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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
For the fiscal year ended December 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period
from _____________ to _____________
Commission file number 1-08660
HUDSON UNITED BANCORP
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(Exact name of registrant as specified in its Charter)
NEW JERSEY 22-2405746
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1000 MACARTHUR BLVD.
MAHWAH, NEW JERSEY 07430
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201)236-2600
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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
--------------------------
(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 4, 2002 was $1,334,540,302.
The number of shares of Registrant's common stock, no par value, outstanding as
of March 4, 2002 was 45,383,583.
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 to take advantage of the additional
powers provided to bank holding companies. The Company directly owns Hudson
United plus four additional subsidiaries, which are HUBCO Capital Trust I, HUBCO
Capital Trust II, JBI Capital Trust I and Jefferson Delaware, 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 nine subsidiaries. All of the assets
and liabilities of the subsidiaries of the Company and the Bank are consolidated
on the balance sheet of the Company for shareholder reporting purposes. A
further description of these subsidiaries is contained in the section "Other
Subsidiaries" in this current document.
At December 31, 2001, HUB, through its subsidiaries, had total deposits of $6.0
billion, total loans and leases ("loans") of $4.4 billion and total assets of
$7.0 billion. HUB ranked third among commercial banks and bank holding companies
headquartered in New Jersey in terms of asset size at December 31, 2001. Hudson
United operates over 200 branches throughout New Jersey, Connecticut, lower New
York State and eastern Pennsylvania.
Hudson United is a full service commercial bank and offers the services
generally provided by commercial banks of similar size and character, including
imaged checking, savings, and time deposit accounts, 24-hour telephone banking,
internet banking, trust services, cash management services, merchant 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 financing, foreign
currency purchases and letters of credit. The Bank's deposit accounts are
competitive with those of other banks and include checking, savings, money
market accounts and a variety of interest-bearing transaction accounts. In the
lending area, the Bank primarily engages in commercial lending, commercial real
estate lending, consumer lending primarily consisting of home equity loans and
auto loans and "private label" credit card programs for certain retailers and
other businesses. Most of the Company's loans are secured by commercial real
estate, residential real estate or other assets of borrowers.
The Company's main focus is on building banking relationships with individuals,
and small and medium sized businesses. Management attempts to differentiate the
Company from competitors by creating a superior "customer experience". In
addition, the Company believes its ability to supply the services of a large
institution with the personal touch of a small community bank represents a
competitive advantage.
Recent Change in Asset Size
The Company's total assets at December 31, 2001 were $7.0 billion, which
represented a slight increase in its total assets from the prior year, which
were $6.8 billion at December 31, 2000. This increase was due to increases in
investment securities of $935.8 million and other assets of $126.6 million being
offset in part by a decrease of $896.6 million in residential mortgage loans.
The increase in securities and the decline in residential mortgage loans was due
primarily to residential mortgage loan securitizations of $668.5 million during
2001. The increase in other assets was due primarily to the Company's investment
of $125 million in bank owned life insurance during June 2001. The Company's
primary focus in 2001 was on core business growth. Management focused on
executing its business strategies and in providing superior customer service. In
addition, during the year the Company's management team was strengthened through
the hiring of various senior and executive managers. The managers brought to
Hudson United diverse experience from a wide range of financial institutions.
The Company's total assets at December 31, 2000 were $6.8 billion, which
represented a significant reduction in its total assets from the prior year,
which were $9.7 billion at December 31, 1999. The reduction in total assets was
primarily the result of the Company's decision to implement a balance sheet
deleveraging strategy, under which the Company sold a significant amount of its
lower yielding investment securities portfolio and used the proceeds from such
sale to reduce its borrowings. The Company implemented this deleveraging
strategy to attempt to increase the Company's net interest margin, return on
assets, return on equity and earnings per share through a stock repurchase
program utilizing the capital which was freed up through the deleveraging while
also reducing the Company's exposure to changes in interest rates (See
Management's Discussion and Analysis).
Proposed Merger with Dime Bancorp, Inc. ("Dime") which was Terminated
in 2000
HUB entered into a merger agreement in 1999 with Dime, a New York City based
financial institution, under which HUB and Dime were to merge with Dime as the
surviving corporation in the merger changing its name to Dime United Bancorp,
Inc. ("Dime United"). Dime shareholders would have owned 56% of the outstanding
Dime United stock and HUB shareholders would have owned 44% of the outstanding
Dime United Stock following the merger. The proposed merger with Dime would have
been the largest business combination in HUB's corporate history.
The closing of the proposed merger was initially delayed, and the merger was
eventually terminated in 2000, following the announcement by North Fork
Bancorporation of an unsolicited acquisition bid for Dime. The initial delay and
the eventual termination of the merger had a negative impact on the Company's
growth and profitability during 1999 and 2000.
Under the terms of the merger termination agreement between Dime and the
Company, Dime was required to pay the Company a minimum merger termination fee
of $15 million on or before October 28, 2001. Dime was also required to pay
additional amounts to the Company on or before October 28, 2001, up to a maximum
amount of $92 million, in the event that Dime entered into certain transactions
with third parties involving a sale by Dime of a substantial portion of its
assets, a significant subsidiary, Dime itself or the acquisition of a certain
percentage of Dime's outstanding common stock. HUB recognized the minimum
termination fee payable from Dime as revenue when the pending merger was
terminated in 2000, which revenue was less than the expenses incurred by the
Company in the terminated merger. In June 2001, Dime agreed to merge with
Washington Mutual, Inc. Pursuant to the above mentioned termination agreement,
Dime was required to pay Hudson United $77 million upon the closing of the
merger with Washington Mutual. The merger of Dime and Washington Mutual closed
in January of 2002. The Company recognized the additional $77 million of
termination payments as revenue in the first quarter of 2002. The Company also
recorded in the first quarter of 2002 approximately $15 million of expenses
related to the terminated merger including financial advisor fees, acceleration
of employee retention awards and other expenses.
Acquisition Activity by the Company
The Company did not complete any acquisitions of other companies in 2001 or
2000.
The Company entered into agreements at several times in 2001 to purchase third
party credit card assets from a subsidiary of Transamerica Finance Company. As
of December 31, 2001, the Company had paid total consideration of $161.4 million
for $157.0 million of these assets, with an associated premium of $4.4 million
that is being amortized over five years. In August 2001, the Company assumed
deposit liabilities from First International Bank in the amount of $272.8
million at a discount of $0.5 million. These were deposit liabilities were
primarily short term brokered deposits.
The Company completed six acquisitions in 1999, and had completed a total of 31
acquisitions since October 1990. The Company increased its total assets over
this period from $550 million to $7.0 billion, and increased its branch network
from 15 branches to over 200 branches, primarily as a result of these
acquisitions.
On March 26, 1999, the Company completed its assumption of $151 million of
deposit liabilities and purchase of 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. That agreement was terminated in 2000
due to Advest's acquisition by a third party.
The above acquisitions in 1999 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 Jeff and SJB acquisitions in the year ended December 31, 1999 were accounted
for under the poolings-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:
Loans
Purchase Deposits Purchased
Price Assumed or Acquired 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 ................................... 38.2 204 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 believes that its profitability and its financial condition was
significantly impacted by its acquisition strategy and by the consummation of
its acquisitions. From 1990 to 2001 the Company's return on average assets
increased from less than 1% to 1.5% and its return on average equity increased
from less than 10% to 25%.
The Company intends to continue to seek opportunities to acquire other banks or
financial services companies, and to acquire specific loans or other assets
and/or to assume deposit or other liabilities of other banks or financial
services companies. There can be no assurance that the Company will be
successful in making additional acquisitions or, if additional acquisitions are
made, that these acquisitions will enhance the profitability of the Company.
Stock Repurchases by the Company in 2001 and 2000
In November 1993, the Company's Board of Directors authorized management to
repurchase up to 10 percent of its outstanding common stock each year. The
program may be discontinued or suspended at any time, and there is no assurance
that the Company will purchase the full amount authorized. 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 future acquisitions. In June 2000, the Company's Board of Directors
authorized the repurchase of up to 20% of the Company's outstanding shares.
During 2000,
the Company purchased 9.4 million treasury shares at an aggregate cost of $l93.3
million,of which 5.2 million shares were reissued for stock dividends, stock
options and other employee benefit plans. In June 2001, the Company's Board of
Directors extended the Company's stock repurchase program until December 2002
and authorized additional repurchases of up to 10% of the Company's outstanding
shares.
During 2001, the Company purchased 2.3 million treasury shares at an aggregate
cost of $56.3 million. During 2001, 179,209 shares were reissued for stock
options. At December 31, 2001, there were 45.8 million shares of the Company's
common stock outstanding.
Other Subsidiaries
In addition to Hudson United Bank, the Company directly owns four consolidated
subsidiaries that were established for the purpose of issuing and servicing the
capital trust securities of the Company which enhance the regulatory capital of
the Company. They are HUBCO Capital Trust I, HUBCO Capital Trust II, JBI Capital
Trust I, and Jefferson Delaware, Inc.
The Company is also the indirect owner, through Hudson United, of the following
nine consolidated subsidiaries.
In 1997, Hudson United established a directly owned subsidiary called HUB
Mortgage Investments, Inc. At December 31, 2001, $578.3 million of mortgage
loans and $851.1 million in mortgage-related investment securities of Hudson
United were being managed by this subsidiary, which operates as a real estate
investment trust. This subsidiary was established to manage the Company's
mortgage-related assets and assist in managing its state income tax liability.
In 1987, Hudson United established a directly owned subsidiary called Hendrick
Hudson Corp. As of December 31, 2001, no Hudson United assets are being managed
by Hendrick Hudson Corp. of New Jersey. This subsidiary was established to
manage the Company's investment portfolio and assist in managing its state
income tax liability.
In 1998 Hudson United established NJ Investments of Delaware, Inc. As of
December 31, 2001, $474.2 million of Hudson United's investment portfolio was
being managed by NJ Investments of Delaware, Inc. This subsidiary was
established to manage the Company's investment portfolio and assist in managing
its state income tax liability.
Hudson United owns five subsidiaries that were established for the purpose of
holding real estate assets. They are -- Lafayette Development Corp., Plural
Realty, Inc., PSB Associates, Inc., AMBA Realty Corporation and Riverdale Timber
Ridge, Inc.
All of the assets and liabilities of the subsidiaries are consolidated in the
Company's financial statements.
Hudson Trader Brokerage Services, Inc., which was established in 1991, is a
subsidiary that was engaged in brokerage services. This subsidiary is inactive
and is expected to be officially dissolved in 2002.
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, a New
Jersey based institution. HUB simultaneously made a capital contribution of the
remaining 50% to Hudson United Bank. 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.
The Company currently outsources such services to an independent third party
provider of such data processing and other services. The Company's investment in
UFS is zero and UFS is expected to be officially dissolved in 2002.
Employee Relations
Hudson United Bank enjoys a good relationship with its employees and is 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 bank 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 a bank 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. A bank 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". A bank
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. A bank 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, 2001, 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 and
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, 2001, HUB's total risk-based
capital ratio was 10.51% and its tier 1 risk-based capital ratio was 7.53%.
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, 2001, HUB had a leverage capital ratio of 5.75%.
HUB and its subsidiary bank are 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,
2001, 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").
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 also charged 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 became equal.
The 1996 Act instituted a number of other regulatory relief provisions.
Restrictions on Dividend Payments, Loans, or Advances
The holders of HUB's common stock will receive dividends only when, and if such
dividends are 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 of
paid-in capital of not less than 50 percent of the capital stock amount. As of
December 31, 2001 the maximum amount available for distribution to HUB from
Hudson United was $556.3 million, subject to regulatory capital limitations.
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 from the Bank are
required to be collateralized by specific assets owned by HUB or affiliates..
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") enables a bank holding company 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 the legislation, each
state had 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. The vast majority of states have allowed interstate banking by
merger but have not authorized de novo branching.
Recent Legislation
As part of the USA Patriot Act, signed into law on October 26, 2001, Congress
adopted the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the "Act"). The Act authorizes the Secretary of the
Treasury, in consultation with the heads of other government agencies, to adopt
special measures applicable to financial institutions such as banks, bank
holding companies, broker-dealers and insurance companies. Among its other
provisions, the Act requires each financial institution: (i) to establish an
anti-money laundering program; (ii) to establish due diligence policies,
procedures and controls that are reasonably designed to detect and report
instances of money laundering in United States private banking accounts and
correspondent accounts maintained for non-United States persons or their
representatives; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
the Act expands the circumstances under which funds in a bank account may be
forfeited and requires covered financial institutions to respond under certain
circumstances to requests for information from federal banking agencies within
120 hours.
Treasury regulations implementing the due diligence requirements must be issued
no later than April 24, 2002. Whether or not regulations are adopted, the law
becomes effective July 23, 2002. Additional regulations are to be adopted during
2002 to implement minimum standards to verify customer identity, to encourage
cooperation among financial institutions, federal banking
agencies, and law enforcement authorities regarding possible money laundering or
terrorist activities, to prohibit the anonymous use of "concentration accounts,"
and to require all covered financial institutions to have a Bank Secrecy Act
compliance program.
The Act also amends the Bank Holding Company Act and the Bank Merger Act to
require the federal banking agencies to consider the effectiveness of a
financial institution's anti-money laundering activities when reviewing an
application under these acts.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 became effective in
early 2000. The Modernization Act:
o allows bank holding companies meeting management, capital and Community
Reinvestment Act Standards to engage in a substantially broader range of
nonbanking activities than previously 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;
o allows insurers and other financial service companies to acquire banks;
o removes various restrictions previously applied to bank holding company
ownership of securities firms and mutual fund advisory companies; and
o establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
The Modernization Act also modified other 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 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. At December 31,
2001, HUB had 5 wholly-owned subsidiaries including Hudson United. In addition,
HUB, through Hudson United, indirectly owns 9 additional wholly-owned
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.
At December 31, 2001, HUB, through its subsidiaries, had total deposits of $6.0
billion, total loans of $4.4 billion and total assets of $7.0 billion. HUB
ranked third among commercial banks and bank holding companies headquartered in
New Jersey in terms of asset size at December 31, 2001. The Bank operates branch
offices throughout the state of New Jersey; in the Hudson Valley area of New
York State; in southern Connecticut in the areas between Greenwich and Hartford;
and in Philadelphia and surrounding areas in Pennsylvania.
Hudson United is a full service commercial bank and offers the services
generally provided by commercial banks of similar size and character, including
imaged checking, savings, and time deposit accounts, 24-hour telephone banking,
internet banking, trust services, cash management services, merchant 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 financing, foreign
currency purchases and letters of credit. The Bank's deposit accounts are
competitive with those of other banks and include checking, savings, money
market accounts and a variety of interest-bearing transaction accounts. In the
lending area, the Bank primarily engages in commercial lending, commercial real
estate lending, consumer lending primarily consisting of home equity loans and
auto loans and "private label" credit card programs for certain retailers and
other businesses. Most of the Company's loans are secured by commercial real
estate, residential real estate or other assets of borrowers.
The Company's main focus is on building banking relationships with individuals,
and small and medium sized businesses. Management attempts to differentiate the
Company from competitors by creating a superior "customer experience". In
addition, the Company believes its ability to supply the services of a large
institution with the personal touch of a small community bank represents a
competitive advantage.
Hudson United offers a variety of trust services. At December 31, 2001, Hudson
United's Trust Department had approximately $930.9 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 industries and credit unions.
Other financial institutions, such as mutual funds, consumer finance companies,
factoring companies, and insurance companies, also compete with the Company for
loans or 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, extend loans, sell its
services and operate at a strong level of performance.
Hudson United has focused on becoming an integral part of the communities it
serves. Officers and employees are incented to meet the needs of their customers
and to meet the needs of the local communities served.
The Company had 1,777 full-time equivalent employees as of December 31, 2001.
(d) Financial Information about foreign and domestic operations and export
sales.
Not Applicable
(e) Executive Officers of the Registrant
The following table sets forth certain information as to each executive officer
of the Company who is not a director.
Executive
Name, Age and Officer of
Position with the Company
the Company Since Principal Position
- --------------------------------------------------------------------------------
Joseph Barr, 52 ................. 2001 Executive Vice President,
Retail Banking
William R. Coda, 44 ............. 2000 Executive Vice President,
Human Resources and
Professional Development
William A. Houlihan, 46 ......... 2001 Executive Vice President, and
Chief Financial Officer
James Mayo, 62 .................. 2000 Executive Vice President,
Operations and Technology
Thomas R. Nelson, 57 ............ 1998 Executive Vice President;
Private Label Credit Card
Thomas J. Shara, 44 ............. 1995 Executive Vice President and
Senior Loan Officer
D. Lynn Van Borkulo-Nuzzo, 52 ... 1995 Executive Vice President and
Corporate Secretary
(f) Statistical Disclosure Required Pursuant to Securities Exchange Act,
Industry Guide 3
The statistical disclosures for a bank holding company required pursuant to
Industry Guide 3 are contained on the following pages of this Report on Form
10K.
ITEM 2. PROPERTIES
The corporate headquarters of the Company and the Bank is located in a three
story facility in Mahwah, New Jersey. HUB owns the building which is
approximately 64,350 square feet and houses the executive offices of the Company
and its subsidiaries. Hudson United occupied 201 branch offices as of December
31, 2001, of which 97 are owned and 104 are leased.
ITEM 3. LEGAL PROCEEDINGS
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 legal
proceedings which have arisen and which 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 the year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 2001, the Company had approximately 7,670 shareholders of
record.
The Company's common stock is listed on the New York Stock Exchange under the
symbol of "HU". 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.
2001
--------------------------
High Low
---------- --------
1st Quarter ..................... $23.42 $20.00
2nd Quarter ..................... 26.20 21.50
3rd Quarter ..................... 28.80 25.01
4th Quarter ..................... 29.33 25.02
2000
--------------------------
High Low
---------- --------
1st Quarter ..................... $22.61 $16.42
2nd Quarter ..................... 24.77 17.67
3rd Quarter ..................... 25.11 20.34
4th Quarter ..................... 24.27 17.27
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.
2001 2000
---- ----
March ............. $0.250 March ........... $0.227
June .............. 0.250 June ............ 0.227
September ......... 0.250 September ....... 0.227
December .......... 0.260 December ........ 0.250
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands Except For Per Share Amounts)
The following selected financial data should be read in conjunction with HUB's
Consolidated Financial Statements and the notes presented elsewhere herein.
Results reported in this table for years other than 2001 have been restated to
reflect pooling of interest transactions. Reference should be made to footnote
2, Business Combinations, of the Financial Statements for a discussion of recent
acquisitions that affect the comparability of the information contained in this
table.
($ 000) except per share data 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net Interest Income .......................... $ 285,366 $ 319,726 $ 343,066 $ 328,850 $ 326,544
Provision for Possible Loan and Lease
Losses .................................... 34,147 24,000 52,200 35,607 24,442
Net Income ................................... 94,461 49,821 69,338 26,751 83,995
Per Share Data(1)
Earnings Per Share:
Basic ..................................... 2.02 0.93 1.21 0.46 1.41
Diluted ................................... 2.00 0.92 1.18 0.44 1.35
Cash Dividends - Common ...................... 1.01 0.93 0.88 0.77 0.65
Balance Sheet Totals
(at or for the year ended December 31,):
Total Assets ................................. 6,999,535 6,817,226 9,686,286 8,897,775 8,649,847
Long Term Debt ............................... 248,300 248,300 257,300 257,300 210,050
Average Assets ............................... 6,710,167 8,207,384 9,248,141 8,721,572 8,314,181
Average Deposits ............................. 5,825,107 5,901,510 6,596,220 6,879,120 6,669,840
Average Equity ............................... 378,647 464,860 580,238 646,851 669,756
(1) Per share data is adjusted retroactively to reflect a 10% stock dividend
paid December 1, 2000, a 3% stock dividend paid December 1, 1999, a 3% stock
dividend paid September 1, 1998 and a 3% stock dividend paid December 1, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements Regarding Forward-Looking Information
This form 10-K, both in the Management Discussion & Analysis and elsewhere,
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are not historical facts and
include expressions about management's confidence and strategies and
management's expectations about new and existing programs and products,
relationships, opportunities, technology and market conditions. These statements
may be identified by such forward looking terminology as "expect," "look,"
"believe," "anticipate," "consider," "may," "will," or similar statements or
variations of such terms. Such forward-looking statements involve certain risks
and uncertainties. These include, but are not limited to, changes in interest
rates, changes in economic conditions especially as they have been affected by
recent developments, deposit and loan trends, loan quality, trends in loan loss
provisions; changes in relationships with customers, failure to realize expected
cost savings or revenue enhancements from changes in business strategies and
acquisitions, and the effects of legal and regulatory provisions applicable to
the Company and its competitors. Actual results may differ materially from the
results discussed in these forward-looking statements. The Company assumes no
obligation for updating any such forward-looking statements at any time.
Acquisition Summary
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 with $7 billion in assets. From 1990 to 2001 return on average
assets increased from less than 1% to 1.5% and return on average equity
increased from less than 10% to 25%. 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 should become accretive to earnings within a short time frame,
generally within one year. The financial results of certain of these
acquisitions are difficult to measure other than on an as-reported basis each
quarter because stock for stock acquisitions accounted for using the
pooling-of-interests method change historical results from those actually
reported by the Company.
The Company did not complete any acquisitions of other companies in 2001 and
2000.
The Company entered into agreements at several times in 2001 to purchase credit
card assets from a subsidiary of Transamerica Finance Company. As of December
31, 2001, the Company had paid total consideration of $161.4 million for $157.0
million of these assets, with an associated premium of $4.4 million that is
being amortized over five years. In August 2001, the Company assumed deposit
liabilities from First International Bank in the amount of $272.8 million at a
discount of $0.5 million. These were primarily brokered time deposits.
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 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. That agreement was terminated in 2000
due to Advest's acquisition by a third party.
The above 1999 acquisitions were accounted for under the purchase method of
accounting and, as such, the assets and earnings of the acquired entity 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
New Jersey.
The Jeff and SJB acquisitions were accounted for using the pooling-of-interests
accounting method and, accordingly, the statements for periods prior to the
acquisitions have been restated to include these institutions and their results
of operations.
Special Charges Summary
In 2000 and 1999, 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.
Years Ended December 31,
SPECIAL CHARGES ------------------------
(IN THOUSANDS) 2000 1999
-------- --------
Merger related and restructuring
charges ............................. $ 15,004 $ 32,031
Nonrecurring Operating Charges ......... 7,000 --
Investment Security losses ............. 63,619 5,162
Special provisions for loan losses ..... -- 33,000
-------- --------
Total special charges pre-tax .......... $ 85,623 $ 70,193
======== ========
Total special charges after-tax ........ $ 58,472 $ 47,854
======== ========
Results of Operations for the Years
Ended December 31, 2001, 2000 and 1999
The Company reported net income of $94.5 million and fully diluted earnings per
share of $2.00 in 2001. The Company had net income of $49.8 million and fully
diluted earnings per share of $0.92 in 2000. Excluding special charges,
operating earnings were $108.3 million and fully diluted earnings per share were
$2.00 in 2000. The Company had net income of $69.3 million and fully diluted
earnings per share of $1.18 in 1999. Excluding special charges, the Company had
operating earnings of $117.2 million and fully diluted earnings per share of
$2.00 in 1999.
Years Ended December 31,
--------------------------------------
2001 2000 1999
--------- --------- ---------
Return on Average Assets .............. 1.41% 0.61% 0.75%
Return on Average Assets
(excluding special charges) ......... 1.41% 1.32% 1.27%
Return on Average Equity .............. 24.95% 10.72% 11.95%
Return on Average Equity
(excluding special charges) ......... 24.95% 23.30% 20.20%
Common Dividend Payout Ratio .......... 50.50% 101.09% 74.58%
Common Dividend Payout Ratio
(excluding special charges) ......... 50.50% 46.50% 44.00%
Average Stockholders' Equity to
Average Assets Ratio ............... 5.64% 5.66% 6.27%
Average Balances, Net Interest Income, Yields, and Rates
Years Ended December 31,
-----------------------------------------------------------------------------------------------------
For the Years Ending 2001 2000 1999
--------------------------------- ------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
($ 000) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- --------- ----------- -------- ------- ------------ --------- ------
ASSETS
Interest-bearing deposits
with banks ................ $ $ -- -- $ -- $ -- -- $ 17,441 $ 1,132 6.49%
Federal funds sold .......... 108,026 3,241 3.00% 1,770 111 6.31% 76,672 4,980 6.50%
Securities-taxable .......... 1,195,549 81,646 6.83% 2,098,809 133,921 6.38% 3,328,654 204,937 6.16%
Securities-tax exempt (1) ... 38,487 2,628 6.83% 36,217 2,643 7.30% 85,184 7,249 8.51%
Loans (2) ................... 4,793,998 386,791 8.07% 5,470,763 475,672 8.69% 5,136,467 432,041 8.41%
---------- --------- ----- ---------- -------- ---- ---------- -------- ----
Total Earning Assets ........ $6,136,060 $ 474,306 7.73% $7,607,559 $612,347 8.10% $8,644,418 $650,339 7.52%
Cash and due from banks ..... 226,551 243,729 273,926
Allowance for loan losses .. (85,311) (97,500) (79,095)
Premises and equipment ...... 120,880 129,502 115,924
Other assets ................ 311,987 324,094 292,968
---------- ---------- ----------
TOTAL ASSETS ................ $6,710,167 $8,207,384 $9,248,141
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW/Money market deposit
accounts .................. $1,061,877 $ 20,198 1.90% $ 1,029,708 $ 23,035 2.24% $1,199,059 $ 24,125 2.01%
Savings accounts ............ 1,382,794 25,666 1.86% 1,504,151 38,506 2.56% 1,405,688 28,184 2.00%
Time deposits ............... 2,279,391 109,199 4.79% 2,192,996 112,290 5.12% 2,821,338 138,426 4.91%
---------- --------- ----- ----------- -------- ---- ---------- -------- ----
Total Interest-Bearing
Deposits .................. 4,724,062 155,063 3.28% $ 4,726,855 $173,831 3.68% $5,426,085 $190,735 3.52%
Borrowings .................. 221,123 9,020 4.08% 1,575,481 93,564 5.94% 1,722,512 88,902 5.16%
Long-term debt .............. 248,300 20,914 8.42% 253,882 21,188 8.35% 257,218 21,873 8.50%
---------- --------- ----- ----------- -------- ---- ---------- -------- ----
Total Interest-Bearing
Liabilities ............... 5,193,485 184,997 3.56% $ 6,556,218 $288,583 4.40% $7,405,815 $301,510 4.07%
Demand deposits ............. 1,101,045 1,174,655 1,170,135
Other liabilities ........... 36,990 11,651 91,953
Stockholders' equity ........ 378,647 464,860 580,238
---------- ----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ...... $6,710,167 $ 8,207,384 $9,248,141
========== =========== ==========
NET INTEREST INCOME ......... $ 289,309 $323,764 $348,829
========= ======== ========
NET INTEREST MARGIN (3) ..... 4.71% 4.26% 4.04%
==== ==== ====
(1) The tax equivalent adjustments for the years ended December 31, 2001, 2000
and 1999 were $920, $925 and $2,245, respectively, and are based on a tax
rate of 35%.
(2) The tax equivalent adjustments for the years ended December 31, 2001, 2000
and 1999 were $3,023, $3,113 and $3,518, 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)
--------------------------------------- ------------------------------------
For the Years Ending December 31, 2001 OVER 2000 2000 OVER 1999
--------------------------------------- ------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------ --------- ---------- --------- ---------- ----------
Loans $ (54,603) $(34,278) $ (88,881) $ 29,050 $ 14,581 $ 43,631
Securities-taxable (61,685) 9,410 (52,275) (78,355) 7,339 (71,016)
Securities-tax exempt 155 (170) (15) (3,575) (1,031) (4,606)
Federal funds sold 3,188 (58) 3,130 (4,869) 0 (4,869)
Interest bearing deposits -- -- -- (1,131) 0 (1,131)
--------- -------- --------- -------- -------- ---------
Total interest income $(112,945) $(25,096) $(138,041) $(58,880) $ 20,889 $ (37,991)
--------- -------- --------- -------- -------- ---------
NOW/Money market deposit accounts $ 612 $ (3,449) $ (2,837) $ (3,793) $ 2,703 $ (1,090)
Savings (2,253) (10,587) (12,840) 2,521 7,801 10,322
Time deposits 4,139 (7,230) (3,091) (32,171) 6,035 (26,136)
Short-term borrowings (55,241) (29,304) (84,545) (8,734) 13,396 4,662
Long-term debt (470) 197 (273) (279) (405) (684)
--------- -------- --------- -------- -------- --------
Total interest expense $ (53,213) $(50,373) $(103,586) $(42,456) $ 29,530 $ (12,926)
--------- -------- --------- -------- -------- ---------
Net Interest Income $ (59,732) $ 25,277 $ (34,455) $(16,424) $ (8,641) $ (25,065)
========= ======== ========= ======== ======== =========
Net Interest Income
Net interest income is the difference between the interest earned on earning
assets and the interest paid on interest bearing liabilities. 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; and the investment
securities portfolio. The securities portfolio is invested primarily in U.S.
Government Agency securities, U.S. Government Agency mortgage-backed securities
and mortgage-related securities. Cash received from deposits and borrowings not
required to fund loans and other assets are invested primarily in investment
securities. The principal interest bearing liabilities are deposit accounts and
borrowings.
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 a FTE basis was $289.3 million for 2001 compared to
$323.8 million for 2000 and $348.8 million for 1999. The decrease in net
interest income in 2001 compared to 2000 was due to a $1.5 billion decrease in
average interest-earning assets, partially offset by an increase in the net
interest margin of 45 basis points. The decrease in average interest-earning
assets was mainly due to a lower average volume of investment securities due to
the Company's deleveraging program. The decline in net interest income in 2000
compared to 1999 was due to a $1.04 billion decrease in average interest-earning
assets, partially offset by a 22 basis point increase in the net interest
margin.
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 4.71%
in 2001 compared to 4.26% in 2000 and 4.04% in 1999. The 45 basis point increase
in net interest margin in 2001 from 2000 was due mainly to lower interest rates
paid on deposits and borrowings that exceeded the decrease in interest rates on
interest earning assets. The 22 basis point increase in net interest margin in
2000 from 1999 was primarily due to an improvement in the asset mix, caused by
an increase in average loans and a decrease in lower yielding investment
securities, offset in part by higher interest rates paid on deposits and
borrowings.
Noninterest Income
Noninterest income, excluding security gains/(losses) and trading asset gains
was $98.1 million for 2001, $89.7 million for 2000 and $89.9 million for 1999.
The increase in 2001 compared to 2000 was primarily due to increases in credit
card fees, as a result of the Company's growth in the private label credit card
business, increased retail service fees and the Company's investment in separate
account bank owned life insurance in June 2001. In 2000, deposit account service
fees grew 7% which was offset by declines in credit card and non-deposit related
fee income. Noninterest income, excluding security gains/(losses) and trading
asset gains, as a percentage of total net revenue (net interest income plus non
interest income excluding gains and losses on securities and trading asset
gains) was 26% in 2001, 22% in 2000, and 21% in 1999. Included in noninterest
income for 2000 is a $63.6 million pre-tax special charge, related to the
Company's balance sheet deleveraging program.
Noninterest Expenses
Noninterest expense, excluding special charges, decreased to $227.2 million in
2001 from $228.0 million in 2000 and $239.3 million in 1999. The decline in
expense in 2001 was due primarily to cost savings related to efficiencies in
operations partially offset by higher business development expenses. The
decrease in expenses to $228.0 million in 2000 from $ 239.3 million in 1999 was
due primarily to cost savings related to the JeffBanks and Southern Jersey
Bancorp acquisitions.
Salary and benefit expense was $83.5 million in 2001, $89.9 million in 2000 and
$102.7 million in 1999. The decline in 2001 compared to 2000, and in 2000
compared to 1999, was due to efficiencies realized in staff and support
functions and consolidation of benefit plans.
Equipment expense was $18.6 million in 2001 as compared to $20.4 million in 2000
and $14.7 million in 1999. The lower expense in 2001 when compared to 2000
resulted mainly from efficiencies achieved after system conversion of the 1999
acquisitions was completed. The higher expense in 2000 when compared to 1999
resulted mainly from improvements in the Company's technological infrastructure.
Outside services expense was $50.4 million in 2001 as compared to $43.9 million
in 2000 and $48.8 million in 1999. The increase in 2001 from 2000 resulted
primarily from higher expenses related to developing and supporting the
Company's business lines, paid primarily to third party data and item processing
companies. The increase in 2000 compared to 1999 resulted from a $4.5 million
decrease in professional fees.
Amortization of intangibles expense was $15.1 million in 2001, $15.5 million in
2000 and $14.9 million in 1999. Refer to the Recent Accounting Standards portion
of the Notes to Consolidated Financial Statements for further discussion of
intangible amortization.
There were no merger related and restructuring costs in 2001. Merger related and
restructuring costs were $15.0 million and other nonrecurring operating charges
were $7.0 million in 2000 primarily related to the terminated Dime merger of
equals. These merger related and restructuring costs include the approximate
amounts of $4.8 million for the recognition of severance benefits and consulting
agreements, $2.0 million for stay pay obligations to current employees, $2.0
million for payments and reserves for the settlements of pre-existing litigation
at acquired institutions and $4.2 million for the recognition of obligations for
which the bank will not receive future benefits. The balance of the expenses are
comprised of building writedowns and miscellaneous expenses including search
fees, advisor expenses, and other miscellaneous items. The nonrecurring
operating charges include $3.7 million related to the change to a new outsource
service provider, $2.0 million for planned branch consolidation, and $1.3
million for the recognition of obligations for which the Bank will not recover
future benefits.
Merger related and restructuring costs were $32.0 million in 1999. These costs
include $12.6 million for payout and accruals for employment contracts,
severance and other employee related costs, $3.9 million for branch closings,
fixed asset disposition and other occupancy related costs, $5.6 million for
technical support for system conversion and early termination of system related
contracts, $1.8 million for legal and accounting professional services, $4.1
million for financial advisor costs, $2.0 million provision for other real
estate owned and $2.0 million for other merger related expenses.
Federal Income Taxes
During valuation reviews in 2000, the Company established a $2.9 million
valuation allowance against capital losses resulting from the sale of securities
in 2000. Primarily as a result of a reduction in the allowance due to gains from
the sale of securities and a higher level of tax exempt income resulting from an
investment in bank owned life insurance, the Company had a lower effective tax
rate and a lower provision for income taxes in 2001 compared to 2000 and 1999.
The effective tax rate was 29.2% in 2001, 35.1% in 2000 and 36.0% in 1999.
Financial Condition
Total assets at December 31, 2001 were $7.0 billion, an increase from total
assets at December 31, 2000 of $6.8 billion. This increase was due to increases
in investment securities of $935.8 million and other assets of $126.6 million
being offset in part by a decrease of $896.6 million in residential mortgage
loans. The increase in securities and the subsequent decline in residential
mortgage loans was due mainly to residential mortgage loan securitizations of
$668.5 million during 2001. The increase in other assets was due primarily to
the Company's investment of $125 million in bank owned life insurance during
June 2001.
The Company designated $576 million of available for sale investment securities
as trading account assets in the fourth quarter of 2001. The designation of
securities was done as part of an investment securities portfolio restructuring
strategy to reduce the overall average life of the investment portfolio and
increase its cash flow, in anticipation of a stronger economy and a higher
interest rate environment at some point in the future. This strategy also
involves reducing the duration of the investment portfolio, and decreasing the
potential changes in the market value of the underlying assets. This
restructuring strategy should result in reduced interest income from its
investment portfolio with interest rates at current levels, but more interest
income as interest rates rise. The designation of securities resulted in a $10.2
million pretax gain in the fourth quarter of 2001. All of these securities were
subsequently sold in the first quarter of 2002.
The Company also designated certain non-performing commercial and residential
mortgage loans as held for sale assets in the fourth quarter of 2001. The
designation is being done as part of a strategy to accelerate the resolution of
such assets in 2002, to enable the Company to allocate more resources to new
business activities. The non-performing loans prior to designation had a net
book value of $26.3 million. The designation resulted in a $10.1 million
provision for possible loan and lease losses relating to non-performing loans
held for sale in the fourth quarter of 2001, and a corresponding charge off in
the same amount. It is expected that these non-performing loans will be sold
during the first quarter of 2002.
Total liabilities at December 31, 2001 were $6.6 billion, an increase from total
liabilities at December 31, 2000 of $6.4 billion.
Total Stockholders' Equity was $383.9 million at December 31, 2001, an increase
of $15.4 million from Stockholders' Equity of $368.5 million at December 31,
2000. This increase was due to net income of $94.5 million and other
comprehensive income of $21.7 million, partially offset by cash dividends paid
of $47.4 million and purchases of treasury stock of $56.3 million.
Securities
The securities portfolio serves as a source of liquidity, earnings, and a means
of managing interest rate risk along with other asset liability management
strategies. Consequently, the securities portfolio is managed over time in
response to changes in market conditions and loan demand. The securities
portfolio comprised 19% of the total assets of the Company at December 31, 2001
and 14% of the total assets of the Company at December 31, 2000.
The Company's securities portfolio consists primarily of U.S. government agency
mortgage-backed and mortgage-related securities.
The following tables summarize the composition of the portfolios as of December
31, 2001 and 2000 (in thousands):
2001 2000
--------------------------------------------------- ----------------------------------------------
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 ........ $ 12,904 $ 147 $ -- $ 13,051 $ 31,839 $ 37 $ (48) $ 31,828
U.S. Government
Agencies .............. -- -- -- -- 3,500 -- -- 3,500
Mortgage-backed
securities ............ 1,032,993 14,670 (1,068) 1,046,595 241,356 320 (3,642) 238,034
States and Political
subdivisions .......... 26,992 363 (6) 27,349 1,516 41 -- 1,557
Asset backed and Other
debt securities ....... 170,747 314 (31) 171,030 3,754 -- (193) 3,561
Federal Home Loan
Bank stock ............ 21,877 -- -- 21,877 105,924 -- -- 105,924
Other equity securities 22,571 614 (690) 22,495 43,092 279 (5,048) 38,323
---------- ------- -------- ---------- -------- ----- ------- --------
$1,288,084 $16,108 $ (1,795) $1,302,397 $430,981 $ 677 $(8,931) $422,727
========== ======= ======== ========== ======== ===== ======= ========
2000
-------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED -------------------- MARKET
COST GAINS (LOSSES) VALUE
-------------------------------------------
HELD TO MATURITY
PORTFOLIO
U.S. Government ......... $ 24,199 $ -- $ (69) $ 24,130
U.S. Government
Agencies .............. 38,229 488 (45) 38,672
Mortgage-backed
securities ............ 406,518 543 (7,845) 399,216
States and Political
subdivisions .......... 51,246 187 (41) 51,392
Other debt securities ... -- -- -- --
--------- ------- ------- --------
$ 520,192 $ 1,218 $(8,000) $513,410
========= ======= ======= ========
The following table summarizes trading assets at December 31, 2001 (in
thousands):
ESTIMATED MARKET
VALUE
-----------------
TRADING ASSET PORTFOLIO
Mortgage-backed securities ....................... $ 575,007
Other debt securities ............................ 1,301
---------
Total ......................................... $ 576,308
=========
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", effective January 1, 2001. At the same time, the total held
to maturity investment portfolio, at an amortized cost of $520,192, was
transferred to the available for sale investment portfolio. At the time of
transfer the market value of these securities was $513,410 and the unrealized
loss on these securities was $6,782. The increase in investment securities at
December 31, 2001 compared to December 31, 2000 was due to the securitization of
$668.5 million of residential mortgages.
INVESTMENT PORTFOLIO
Carrying Value at End of Each Year
As of December 31,
------------------------------------------
2001 2000 1999
----------- ---------- -----------
(in thousands)
U.S. Treasury and other U.S. Government Agencies
and Corporations ........................................ $ 1,059,646 $ 742,308 $ 3,087,607
State and Political Subdivisions .......................... 27,349 52,803 27,620
Asset backed and Other Debt Securities .................... 169,729 3,561 45,348
Equity Securities ......................................... 45,673 144,247 205,951
----------- ---------- -----------
Subtotal ......................................... 1,302,397 942,919 3,366,526
Trading Assets ............................................ 576,308 -- --
----------- ---------- -----------
TOTAL .............................................. $ 1,878,705 $ 942,919 $ 3,366,526
=========== ========= ===========
Maturities and Weighted Average Yield for the Year Ending December 31, 2001 (in
thousands)
Maturing
-------------------------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
------------------- ------------------ ----------------- --------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------ ------- ----- -------- ------ ---------- ------
U.S. Treasury and other
U.S. Government
Agencies and
Corporations ........... $ 9,090 3.33% $ 3,139 5.30% $ 88,985 6.15% $ 958,432 5.86%
States and Political
Subdivisions ........... 18,484 4.71 4,839 7.32 3,619 7.85 407 8.00
Asset backed and Other
Debt Securities ........ 68,358 5.45 68,408 5.45 23,938 6.07 9,025 6.65
Equity Securities ......... 21,877 5.55 -- -- -- -- 23,796 5.63
--------- -------- -------- ----------
Subtotal ............. 117,809 5.19 76,386 5.56 116,542 6.19 991,660 5.86
Trading Assets ............ -- -- -- 576,308 6.36
--------- -------- -------- ----------
TOTAL ............... $ 117,809 5.19 $ 76,386 5.56 $116,542 6.19 $1,567,968 6.04
========= ======== ======== ==========
Weighted average yields on tax-exempt obligations have been computed on a fully
tax-equivalent basis assuming a federal tax rate of 35.0 percent.
Loan Portfolio Distribution of Loans by Category
(Dollars in thousands)
(as of December 31,)
----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ---------- ---------- ---------- -----------
Loans secured by
real estate:
Residential mortgage
loans ................... $ 537,055 $1,433,697 $1,639,578 $1,739,054 $1,877,888
Loans held for sale ....... 16,185 -- 9,073 14,600 4,327
Residential home equity
loans ................... 329,571 338,164 357,941 230,587 216,215
Commercial mortgage loans . 826,151 920,397 1,024,844 978,040 1,105,440
---------- ---------- ---------- ---------- ----------
$1,708,962 $2,692,258 $3,031,436 $2,962,281 $3,203,870
---------- ---------- ---------- ---------- ----------
Commercial and
industrial loans:
Secured by real estate .... 232,005 280,544 275,411 233,536 285,057
Other ..................... 1,602,901 1,610,627 1,490,837 1,004,149 818,484
---------- ---------- ---------- ---------- ----------
$1,834,906 $1,891,171 $1,766,248 $1,237,685 $1,103,541
Credit cards .............. 299,295 158,922 209,863 107,331 114,550
Other loans to
individuals ............. 617,624 535,172 672,034 578,346 489,800
---------- ---------- ---------- ---------- ----------
Total Loan Portfolio ...... $4,460,787 $5,277,523 $5,679,581 $4,885,643 $4,911,761
========== ========== ========== ========== ==========
Total loans decreased by $816.7 million to $4.46 billion at December 31, 2001
from $5.28 billion at December 31, 2000. The decline was mainly due to decreases
in residential and commercial mortgage loans. The decrease in residential
mortgage loans was due in most part to $668.5 million of securitizations
completed during 2001. Credit card and other loans to individuals increased from
year-end 2000 to year-end 2001. The Company continued its strategy of reducing
its percentage of lower yielding residential mortgage loans arising from the
thrift institutions acquired in 1998 as residential mortgage loans were 12% of
total loans at December 31, 2001 compared to 27% of total loans at December 31,
2000.
The following table shows the maturity of loans outstanding (excluding
residential mortgages of 1-4 family residences, installment loans and lease
financing). Also provided are the amounts classified according to the
sensitivity to changes in interest rates.
Maturities and Sensitivity to Changes in Interest Rates as of December 31,
2001 (in thousands)
(In thousands) MATURING
----------------------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
----------- ------------ ------------ -----------
Commercial, Financial,
and Agricultural ........... $1,104,522 $ 218,792 $ 279,587 $1,602,901
Real Estate Construction ...... 194,674 31,826 5,505 232,005
Real Estate - Mortgage ........ 694,127 347,693 464,181 1,506,001
---------- --------- --------- ----------
TOTAL ...... $1,993,323 $ 598,311 $ 749,273 $3,340,907
========== ========= ========= ==========
SENSITIVITY TO CHANGES IN INTEREST RATES
As of December 31, 2001
--------------------------
Fixed Variable
Rate Rate
---------- -----------
Due Within One Year ...................... $ 171,379 $1,821,944
Due After One But Within Five Years ...... 484,676 113,635
Due After Five Years ..................... 730,501 18,772
---------- ----------
TOTAL .................................. $1,386,556 $1,954,351
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, the areas in which the Company's branches are located. 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.
Nonaccruing loans include commercial loans and commercial mortgage loans past
due for payment 90-days or more or deemed uncollectable. Consumer loans are
charged off after 120 days and credit card loans are charged off after 180 days.
Residential real estate loans are generally placed on nonaccrual status after
180 days of delinquency. 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 no
loans which are considered renegotiated as of December 31, 2001.
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. OREO, including OREO
classified in "Assets Held for Sale" on the balance sheet, amounted to $3.4
million at December 31, 2001, $4.3 million at December 31, 2000, and $3.9
million at December 31, 1999.
Nonperforming Assets
Nonperforming assets were $47.9 million at December 31, 2001 compared to $62.2
at December 31, 2000 and $53.1 million at December 31, 1999. Of the
nonperforming assets,at December 31, 2001, $16.2 million were classified as
loans held for sale and are expected to be disposed of in the first quarter of
2002. The decline at December 31, 2001 from December 31, 2000 was mainly the
result of the Company's chargeoffs of non performing loans and resolutions of
non performing loans, due to the Company's continuing effort to reduce the level
of nonperforming assets. The increase at December 31, 2000 from December 31,
1999 was mainly due to an increase in non-performing commercial and industrial
loans.
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 $7.6 million in 2001, $4.5 million in 2000, and $3.2 million in
1999. The amount of interest income recorded on such loans for each of the years
was $0.9 million in 2001, $0.6 million in 2000, and $0.4 million in 1999. 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) ---------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- -------- --------- -----------
Nonaccrual Loans ....................................... $ 44,469(1) $ 57,898 $ 46,352 $ 46,178 $ 64,766
Renegotiated Loans ..................................... -- -- 2,751 5,632 19,054
--------- --------- -------- --------- ---------
Total Nonperforming Loans ........................... $ 44,469 $ 57,898 $ 49,103 $ 51,810 $ 83,820
Other Real Estate Owned ................................ 3,381 4,318 3,948 8,151 15,568
--------- --------- -------- --------- ---------
Total Nonperforming Assets .......................... $ 47,850 $ 62,216 $ 53,051 $ 59,961 $ 99,388
========= ========= ======== ========= =========
Ratios:
Nonaccrual Loans to Total Loans ..................... 1.00% 1.10% 0.82% 0.95% 1.32%
Allowance for Loan and Lease Losses to
Nonaccrual Loans ................................. 158 164 213 165 132
Allowance for Loan and Lease Losses to
Nonperforming Loans .............................. 158 164 201 147 102
- ----------
(1) Includes $162 million of nonperforming loans held for sale at December 31,
2001.
The following table shows the loans past due 90 days or more and still
accruing and applicable asset quality ratios:
AS OF DECEMBER 31,
-------------------------------
(Dollars in thousands) 2001 2000 1999
--------- ------- ---------
Commercial &
industrial .......... $ 2,600 $ 4,293 $ 3,004
Real estate mortgages . 6,053 13,080 13,085
Consumer credit ....... 3,287 4,034 3,011
Credit card ........... 9,068 8,371 4,139
------- ------- -------
Total Loans
Past-Due 90-Days or
More and Still
Accruing ............ $21,008 $29,778 $23,239
======= ======= =======
As a percent of
Total Loans ....... 0.47% 0.56% 0.41%
As a percent of
Total Assets ...... 0.30% 0.44% 0.24%
Allowance for Possible Loan and Lease Losses
The provision for possible loan and lease losses was $34.1 million for 2001
compared with $24.0 million in 2000 and $52.2 million in 1999. The increase
resulted from a provision established in conjunction with the designation of
certain nonperforming commercial mortgage loans and residential mortgage loans
as held for sale assets in the fourth quarter of 2001. The designation is being
done as part of a strategy to accelerate the resolution of such assets in 2002,
to enable the Company to allocate more resources to new business activities. The
nonperforming loans prior to the designation had a net book value of $26.3
million. The designation resulted in a $10.1 million provision for possible loan
and lease losses relating to nonperforming loans held for sale in the fourth
quarter of 2001, and a corresponding charge off in the same amount. The decrease
in 2000 from 1999 was due to a $33.0 million special provision taken in 1999 to
conform the loan reserve policies of Jeff and SJB to that of the Company.
The determination of the adequacy of the Allowance for Possible Loan and Lease
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. The
methodology employed for assessing the adequacy of the Allowance consists of the
following two criteria:
1. 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.
2. 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 of the allowance for the non-criticized loans in each portfolio
and for all off-balance sheet exposures is determined 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 work out and collection staffs, 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 and Lease Losses to be adequate at December 31, 2001.
The Allowance as a percentage of total loans outstanding was 1.58% at December
31, 2001, 1.80% at December 31, 2000 and 1.74% at December 31, 1999. The
Allowance as a percentage of nonperforming loans was 158% at December 31, 2001,
164% at December 31, 2000 and 201% at December 31, 1999.
The following is a summary of the activity in the allowance for possible loan
and lease losses, by loan category, for the years indicated (in thousands):
- -
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Amount of Loans Outstanding at End of Year ...... $4,460,787 $5,277,523 $5,679,581 $4,885,643 $4,911,761
Daily Average Amount of Loans Outstanding ....... 4,793,998 $5,470,763 $5,136,467 $4,923,410 $4,824,845
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
Balance at beginning of year .................... $ 95,180 $ 98,749 $ 76,043 $ 85,230 $ 81,979
Loans charged off:
Real estate mortgages ......................... 6,851 2,847 13,657 11,207 10,861
Commercial and Industrial ..................... 21,323 8,778 10,388 10,034 7,489
Consumer Credit ............................... 33,517 23,781 24,012 22,083 15,364
Other ......................................... 67 -- -- -- 384
Assets held for sale (1) ...................... 10,147 -- -- 9,521
---------- ---------- ---------- ---------- ----------
Total loans charged off .................... $ 71,905 $ 35,406 $ 48,057 $ 52,845 $ 34,098
Recoveries:
Real estate mortgages ......................... 935 772 1,902 988 2,684
Commercial and Industrial ..................... 1,625 1,822 1,962 1,629 3,113
Consumer Credit ............................... 5,255 5,243 6,065 3,437 3,512
Other ......................................... 98 -- -- 47 798
---------- ---------- ---------- ---------- ----------
Total recoveries ........................... 7,913 7,837 9,929 6,101 10,107
---------- ---------- ---------- ---------- ----------
Net loans charged off ...................... 63,992 27,569 38,128 46,744 23,991
Provision for possible loan and lease losses --
portfolio loans ............................... 24,000 24,000 52,200 35,607 24,442
Provision for possible loan and lease losses --
non-performing loans held for sale ............ 10,147 -- -- -- --
Allowance of acquired companies ................. 4,711 -- 8,634 1,950 2,800
---------- ---------- ---------- ---------- ----------
Balance at end of year .......................... $ 70,046 $ 95,180 $ 98,749 $ 76,043 $ 85,230
---------- ---------- ---------- ---------- ----------
Provision for possible loan and lease losses as
a percentage of average loans outstanding ..... 0.71% 0.44% 1.02% 0.72% 0.51%
Net charge offs as a percentage of average loans
outstanding ................................... 1.33% 0.50% 0.74% 0.95% 0.50%
Allowance for possible loan and lease losses as
a percentage of loans outstanding at year end . 1.57% 1.80% 1.74% 1.56% 1.74%
(1) The writedown of assets held for sale pertains to the planned disposal of
$54 million of nonaccrual loans and OREO properties in 1998 and $16.2
million of nonaccrual loans in 2001.
Management formally reviews the loan portfolio and evaluates credit risk on a
monthly basis throughout the year. Such review takes into consideration the
financial condition of the borrowers, fair market value of the collateral, level
of delinquencies, historical loss experience by loan category, industrial trends
and the impact of local and national economic conditions.
The following is the allocation of the allowance for possible loan losses by
loan category (in thousands):
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------------------------------
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS(%) ALLOWANCE LOANS(%) ALLOWANCE LOANS(%) ALLOWANCE LOANS(%) ALLOWANCE LOANS(%)
----------------------------------------------------------------------------------------------------------
Real estate mortgages ..... $ 9,607 30.7% $ 23,245 44.4% $25,484 46.5% $23,868 60.6% $30,273 65.2%
Commercial and industrial . 32,546 41.3% 42,355 36.2% 43,974 31.8% 18,493 25.3% 20,233 22.5%
Consumer Credit ........... 27,893 28.0% 28,278 19.4% 24,895 21.7% 20,650 14.1% 11,650 12.3%
Unallocated ............... 0 1,302 4,396 13,032 23,074
------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Total ..................... $70,046 100.0% $ 95,180 100.0% $98,749 100.0% $76,043 100.0% $85,230 100.0%
======= ===== ======== ===== ======= ===== ======= ===== ======= =====
Deposits
As of December 31, 2001, Hudson had 98 branch offices in New Jersey, 36 branch
offices in New York State, 42 branch offices in Connecticut, and 25 branch
offices in Pennsylvania, for a total of 201 branches.
The following table summarizes the deposit base at the dates indicated (in
thousands):
DECEMBER 31,
------------------------------------------------------------------------------
2001 2000 1999
2001 % OF TOTAL 2000 % OF TOTAL 1999 % OF TOTAL
---------- ---------- ---------- ---------- ---------- ----------
Noninterest-bearing deposits ...... $1,215,367 20.3% $1,162,677 20.0% $1,231,478 19.1%
NOW/MMDA deposits ................. 1,233,964 20.6% 1,080,641 18.6% 1,145,398 17.7%
Savings deposits .................. 1,317,973 22.0% 1,441,073 24.8% 1,528,033 23.7%
Time deposits ..................... 2,216,241 37.1% 2,128,876 36.6% 2,550,436 39.5%
---------- ----- ---------- ----- ---------- -----
Total Deposits .................... $5,983,545 100.0% $5,813,267 100.0% $6,455,345 100.0%
========== ===== ========== ===== ========== =====
Total deposits increased at December 31, 2001 from December 31, 2000.
Approximately 20% of the Company's deposits were in non-interest bearing
accounts, 43% in NOW, MMDA and savings accounts, and 37% in time deposits as of
December 31, 2001.
The following table sets forth average deposits and average rates for each of
the years indicated.
As of December 31,
2001 2000 1999
-------------------------- ---------------------------- ---------------------------
Interest Interest Interest
Amount Rate Amount Rate Amount Rate
---------- --------- ------------ ----------- ----------- -----------
(In thousands)
Domestic Bank Offices:
Noninterest bearing demand
deposits .................... $1,101,045 $ 1,174,655 $ 1,170,135
Interest-bearing
demand deposits ............. 1,061,877 1.90% 1,029,708 2.24% 1,199,059 2.01%
Savings deposits .............. 1,382,794 1.86% 1,504,151 2.56% 1,405,688 2.00%
Time deposits ................. 2,279,392 4.79% 2,192,996 5.12% 2,821,338 4.91%
---------- ----------- -----------
TOTAL ................ $5,825,108 $ 5,901,510 $ 6,596,220
========== =========== ===========
Maturities of certificates of deposit and other time deposits of $100,000 or
more issued by domestic offices, outstanding at December 31, 2001 are summarized
as follows:
Time Certificates Other Time
of Deposit Deposits Total
---------- ------------- ----------
(In thousands)
3 months or less ................ $ 285,088 $ 248,824 $ 533,912
Over 3 through 6 months ......... 111,445 27,657 139,102
Over 6 through 12 months ........ 99,687 -- 99,687
12 months and over .............. 61,594 65,291 126,885
---------- ---------- ---------
TOTAL ........................... $ 557,814 $ 341,772 $ 899,586
========== ========== =========
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 the
ability to attract deposits from businesses and individuals through its
branches; brokered deposits from securities firms; cash flow from interest;
prepayments and principal repayments on investment securities and loans;
Securities Available for Sale, and the ability to borrow funds on a
collateralized basis from the Federal Home Loan Bank and Federal Reserve
discount window, repurchase agreements collateralized by securities with
securities firms, and other sources. The management of balance sheet volumes,
mixes, and maturities enables the Company to maintain adequate levels of
liquidity.
The Company does not rely on its unsecured credit ratings for borrowing senior
debt to fund its operations in the institutional certificate of deposit market
or debt market. The Company does rely on its unsecured credit ratings for
issuing subordinated debt and capital trust securities to enhance its regulatory
capital ratios.
Fitch has assigned Hudson United Bank a rating of A- for long term deposits and
F2 for short term deposits. In addition Fitch has assigned a rating of BBB for
subordinated debt and capital trust obligations of the Company. Moody's has
assigned to Hudson United Bank a Baa1 rating for long term deposits and a rating
of P2 for short term deposits. Standard and Poor's has assigned a rating of BB+
to the Company's subordinated debt.
Any downgrading of the Company's unsecured credit ratings would not cause the
interest rate on any of its subordinated debt or capital trust obligations to
increase, or cause the principal amount to be pu