41% 4,923,410 424,359 8.62%
------------------------------------ ------------------------------------
Total Earning Assets 8,644,418 650,339 7.52% 8,147,072 630,112 7.73%
Cash and due from banks 273,926 251,799
Allowance for loan losses (79,095) (84,605)
Premises and equipment 115,924 112,609
Other assets 292,968 294,697
----------- -----------
TOTAL ASSETS $ 9,248,141 $ 8,721,572
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing transaction accounts $ 1,199,059 $ 24,125 2.01% $ 1,365,426 $ 32,070 2.35%
Savings accounts 1,405,688 28,184 2.00% 1,328,052 31,121 2.34%
Time deposits 2,821,338 138,426 4.91% 3,106,134 165,144 5.32%
------------------------------------ ------------------------------------
Total Interest-Bearing Deposits 5,426,085 190,735 3.52% 5,799,612 228,335 3.94%
Borrowings 1,722,512 88,902 5.16% 859,372 47,907 5.57%
Long-term debt 257,218 21,873 8.50% 235,886 20,231 8.58%
------------------------------------ ------------------------------------
Total Interest-Bearing Liabilities 7,405,815 301,510 4.07% 6,894,870 296,473 4.30%
Demand deposits 1,170,135 1,079,508
Other liabilities 91,953 100,343
Stockholders' equity 580,238 646,851
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 9,248,141 $ 8,721,572
=========== ===========
NET INTEREST INCOME $ 348,829 $ 333,639
=========== ===========
NET INTEREST MARGIN (3) 4.04% 4.10%
==== ====
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS, AND RATES
- --------------------------------------------------------------------------------
1997
------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
------------------------------------
ASSETS
Interest-bearing deposits with banks $ 373 $ 17 4.56%
Federal funds sold 183,086 10,552 5.76%
Securities-taxable 2,658,129 179,637 6.76%
Securities-tax exempt (1) 90,084 7,695 8.54%
Loans (2) 4,824,845 420,650 8.72%
------------------------------------
Total Earning Assets 7,756,517 618,551 7.97%
Cash and due from banks 259,907
Allowance for loan losses (81,510)
Premises and equipment 90,081
Other assets 289,186
-----------
TOTAL ASSETS $ 8,314,181
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing transaction accounts $ 1,267,143 $ 37,135 2.93%
Savings accounts 1,403,988 33,839 2.41%
Time deposits 3,049,175 162,606 5.33%
------------------------------------
Total Interest-Bearing Deposits 5,720,306 233,580 4.08%
Borrowings 672,002 37,864 5.63%
Long-term debt 202,824 17,647 8.70%
------------------------------------
Total Interest-Bearing Liabilities 6,595,132 289,091 4.38%
Demand deposits 949,534
Other liabilities 99,759
Stockholders' equity 669,756
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 8,314,181
===========
NET INTEREST INCOME $ 329,460
===========
NET INTEREST MARGIN (3) 4.25%
====
(1) The tax equivalent adjustments for the years ended December 31, 1999, 1998
and 1997 were $2,245, $3,289 and $2,694, respectively, and are based on a
tax rate of 35%.
(2) The tax equivalent adjustments for the years ended December 31, 1999, 1998
and 1997 were $3,518, $1,500 and $222, respectively, and are based on a tax
rate of 35%. Average loan balances include nonaccrual loans and loans held
for resale.
(3) Represents tax equivalent net interest income divided by interest-earning
assets.
THE FOLLOWING TABLE PRESENTS THE RELATIVE CONTRIBUTION OF CHANGES IN VOLUMES AND
CHANGES IN RATES TO CHANGES IN NET INTEREST INCOME FOR THE PERIODS INDICATED.
THE CHANGE IN INTEREST INCOME AND INTEREST EXPENSE ATTRIBUTABLE TO THE COMBINED
IMPACT OF BOTH VOLUME AND RATE HAS BEEN ALLOCATED PROPORTIONATELY TO THE CHANGE
DUE TO VOLUME AND THE CHANGE DUE TO RATE (IN THOUSANDS):
CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME-RATE/VOLUME ANALYSIS
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------------------------ -------------------------------------
1999 OVER 1998 1998 OVER 1997
------------------------------------ -------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- ----------------------------------------------------------------------------------------- -------------------------------------
Loans $ 18,079 $(10,397) $ 7,682 $ 8,530 $ (4,821) $ 3,709
Securities-taxable 28,211 (6,906) 21,305 14,123 (10,128) 3,995
Securities-tax exempt (2,341) 142 (2,199) 1,861 (108) 1,753
Federal funds sold (7,810) 1,981 (5,829) 1,086 (829) 257
Interest bearing deposits (1,052) 320 (732) 1,843 4 1,847
------------------------------------ -------------------------------------
Total interest and fee income 35,087 (14,860) 20,227 27,443 (15,882) 11,561
------------------------------------ -------------------------------------
Interest bearing transaction accounts (3,650) (4,295) (7,945) 2,720 (7,785) (5,065)
Savings 1,744 (4,681) (2,937) (1,797) (921) (2,718)
Time deposits (14,507) (12,211) (26,718) 3,030 (492) 2,538
Short-term borrowings 44,794 (3,799) 40,995 10,449 (406) 10,043
Long-term debt 1,815 (173) 1,642 2,839 (255) 2,584
------------------------------------ -------------------------------------
Total interest expense 30,196 (25,159) 5,037 17,241 (9,859) 7,382
------------------------------------ -------------------------------------
Net Interest Income $ 4,891 $ 10,299 $ 15,190 $ 10,202 $ (6,023) $ 4,179
==================================== ====================================
Net Interest Income
Net interest income is the difference between the interest earned on earning
assets and the interest paid on deposits and borrowings. The principal earning
assets are the loan portfolio, comprised of commercial loans to businesses,
mortgage loans to businesses and individuals, consumer loans (such as car loans,
home equity loans, etc.) and credit card loans, along with the investment
portfolio. The portfolio is invested primarily in U.S. Government Agency
Securities, U.S. Government Agency mortgage-backed securities and
mortgage-related securities. Given the current rate environment, the weighted
average life of the portfolio is approximately 2.4 years. Deposits and
borrowings not required to fund loans and other assets are invested primarily in
U.S. Government and U.S. Government Agency Securities.
Net interest income is affected by a number of factors including the level,
pricing, and maturity of earning assets and interest-bearing liabilities,
interest rate fluctuations, asset quality and the amount of noninterest-bearing
deposits and capital. In the following discussion, interest income is presented
on a fully taxable-equivalent basis ("FTE"). Fully taxable-equivalent interest
income restates reported interest income on tax-exempt loans and securities as
if such interest were taxed at the statutory Federal income tax rate of 35%.
Net interest income on an FTE basis in 1999 was $348.8 million compared to
$333.6 million in 1998 and $329.5 million in 1997. The increase in net interest
income in 1999 compared to 1998 was due to a $497 million increase in
interest-earning assets, partially offset by a decline in the net interest
margin of six basis points. The increase in interest-earning assets was mainly
due to a higher average volume of investment securities and loans. The
improvement in net interest income in 1998 compared to 1997 was due to a $391
million increase in interest-earning assets, partially offset by a 15 basis
point decline in the net interest margin. Higher average volumes of investment
securities and loans were the primary factors underlying the increase in
interest-earning assets for the 1998 period compared to 1997.
Net Interest Margin
Net interest margin is computed by dividing net interest income on a FTE basis
by average interest-earning assets. The Company's net interest margin was 4.04%,
4.10%, and 4.25% for 1999, 1998 and 1997, respectively. The six basis point
decline in net interest margin from 1998 to 1999 was due primarily to the impact
of treasury share repurchases and lower rates earned on loans and investment
securities. Partially offsetting these factors was an increase in average demand
deposits and lower rates paid on interest-bearing deposits and borrowings. The
15 basis point decline in net interest margin in 1998 compared to 1997 was due
to the same factors described above in the 1999 and 1998 comparison, including
higher average demand deposits.
The Company's average cost of deposits for 1999 was 2.89% compared to 3.32% for
1998 and 3.50% for 1997.
Approximately 37% of the Company's deposits were in transaction accounts, 24% in
savings accounts, and 39% in time deposits as of December 31, 1999.
Provision and Allowance for Possible Loan Losses
The determination of the adequacy of the Allowance for Possible Loan Losses
("the Allowance") and the periodic provisioning for estimated losses included in
the consolidated financial statements is the responsibility of management. The
evaluation process is undertaken on a monthly basis. Methodology employed for
assessing the adequacy of the Allowance consists of the following criteria:
The establishment of reserve amounts for all specifically identified criticized
loans, including those arising from business combinations, that have been
designated as requiring attention by management's internal loan review program.
The establishment of reserves for pools of homogenous types of loans not subject
to specific review, including 1-4 family residential mortgages, consumer loans,
and credit card accounts, based upon historical loss rates.
An allocation for the non-criticized loans in each portfolio, and for all
off-balance sheet exposures, based upon the historical average loss experience
of those portfolios.
Consideration is also given to the changed risk profile brought about by the
aforementioned business combinations, customer knowledge, the results of ongoing
credit quality monitoring processes, the adequacy and expertise of the Company's
lending staff, underwriting policies, loss histories, delinquency trends, the
cyclical nature of economic and business conditions and the concentration of
real estate related loans located in the Northeastern part of the United States.
Since many of the loans depend upon the sufficiency of collateral as a secondary
source of repayment, any adverse trend in the real estate markets could affect
underlying values available to protect the Company from loss. Other evidence
used to determine the amount of the Allowance and its components are as follows:
- - regulatory and other examinations
- - the amount and trend of criticized loans
- - actual losses
- - peer comparisons with other financial institutions
- - economic data associated with the real estate market in the Company's area
of operations
- - opportunities to dispose of marginally performing loans for cash
considerations
Based upon the process employed and giving recognition to all attendant factors
associated with the loan portfolio, management considers the Allowance for
Possible Loan Losses to be adequate at December 31,1999.
The provision for possible loan losses was $52.2 million for 1999 compared with
$35.6 million and $24.4 million in 1998 and 1997, respectively. The increase in
1999 from 1998 was due to a $33.0 million special provision taken to conform the
loan reserve policies of Jeff and SJB to that of the Company. The increased
provision in 1998 when compared to 1997 was primarily due to higher provisions
taken by acquired companies. The Allowance as a percentage of total loans
outstanding at year-end for the last three years was 1.74%, 1.56% and 1.74%. The
Allowance as a percentage of nonperforming loans for the past three years was
201%, 147% and 102%.
The following is a summary of the activity in the allowance for possible loan
losses, by loan category for the years indicated (in thousands):
ALLOWANCE FOR POSSIBLE LOAN LOSSES
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
--------------------------------------------
Amount of Loans Outstanding at End of Year $5,679,581 $4,885,643 $4,911,761
============================================
Daily Average Amount of Loans Outstanding $5,136,467 $4,923,410 $4,824,845
============================================
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Balance at beginning of year $ 76,043 $ 85,230 $ 81,979
Loans charged off:
Real estate mortgages 13,657 11,207 10,861
Commercial and Industrial 10,388 10,034 7,489
Consumer Credit 24,012 22,083 15,364
Other -- -- 384
Writedown of assets held for sale (1) -- 9,521 --
--------------------------------------------
Total loans charged off 48,057 52,845 34,098
--------------------------------------------
Recoveries:
Real estate mortgages 1,902 988 2,684
Commercial and Industrial 1,962 1,629 3,113
Consumer Credit 6,065 3,437 3,512
Other -- 47 798
--------------------------------------------
Total recoveries 9,929 6,101 10,107
--------------------------------------------
Net loans charged off 38,128 46,744 23,991
--------------------------------------------
Provision for loan losses 52,200 35,607 24,442
Allowance of acquired companies 8,634 1,950 2,800
--------------------------------------------
Balance at end of year $ 98,749 $ 76,043 $ 85,230
============================================
Net charge offs as a percentage of average loans
outstanding 0.74% 0.95% 0.50%
Allowance for possible loan losses as a percentage
of loans outstanding at year end 1.74% 1.56% 1.74%
(1) The writedown of assets held for sale pertains to the disposal of $54
million of nonaccrual loans discussed further in the "Noninterest Income" and
"Asset Quality" sections that follow.
The following is the allocation of the allowance for possible loan losses by
loan category (in thousands):
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------
CATEGORY CATEGORY CATEGORY
PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
- ---------------------------------------------------------------------------------------------------------------------
Real estate mortgages $25,484 46.5% $23,868 60.6% $30,273 65.2%
Commercial and industrial 43,974 31.8% 18,493 25.3% 20,233 22.5%
Consumer Credit 24,895 21.7% 20,650 14.1% 11,650 12.3%
Unallocated 4,396 13,032 23,074
--------------------------------------------------------------------------------------
Total $98,749 100.0% $76,043 100.0% $85,230 100.0%
======================================================================================
Noninterest Income
Noninterest income, excluding securities gains and loss on assets held for sale,
increased 27% to $89.9 million for 1999 from $70.9 million in 1998. The amount
in 1998 was an increase of 16% over the $61.0 million reported in 1997. The
increase for 1999 compared to 1998 was due to growth in Shoppers Charge fees
(the Company's private label credit card division) and mortgage divisions and
increased sales of alternative investment products. The improvement in 1998 from
1997 was mainly the result of growth in Shoppers Charge fees and other
non-deposit related fee income. Noninterest income, excluding security gains and
loss on assets held for sale, as a percentage of total net revenue was 21%, 19%
and 15% in 1999, 1998, and 1997, respectively. The Company had $1.2 million in
securities losses in 1999, and security gains of $4.5 million and $9.4 million
in 1998 and 1997, respectively. The $1.2 million in losses in 1999 included a
$5.2 million pre-tax special charge related to the sale of investment securities
acquired in the Jeff acquisition. The amount for 1998 included a $0.6 million
pre-tax special charge related to the sale of investment securities acquired in
the PFC acquisition. Excluding the special charges, the Company had security
gains of $4.0 million in 1999 and $5.1 million in 1998.
Included in noninterest income for 1998 is a $23.3 million pre-tax, $14.9
million after-tax special charge, related to the
disposal of $64 million of non-performing loans and Other Real Estate Owned
(OREO).
Noninterest Expenses
Noninterest expense, excluding merger related and restructuring costs, increased
to $239.3 million in 1999 from $232.2 million in 1998. The primary reason for
the increase was the higher cost of supporting the Company's expanding business
lines. The decline in expenses from $239.5 million in 1997 to $232.2 million in
1998 resulted mainly from the consolidation and realization of efficiencies in
acquired institutions.
Salary and benefit expense was $102.7 million in 1999, $107.2 million and $115.2
million in 1998 and 1997, respectively. The decline in 1999 compared to 1998
was due to efficiencies realized in staff and support functions and
consolidation of benefit plans. The decline from 1997 to 1998 resulted mainly
from the same sources related to acquired institutions.
Occupancy expense was $24.9 million in 1999, $24.8 million in 1998, and $23.2
million in 1997. The increase in 1998 resulted largely from the acquisition of
the First Union branches. Equipment expense was $14.7 million in 1999 compared
to $11.3 million in 1998 and $11.6 million in 1997. The higher 1999 expense when
compared to 1998 resulted from improvements in the Company's technological
infastructure.
Outside services expense was $48.8 million in 1999, $34.8 million in 1998 and
$33.4 million in 1997. The increase in 1999 compared to 1998 reflected higher
expenses, primarily related to Shoppers Charge, incurred to support business
expansion.
Other Real Estate Owned (OREO) expense declined to $0.1 million in 1999 compared
to $3.3 million in 1998 and $5.6 million in 1997. A decline in OREO properties
was responsible for the reduction in expense.
Amortization of intangibles expense increased to $14.9 million in 1999 from
$12.1 million in 1998 and $10.4 million in 1997. The increases are attributable
to the additional goodwill established for the acquisitions and branch purchases
described previously.
Merger related and restructuring costs were $32.0 million in 1999 and $69.1
million in 1998. The 1999 costs include payout and accruals for employment
contracts, severance and other employee related costs ($12.6 million), branch
closing, fixed asset disposition and other occupancy related costs ($3.9
million), technical support for system conversion and early termination of
system related contracts ($5.6 million), legal and accounting professional
services and approval costs ($1.8 million), financial advisor costs ($4.1
million), provison for other real estate owned ($2.0 million) and other merger
related expenses ($2.0 million).
Federal Income Taxes
The income tax provision for Federal and state taxes approximates 36.0% for
1999, 38.8% for 1998 and 36.9% for 1997. The higher effective tax rate in 1998
compared to both 1999 and 1997 was due primarily to higher nondeductible
merger-related expenses in 1998.
Financial Condition
Total assets at December 31, 1999 were $9.7 billion, an increase from assets of
$8.9 billion at December 31, 1998. This increase in assets resulted primarily
from a $794 million increase in loans to $5.7 billion at December 31, 1999.
Total deposits were $6.5 billion and $6.8 billion, respectively, at year-end
1999 and 1998. Borrowings amounted to $2.4 billion and $970 million at December
31, 1999 and 1998, respectively. The increase in borrowings resulted primarily
from the need to fund the growth in loans and investment securities.
The Company considers its liquidity and capital to be adequate. At the end of
1999, the Company had $3.4 billion in investment securities, $2.8 billion in its
available for sale portfolio and $562 million in its held to maturity portfolio.
Total Stockholders' Equity was $519.2 million at December 31, 1999 and $619.9
million at December 31, 1998. The net decline in Stockholders' Equity of $100.7
million resulted from the Company's purchase of $121.4 million in treasury
shares , the impact of marking to market the Company's available for sale
security portfolio of $53.6 million, and cash dividends paid of $45.3 million.
This was partially offset by $69.3 million of net income and an increase in
equity of $50.1 million resulting from the effect of exercised stock options,
warrants, other compensation plans and the issuance of treasury shares for the
LFB acquisition.
Securities Held to Maturity and Securities Available for Sale
The securities portfolios serve as a source of liquidity, earnings, and a means
of managing interest rate risk. Consequently, the portfolios are managed over
time in response to changes in market conditions and loan demand. At December
31, 1999 and 1998, the portfolios comprised 35% and 37%, respectively, of the
total assets of the Company.
The Company's philosophy (strategy) with respect to managing the portfolio is to
purchase U.S. government and agency securities as well as U.S. government agency
mortgage-backed and mortgage-related securities.
The following tables summarize the composition of the portfolios as of
December 31, 1999 and 1998 (in thousands):
1999 1998
------------------------------------------------- -------------------------------------------------
GROSS UNREALIZED ESTIMATED GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------- MARKET AMORTIZED ------------------- MARKET
COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY PORTFOLIO
U. S. Government $ 24,195 $ -- $ (253) $ 23,942 $ 42,373 $ 393 $ -- $ 42,766
U.S. Government Agencies 45,960 201 (636) 45,525 37,360 1,462 -- 38,822
Mortgage-backed securities 467,540 220 (19,967) 447,793 539,725 2,277 (717) 541,285
States and Political
subdivisions 24,500 26 (575) 23,951 16,190 204 (4) 16,390
Other debt securities 29 -- -- 29 -- -- -- --
------------------------------------------------- -------------------------------------------------
$ 562,224 $ 447 $(21,431) $ 541,240 $ 635,648 $ 4,336 $ (721) $ 639,263
================================================= ==================================================
1999 1998
------------------------------------------------- -------------------------------------------------
GROSS UNREALIZED ESTIMATED GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------- MARKET AMORTIZED ------------------- MARKET
COST GAINS (LOSSES) VALUE COST GAINS (LOSSES) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE PORTFOLIO
U. S. Government $ 87,332 $ 196 $ (303) $ 87,225 $ 108,036 $ 1,940 $ -- $ 109,976
U.S. Government Agencies 350,040 85 (7,595) 342,530 425,610 3,555 (59) 429,106
Mortgage-backed securities 2,167,606 1,431 (48,880) 2,120,157 1,888,149 14,984 (4,956) 1,898,177
States and Political
subdivisions 3,118 12 (10) 3,120 87,132 3,047 (114) 90,065
Other debt securities 47,128 4 (1,813) 45,319 20,690 152 (58) 20,784
Equity securities 213,826 1,932 (9,807) 205,951 110,403 2,471 (674) 112,200
------------------------------------------------- -------------------------------------------------
$ 2,869,050 $ 3,660 $(68,408) $ 2,804,302 $ 2,640,020 $ 26,149 $ (5,861) $ 2,660,308
================================================= ==================================================
Loan Portfolio Distribution of Loans by Category
DECEMBER 31,
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
---------------------------------------------
Loans secured by real estate:
Residential mortgage loans $1,639,578 $1,739,054 $1,877,888
Mortgages held for sale 9,073 14,600 4,327
Residential home equity
loans 357,941 230,587 216,215
Commercial mortgage loans 1,024,844 978,040 1,105,440
---------------------------------------------
3,031,436 2,962,281 3,203,870
---------------------------------------------
Commercial and industrial
loans:
Secured by
real estate 275,411 233,536 285,057
Other 1,490,837 1,004,149 818,484
---------------------------------------------
1,766,248 1,237,685 1,103,541
---------------------------------------------
Credit cards 209,863 107,331 114,550
Other loans to individuals 672,034 578,346 489,800
---------------------------------------------
Total Loan Portfolio $5,679,581 $4,885,643 $4,911,761
=============================================
Total loans increased by $793.9 million to $5.7 billion at December 31, 1999
from $4.9 billion at December 31, 1998. Commercial and industrial loans
accounted for over half of the growth as they increased by $528.5 million to
$1.8 billion at year-end 1999. Of the growth, $370.0 million was related to the
Company's acquisition of Lyon Credit Corporation. Home equity and credit card
loans also exhibited high growth rates. The Company continued its strategy of
reducing its percentage of lower yielding residential mortgage loans arising
from the thrift institutions acquired in 1998. Residential mortgage loans
amounted to $1.6 billion at December 31, 1999 and represented 29% of total loans
compared to 36% of total loans at December 31, 1998.
Asset Quality
The Company's principal earning assets are its loans, which are made primarily
to businesses and individuals located in New Jersey, New York, Connecticut and
Pennsylvania. Inherent in the lending business is the risk of deterioration in a
borrower's ability to repay loans under existing loan agreements. Other risk
elements include the amount of nonaccrual and past-due loans, the amount of
potential problem loans, industry or geographic loan concentrations, and the
level of OREO that must be managed and disposed of. The following table shows
the loans past due 90 days or more and still accruing and applicable asset
quality ratios:
DECEMBER 31,
-------------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
-------------------------------------------------------------------------------
Commercial & industrial $ 3,004 $ 3,048 $ 3,578
Real estate mortgages 13,085 9,739 13,938
Consumer credit 3,011 4,263 3,224
Credit card 4,139 4,211 3,609
-------------------------------------------
Total Loans Past-Due 90-Days
or More and Still Accruing $ 23,239 $ 21,261 $ 24,349
===========================================
As a percent of Total Loans 0.41% 0.44% 0.50%
As a percent of Total Assets 0.24% 0.24% 0.28%
Nonaccruing loans include commercial loans and commercial mortgage loans
past-due 90-days or more or deemed uncollectable. Residential real estate loans
are generally placed on nonaccrual status after 180 days of delinquency.
Consumer loans are charged off after 120 days and credit card loans are charged
off after 180 days. Any loan may be put on nonaccrual status earlier if the
Company has concern about the future collectability of the loan or its ability
to return to current status.
Nonaccrual real estate mortgage loans are principally loans in the foreclosure
process secured by real estate, including single family residential,
multi-family, and commercial properties.
Nonaccruing consumer credit loans are loans to individuals. Excluding the credit
card receivables, these loans are principally secured by automobiles or real
estate.
Renegotiated loans are loans which were renegotiated as to the term or rate or
both to assist the borrower after the borrower has suffered adverse effects in
financial condition. Terms are designed to fit the ability of the borrower to
repay and the Company's objective of obtaining repayment. The Company has $2.7
million of loans which are considered renegotiated.
OREO consists of properties on which the Bank has foreclosed or has taken a deed
in lieu of the loan obligation. OREO properties are carried at the lower of cost
or fair value at all times, net of estimated costs to sell. The cost to maintain
the properties during ownership, and any further declines in fair value are
charged to current earnings. The Company has been successful in disposing of
OREO properties, including those acquired in acquisitions. At December 31, 1999,
1998, and 1997, OREO, including OREO classified in "Assets Held for Sale" on the
balance sheet, amounted to $3.9 million, $8.2 million, and $15.6 million,
respectively. The year to year declines reflect the Company's continuing efforts
to dispose of OREO properties.
Nonperforming assets were $53.1 million at December 31, 1999, $60.0 million at
December 31, 1998, and $99.4 million at December 31, 1997. The decline from
December 31, 1998 to December 31, 1999 was mainly the result of the Company's
continuing effort to reduce the level of nonperforming assets. The decline from
year-end 1997 to year-end 1998 was largely due to the $23.3 million pre-tax
charge and the $10.3 million writedown against the Allowance for Possible Loan
Losses and OREO reserve related
to the disposal of non-performing loans and OREO.
The amount of interest income on nonperforming loans which would have been
recorded had these loans continued to perform under their original terms
amounted to $3.2 million, $8.0 million, and $6.8 million for the years 1999,
1998, and 1997, respectively. The amount of interest income recorded on such
loans for each of the years was $0.4 million, $0.7 million, and $1.5 million,
respectively. The Company has no outstanding commitments to advance additional
funds to borrowers whose loans are in a nonperforming status.
Measures to control and reduce the level of nonperforming loans are continuing.
Efforts are made to identify slow paying loans and collection procedures are
instituted. After identification, steps are taken to understand the problems of
the borrower and to work with the borrower toward resolving the problem, if
practicable. Continuing collection efforts are a priority for the Company.
The following table summarizes the Company's nonperforming assets at the dates
indicated (in thousands):
DECEMBER 31,
NONPERFORMING ASSETS (INCLUDING ASSETS HELD FOR SALE) 1999 1998 1997
- -------------------------------------------------------------------------------------
Nonaccrual Loans $46,352 $46,178 $64,766
Renegotiated Loans 2,751 5,632 19,054
-----------------------------
Total Nonperforming Loans 49,103 51,810 83,820
Other Real Estate Owned 3,948 8,151 15,568
-----------------------------
Total Nonperforming Assets $53,051 $59,961 $99,388
=============================
Ratios:
Nonaccrual Loans to Total Loans 0.82% 0.95% 1.32%
Nonperforming Assets to Total Assets 0.55 0.67 1.15
Allowance for Loan Losses to Nonaccrual Loans 213 165 132
Allowance for Loan Losses to Nonperforming Loans 201 147 102
Deposits
As of December 31, 1999, Hudson had 112 branch offices in New Jersey 33 branch
offices in New York state, 42 branch offices in Connecticut, and 26 branch
offices in Pennsylvania.
Through business development incentives, the Company strives to generate the
lowest cost deposits. The following table summarizes the deposit base at the
dates indicated (in thousands):
DECEMBER 31,
1999 1998 1997
------------------------------------------
Noninterest- bearing
deposits $1,231,478 $1,214,521 $1,048,846
NOW/MMDA deposits 1,145,398 1,249,772 1,312,082
Savings deposits 1,528,033 1,367,117 1,366,225
Time deposits 2,550,436 2,941,826 3,049,894
------------------------------------------
Total Deposits $6,455,345 $6,773,236 $6,777,047
==========================================
While total deposits declined from year-end 1998 to year-end 1999, there was a
favorable change in the mix, as higher cost time deposits declined by $391
million while noninterest-bearing and other lower cost deposits increased by $73
million. As of December 31, 1999, noninterest bearing, NOW, MMDA, and savings
deposits represented 61% of total deposits.
Liquidity
Liquidity is a measure of the Company's ability to meet the needs of depositors,
borrowers, and creditors at a reasonable cost and without adverse financial
consequences. The Company has several liquidity measurements that are evaluated
on a frequent basis. The Company has adequate sources of liquidity including
Securities Available for Sale, Federal funds lines, and the ability to borrow
funds from the Federal Home Loan Bank and Federal Reserve discount window. The
management of balance sheet volumes, mixes, and maturities enables the Company
to maintain adequate levels of liquidity.
Capital
Capital adequacy is a measure of the amount of capital needed to support asset
growth, absorb unanticipated losses, and provide safety for depositors. The
regulators establish minimum capital ratio guidelines for the banking industry.
The following table sets forth the regulatory minimum capital ratio guidelines,
the capital ratio guidelines an institution must meet to be considered well
capitalized and the current capital ratios of the Company.
REGULATORY MINIMUM WELL CAPITALIZED COMPANY CAPITAL
CAPITAL RATIOS CAPITAL RATIOS RATIOS
Tier 1 Leverage Ratio 4% 5% 5.7%
Tier 1 Risk-Based Capital Ratio 4% 6% 8.7%
Total Risk-Based Capital 8% 10% 12.0%
At December 31, 1999, 1998, and 1997, the Company exceeded all regulatory
capital guidelines including those for a well capitalized institution.
On December 1, 1997, the Company paid a 3% stock dividend and increased its
regular quarterly cash dividend from $0.18 to $0.19 per common share. On
September 3, 1998, the Company paid a 3% stock dividend and increased its
regular quarterly cash dividend to $0.25 per common share. On December 1, 1999,
the Company paid a 3% stock dividend and maintained its regular quarterly cash
dividend at $0.25 per common share. The dividend payout ratio, based on cash
dividends per share and diluted earnings per share, was 75% for 1999 compared to
173% for 1998
and 48% in 1997. The higher ratios in 1999 and 1998 were due to lower net income
resulting from the special charges in those years. Excluding special charges,
the payout ratio would have been 44% in 1999 and 52% in 1998.
In February 1993, the Company issued $9.0 million aggregate principal amount of
subordinated debentures which mature in 2003 and bear interest at 9.5% per annum
payable semi-annually. These notes are redeemable at the option of the Company,
in whole or in part, at any time after February 15, 2000, at their stated
principal amount plus accrued interest, if any.
In January 1994, the Company issued $25.0 million aggregate principal amount of
subordinated debentures which mature in 2004 and bear interest at 7.75% per
annum payable semi-annually.
In March 1996, the Company issued $23.0 million aggregate principal amount of
subordinated debentures which mature in 2006 and bear interest at 8.75% per
annum payable semi-annually. These notes are redeemable at the option of the
Company, in whole or in part, at any time after April 1, 2001, at their stated
principal amount plus accrued interest, if any.
In September 1996, the Company issued $75.0 million of subordinated debt. The
subordinated debentures bear interest at 8.20% per annum payable semi-annually
and mature in 2006.
Proceeds of the above issuances were used for general corporate purposes
including providing Tier I capital to the subsidiary bank. The debt has been
structured to comply with the Federal Reserve Bank rules regarding debt
qualifying as Tier 2 capital at the Company.
In January 1997, the Company placed $50.0 million in aggregate liquidation
amount of 8.98% Capital Securities due February 2027, using HUBCO Capital Trust
I, a statutory business trust formed under the laws of the State of Delaware.
The sole asset of the trust, which is the obligor on the Series B Capital
Securities, is $51.5 million principal amount of 8.98% Junior Subordinated
Debentures due 2027 of the Company.
In February 1997, the Company placed $25.0 million in aggregate liquidation
amount of 9.25% Capital Securities due March 2027, using JBI Capital Trust I, a
statutory business trust formed under the laws of the State of Delaware. The
sole asset of the trust, which is the obligor on the Series B Capital
Securities, is $25.3 million principal amount of 9.25% Junior Subordinated
Debentures due 2027 of the Company. The 9.25% Trust preferred securities are
callable by the Company on or after March 31, 2002, or earlier in the event the
deduction of related interest for federal income taxes is prohibited, treatment
as Tier I capital is no longer permitted or certain other contingencies arise.
In June 1998, the Company placed $50.0 million in aggregate liquidation amount
of 7.65% Capital Securities due June 2028, using HUBCO Capital Trust II, a
statutory business trust formed under the laws of the State of Delaware. The
sole assets of the trust, which is the obligor on the Series B Capital
Securities, is $51.5 million principal amount of 7.65% Junior Subordinated
Debentures due 2028 of the Company.
The three issues of capital securities have preference over the common
securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation and are guaranteed by the Company. The net
proceeds of the offerings are being used for general corporate purposes and to
increase capital levels of the Company and its subsidiaries. The securities
qualify as Tier I capital under the capital guidelines of the Federal Reserve.
At the end of the reporting period, there were no known uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity or capital resources.
Liquidity and interest rate sensitivity management
The primary objectives of asset/liability management are to provide for the
safety of depositor and investor funds, assure adequate liquidity, maintain an
appropriate balance between interest-sensitive earning assets and
interest-sensitive liabilities and enhance earnings. Liquidity management is a
planning process that ensures that the Company has ample funds to satisfy
operational needs, projected deposit outflows, repayment of borrowing and loan
obligations and the projected credit needs of its customer base. Interest rate
sensitivity management ensures that the Company maintains acceptable levels of
net interest income throughout a range of interest rate environments. The
Company seeks to maintain its interest rate risk within a range that it believes
is both manageable and prudent, given its capital and income generating
capacity.
Liquidity risk is the risk to earnings or capital that would arise from a bank's
inability to meet its obligations when they come due, without incurring
unacceptable losses. The Company uses several measurements in monitoring its
liquidity position. In addition, the Company has a number of borrowing
facilities with banks, primary broker dealers, the Federal Home Loan Bank and
Federal Reserve that are or can be used as sources of liquidity without having
to sell assets to raise cash. At December 31, 1999, the Company's liquidity
ratios exceed all minimum standards set forth by internal policies.
The Company has an asset/liability management committee which manages the risks
associated with the volatility of interest rates and the resulting impact on net
interest income, net income and capital. The management of interest rate risk at
the Company is performed by: (i) analyzing the maturity and repricing
relationships between interest earning assets and interest bearing liabilities
at specific points in time (`GAP') and (ii) "income simulation analysis" which
analyzes the effects of interest rate changes on net interest income, net income
and capital over specific periods of time and captures the dynamic impact of
interest rate changes on the Company's mix of assets and liabilities.
The table on the following page presents the GAP position of the Company at
December 31, 1999. In preparing this table, management has anticipated
prepayments for mortgage-backed securities and mortgage-related securities
according to standard industry prepayment assumptions in effect at year-end.
Total loans includes adjustable rate loans which are placed according to
repricing periods. Fixed rate residential mortgages are assumed to prepay at an
annual rate of 6% which is consistent with historical average housing turnover
rates. Money market deposits and interest-bearing demand accounts have been
included in the due within 90 days category. Assets with daily floating rates
are included in the due
within 90 days category. Assets and liabilities are included in the table based
on their maturities, expected cash repayments or period of first repricing,
subject to the foregoing assumptions.
In analyzing its GAP position, although all time periods are considered, the
Company emphasizes the next twelve month period. An institution is considered to
be liability sensitive, or having a negative GAP, when the amount of
interest-bearing liabilities maturing or repricing within a given time period
exceeds the amount of its interest-earning assets also repricing within that
time period. Conversely, an institution is considered to be asset sensitive, or
having a positive GAP, when the amount of its interest-bearing liabilities
maturing or repricing is less than the amount of its interest-earning assets
also maturing or repricing during the same period. Theoretically, in a falling
interest rate environment, a negative GAP should result in an increase in net
interest income, and in a rising interest rate environment this negative GAP
should adversely affect net interest income. The converse would be true for a
positive GAP.
However, shortcomings are inherent in a simplified GAP analysis that may result
in changes in interest rates affecting net interest income more or less than the
GAP analysis would indicate. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Furthermore, repricing
characteristics of certain assets and liabilities may vary substantially within
a given time period. In the event of a change in interest rates, prepayment and
early withdrawal levels could also deviate significantly from those assumed in
calculating GAP. Also, GAP does not permit analysis of how changes in the mix of
various assets and liabilities and growth rate assumptions impact net interest
income.
The following table shows the Gap position of the Company at December 31