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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 14, 1995
-----------------
HUBCO, Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 0-010699 22-2405746
---------- -------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1000 MacArthur Boulevard, Mahwah, New Jersey 07430
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 236-2641
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Exhibit Index at Page
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<PAGE>
Item 5. Other Events.
On February 14, 1995, HUBCO, Inc. ("HUBCO") entered into a definitive
agreement with Urban National Bank ("Urban") pursuant to which Urban will be
merged with and into Hudson United Bank, HUBCO's commercial bank subsidiary.
Under the terms of the agreement, shareholders of Urban will receive 2.17 shares
of HUBCO common stock in exchange for each of the 984,372 Urban shares
outstanding, subject to adjustment. The exchange ratio will be adjusted downward
in the event that the Closing Shareholder's Equity of Urban, as defined in the
agreement, falls below $11,795,000. The agreement further provides that Urban
may terminate the transaction in the event that the exchange ratio, as adjusted,
is less than 2.0, the Average Closing Price of HUBCO common stock, as defined in
the agreement, is less than $12.75 per share, or if the exchange ratio
multiplied by the Average Closing Price of the HUBCO common stock yields an
amount less than $26.65. The agreement also provides that in the event Urban
terminates the agreement with HUBCO and subsequently enters into an agreement
with a third party pursuant to which Urban will be acquired, sell substantially
all of its assets, or undertake a transaction having substantially similar
effect, such third party will be required to pay HUBCO a breakup fee equal to
$1,000,000.
Consummation of the merger is subject to several conditions, including that
the transaction qualify as a pooling of interests for accounting purposes and
that the parties receive all necessary regulatory approvals.
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<PAGE>
In addition, the agreement provides that after the merger, Mr. Robert
Mangano, President of Urban, will join Hudson United Bank as an executive vice
president, and that Messrs. Bryant D. Malcolm and W. Peter McBride, currently
directors of Urban, will become members of the Board of Directors of HUBCO. In
addition, Messrs. Malcolm, McBride and Joseph Pfeifer, who is also a director of
Urban, will join the Board of Hudson United Bank.
Recent Developments Regarding HUBCO
On January 18, 1995, HUBCO reported its results for the year ended December
31, 1994. Net income for the year ended December 31, 1994 increased to
$16,931,000 or $2.45 per share fully diluted compared with $14,202,000 or $2.06
per share last year. Adjusted for the 3 for 2 stock split effective January 14,
1995 (the "Stock Split"), earnings per share were $1.64 fully diluted, up from
$1.37 in 1993. HUBCO's 1994 return on average equity was 19% and return on
average assets was 1.35%.
Net income for the fourth quarter ended December 31, 1994 rose 25% to a
record $4,700,000, or $.65 per share fully diluted, from $3,755,000, or $.55 per
share in 1993. On an adjusted basis, earnings per share were $.43 and $.36
respectively. On an earnings per share basis, the increase was 16% after
calculating the fully diluted effect of the conversion of the preferred stock
issued in the Washington Bancorp acquisition. HUBCO's annualized return on
average equity for the fourth quarter of 1994 was 18.9% and the annualized
return on average assets was 1.35%.
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<PAGE>
For the year ended December 31, 1994, net interest income was $58,021,000,
up from $47,018,000 in 1993. HUBCO's net interest margin for 1994 was 5.09%
versus 5.20% for 1993 and was 5.33% for the fourth quarter of 1994 versus 5.16%
for last year's fourth quarter. The fourth quarter's increased net interest
margin is a result of the acquisition of Shoppers Charge Accounts Co. in the
fourth quarter. The acquisition of this credit card company had the effect of
increasing HUBCO's net interest margin and also increasing its operating
expenses.
Fee income for 1994 was $9,990,000, up 16% from last year and for the
fourth quarter of 1994 totaled $2,597,000, up 18% from the comparable period in
1993.
Total operating expenses for 1994 were $38,004,000, up from $29,971,000
last year and for the fourth quarter totaled $11,041,000, compared with
$7,352,000 for the same quarter last year. These increases are due in large
measure to the three acquisitions completed during 1994.
HUBCO's efficiency ratio (a ratio of overhead expense to recurring tax
equivalent income) for the fourth quarter was 55.3% and for the full year was
54.9%. Included in the results for 1994 are the amortization of non-cash
purchase accounting adjustments which total approximately $1,500,000. Overhead
expenses in 1994 include the expenses related to maintaining two corporate
headquarters, completing HUBCO's computer conversion, converting Washington
Bancorp and the Polifly acquisition to the new HUBCO system, plus the conversion
to an imaged check processing system. The results do not reflect the full cost
savings from the four branch consolidations which occurred in December.
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<PAGE>
For the year ended December 31, 1994 total assets increased by 32% to
$1.377 billion, total loans grew by 38% to $716 million and deposits increased
by 28% to $1.2 billion. The growth in comparative totals are principally the
result of the acquisitions completed this year.
Total non-performing assets of $13,650,000 (.99% of total assets) were up
$3,628,000 from last year despite HUBCO having acquired Washington Bancorp which
brought approximately $18,000,000 of non-performing assets to HUBCO.
Non-performing assets decreased by $3,407,000 from last quarter due primarily to
the sale of a pool of non-performing mortgage loans. Total non-performing loans
of $10,456,000 were up from $7,711,000 last year and down from $14,183,000 at
September 30, 1994. The provision for loan losses was $3,000,000 during 1994.
The allowance for possible loan losses ($13,228,000) as a percentage of loans
was 1.8% and covered 133% of non-accruing loans, 127% of non-performing loans
and 97% of non-performing assets at year end.
HUBCO's stockholders equity was $99,020,000 at year end 1994 versus
$78,954,000 last year. At December 31, 1994, HUBCO's Tier I Risk Based Capital
Ratio was 12.24%, the Total Capital Ratio was 16.90%, and the Leverage Capital
Ratio was 6.55%. These ratios all exceed the regulatory requirements of 6%, 10%
and 5% respectively to be considered a well-capitalized institution.
Urban National Bank
Urban National Bank is a national bank headquartered in Franklin Lakes, New
Jersey. Urban operates a commercial banking
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<PAGE>
business similar to other institutions of its size, offering lending, depository
and related financial services to individuals and small to medium size
businesses in its northern New Jersey market area. Urban offers short and medium
term loans, lines of credit, letters of credit, inventory and accounts
receivable financing, real estate construction loans and first mortgages.
Urban's deposit products include demand deposits, savings accounts, time deposit
accounts and rent security. Urban also offers collection, wire transfer and
night depository services. Urban operates through its branch network consisting
of nine offices in western Bergen and northern Passaic Counties, New Jersey.
In January, 1995, Urban publicly reported its results for the year ended
December 31 1994. HUBCO includes this information in this filing based upon
Urban's report. For the year ended December 31, 1994, Urban reported net income
of $1,484,000 or $1.51 per share, a 44.7% increase in net income from the year
ended December 31, 1993 when net income was $1,025,000 or $1.04 per share. Net
interest income for the year ended December 31, 1994 also increased by 13.2% to
$9,300,000 from the $8,213,000 reported for the year ended December 31, 1993.
Urban's non-performing assets declined during 1994 to $6.5 million, a
decrease of 19.6% over non-performing assets at December 31, 1993. Urban's loan
loss reserve at December 31, 1994 totaled $1,486,000 or 1.65% of total loans. At
December 31,
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<PAGE>
1994, Urban reported total assets of $241.3 million and total deposits of $206.4
million.
Pro Forma Combined Financial Information
The following unaudited pro forma financial information takes into account
HUBCO's recently completed acquisition of Washington Bancorp, Inc. (the
"Washington Merger") and HUBCO's pending acquisitions of Jefferson National Bank
("Jefferson") and Urban. The Washington Merger, consummated on July 1, 1994, has
been accounted for as a purchase; accordingly, HUBCO's historical financial
statements reflect the consolidated results of operations of Washington Bancorp,
Inc. ("Washington") solely for periods on and after July 1, 1994. In contrast,
both the Jefferson merger and the Urban merger are intended to be accounted for
as poolings of interests. Under the pooling of interests method of accounting,
HUBCO's consolidated financial statements will be retroactively adjusted after
the mergers to combine the results of the operations of HUBCO, Jefferson and
Urban for periods prior to the consummation of the mergers.
The following unaudited Pro Forma Combined Condensed Balance Sheet of
HUBCO, Jefferson and Urban at September 30, 1994 gives effect to the Jefferson
and Urban mergers as if they had been consummated on that date, based on
adjustments described in the accompanying Notes to the Pro Forma Combined
Condensed Unaudited Financial Statements (the "Notes"). Inasmuch as the
Washington Merger was consummated prior to September 30, 1994, HUBCO's
historical balance sheet at September 30, 1994 includes the
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<PAGE>
assets and liabilities of Washington retained by the merged institution at
September 30, 1994.
Also presented are three separate unaudited Pro Forma Combined Condensed
Statements of Income, covering (i) the nine months ended September 30, 1994 (the
"Interim Pro Forma Statement"), (ii) the year ended December 31, 1993 (the "1993
Pro Forma Statement"), and (iii) the year ended December 31, 1992 (the "1992 Pro
Forma Statement"). These unaudited Pro Forma Combined Condensed Statements of
Income reflect the following:
o The Interim Pro Forma Statement gives effect to the Washington Merger
and the Jefferson and Urban mergers as if such transactions had
occurred on January 1, 1994. The Interim Pro Forma Statement combines
the results of operations of (i) HUBCO for the nine months ended
September 30, 1994 (including the results of operations of Washington
from July 1, 1994 to September 30, 1994), (ii) Washington for the six
months ended June 30, 1994, (iii) Jefferson for the nine months ended
September 30, 1994, and (iv) Urban for the nine months ended September
30, 1994 subject to the adjustments set forth in the Notes.
o The 1993 Pro Forma Statement gives effect to the Washington Merger and
the Jefferson and Urban mergers as if such transactions had occurred
on January 1, 1993 and combines the results of operations of HUBCO,
Washington, Jefferson and Urban for the year ended December 31, 1993,
subject to the adjustments set forth in the Notes.
o Due to differences in the disclosures applicable to the purchase and
pooling of interests methods of accounting, the 1992 Pro Forma
Statements give effect to the Jefferson and Urban mergers as if they
had occurred on January 1, 1992, but do not give effect to the
Washington Merger. Thus, the 1992 Pro Forma Statements combine the
results of operations of HUBCO, Jefferson and Urban for the periods
presented, but do not include any information regarding Washington.
Any comparison of the 1992 Pro Forma Statements with pro forma data
for other periods presented herein should take into account that the
1992 Pro Forma Statements do not reflect Washington's results of
operations, while
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<PAGE>
such other pro forma data reflects Washington's results of operations
either in Washington's historical financial statements (through June
30, 1994) or in HUBCO's historical financial statements (from July 1,
1994 to September 30, 1994).
The unaudited pro forma information presented herein has been prepared by
HUBCO management based upon the historical financial statements and related
notes thereto of HUBCO, Washington, Jefferson and Urban. The Pro Forma Combined
Condensed Statements of Income are not necessarily indicative of the results of
operations which would have been achieved had these transactions been
consummated as of the beginning of such periods for which such data are
presented and should not be construed as being representative of future periods.
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<PAGE>
Summary Pro Forma Combined Unaudited Financial information
For the Nine Months For the Year
Ended September 30, Ended December 31,
1994 1993 1992
-------- -------- --------
(In thousands, except per share amounts)
RESULTS OF OPERATIONS:
Net interest income before provision
for possible loan losses............ $54,775 $65,822 $52,935
Provision for possible loan losses.... 3,276 5,558 7,944
Net interest income after provision
for possible loan losses ........... 51,499 60,264 44,991
Income before income taxes............ 18,662 19,938 9,608
Net income............................ 11,513 13,916 8,971
Income per common share (1):
Primary ............................ $0.85(2) $0.97 $0.75
Fully diluted....................... 0.84 0.97 0.75
As of
September 30
1994
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BALANCE SHEET:
Total assets........................... $1,718,322
Total deposits......................... 1,512,259
Total stockholders' equity............. 116,033
Book value per common share(1)......... 7.75
9
<PAGE>
<TABLE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1994
(Unaudited)
<CAPTION>
Pro Forma
Historical Pro Forma Combined Historical Pro Forma
---------- --------- Adjustments HUBCO and --------- Adjustments Pro Forma
HUBCO Jefferson Jefferson Jefferson Urban Urban Combined
---------- --------- --------- --------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks.......... $ 56,434 $ 5,039 $ -- $ 61,473 $ 15,084 $ -- $ 76,557
Securities....................... 576,688 24,805 (24,805)(A) 576,688 60,796 -- 637,484
Securities available for sale.... 48,254 8,929 23,737 (B) 80,920 46,905 (11)(AA) 127,814
Federal funds sold............... 10,845 5,110 -- 15,955 -- -- 15,955
Loans............................ 661,954 44,695 1,777 (C) 708,426 90,707 399 (BB) 799,532
Allowance for possible
loan losses.................... (14,310) (1,648) (170)(D) (16,128) (1,515) (46)(CC) (17,689)
Premises and equipment........... 30,836 819 -- 31,655 1,850 -- 33,505
Other real estate................ 2,874 2,420 (1,607)(E) 3,687 2,845 (353)(DD) 6,179
Intangible assets................ 10,204 -- -- 10,204 -- -- 10,204
Other assets..................... 23,033 1,609 336 (F) 24,978 3,803 -- 28,781
---------- ------- -------- ---------- -------- ---- ----------
Total Assets................. $1,406,812 $91,778 $ (732) $1,497,858 $220,475 $(11) $1,718,322
========== ======= ======= ========== ======== ==== ==========
</TABLE>
10
<PAGE>
<TABLE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1994
(Unaudited)
<CAPTION>
Pro Forma
Historical Pro Forma Combined Historical Pro Forma
---------- --------- Adjustments HUBCO and --------- Adjustments Pro Forma
HUBCO Jefferson Jefferson Jefferson Urban Urban Combined
---------- --------- --------- --------- --------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Deposits....................... $1,236,109 $85,288 $ -- $1,321,397 $190,862 $ -- $1,512,259
Short term borrowings.......... 40,271 -- -- 40,271 16,996 -- 57,267
Other liabilities.............. 6,771 494 -- 7,265 498 -- 7,763
---------- ------- ------- ---------- -------- ------- ----------
Total Liabilities........... 1,283,151 85,782 -- 1,368,933 208,356 -- 1,577,289
---------- ------- ------- ---------- -------- ------- ----------
Subordinated debentures.......... 25,000 -- -- 25,000 -- -- 25,000
---------- ------- ------- ---------- -------- ------- ----------
Stockholders' Equity:
Preferred stock................ 19,147 -- -- 19,147 -- -- 19,147
Common stock................... 18,492 1,357 (270)(G) 19,579 1,230 2,566 (EE) 23,375
Additional paid in capital..... 49,048 1,474 8 (H) 50,530 1,329 (2,574)(FF) 49,285
Retained earnings.............. 22,239 3,249 -- 25,488 11,288 36,776
Unrealized holding gain (loss)
on securities available for
sale, net of income taxes.... 302 (84) (470)(I) (252) (1,728) (3)(GG) (1,983)
Treasury stock................. (9,343) -- -- (9,343) -- -- (9,343)
Restricted stock awards........ (1,224) -- -- (1,224) -- -- (1,224)
---------- ------- ------- ---------- -------- ------- ----------
Total stockholders' equity.. 98,661 5,996 (732) 103,925 12,119 (11) 116,033
---------- ------- ------- ---------- -------- ------- ----------
Total liabilities and
stockholders' equity..... $1,406,812 $91,778 $(732) $1,497,858 $220,475 $ (11) $1,718,322
========== ======= ===== ========== ======== ======= ==========
</TABLE>
11
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(Unaudited)
For the Nine Months Ended September 30, 1994
<TABLE>
<CAPTION>
Washington
Historical Pro Forma
Six Months Pro Forma Combined Pro Forma
HUBCO Ended Adjustments HUBCO and Jefferson Adjustments
Historical June 30, 1994 Washington Washington Historical Jefferson
---------- ------------- ----------- ---------- ---------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans..................... $35,328 $6,728 $ (452)(a) $41,604 $3,088 --
Securities................ 23,847 2,220 142 (b) 26,261 1,028 --
53 (c)
(1)(d)
Federal funds sold........ 366 50 -- 416 301 --
------- ------ ------- ------- ------ ------
Total interest income... 59,541 8,998 (258) 68,281 4,417 --
------- ------ ------- ------- ------ ------
Interest expense:
Deposits.................. 16,690 3,625 793 (e) 21,108 1,580 --
Borrowings................ 406 10 430 (f) 846 -- --
Subordinated debt......... 1,259 -- -- 1,259 -- --
------- ------ ------- ------- ------ ------
Total interest expense.. 18,355 3,635 1,223 23,213 1,580 --
------- ------ ------- ------- ------ ------
Net interest income
before provision for
possible loan losses.. 41,186 5,363 (1,481) 45,068 2,837 --
Provision for possible loan
losses.................... 1,950 825 -- 2,775 175 151 (J)
------- ------ ------- ------- ------ ------
Net interest income
after provision for
possible loan losses.. 39,236 4,538 (1,481) 42,293 2,662 (151)
------- ------ ------- ------- ------ ------
Non-interest income......... 7,392 473 -- 7,865 378 --
------- ------ ------- ------- ------ ------
Operating expenses:
Salaries and other
employee benefits....... 14,509 1,684 -- 16,193 1,188 --
Occupancy and equipment
expense................. 4,402 395 18 (g) 4,815 333 --
Other operating expenses.. 8,051 3,470 500 (h) 12,021 1,549 (151) (J)
------- ------ ------- ------- ------ ------
Total operating
expenses.............. 26,962 5,549 518 33,029 3,070 (151)
------- ------ ------- ------- ------ ------
Income (loss) before
income taxes.......... 19,666 (538) (1,999) 17,129 (30) --
Income tax provision
(benefit)................. 7,435 (123) (760) (i) 6,552 64 --
------- ------ ------- ------- ------ ------
Net income (loss)....... $12,231 ($415) ($1,239) $10,577 ($ 94) $ --
======= ====== ======= ======= ====== ======
<CAPTION>
Pro Forma
Combined
HUBCO Pro Forma
Washington Urban Adjustments Pro Forma
and Jefferson Historical Urban Combined
------------- ------------- ------------ ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans..................... $44,692 $5,735 $ -- $50,427
Securities................ 27,289 4,113 -- 31,402
Federal funds sold........ 717 94 -- 811
------- ------ ------- -------
Total interest income... 72,698 9,942 -- 82,640
------- ------ ------- -------
Interest expense:
Deposits.................. 22,688 2,685 -- 25,373
Borrowings................ 846 387 -- 1,233
Subordinated debt......... 1,259 -- -- 1,259
------- ------ ------- -------
Total interest expense.. 24,793 3,072 -- 27,865
------- ------ ------- -------
Net interest income
before provision for
possible loan losses.. 47,905 6,870 -- 54,775
Provision for possible loan
losses.................... 3,101 125 50 (HH) 3,276
------- ------ ------- -------
Net interest income
after provision for
possible loan losses.. 44,804 6,745 (50) 51,499
------- ------ ------- -------
Non-interest income......... 8,243 1,018 -- 9,261
------- ------ ------- -------
Operating expenses:
Salaries and other
employee benefits....... 17,381 3,150 -- 20,531
Occupancy and equipment
expense................. 5,148 1,075 -- 6,223
Other operating expenses.. 13,419 1,975 (50) (HH) 15,344
------- ------ ------- -------
Total operating
expenses.............. 35,948 6,200 (50) 42,098
------- ------ ------- -------
Income (loss) before
income taxes.......... 17,099 1,563 -- 18,662
Income tax provision
(benefit)................. 6,616 533 -- 7,149
------- ------ ------- -------
Net income (loss)....... $10,483 $1,030 $ -- $11,513
======= ====== ======= =======
</TABLE>
12
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(Unaudited)
For the Nine Months Ended September 30, 1994
<TABLE>
<CAPTION>
Washington
Historical Pro Forma
Six Months Pro Forma Combined Pro Forma
HUBCO Ended Adjustments HUBCO and Jefferson Adjustments
Historical June 30, 1994 Washington Washington Historical Jefferson
---------- ------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income per share(x):
Primary(y). ............... $1.22 $1.00
Fully diluted ............. 1.20 0.97
Book Value per common
share (x)................... 8.15 8.15
Dividends per common share
(x)......................... 0.26 0.26
Weighted average number of
common shares outstanding
(x)......................... 9,757 9,757
<CAPTION>
Pro Forma
Combined
HUBCO, Pro Forma
Washington Urban Adjustments Pro Forma
and Jefferson Historical Urban Combined
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Income per share(x):
Primary (y)................ $0.93 $0.85
Fully diluted ............. 0.91 0.84
Book Value per common
share (x)................... 8.18 7.75
Dividends per common share
(x)......................... 0.26 0.26
Weighted average number of
common shares outstanding
(x)......................... 10,368 12,503
<FN>
(x) Shares issued and outstanding have been adjusted for the Stock Split.
(y) After reduction of $287 ($.36 per share) of Series A Preferred Stock dividends for the HUBCO historical financial
information. After reduction of $861 ($1.08 per share) of Series A Preferred Stock dividends for the pro forma combined
HUBCO and Washington financial information and the pro forma combined HUBCO, Washington and Jefferson financial
information and the pro forma combined HUBCO, Washington, Jefferson and Urban financial information.
</FN>
See accompanying notes to pro forma combined condensed unaudited financial statements.
</TABLE>
13
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(Unaudited)
For the year ended December 31, 1993
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Combined Pro Forma
HUBCO Washington Adjustments HUBCO and Jefferson Adjustments
Historical Historical Washington Washington Historical Jefferson
---------- ------------- ----------- ---------- ---------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans ...................... $43,546 $14,782 ($ 904)(a) $57,424 $4,896 $ --
Securities ................. 23,442 3,604 285 (b) 27,435 781 --
105 (c)
(1)(d)
Federal funds sold ......... 771 172 -- 943 442 --
------- ------- ------- ------- ------- ------
Total interest income .... 67,759 18,558 (515) 85,802 6,119 --
------- ------- ------- ------- ------- ------
Interest expense:
Deposits ................... 20,379 8,795 1,586 (e) 30,760 2,311 --
Borrowings ................. 362 18 861 (f) 1,241 -- --
------- ------- ------- ------- ------- ------
Total interest expense ... 20,741 8,813 2,447 32,001 2,311 --
------- ------- ------- ------- ------- ------
Net interest income
before provision for
possible loan losses .... 47,018 9,745 (2,962) 53,801 3,808 --
Provision for possible
loan losses ................. 3,600 420 -- 4,020 1,156 189 (J)
------- ------- ------- ------- ------- ------
Net interest income
after provision for
possible loan losses .... 43,418 9,325 (2,962) 49,781 2,652 (189)
------- ------- ------- ------- ------- ------
Non-interest income .......... 8,606 949 -- 9,555 489 --
------- ------- ------- ------- ------- ------
Operating expenses:
Salaries and other
employee benefits ......... 16,501 3,468 -- 19,969 1,469 --
Occupancy and equipment
expense ................... 5,016 797 36 (g) 5,849 412 --
Other operating expenses ... 8,454 4,503 1,001 (h) 13,958 2,554 (189) (J)
------- ------- ------- ------- ------- ------
Total operating
expenses ................ 29,971 8,768 1,037 39,776 4,435 (189)
------- ------- ------- ------- ------- ------
Income (loss) before
income taxes ............ 22,053 1,506 (3,999) 19,560 (1,294) --
Income tax provision
(benefit) ................... 7,851 (1,018) (1,520) (i) 5,313 62 --
------- ------- ------- ------- ------- ------
Net Income (loss) ........ $14,202 $2,524 ($2,479) $14,247 ($1,356) $ --
======= ======= ======= ======= ======= ======
Pro Forma
Combined
HUBCO, Pro Forma
Washington Urban Adjustments Pro Forma
and Jefferson Historical Urban Combined
------------- ------------- ------------ ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest Income:
Loans ...................... $62,320 $7,698 $ -- $70,018
Securities ................. 28,216 4,780 -- 32,996
Federal funds sold ......... 1,385 194 -- 1,579
------- ------ ----- -------
Total interest income .... 91,921 12,672 -- 104,593
------- ------ ----- -------
Interest expense:
Deposits ................... 33,071 3,914 -- 36,985
Borrowings ................. 1,241 545 -- 1,786
------- ------ ----- -------
Total interest expense ... 34,312 4,459 -- 38,771
------- ------ ----- -------
Net interest income
before provision for
possible loan losses .... 57,609 8,213 -- 65,822
Provision for possible
loan losses ................. 5,365 118 75 (HH) 5,558
------- ------ ----- -------
Net interest income
after provision for
possible loan losses .... 52,244 8,095 (75) 60,264
------- ------ ----- -------
Non-interest income .......... 10,044 1,484 -- 11,528
------- ------ ----- -------
Operating expenses:
Salaries and other
employee benefits ......... 21,438 3,698 -- 25,136
Occupancy and equipment
expense ................... 6,261 1,340 -- 7,601
Other operating expenses .... 16,323 2,869 (75)(HH) 19,117
------- ------ ----- -------
Total operating
expenses ................ 44,022 7,907 (75) 51,854
------- ------ ----- -------
Income (loss) before
income taxes ............ 18,266 1,672 -- 19,938
Income tax provision
(benefit) ................... 5,375 647 -- 6,022
------- ------ ----- -------
Net Income (loss) ........ $12,891 $1,025 $-- $13,916
======= ====== ===== =======
</TABLE>
14
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(Unaudited)
For the year ended December 31, 1993
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Combined Pro Forma
HUBCO Washington Adjustments HUBCO and Jefferson Adjustments
Historical Historical Washington Washington Historical Jefferson
---------- ------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income per share (x):
Primary (y) ................ $ 1.37 $ 1.26
Fully diluted .............. 1.37 1.23
Dividends per common share (x) 0.31 0.31
Weighted average number of
common shares outstanding (x) 10,364 10,364
<CAPTION>
Pro Forma
Combined
HUBCO, Pro Forma
Washington Urban Adjustments Pro Forma
and Jefferson Historical Urban Combined
------------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
Income per share (x):
Primary (y) ................ $ 1.07 $ 0.97
Fully diluted .............. 1.06 0.97
Dividends per common share (x) 0.31 0.31
Weighted average number of
common shares outstanding (x) 10,975 13,110
<FN>
(x) Shares issued and outstanding have been adjusted for the Stock Split.
(y) After reduction of $1,149 ($1.44 per share) of Series A Preferred Stock dividends for the pro forma combined HUBCO and
Washington financial information and the pro forma combined HUBCO, Washington and Jefferson financial information and the pro
forma combined HUBCO, Washington, Jefferson and Urban financial information.
</FN>
See accompanying notes to pro forma combined condensed unaudited financial statements.
</TABLE>
15
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(Unaudited)
For the year ended December 31, 1992
<TABLE>
<CAPTION>
Pro Forma
Historical Pro Forma Combined Pro Forma
--------------------------- Adjustments HUBCO and Urban Adjustments Pro Forma
HUBCO Jefferson Jefferson Jefferson Historical Urban Combined
---------- ------------- ----------- --------- ---------- ----------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans ...................... $45,406 $6,105 $-- $51,511 $9,432 $-- $60,943
Securities ................. 20,898 908 -- 21,806 3,517 -- 25,323
Federal funds sold ......... 1,342 418 -- 1,760 270 -- 2,030
------- ------- ------- ------- ------- ------ -------
Total interest income .... 67,646 7,431 -- 75,077 13,219 -- 88,296
------- ------- ------- ------- ------- ------ -------
Interest expense:
Deposits ................... 26,094 3,454 -- 29,548 5,068 -- 34,616
Borrowings ................. 539 -- -- 539 206 -- 745
------- ------- ------- ------- ------- ------ -------
Total interest expense ... 26,633 3,454 -- 30,087 5,274 -- 35,361
------- ------- ------- ------- ------- ------ -------
Net interest income
before provision for
possible loan losses .... 41,013 3,977 -- 44,990 7,945 -- 52,935
Provision for possible
loan losses ................. 4,116 1,718 422 (J) 6,256 1,598 90 (HH) 7,944
------- ------- ------- ------- ------- ------ -------
Net interest income
after provision for
possible loan losses .... 36,897 2,259 (422) 38,734 6,347 (90) 44,991
------- ------- ------- ------- ------- ------ -------
Non-interest income .......... 7,657 324 -- 7,981 2,736 -- 10,717
------- ------- ------- ------- ------- ------ -------
Operating expenses:
Salaries and other
employee benefits ......... 13,704 1,374 -- 15,078 3,884 -- 18,962
Occupancy and equipment
expense ................... 4,942 383 -- 5,325 1,351 -- 6,676
Other operating expenses ... 15,703 2,125 (422)(J) 17,406 3,146 (90)(HH) 20,462
------- ------- ------- ------- ------- ------ -------
Total operating
expenses ................ 34,349 3,882 (422) 37,809 8,381 (90) 46,100
------- ------- ------- ------- ------- ------ -------
Income (loss) before
income taxes ............ 10,205 (1,299) -- 8,906 702 -- 9,608
Income tax provision
(benefit) ................... 564 (181) -- 383 254 -- 637
------- ------- ------- ------- ------- ------ -------
Net Income (loss) ........ $9,641 ($1,118) $-- $8,523 $448 $-- $8,971
======= ======= ======= ======= ======= ====== =======
Income per share (x):
Primary .................... $1.06 $0.87 $0.75
</TABLE>
16
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(Unaudited)
For the year ended December 31, 1992
<TABLE>
<CAPTION>
Pro Forma
Historical Pro Forma Combined Pro Forma
--------------------------- Adjustments HUBCO and Urban Adjustments Pro Forma
HUBCO Jefferson Jefferson Jefferson Historical Urban Combined
---------- ------------- ----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fully diluted............... 1.06 0.87 0.75
Dividends per common
share (x)................... 0.27 0.27 0.27
Weighted average number of
common shares
outstanding (x):............ 9,136 9,747 11,882
</TABLE>
(x) Shares issued and outstanding have been adjusted for the Stock Split.
See accompanying notes to pro forma combined condensed financial statements.
17
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED
UNAUDITED FINANCIAL STATEMENTS
1) The following is a summary of the adjustments required to the pro forma
combined condensed statements of income of HUBCO and Washington assuming the
adjustments were made as of the beginning of the periods presented:
(a) To record the amortization on a straight line basis (which is not
materially different than the level yield basis) of the premium on the
loan portfolio over 4.6 years.
(b) To record the amortization on a straight line basis (which is not
materially different than the level yield basis) of the discount on the
investment portfolio over its estimated life of 1.6 years.
(c) To reflect an increase of interest income from the proceeds of
Washington stock options at 6.25%.
(d) To reflect a loss of interest income for the use of funds for
acquisition expenses at 6.25%.
(e) To record the amortization of the premium on deposits.
(f) To reflect an increase in the cost of funds for cash payments to
Washington shareholders at 4.50%.
(g) To reflect an increase in depreciation expense reflecting the net
increase in carrying value of premises and equipment.
(h) To reflect the increase in expense from the amortization of cost over
fair value of the Washington Merger based on a 5 year life.
(i) To reflect the anticipated tax benefit on the pro forma adjustments.
The following summarizes the acquisition of Jefferson by HUBCO in a pooling of
interest transaction as reflected in the accompanying pro forma combined
condensed unaudited financial statements.
2) Securities
Transfer of Jefferson's "Held to Maturity" portfolio
to HUBCO's "Available for Sale" portfolio. ($24,805)(A)
=======
3) Securities Available for Sale
Transfer of Jefferson's "Held to Maturity" portfolio
to HUBCO's "Available for Sale" portfolio. $24,805
To record the mark-to-market on Jefferson's "Held to
Maturity" portfolio transferred to HUBCO's "Available
for Sale" portfolio. (800)
To eliminate Jefferson's shares currently owned
by HUBCO. (268)
-------
$23,737 (B)
=======
18
<PAGE>
4) Loans
To reclassify Jefferson's in-substance foreclosures
to loans to conform to HUBCO's implementation of
Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan."
("SFAS 114"). $1,777 (C)
=======
5) Allowance for Possible Loan Losses
To reclassify Jefferson's valuation allowance on in-
substance foreclosures to the allowance for possible
loan losses to conform to HUBCO's implementation of
SFAS 114. ($170)(D)
=======
6) Other Real Estate
To reclassify Jefferson's in-substance foreclosures
to loans to conform to HUBCO's implementation of
SFAS 114. ($1,777)
To reclassify Jefferson's valuation allowance on in-
substance foreclosures to the allowance for possible
loan losses to conform to HUBCO's implementation of
SFAS 114. 170
-------
($1,607)(E)
=======
7) Other Assets
To record the deferred tax adjustment relating to
the mark-to-market on the Jefferson "Held to Maturity"
portfolio transferred to HUBCO's "Available for
Sale" portfolio. $304
To record the deferred tax adjustment related to the
unrealized holding loss on the Jefferson "Available for
Sale" portfolio transferred to HUBCO's "Available for
Sale" portfolio. 32
-------
$336 (F)
=======
8) Common Stock
Retirement of Jefferson's outstanding common stock. ($1,357)
Issuance of 610,829 shares of HUBCO Common Stock with a
stated value of $1.778 per share. 1,087
-------
($270)(G)
=======
19
<PAGE>
9) Additional Paid in Surplus
To transfer excess common stock to additional paid in surplus. $270
To eliminate Jefferson's shares currently owned by HUBCO. (262)
-------
$8 (H)
=======
10) Unrealized Holding Gain (Loss) on Securities
Available for Sale
Eliminate unrealized holding gain on Jefferson Common
Stock held by HUBCO. ($6)
To record the unrealized holding loss on the Jefferson
"Available for Sale" portfolio for the related deferred
taxes resulting from the transfer to HUBCO's "Available
for Sale" portfolio. 32
To record the unrealized holding loss, net of the
related deferred tax adjustment on the transfer of the
Jefferson "Held to Maturity" portfolio to HUBCO's
"Available for Sale" portfolio. (496)
-------
($470)(I)
=======
11) Other Real Estate
The Pro Forma Combined Condensed Statements of Income
for the nine months ended September 30, 1994 and
for the years ended December 31, 1993, and 1992 have
been adjusted to reclassify Jefferson's ORE valuation
reserves on in-substance foreclosures to HUBCO's provision
for possible loan losses to conform to HUBCO's implementation
of SFAS 114. Accordingly, the provision for possible loan
losses has been increased and other operating expenses
decreased by $151, $189 and $422, respectively. (J)
12) Shopper's Charge Account Transaction
On December 7, 1994, the Bank acquired the Shopper's Charge
Accounts Co. ("Shoppers") for approximately $16.3 million in cash
in a transaction accounted for under the purchase method of
accounting. Accordingly, the Bank recorded approximately $63.4
million in assets and $46.9 million in liabilities. The
difference reflects the stockholders' equity of Shoppers of
$13.2 million and purchase accounting adjustments of approximately
$3.3 million. HUBCO estimates that no goodwill will arise from
the transaction and that the acquisition of Shoppers will not
have a material effect on the financial condition or results
of operations of HUBCO as of and for the year ended
December 31, 1994.
20
<PAGE>
The following summarizes the acquisition of Urban by HUBCO in a
pooling of interest transaction as reflected in the accompanying
pro forma combined condensed unaudited financial statements.
13) Securities Available for Sale
To eliminate Urban shares currently owned by HUBCO. ($11)(AA)
=======
14) Loans
To reclassify Urban's in-substance foreclosures
to loans to conform to HUBCO's implementation of
SFAS 114. $399 (BB)
=======
15) Allowance for Possible Loan Losses
To reclassify Urban's valuation allowance on in-
substance foreclosures to the allowance for possible
loan losses to conform to HUBCO's implementation of
SFAS 114. ($46)(CC)
=======
16) Other Real Estate
To reclassify Urban-insubstance foreclosures
to loans to conform to HUBCO's implementation of
SFAS 114. ($399)
To reclassify Urban's valuation allowance on in-
substance foreclosures to the allowance for possible
loan losses to conform to HUBCO's implementation of
SFAS 114. 46
-------
($353)(DD)
=======
17) Common Stock
Retirement of Urban's outstanding common stock. ($1,230)
Issuance of 2,135,002 shares of HUBCO Common Stock
with a stated value of $1.778 per share. 3,796
-------
$2,566 (EE)
=======
21
<PAGE>
18) Additional Paid in Capital
To transfer paid in capital to common stock for
the issuance of 2,135,002 shares of HUBCO stock,
net of Urban's capital. ($2,566)
To eliminate Urban shares currently owned by HUBCO (8)
-------
($2,574)(FF)
=======
19) Unrealized Holding Gain (Loss) on Securities
Available for Sale
Eliminate unrealized holding gain on Urban Common
Stock held by HUBCO. ($3)(GG)
-------
20) Other Real Estate
The Pro Forma Combined Condensed Statements of Income
for the nine months ended September 30, 1994 and
for the years ended December 31, 1993, and 1992 have
been adjusted to reclassify Urban's ORE valuation
reserves on in-substance foreclosures to HUBCO's provision
for possible loan losses to conform to HUBCO's implementation
of SFAS 114. Accordingly, the provision for possible loan
losses has been increased and other operating expenses
decreased by $50, $75 and $90, respectively. (HH)
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF URBAN'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of Urban's financial condition and
results of operations should be read in conjunction with Urban's financial
statements included as an exhibit to this Current Report on Form 8-K.
Results of Operations
Summary
Urban has been able to operate profitably throughout its entire thirty-two
year history. During the years 1991 and 1992, Urban experienced difficulties
within its loan portfolio reflecting, among other things, weakness in the New
Jersey real estate market and a generally weakened economy. These two factors
contributed to a substantial decline in real estate values, high levels of
unemployment, and increased bankruptcy activity. This overall weakness created
numerous loan defaults which produced increased levels of foreclosures within
Urban's loan portfolio and resulted in significant increases in Urban's
non-performing assets. The high levels of non-performing assets required Urban
to make substantial increases to its allowance for possible loan losses during
1991 and 1992, and incur higher levels of expenses relating to property that was
foreclosed or in the process of foreclosure. Although Urban remained profitable
in 1991 and 1992, these factors, among others, negatively impacted the bank's
net operating income in those years. During 1993 and through the third quarter
of 1994, Urban's net income showed substantial improvement, which was a direct
result of reduced levels of non-performing assets and lower provisions for loan
and real estate losses. At September 30, 1994 non-performing assets stood at
their lowest levels in two years. Also bolstering earnings performance during
this period was an increase in net interest income which was generally
attributable to lower interest costs on deposits, and increases in the level of
interest income from loans and securities.
Net Interest Income
Net interest income is the largest component of Urban's operating income.
The following tables reflect the components of net interest income, setting
forth, for the nine months ended September, 30, 1994 and 1993 and for each of
the years in the two year period ended December 31, 1993, (i) average assets,
liabilities and shareholders' equity, (ii) interest income earned on
interest-earning assets and interest expense paid on interest bearing
liabilities, (iii) average yields earned on interest-earning assets and average
rates paid on interest-bearing liabilities, (iv) Urban's net interest spread
(i.e., the difference between the average yield earned on interest-earning
assets and the average rate paid on interest-bearing liabilities), (v) the net
interest margin or net yield earned on interest-earning assets (i.e., net
interest income as a percentage of interest-earning assets) and (vi) the ratio
of average interest-earning assets to average interest-bearing liabilities.
23
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------
1994 1993
------------------------------- ------------------------------
Interest Average Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense(1) Rate(2) Balance Expense(1) Rate(2)
------- ---------- ------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning Assets:
Loans (net of unearned income)(3) .................... $ 87,345 $5,735 8.75% $ 90,349 $5,869 8.66%
Taxable securities ................................... 97,394 3,767 5.16% 79,992 3,244 5.41%
Tax-exempt securities ................................ 10,672 246 3.07% 3,637 96 3.52%
Interest-bearing deposits ............................ 3,581 100 3.72% 4,368 101 3.08%
Federal funds sold ................................... 3,683 94 3.40% 8,713 189 2.89%
-------- ------ ------- -------- ------ -------
Total interest-earning assets ................ 202,675 9,942 6.54% 187,059 9,499 6.77%
-------- ------ ------- -------- ------ -------
Allowance for possible loan losses ........................... (1,591) (1,743)
Noninterest-earning assets ................................... 19,532 22,352
-------- --------
Total assets ................................. $220,616 $207,668
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Demand deposits .............................................. $ 46,154 $ 37,374
Interest-Bearing Liabilities:
Demand deposits ...................................... 73,845 1,104 1.99% 69,137 1,225 2.36%
Savings deposits ..................................... 31,317 519 2.21% 26,094 541 2.76%
Time deposits ........................................ 40,278 1,062 3.52% 43,084 1,241 3.84%
-------- ------ ------- -------- ------ -------
Total interest-bearing deposits .............. 145,440 2,685 2.46% 138,315 3,007 2.90%
-------- ------ ------- -------- ------ -------
Total deposits ............................... 191,594 2,685 1.87% 175,689 3,007 2.28%
-------- ------ ------- -------- ------ -------
Borrowings ................................................... 15,703 387 3.29% 18,322 397 2.89%
-------- ------ ------- -------- ------ -------
Total Interest-bearing liabilities ........................... 161,143 3,072 2.54% 156,637 3,404 2.90%
-------- ------ ------- -------- ------ -------
Other liabilities ............................................ 1,111 1,671
-------- --------
Shareholders' Equity ......................................... 12,208 11,986
-------- --------
Total liabilities and shareholders' equity ... $220,616 $207,668
======== ========
Net interest income; net interest spread ..................... $6,870 4.00% $6,095 3.87%
====== ======= ====== =======
Net yield on interest-earning assets ......................... 4.52% 4.34%
======= =======
Ratio of average interest-earning assets to
average interest-bearing liabilities ....................... 125.77% 119.42%
======= =======
- ------------
<FN>
(1) Includes loan fees, which are not material.
(2) Percentages have been annualized for purposes of comparability with
year-end data.
(3) Includes non-accruing loans, which have the effect of reducing the average
rates earned on Urban's loan portfolio.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1993 1992
------------------------------- ------------------------------
Interest Average Interest Average
Average Income/ Interest Average Income/ Interest
Balance Expense(1) Rate Balance Expense(1) Rate
------- ---------- ------- ------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-Earning Assets:
Loans (net of unearned income)(2) .................... $ 89,010 $ 7,698 8.65% $103,950 $ 9,432 9.07%
Taxable securities ................................... 83,424 4,458 5.34% 46,475 3,085 6.64%
Tax-exempt securities ................................ 4,707 168 3.57% 7,463 431 5.78%
Interest-bearing deposits ............................ 4,942 154 3.12% 20 1 5.00%
Federal funds sold ................................... 8,190 194 2.37% 11,536 270 2.34%
-------- ------ ------- -------- -------
Total interest-earning assets ................ 190,273 12,672 6.66% 169,444 13,219 7.80%
-------- ------ ------- -------- -------
Allowance for possible loan losses ........................... (1,762) (1,630)
Noninterest-earning assets ................................... 22,154 22,881
-------- --------
Total assets ................................. $210,665 $190,695
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Demand deposits .............................................. $ 37,093 $ 36,830
-------- --------
Interest-Bearing Liabilities:
Demand deposits ...................................... 71,234 1,603 2.25% 64,902 2,052 3.16%
Savings deposits ..................................... 26,247 692 2.64% 20,906 623 2.98%
Time deposits ........................................ 43,000 1,619 3.77% 49,605 2,393 4.82%
-------- ------ ------- -------- ------- -------
Total interest-bearing deposits .............. 140,481 3,914 2.79% 135,413 5,068 3.74%
-------- ------ ------- -------- ------- -------
Total deposits ............................... 177,574 3,914 2.20% 172,243 5,068 2.94%
-------- ------ ------- -------- ------- -------
Borrowings ........................................... 18,779 545 2.90% 6,207 206 3.32%
-------- ------ ------- -------- ------- -------
Total interest-bearing liabilities ........... 159,260 4,459 2.80% 141,620 5,274 3.72%
Other liabilities ............................................ 2,195 749
Shareholders' Equity ......................................... 12,117 11,496
-------- --------
Total liabilities and shareholders'
equity ..................................... $210,665 $190,695
======== ========
Net interest income; net interest spread ..................... $ 8,213 3.86% $ 7,945 4.08%
======= ======= ======= =======
Net yield on interest-earning assets ......................... 4.32% 4.69%
======= =======
Ratio of average interest-earning assets to
average interest-bearing liabilities ....................... 119.47% 119.65%
======= =======
- ------------
<FN>
(1) Includes loan fees, which are not material.
(2) Includes non-accruing loans, which have the effect of reducing the average
rates earned on Urban's loan portfolio.
</FN>
</TABLE>
25
<PAGE>
The following table demonstrates the relative impact on net interest income
of changes in the volume of interest-earning assets and interest-bearing
liabilities and of changes in rates earned and paid by Urban on such assets and
liabilities. Changes attributable to the interactive effects of volume and rate
(mix variance) have been allocated equally to changes due to volume and rate.
Dollar amounts are in thousands of dollars.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1994
Compared with Nine Months
Ended September 30, 1993 1993 Compared with 1992
------------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
--------------------- ----------------------
Total Average Average Total Average Average
Change Volume Rate Change Volume Rate
------ -------- ------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans (net of unearned
income) .................................. ($134) ($194) $ 60 ($1,734) ($1,358) ($ 376)
Taxable securities ............................... 523 706 (183) 1,373 2,456 (1,083)
Tax-exempt securities ............................ 150 186 (36) (263) (159) (104)
Interest-bearing deposits ........................ (1) (17) 16 153 246 (93)
Federal funds sold ............................... (95) (109) 14 (76) (78) 2
----- ----- ----- ------- ------- -------
Total interest earning assets ............ 443 572 (129) (547) 1,107 (1,654)
----- ----- ----- ------- ------- -------
Interest expense:
Demand deposits .................................. (121) 83 (204) (449) 200 (649)
Savings deposits ................................. (22) 107 (129) 69 159 (90)
Time deposits .................................... (179) (80) (99) (774) (320) (454)
Borrowings ....................................... (10) (57) 47 339 417 (78)
----- ----- ----- ------- ------- -------
Total interest bearing
liabilities ...................... (332) 53 (385) (815) 456 (1,271)
----- ----- ----- ------- ------- -------
Net change in interest income ............................ $775 $519 $256 $ 268 $ 651 ($ 383)
===== ===== ===== ======= ======= =======
</TABLE>
Consolidated Financial Summary
<TABLE>
<CAPTION>
For Nine Months Ended For Year Ended December 31,
September 30, 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C>
STATEMENTS of INCOME (Thousands)
Net Interest Income ................. $ 6,870 $ 8,213 $ 7,945
Net Income .......................... $ 1,080 $ 1,025 $ 448
- --------------------------------------------------------------------------------------------
STATEMENTS OF CONDITION (Thousands)
Total Assets ........................ $220,475 $227,377 $200,900
Loans, Net.. ........................ 89,192 84,018 91,454
Deposits ............................ 190,682 189,689 175,409
Allowance for Loan Losses ........... 1,515 1,616 1,553
Stockholders' Equity ................ 12,119 12,767 11,742
Primary Capital (Equity plus ........ 13,634 14,383 13,295
Allowance for Loan Losses)
- --------------------------------------------------------------------------------------------
NET INCOME PER SHARE DATA
Net Income Per Share ................ $ 1.10 $ 1.04 $ .46
Dividends Per Share ................. 0.00 0.00 0.00
Average Number of Shares Outstanding 984,372 984,372 984,372
- --------------------------------------------------------------------------------------------
KEY RATIOS
Return on Average Assets
(Annualized) ...................... 0.65% 0.48% 0.23%
Return on Average Equity
(Annualized) ...................... 11.80% 8.46% 3.90%
Allowance for Loan Losses to
Total Loans ......................... 1.67% 1.89% 1.67%
Stockholders' Equity to
Total Assets ........................ 5.50% 5.62% 5.84%
Primary Capital to
Total Assets ........................ 6.18% 6.33% 6.62%
- --------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Urban's net interest income has grown steadily from 1992 to 1993 and
through the first nine months of 1994. Net interest income increased by 3.4%
($268,000) from 1992 to 1993, and by 12.7% ($775,000) from the first nine months
of 1993 to the first nine months of 1994. The impact of non-accrual loans on net
interest income has been substantial. The total amount of interest received on
non-accrual loans outstanding amount to approximately $129,000 in 1992, $70,000
in 1993, and $57,000 during the first nine months of 1994. Had such loans
performed in accordance with their original contract terms, interest income of
approximately $388,000 would have been recognized in 1992, $387,000 in 1993, and
$228,000 during the first nine months of 1994.
In 1993, Urban reduced its reliance on federal funds sold. The average
volume of this relatively low yielding interest-earning asset declined from
$11.5 million in 1992 to $8.2 million in 1993. This reduction was effected at
the same time that depositors were moving their funds out of more expensive time
deposits into shorter term deposit products at Urban and into other investment
vehicles outside of Urban. The resulting decrease in the average volume of high
interest rate funding sources enabled Urban to record the above-mentioned
$268,000 increase in net interest income in 1993, notwithstanding a substantial
reduction in interest income resulting primarily from a decline in yields on
Urban's interest-earning assets.
During 1993, an $11.5 million decrease in average loan volume adversely
affected Urban's interest income and net interest income. This was offset in
part by the reduction in funding costs resulting from the declining rate
environment and the continuing migration of deposits into shorter-term, less
costly sources of funds.
The $775,000 increase in net interest income for the nine months ended
September 30, 1994 is attributable primarily to the continuing low cost of funds
including an $8.8 million increase in the average balance of non-interest
bearing demand deposits. Also bolstering earnings performance for the period
were the sales proceeds of foreclosed real estate, which were reinvested in
earning assets.
During the periods presented herein, Urban has been able to attain
improving net interest spreads and net interest margins, primarily as a result
of (i) the fixed rate nature of a portion of Urban's portfolio, (ii) the
declining interest rate environment in periods prior to 1994, (iii) an increase
in the contribution of non-interest-bearing funding sources, and (iv) a decline
in non-interest earning assets. As noted elsewhere herein, the fixed rate nature
of a portion of Urban's loan portfolio could adversely affect net interest
income should current market rates of interest continue to increase.
Provision for Possible Losses
Management of Urban performs an ongoing review of the adequacy of the
allowance for possible loan losses in connection with its review of the loan
portfolio. The review of the allowance includes an evaluation of changes in the
nature and volume of the loan portfolio, overall portfolio quality, review of
specific problem loans, industry experience, collateral value and current
economic conditions. The allowance is reduced by charge-offs and increased by
recoveries on charged-off loans and charges against earnings referred to as
"provisions for possible loan losses". The substantial deterioration in the
local real estate market and the weakening of general economic conditions led to
higher provisions for possible loan losses in 1992. Urban's provision was
$1,598,000 in 1992. Management has been able to reduce the provision for
possible loan losses to $118,000 in 1993 and to $125,000 during the first nine
months of 1994.
27
<PAGE>
Other Income
The following table reflects the components of other (i.e., non-interest)
income for the nine months ended September 30, 1994 and 1993, and for each of
the past two years.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
----------------------- ------------------------
1994 1993 1993 1992
-------- ------ ------ -------
(In thousands)
<S> <C> <C> <C> <C>
Gains (Losses) on sales of securities, net ...... ($ 83) $ 183 $ 83 $1,309
Fees, commisions and certain charges ............ 885 813 1,134 1,172
Other ........................................... 216 187 267 255
------ ------ ------ ------
Total ................................... $1,018 $1,183 $1,484 $2,736
====== ====== ====== ======
</TABLE>
The slight improvement in Urban's fee and service charge income during the
first nine months of 1994 reflects a restructuring of Urban's fee structure
implemented during 1993. The favorable interest rates experienced in 1992
allowed the Bank to restructure its investment portfolio while providing a
significant increase to 1992 total income.
Other Expenses
The following table reflects the components of other (i.e., non-interest)
expenses for the nine months ended September 30, 1994 and 1993, and for each of
the past two years.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
---------------------- -------------------------
1994 1993 1993 1992
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Salaries and employee benefits .................. $3,150 $2,813 $3,698 $3,884
Occupancy, furniture and equipment .............. 1,075 972 1,340 1,351
Federal Deposit Insurance premium ............... 347 329 438 382
Legal ........................................... 140 70 201 253
Other real estate expenses:
Cost of operations ...................... 263 275 286 174
Valuation adjustments ................... 70 278 488 1,046
Other ........................................... 1,155 1,060 1,456 1,291
------ ------ ------ ------
Total ........................... $6,200 $5,797 $7,907 $8,381
====== ====== ====== ======
</TABLE>
The increase in salaries and employee benefits during the first nine months
of 1994 is primarily attributable to an increase in the cost of Urban's
self-funded insurance plan, increases in salaries relating to the introduction
of a mortgage origination unit and the introduction of a mutual fund/annuity
program. The balance of the increase relates to salary increases granted during
the year. Urban also incurred historically high expenses relating to "other real
estate" (i.e., real estate which has either been foreclosed or is in the process
of foreclosure). Such expenses include both the actual expenses of operating ORE
properties (which increased 64.4% from 1992 to 1993) and charges to earnings
that must be taken as valuation adjustments (which increased 197% from 1991 to
1992 and decreased 53.3% from 1992 to 1993) in recognition of market value
declines. During 1992 a new senior management team was hired to deal with the
increased level of problem assets and their effect on Urban. The historically
high valuation adjustments experienced in 1992 were attributable to a review
process, by management, which resulted in conservative market valuations on ORE
properties.
Urban incurred significant expenses from 1992 through the first nine months
of 1994 attributable to professional fees associated with Urban's efforts to
protect its interests in problem loan transactions, ORE Properties, and other
legal matters. A substantial portion of the increase in "other" non-interest
expenses from 1992 to 1993 and the first nine months of 1994 relates to the
Bank's increase in the marketing of its products.
28
<PAGE>
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes"
(Statement 109). Statement 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability method
of accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on deferred
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Effective January 1, 1993, Urban adopted Statement 109. Prior years'
financial statements were not restated to comply with Statement 109. The effects
of adopting Statement 109 in 1993 have not been significant.
Urban has recorded provisions for income taxes of $254,000, $647,000 and
$559,000, respectively, for 1992, 1993 and the first nine months of 1994.
Financial Condition
Interest Rate Sensitivity
Urban analyzes its interest sensitivity position to manage the risks
associated with interest rate movements through the use of "gap analysis."
Interest rate risk arises from mismatches in the repricing of assets and
liabilities within a given period. Gap analysis is an approach used to quantify
these differences. A "positive" gap results when the amount of
interest-sensitive assets exceeds the amount of interest-sensitive liabilities
within a given period. A "negative" gap results when interest-sensitive
liabilities exceed interest-sensitive assets within a given period.
The following table illustrates Urban's interest rate gap position as of
September 30, 1994. At that date, Urban had a cumulative negative gap on a
30-day, 90-day, 180-day, and one year basis.
<TABLE>
<CAPTION>
Assets and Liabilities Maturing-Repricing in:
----------------------------------------------------------------------------------------
1-30 31-90 91-180 181-365
Days Days Days Days Over 1 Year Total
--------- --------- -------- --------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Securities held to maturity ........ $ 2,247 $ 1,398 $ 3,975 $ 1,837 $ 47,111 $ 56,568
Securities available for sale ...... 1,617 3,011 3,005 4,049 35,146 46,828
Interest-bearing deposits .......... 29 -- -- 100 -- 129
Term deposits at FHLB .............. 400 3,700 -- -- -- 4,100
Federal Reserve Bank Stock ......... -- -- -- -- 77 77
Installment loans .................. 767 19 230 313 5,109 6,438
Mortgage loans ..................... 19,961 651 1,086 2,208 40,082 63,988
Commercial loans ................... 18,292 226 11 22 1,730 20,281
-------- ------- ------- ------- -------- --------
Total ......................... 43,313 9,005 8,307 8,529 129,255 198,409
-------- ------- ------- ------- -------- --------
Interest-Bearing Liabilities:
Treasury Tax Deposits .............. 1,828 -- -- -- -- 1,828
Demand deposits .................... 69,781 -- -- -- -- 69,781
Savings deposits ................... 30,901 938 -- -- -- 31,839
Time deposits ...................... 7,148 7,505 7,376 7,508 9,282 38,819
Repurchase agreements .............. 7,358 8,095 -- -- -- 15,453
-------- ------- ------- ------- -------- --------
Total ........................ $117,016 $16,538 $ 7,376 $ 7,508 $ 9,282 $157,720
======== ======= ======= ======= ======== ========
Period gap ............................ ($ 73,703) ($ 7,533) $ 931 $ 1,021 $119,973 $ 40,689
Cumulative gap ........................ ($ 73,703) ($81,236) ($80,305) ($79,284) $ 40,689
</TABLE>
29
<PAGE>
For many reasons, an interest sensitivity table is not a complete picture of the
possible effect of interest rate changes on Urban's net interest income. First,
changes in the general level of interest rates will not effect all categories of
assets and liabilities equally or simultaneously. Second, the table represents a
one-day position; variations occur daily as Urban adjusts its interest
sensitivity throughout the year. Third, assumptions must be made to construct
such a table. For example, there are several core deposit products categorized
as interest sensitive in the 30 day interval; however, historically they have
been adjusted less frequently than changes in the leading rate indicators.
Fourth, the re-pricing distribution of interest-sensitive assets may not be
indicative of the liquidity of those assets. Finally, since this table is based
on contractual maturities, it does not include estimates of early principal
payments on mortgages installment loans, mortgage backed securities, and
collateralized mortgage obligations.
In general, the net interest income of a financial institution will be
benefited if the institution has a negative gap during periods of declining
interest rates and a positive gap during periods of increasing interest rates.
Likewise, net interest income generally will be adversely affected if a
financial institution has a positive gap during periods of declining interest
rates or a negative gap during periods of increasing interest rates. Urban's
negative gap, which is attributable in part to the predominance of long-term
mortgage products, can be expected to adversely affect its net interest income
in the future if the current trend of increasing market rates of interest
continues.
The following table sets forth certain categories of loans as of September
30, 1994 in terms of maturity and interest rate sensitivity:
Within 1 to 5 After 5
1 Year Years Years Total
-------- ------ ------- -------
(In thousands)
Commercial loans ............... $11,971 $ 7,906 $ 129 $20,006
Real estate loans .............. 8,406 27,100 28,758 64,264
Installment loans .............. 2,912 3,525 0 6,437
------- ------- ------- -------
Total ..................... $23,289 $38,531 $28,887 $90,707
======= ======= ======= =======
Loans with predetermined rates . $11,568 $25,109 $17,611 $54,288
Loans with floating rates ...... 11,721 13,422 11,276 36,420
------- ------- ------- -------
Total ..................... $23,289 $38,531 $28,887 $90,707
======= ======= ======= =======
Liquidity and Funding
Cash and cash equivalents are Urban's most liquid assets. At September 30,
1994, cash and cash equivalents totaled $19.3 million, as compared with $25.3
million at December 31, 1993. The bulk of this decrease resulted from a $5.1
million net increase in loans partially offset by a $2.7 million net increase in
deposits.
The following table provides information concerning deposit categories
which were in excess of 10% of average total deposits.
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended Year Ended
September 30, December 31, December 31,
1994 1993 1992
------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Non-interest bearing demand deposits:
Average amount ................... $46,154 $37,093 $36,830
Average rate paid ................ -- -- --
Interest bearing demand deposits:
Average amount ................... $73,845 $71,234 $64,902
Average rate paid ................ 1.99% 2.25% 3.16%
Savings deposits:
Average amount ................... $31,317 $26,247 $20,906
Average rate paid ................ 2.21% 2.63% 2.98%
Time deposits:
Average amount ................... $40,278 $43,000 $49,605
Average rate paid ................ 3.52% 3.77% 4.82%
</TABLE>
30
<PAGE>
At September 30, 1994 time deposits in amounts of $100,000 and over matured
as follows (in thousands):
September 30,
1994
-------------
Three months or less ......................... $4,470
Over three months through twelve months ...... 1,131
Over twelve months ........................... 200
------
Total ........................................ $5,801
======
Securities
The amortized cost, gross unrealized gains and losses and estimated market
values of Urban's securities at September 30, 1994 and December 31, 1993 and
1992 are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1994
-----------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Treasury Notes ......................... $ 12,328 $ -- ($ 364) $ 11,964
Obligations of U.S. Government Agencies ..... 21,650 -- (1,371) 20,279
Collateralized Mortgage Obligations
of U.S. Government Agencies ............... 15,713 -- (1,128) 14,585
-------- -------- -------- --------
$ 49,691 $ -- ($ 2,863) $ 46,828
======== ======== ======== ========
Securities held to Maturity
U.S. Treasury Notes ......................... $ 1,025 $ -- ($ 7) $ 1,018
Obligations of U.S. Government Agencies ..... 9,380 -- (894) 8,486
Mortgage Backed Securities of U.S. Government
Agencies .................................. 33,791 -- (2,271) 31,520
State, county, and municipal securities ..... 11,172 -- (183) 10,989
Other securities ............................ 1,200 -- (31) 1,169
-------- -------- -------- --------
$ 56,568 $ -- ($ 3,386) $ 53,182
======== ======== ======== ========
<CAPTION>
December 31, 1993
-----------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury Notes ......................... $ 12,480 $ 125 (125) $ 12,480
Obligations of U.S. Government Agencies ..... 30,825 119 (81) 30,863
Mortgage Backed Securities of U.S. Government
Agencies .................................. 30,086 28 (502) 29,612
Collateralized Mortgage Obligations
of U.S. Government Agencies ............... 18,624 87 (87) 18,624
State, county, and municipal securities ..... 9,509 61 (59) 9,511
Other securities ............................ 4,137 19 -- 4,156
-------- -------- -------- --------
$105,661 $ 439 ($ 854) $105,246
======== ======== ======== ========
<CAPTION>
December 31, 1992
-----------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
-------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury Notes ......................... $ 15,430 $ 337 $ -- $ 15,767
Obligations of U.S. Government Agencies ..... 33,622 75 (431) 33,266
Mortgage Backed Securities of U.S. Government
Agencies .................................. 3,867 -- (29) 3,838
Collateralized Mortgage Obligations
of U.S. Government Agencies ............... 11,753 73 (60) 11,766
State, county, and municipal securities ..... 2,087 -- -- 2,087
-------- -------- -------- --------
$ 66,759 $ 485 ($ 520) $ 66,724
======== ======== ======== ========
</TABLE>
31
<PAGE>
The following table sets forth the maturity distribution and weighted
average yields of Urban's investment securities held to maturity and securities
available for sale as of September 30, 1994. No tax equivalent adjustments have
been made in the following table.
<TABLE>
<CAPTION>
More
Within 1 to 5 5-10 Than 10
1 Year Years Years Years Total
----- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Treasury:
Book value .................... $ 0 $ 0 $ 1,025 $ 0 $ 1,025
Yield ......................... 0% 0% 5.35% 0% 5.35%
U.S. Agencies:
Book value .................... $ 0 $ 2,979 $ 6,401 $ 0 $ 9,380
Yield ......................... 0% 5.35% 5.43% 0% 5.42%
Mortgage Backed Securities:
Book value .................... $ 0 $ 8,499 $12,394 $12,898 $33,791
Yield ......................... 0% 6.26% 5.81% 5.78% 5.88%
State, County, and Municipal:
Book value .................... $4,513 $ 5,726 $ 820 $ 113 $11,172
Yield ......................... 3.17% 3.79% 4.18% 3.98% 3.57%
Other Securities:
Book value .................... $ 76 $ 1,000 $ 0 $ 201 $ 1,277
Yield ......................... 6.00% 5.25% 0% 7.38% 5.62%
Total book value ...................... $4,589 $18,204 $20,640 $13,212 $56,645
====== ======= ======= ======= =======
Weighted average yield ................ 3.22% 5.28% 5.60% 5.71 5.33%
====== ======= ======= ======= =======
Securities available for sale:
U.S. Treasury:
Book value .................... $2,984 $ 7,299 $ 2,045 $ 0 $12,328
Yield ......................... 4.99% 4.50% 5.07% 0% 5.35%
U.S. Agencies:
Book value .................... $ 0 $12,916 $ 8,734 $ 0 $21,650
Yield ......................... 0% 4.81% 5.35% 0% 5.42%
Collaterallized Mortgage Obligations:
Book value .................... $ 0 $ 2,027 $ 2,910 $10,776 $15,713
Yield ......................... 0% 6.09% 5.80% 5.75% 588%
Total book value ...................... $2,984 $22,242 $13,689 $10,776 $49,691
====== ======= ======= ======= =======
Weighted average yield ................ 4.99% 4.82% 5.40% 5.75% 5.55%
====== ======= ======= ======= =======
</TABLE>
Loan Portfolio
Loans are a significant component of Urban's interest-earning assets. Real
estate loans account for a substantial portion of Urban's total loans.
Commercial lending activities are focused primarily on lending to small to
mid-size businesses.
32
<PAGE>
The following table sets forth the classification of Urban's loans by major
category as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
September 30, -----------------
1994 1993 1992
------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Commercial ........................................... $20,006 $22,378 $22,677
Real estate loans secured by:
Construction and land development ............ 2,826 630 533
First mortgages .............................. 23,758 24,529 29,566
Second mortgage .............................. 19,341 17,107 17,330
Non-residential properties ................... 18,339 15,705 18,584
------- ------- -------
Total Real estate loans .............. 84,270 80,349 88,690
Installment .......................................... 6,437 5,285 4,317
------- ------- -------
Total loans .......................... 90,707 85,634 93,007
Less: Allowance for possible loan losses ............. 1,515 1,616 1,553
------- ------- -------
Net loans ............................ $89,192 $84,018 $91,454
======= ======= =======
</TABLE>
Credit Risk
One measure of credit risk is the extent to which a financial institution's
loans have ceased to perform in accordance with the terms initially agreed upon
by the institution and its borrowers. The following table sets forth information
regarding non-accrual loans, other past due loans and other real estate as of
September 30, 1994 and December 31, 1993 and 1992:
<TABLE>
<CAPTION>
December 31,
September 30, ---------------------
1994 1993 1992
------------- ---------------------
(In Thousands)
<S> <C> <C> <C>
Non-performing loans
Non-accrual loans(1) ............................ $3,506 $3,942 $ 3,869
Past due 90 days or more and accruing interest(2) 722 285 2,122
------ ------ -------
Total ................................... 4,228 4,227 5,991
------ ------ -------
Other real estate (3)
Repossessed properties--residential ............. 1,842 1,579 3,013
Repossessed properties--commercial .............. 884 1,104 960
In-substance foreclosure--residential ........... 255 1,698 4,300
In-substance foreclosure--commercial ............ 144 144 404
Less: Valuation allowance .............................. (280) (406) (459)
------ ------ -------
Net other real estate ................................... 2,845 4,119 8,218
------ ------ -------
Total non-performing assets ............. $7,073 $8,346 $14,209
====== ====== =======
Non-performing loans as a percent of total loans
(net of unearned income) ........................ 4.66% 4.99% 6.44%
Non-performing assets as a percent of total loans
(net of unearned income) ........................ 7.80% 9.85% 15.28%
</TABLE>
- ----------
(1) Generally represents those loans as to which management has determined that
the borrowers may be unable to meet contractual principal and/or interest
obligations or where interest or principal is in arrears for a period of
more than 90 days (except when such loans are believed to be fully
collectable and adequately secured). Interest previously accrued on these
loans during the current year and not yet paid is reversed and charged
against income, interest accrued during prior years and not yet paid is
charged against the allowance for possible loan losses. Interest earned
thereafter is only included in income to the extent that it is collected.
33
<PAGE>
(2) Primarily represents those loans in which payments of interest or principal
are contractually past due 90 days or more but which are currently accruing
income at the contractually stated rates, based on a determination that
such loans are believed to be fully collectible and adequately secured.
(3) Consists of assets acquired in foreclosure and assets considered to be in
an in-substance foreclosure status. A loan is treated as in-substance
foreclosure when the borrower has little or no equity in the underlying
property and Urban can reasonably expect repayment to come only from the
operation or sale of the underlying real estate.
Credit Losses
Loans are typically charged-off when they are identified by management or
classified by regulatory authorities as a "loss". Charge-offs of loans are made
when they are determined to be uncollectible. In certain instances, partial
charge-offs are made to recognize the effect of declining collateral values, as
compared to the carrying value of the loan. Net charge-offs increased in 1992 as
compared to prior years, primarily as a result of continuing weakness in the
Bank's primary lending area and a conservative approach to market valuation of
OREO properties.
The following table sets forth information regarding Urban's provision and
allowance for possible loan losses and charge-off experience:
<TABLE>
<CAPTION>
September 30, December 31,
----------------------- -----------------------
1994 1993 1993 1992
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Allowance for Possible Loan Losses:
Balance at beginning of period ........................ $1,616 $1,553 $1,553 $1,366
Provisions (charged to expense) ....................... 125 250 118 1,598
Charge-offs ........................................... (255) (103) (186) (1,525)
Recoveries of charged-off loans ....................... 29 116 131 114
------ ------ ------ ------
Balance at end of period .................. $1,515 $1,816 $1,616 $1,553
====== ====== ====== ======
Ratio of net charge-offs to average loans outstanding (1) .. .34% (.02)% .06% 1.36%
Allowance for possible loan losses as a percent of total
loans (net of unearned income) ........................... 1.67 2.08 1.89 1.67
Allowance for possible loan losses as a percent of
non-performing loans ..................................... 35.83 31.94 38.23 25.92
<FN>
- --------------
(1) The interim data has been annualized for purposes of comparability with
year-end data.
</FN>
</TABLE>
The allowance for possible loan losses is established through a provision
for possible loan losses charged to expense. Losses on loans are charged against
the allowance when management believes the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible based
on evaluations of the collectibility of such loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, industry
experience, collateral value and current economic conditions that may affect the
borrower's ability to pay. Management believes that the allowance for possible
loan losses at September 30, 1994 is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, the OCC, as
an integral part of its examination process, periodically reviews Urban's
allowance for possible loan losses. The OCC may require Urban to recognize
additions to the allowance based on its judgment of information available to the
OCC at the time of its examination.
The principal risk elements in Urban's loan portfolio relate to the value
of real estate collateral underlying Urban's mortgage loans and the economic
strength of Urban's borrowers and guarantors. Urban analyzes these factors as
part of its analysis of the allowance for possible loan losses. While net
charge-offs are not expected to approach 1992 levels during the year ending
December 31, 1995, no assurances can be given in this regard.
34
<PAGE>
<TABLE>
<CAPTION>
For Nine Months For Year Ended December 31,
Short-Term Borrowings September 30, 1994 1993 1992
--------------------- ------------------ ---------------------------
<S> <C> <C> <C>
Securities Sold Under Agreements to Repurchase:
Current Amount .......................................... $15,454 $17,145 $ 6,553
Weighted Average Interest Rate Year-To-Date ............. 2.49% 2.92% 3.39%
Maximum Amount Of Borrowings At Month-End ............... $21,915 $22,336 $ 6,553
Average Balance Year-To-Date ............................ $14,000 $16,779 $ 4,217
Federal Funds Purchased And Other Borrowings:
Current Amount .......................................... $ 0 $ 0 $ 0
Weighted Average Interest Rate Year-To-Date ............. 3.45% 3.00% --
Maximum Amount Of Borrowings At Month-End ............... $ 0 $ 0 $ 0
Average Balance Year-To-Date ............................ $ 29 $ 3 $ 0
Treasury, Tax, & Loan Note Option:
Current Amount .......................................... $ 1,542 $ 6,000 $ 6,477
Weighted Average Interest Rate Year-To-Date ............. 2.21% 2.76% 3.17%
Maximum Amount Of Borrowings At Month-End ............... $ 2,531 $ 7,122 $ 6,000
Average Balance Year-To-Date ............................ $ 1,675 $ 1,996 $ 1,990
</TABLE>
Securities Sold Under Agreements To Repurchase are generally for terms from
one to 364 days, while borrowings under the Treasury, Tax & Loan Program are
generally for periods which do not exceed ninety days.
Recent Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS
No. 114, "Accounting by Creditors for the Impairment of a Loan." SFAS 114 is
effective for financial statements issued for fiscal years beginning after
December 15, 1994. This statement amends SFAS 5, "Accounting for Contingencies."
and SFAS 15, "Accounting by Debtors and Creditors for Troubled Debt
Restructurings." It prescribes the recognition criteria for loan impairment and
the measurement methods for certain impaired loans and loans whose terms are
modified through troubled debt restructurings. See Note 1 of the Notes to
Urban's Financial Statements.
Also in May 1992, FASB issued the SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS 115 addresses the accounting
and reporting requirements for investments in equity securities that have
readily determinable values and all investments in debt securities. This
statement is effective for fiscal years beginning after December 15, 1993.
Capital
The OCC has adopted minimum risk-based and leverage capital guidelines. The
minimum required ratio of qualifying total capital to risk-weighted assets
(including certain off-balance sheet items, such as standby letters of credit)
is 8%, of which at least 4% must consist of Tier 1 capital. As of September 30,
1994, Urban's total risk-based captal ratio was 14.98%, and its Tier 1
risk-based capital was 13.72%. Tier 1 capital consists of common equity and
qualifying perpetual preferred stock (less certain intangibles). Total capital
consists of Tier 1 capital, mandatory convertible debt securities, qualifying
subordinated debt, other preferred stock and a portion of the allowance for
possible loan losses up to 1.25% of total calculated assets. The minimum
required leverage ratio (Tier 1 capital to average total assets) is 3% for
banking organizations that meet certain specified criteria. All other banking
organizations are required to maintain a leverage ratio of 3% plus an additional
cushion of at least 100 to 200 basis points. As of September 30, 1994, Urban's
leverage capital ratio was 6.31% which exceeds the regulatory minimum.
35
<PAGE>
Item 7. Exhibits.
Exhibit No. Description
- ----------- -----------
10 Letter Agreement dated
March 1, 1995 by and among
HUBCO, Inc., Hudson United
Bank and Jefferson National
Bank.
10.1 Agreement and Plan of
Merger dated February 14,
1995 by and among HUBCO,
Inc., Hudson United Bank
and Urban National Bank
(incorporated by reference
from HUBCO, Inc.'s Current
Report on Form 8-K, filed
with the Securities and
Exchange Commission on
February 23, 1995
(Exhibit 2 thereto))
23 Consent of Stephen P.
Radics & Co.
99 Urban National Bank
consolidated financial
statements for the nine
months ended Septem-
ber 30, 1994 and for
the years ended Decem-
ber 31, 1993 and 1992.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, HUBCO,
Inc. has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
HUBCO, INC.
------------------------
(Registrant)
Dated: March 3, 1995 By: /s/ KENNETH T. NEILSON
------------------------------------
Kenneth T. Neilson
President and Chief Executive
Officer
37
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------- ----------- ----
10 Letter Agreement dated
March 1, 1995 by and
among HUBCO, Inc.,
Hudson United Bank and
Jefferson National Bank.
10.1 Agreement and Plan of
Merger dated February 14,
1995 by and among HUBCO,
Inc., Hudson United Bank
and Urban National Bank
(incorporated by reference
from HUBCO, Inc.'s Current
Report on Form 8-K, filed
with the Securities and
Exchange Commission on
February 23, 1995
(Exhibit 2 thereto))
23 Consent of Stephen P.
Radics & Co.
99 Urban National Bank
consolidated financial
statements for the nine
months ended Septem-
ber 30, 1994 and for
the years ended Decem-
ber 31, 1993 and 1992.
38
HUBCO, INC.
HUDSON UNITED BANK
1000 MacArthur Boulevard
Mahwah, New Jersey 07430
March 1, 1995
Jefferson National Bank
155 Jefferson Street
Passaic, New Jersey 07055
This letter will confirm our mutual understanding with respect to the
proposed acquisition by HUBCO, Inc. ("HUBCO") of Urban National Bank ("Urban")
and the related resolicitation of the shareholders of Jefferson National Bank
("Jefferson"). Because of the significance of the proposed Urban acquisition to
HUBCO, HUBCO and Jefferson have agreed to provide Jefferson shareholders with a
report on Form 8-K prepared by HUBCO and containing information about Urban,
including financial information prepared on a pro forma basis to show the effect
of the Urban transaction on HUBCO. HUBCO and Jefferson have also agreed that the
approval of the Jefferson shareholders to the proposed merger of Jefferson with
and into Hudson United Bank (the "Merger") will be resolicited at a new special
meeting to be held on or about March 31, 1995. HUBCO and Jefferson agree that
they will not consummate the Merger unless the Jefferson shareholders approve
the Merger at the new special meeting by the affirmative vote of at least 2/3 of
the shares of Jefferson common stock issued and outstanding on the record date
established for the new special meeting. HUBCO agrees that if the Merger is not
consummated, HUBCO will reimburse Jefferson for Jefferson's out-of-pocket
expenses incurred due to the Urban transaction. Please execute and return a copy
of this letter to signify your agreement with the foregoing.
Very truly yours,
HUBCO, INC.
By: KENNETH T. NEILSON
------------------
HUDSON UNITED BANK
By: KENNETH T. NEILSON
------------------
Acknowledged and agreed to by
JEFFERSON NATIONAL BANK
By: JOSEPH J. GRECO
---------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference, in the Registration
Statement on Form S-4 of HUBCO, Inc., Registration No. 33-56817, of our report
dated January 14, 1994 on our audits of the consolidated financial statements of
Urban National Bank and Subsidiaries as of December 31, 1993 and 1992 and for
each of the three years in the period ended December 31, 1993.
STEPHEN P. RADICS & CO.
Haledon, New Jersey
March 2, 1995
URBAN NATIONAL BANK
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1994 (unaudited)
(in thousands)
ASSETS
CASH AND DUE FROM BANKS ......................................... $ 15,084
INTEREST BEARING DEPOSITS WITH BANKS ............................ 4,228
--------
Total cash and cash equivalents ............................ 19,312
--------
MORTGAGE LOANS HELD FOR SALE, at market value ................... 268
--------
SECURITIES:
Available for sale, at market value ........................... 46,828
Held to maturity (market value of $53,182) .................... 56,568
--------
Total securities ........................................... 103,396
--------
FEDERAL RESERVE BANK STOCK, AT COST ............................. 77
--------
LOANS ........................................................... 90,439
Less- allowance for possible loan losses ........................ 1,515
--------
Net loans .................................................. 88,924
--------
BANK PREMISES AND EQUIPMENT, net ................................ 1,850
--------
OTHER REAL ESTATE, net of allowance for
possible losses of $280 ....................................... 2,845
--------
OTHER ASSETS, including deferred tax asset of $1,648 ............ 3,803
--------
Total assets ............................................... $220,475
========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest bearing demand .................................... $ 50,423
Interest-bearing demand ....................................... 69,781
Savings ....................................................... 31,839
Time of $100,000 or more ...................................... 5,689
Other time .................................................... 33,130
--------
Total deposits ............................................. 190,862
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
AND TREASURY, TAX AND LOAN DEPOSITS ........................... 16,996
--------
OTHER LIABILITIES ............................................... 498
--------
Total liabilities .......................................... 208,356
--------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, par value $1.25; 984,372 shares
authorized, issued and outstanding .......................... 1,230
Additional paid-in capital .................................... 1,329
Retained earnings ............................................. 11,288
Unrealized holding loss on securities available
for sale, net of income tax benefit ......................... (1,728)
--------
Total shareholders' equity ................................. 12,119
--------
Total liabilities and shareholders' equity ................. $220,475
========
F-1
<PAGE>
URBAN NATIONAL BANK
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
For the Nine Months
Ended September 30
(unaudited)
--------------------
1994 1993
---- ----
INTEREST INCOME:
Loans ......................................... $5,735 $5,869
Securities-
Taxable ..................................... 3,637 3,215
Tax-exempt .................................. 246 96
Federal funds sold ............................ 94 189
Other interest-earning assets ................. 230 130
------ ------
Total interest income ...................... 9,942 9,499
------ ------
INTEREST EXPENSE:
Deposits ...................................... 2,685 3,007
Securities sold under agreements to
repurchase and treasury, tax and
loan deposits ............................... 387 397
------ ------
Total interest expense .................... 3,072 3,404
------ ------
Net interest income ....................... 6,870 6,095
Provision for possible loan losses .............. 125 250
------ ------
Net interest income after provision
for possible loan losses ................ 6,745 5,845
------ ------
OTHER INCOME:
Service charges on deposit accounts ........... 885 813
Gains (losses) on sales of securities, net .... (83) 183
Other income, net ............................. 216 187
------ ------
Total other income ......................... 1,018 1,183
OTHER EXPENSES:
Salaries and benefits ......................... $3,150 $2,813
Occupancy and equipment ....................... 1,075 972
Other real estate, net ........................ 333 553
Deposit insurance ............................. 347 329
Legal ......................................... 140 70
Other expenses ................................ 1,155 1,060
------ ------
Total other expenses ....................... 6,200 5,797
------ ------
Income before provision for income taxes ... 1,563 1,231
PROVISION FOR INCOME TAXES ...................... 533 469
------ ------
Income before cumulative effect
of accounting change ..................... 1,030 762
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR CERTAIN DEBT AND EQUITY SECURITIES,
net of related income taxes ................... 50 0
------ ------
Net income ................................. $1,080 $ 762
====== ======
NET INCOME PER SHARE:
Before cumulative effect of accounting
change ...................................... $1.05 $0.77
Cumulative effect of accounting change ........ 0.05 0.00
------ ------
................................................ $1.10 $0.77
===== ======
F-2
<PAGE>
URBAN NATIONAL BANK
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (unaudited)
(in thousands)
<TABLE>
<CAPTION>
Unrealized
Holding Loss
Additional on Securities Total
Common Paid-in Retained Available Shareholders'
Stock Capital Earnings For Sale Equity
------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1993 ................. $ 1,230 $ 1,329 $ 10,208 $ 0 $ 12,767
Cumulative effect of
change in accounting
for certain debt and
equity securities, net
of related income
taxes ......................... 0 0 0 (50) (50)
Unrealized holding
loss on securities
available for sale,
net of income taxes ........... 0 0 0 (1,678) (1,678)
Net income -- nine
months ended
September 30, 1994 ............ 0 0 1,080 0 1,080
-------- -------- -------- -------- --------
BALANCE,
September 30, 1994 ................ $ 1,230 $ 1,329 $ 11,288 ($ 1,728) $ 12,119
======== ======== ======== ======== ========
</TABLE>
F-3
<PAGE>
URBAN NATIONAL BANK
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 (unaudited)
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 1,080
Adjustments to reconcile net income to net
cash provided by operating activities--
Net amortization of security premiums ....................... 615
Depreciation and amortization ............................... 296
Provision for possible loan losses .......................... 125
Provision for possible losses on other real estate .......... 95
(Gains) losses on sales of securities, net .................. 83
Gains on sales of premises and equipment .................... (11)
Losses on sales of loans, net ............................... 22
(Gains) losses on sales of other real estate ................ (26)
Net (increase) decrease in mortgage loans held
for sale .................................................. 631
Deferred income taxes (benefit) ............................. 174
(Increase) decrease in other assets ......................... (2,373)
Increase (decrease) in other liabilities .................... 1,278
-------
Net cash provided by operating activities ................ 1,989
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale--
Proceeds from sales ......................................... 16,371
Purchases ................................................... (12,306)
Proceeds from principal repayments and maturities ........... 6,600
Securities held to maturity--
Proceeds from sales ......................................... 0
Purchases ................................................... (14,441)
Proceeds from principal repayments and maturities ........... 4,849
Loan participations sold ....................................... 450
Net (increase) decrease in loans ............................... (5,522)
Proceeds from the sale of premises and equipment ............... 11
Capital expenditures ........................................... (290)
Decrease in other real estate, net ............................. 1,205
-------
Net cash used in investing activities .................... (3,073)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ............................ 1,173
Net increase (decrease) in securities
sold under agreements to repurchase
and treasury, tax and loan deposits ......................... (6,149)
-------
Net cash provided by (used in)
financing activities ................................... (4,976)
-------
Net decrease in cash and cash equivalents ............... (6,060)
-------
CASH AND CASH EQUIVALENTS, beginning of period .................... 25,372
-------
CASH AND CASH EQUIVALENTS, end of period .......................... $19,312
=======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest ......................................... $ 3,058
Cash paid for federal and state income taxes ................... 857
=======
F-4
<PAGE>
Responsibility Statement
Management of Urban National Bank and Subsidiary is responsible for the
preparation of the consolidated financial statements and all other consolidated
financial information included in this report. The consolidated financial
statements were prepared in accordance with generally accepted accounting
principles applied on a consistent basis. All financial information included in
the report agrees with the consolidated financial statements. In preparing the
consolidated financial statements, management makes informed estimates and
judgments, with consideration given to materiality, about the expected results
of various events and transactions.
Management maintains a system of internal accounting control that includes
personnel selection, appropriate division of responsibilities, and formal
procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance
between the costs of systems of internal control and the benefits derived.
Management reviews and modifies its systems of accounting and internal control
in light of changes in conditions and operations as well as in response to
recommendations from the independent certified public accountants and the
internal auditor. Management believes the accounting and the internal control
systems provide reasonable assurance that assets are safeguarded and financial
information is reliable.
The Board of Directors, through its Audit Committee of Non-Management Directors,
is responsible for determining that management fulfills its responsibilities in
the preparation of consolidated financial statements and the control of
operations.
The Board appoints the independent certified public accountants (the Audit
Committee recommends the independent certified public accountants to the Board
of Directors for approval). The Board (Audit Committee) meets with management,
the independent certified public accountants and the internal auditor, approves
the overall scope of audit work and related fee arrangements, and reviews audit
reports and findings.
ROBERT F. MANGANO, KEITH H. VAN SADERS,
President and Chief Executive Officer Vice President and Comptroller
Independent Auditors' Report
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
URBAN NATIONAL BANK
We have audited the consolidated statements of financial condition of Urban
National Bank (the "Bank") and Subsidiary as of December 31, 1993 and 1992 and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1993. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the financial
position of Urban National Bank and Subsidiary at December 31, 1993 and 1992,
and the results of their operations and cash flows for each of the years in the
three-year period ended December 31, 1993 in conformity with generally accepted
accounting principles.
STEPHEN P. RADICS & CO.
Haledon, New Jersey
January 14, 1994
F-5
<PAGE>
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------
ASSETS 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 10,660,282 $ 14,107,003
Interest-bearing deposits with banks 5,612,026 2,252,685
Federal funds sold 9,000,000 14,100,000
- ---------------------------------------------------------------------------------------
Cash and cash equivalents 25,272,308 30,459,688
Mortgage loans held for sale 919,281 -
Securities available for sale, estimated
fair value of $56,816,000 (1993) and $15,768,000 (1992) 56,815,567 15,430,068
Securities held for investment, estimated
fair value of $48,510,000 (1993) and $50,957,000 (1992) 48,868,543 51,329,240
Federal Reserve Bank stock, at cost 76,800 76,800
Loans, less allowance for loan losses of
$1,615,896 (1993) and $1,553,439 (1992) 83,099,347 91,453,971
Accrued interest receivable, net 1,584,062 1,391,014
Bank premises and equipment, net 1,855,605 2,025,999
Other real estate owned, net 4,119,493 8,217,981
Due from broker 3,672,952 -
Other assets 1,092,867 545,151
- ---------------------------------------------------------------------------------------
Total assets $227,376,825 $200,929,912
=======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
LIABILITIES
- ---------------------------------------------------------------------------------------
Deposits:
Non-interest-bearing demand $ 43,238,872 $ 41,349,795
Interest-bearing demand 75,947,409 67,510,311
Savings 29,198,647 23,077,466
Time of $100,000 or more 5,686,629 3,937,066
Other time 35,606,912 39,535,141
- ---------------------------------------------------------------------------------------
Total deposits 189,678,469 175,409,779
- ---------------------------------------------------------------------------------------
Securities sold under agreements to
repurchase and treasury, tax and loan deposits 23,145,366 13,025,887
Due to broker 1,000,000 -
Other liabilities 785,780 751,969
- ---------------------------------------------------------------------------------------
Total liabilities 214,609,615 189,187,635
- ---------------------------------------------------------------------------------------
Commitments and contingencies - -
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
Common stock:
Par value $1.25; 984,372 shares
authorized, issued and outstanding 1,230,465 1,230,465
Surplus 1,328,587 1,328,587
Retained earnings 10,208,158 9,183,225
- ---------------------------------------------------------------------------------------
Total shareholders' equity 12,767,210 11,742,277
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $227,376,825 $200,929,912
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
1993 1992 1991
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 7,698,180 $ 9,432,082 $11,961,817
Investment securities:
Taxable 4,343,345 2,918,402 2,185,996
Tax-exempt 168,021 431,278 611,540
Federal funds sold 193,833 269,935 484,127
Other interest-earning assets 268,305 167,198 9,384
- ----------------------------------------------------------------------------------------------------
Total interest income 12,671,684 13,218,895 15,252,864
- ----------------------------------------------------------------------------------------------------
Interest expense:
Deposits 3,913,563 5,068,291 7,063,049
Securities sold under agreements to
repurchase and treasury, tax and loan deposits 544,842 205,603 505,958
- ----------------------------------------------------------------------------------------------------
Total interest expense 4,458,405 5,273,894 7,569,007
- ----------------------------------------------------------------------------------------------------
Net interest income 8,213,279 7,945,001 7,683,857
Provision for loan losses 118,000 1,598,000 780,000
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 8,095,279 6,347,001 6,903,857
- ----------------------------------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 1,134,198 1,171,558 1,180,842
Gains on sales of securities 158,005 1,308,608 434,344
Unrealized losses on securities available for sale (75,517) - -
Miscellaneous 267,313 255,410 174,672
- ----------------------------------------------------------------------------------------------------
Total other income 1,483,999 2,735,576 1,789,858
- ----------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 3,697,871 3,884,153 3,708,248
Occupancy, net 845,320 829,214 812,170
Equipment 495,248 522,191 513,596
Other real estate owned, net 773,716 1,219,413 474,147
Federal deposit insurance premium 437,783 382,028 319,836
Legal fees 201,643 252,752 370,396
Miscellaneous 1,455,940 1,290,819 1,436,365
- ----------------------------------------------------------------------------------------------------
Total other expenses 7,907,521 8,380,570 7,634,758
- ----------------------------------------------------------------------------------------------------
Income before income taxes 1,671,757 702,007 1,058,957
Income taxes 646,824 253,551 216,860
- ----------------------------------------------------------------------------------------------------
Net income $ 1,024,933 $ 448,456 $ 842,097
====================================================================================================
NET INCOME PER COMMON SHARE $1.04 $0.46 $0.86
====================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 984,372 984,372 984,372
====================================================================================================
</TABLE>
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
- -------------------------------------------
Number
of Retained
Shares Par Value Surplus Earnings Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance--
January 1, 1991 984,372 $1,230,465 $1,328,587 $ 8,483,295 $11,042,347
Net income - - - 842,097 842,097
Cash dividend paid
$0.60 per share - - - (590,623) (590,623)
- --------------------------------------------------------------------------------------
Balance--
December 31, 1991 984,372 1,230,465 1,328,587 8,734,769 11,293,821
Net income - - - 448,456 448,456
- --------------------------------------------------------------------------------------
Balance--
December 31, 1992 984,372 1,230,465 1,328,587 9,183,225 11,742,277
Net income - - - 1,024,933 1,024,933
- --------------------------------------------------------------------------------------
Balance--
December 31, 1993 984,372 $1,230,465 $1,328,587 $10,208,158 $12,767,210
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,024,933 $ 448,456 $ 842,097
Adjustments to reconcile net income to net
cash provided by operating activities:
Net amortization of premiums and discounts on investments 479,280 224,159 28,356
Net amortization of net deferred loan fees (16,016) - -
Depreciation and amortization of premises and equipment 397,166 410,138 422,086
Depreciation of other real estate owned - 48,632 98,240
Amortization of intangibles 40,000 32,087 41,010
Provision for losses on loans 118,000 1,598,000 780,000
Provision for losses on other real estate owned 487,632 1,046,477 351,657
Unrealized losses on securities available for sale 75,517 - -
(Gains) on sales of securities available for sale (179,640) (1,314,231) -
Losses (gains) on sales of securities held for investment 21,635 5,623 (434,344)
(Gains) losses on sales of premises and equipment - (1,345) 1,935
(Gains) losses on sales of other real estate owned (78,904) 41,048 7,821
Origination of mortgage loans held for sale (919,263) - -
(Increase) decrease in accrued interest receivable, net (193,048) 369,935 147,200
(Increase) decrease in refundable income taxes (162,981) - 116,053
Deferred income taxes (benefit) (429,794) (143,110) (34,013)
(Increase) in other assets (23,749) (40,683) (43,162)
Increase (decrease) in other liabilities 62,619 (506,606) 424,418
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 703,387 2,218,580 2,749,354
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 25,873,200 41,853,156 -
Proceeds from sales of securities held for investment 26,660,889 7,201,220 20,519,219
Proceeds from principal
repayments on and maturities of securities 19,611,902 8,804,624 10,359,814
Purchases of securities available for sale (60,402,643) (42,766,217) -
Purchases of securities held for investment (53,737,894) (37,230,863) (45,355,225)
Loan participation sold 350,000 - -
Net decrease in loans 8,267,613 11,842,145 4,034,295
Recovery of loan losses 130,577 113,992 43,689
Proceeds from the sale of premises and equipment - 4,500 13,200
Additions to premises and equipment (226,772) (128,668) (302,384)
Proceeds from the sale of other real estate owned 3,101,948 762,129 828,667
Repayments of principal on loans foreclosed in-substance 92,244 517 -
Additions to real estate owned - (170,111) -
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (30,278,936) (9,713,576) (9,858,725)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 14,268,690 (3,449,578) 21,692,907
Net increase (decrease) in securities sold under
agreements to repurchase and treasury, tax and loan deposits 10,119,479 5,777,498 (3,658,083)
Cash dividends paid - - (590,623)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 24,388,169 2,327,920 17,444,201
- --------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (5,187,380) (5,167,076) 10,334,830
Cash and cash equivalents - beginning 30,459,688 35,626,764 25,291,934
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - ending $ 25,272,308 $ 30,459,688 $ 35,626,764
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
1993 1992 1991
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental schedule of noncash
investing and financing activities:
Purchase of securities held
for investment not yet settled in cash $ 1,000,000 $ - $ -
Sales of securities held for sale not yet settled in cash 3,672,952 - -
Transfer of investment
securities from held for investment to available for sale 13,046,923 15,430,068 -
Charge off of loans receivable to allowance for loan losses 186,120 1,524,864 462,920
Charge off of other real estate owned 540,632 587,477 351,657
Transfer of loans receivable to other real estate owned 144,315 4,659,909 2,628,136
Transfer of other real estate owned to loans receivable 234,883 - -
Loans to facilitate the sale of other real estate owned 405,000 140,000 -
Supplemental disclosures of cash flow information:
Cash paid for interest 4,492,407 5,457,072 7,609,036
Cash paid (refunds received) for federal and state income taxes 1,174,796 345,795 (84,258)
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
ACCOUNTING Basis of consolidated financial statement presentation
POLICIES
The consolidated financial statements include the accounts of the
Bank and its wholly owned subsidiary, UNB Holdings, Inc. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In
preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
consolidated statement of financial condition and revenues and
expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to
significant changes relate to the determination of the allowance
for loan losses and the valuation of other real estate owned.
Management believes that the allowance for loan losses is
adequate and that other real estate owned is appropriately
valued. While management uses available information to recognize
losses on loans and other real estate owned, future additions to
the allowance for loan losses or further writedowns of other real
estate owned may be necessary based on changes in economic
conditions in the market area.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's
allowance for loan losses and other real estate owned valuations.
Such agencies may require the Bank to recognize additions to the
allowance or additional writedowns based on their judgments about
information available to them at the time of their examination.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks,
interest-bearing deposits with banks having original maturities
of three months or less and federal funds sold. Generally,
federal funds sold are sold for one-day periods.
Securities available for sale
Securities to be held for indefinite periods of time, including
securities that management intends to use as part of its
asset/liability strategy or that may be sold in response to
changes in interest rates, changes in prepayment risks, the need
to increase regulatory capital or other similar factors, are
classified as available for sale and are carried at the lower of
amortized cost or market value with any such valuation adjustment
recognized in operations. Gain or loss on sales of securities is
based on the specific identification method.
F-9
<PAGE>
Notes to Consolidated Financial Statements
Securities held for investment
Securities held for investment are recorded at cost, with any
discount or premium amortized to maturity. These securities are
not adjusted to the lower of cost or market value because the
Bank has the ability, and it is generally management's intention,
to hold them to maturity. If any such securities are sold, gain
or loss is based on the specific identification method.
Mortgage loans held for sale
Mortgage loans held for sale are reflected at the lower of cost
or market value. Valuation computations are made in the aggregate
by type of loan and rate of interest.
Loans
Loans are stated at the amount of unpaid principal less deferred
loan fees and an allowance for loan losses. Interest is
calculated by use of the actuarial method. Accrual of interest is
discontinued when management believes, after considering economic
and business conditions, collection efforts, the borrowers'
financial condition and the value of collateral, that collection
of interest is doubtful. Interest on such loans, if appropriate,
is recognized as income as payments are received. A loan is
returned to accrual status when factors indicating doubtful
collectibility no longer exist.
The Bank defers loan origination fees and certain direct loan
origination costs and amortizes such amounts, using the
level-yield method, as an adjustment of yield over the
contractual life of the loan.
Allowance for loan losses
The allowance for loan losses is established through a provision
for loan losses charged to operations. Loans are charged against
the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem
loans, and current economic conditions that may affect the
borrowers' ability to pay. In that the loan portfolio includes
larger commercial loans and consumer credits, which traditionally
have a higher degree of risk than collateralized real estate
loans, management feels it is necessary to provide an adequate
unallocated loss allowance to absorb an unanticipated loss in one
of these categories.
Concentration of risk
The Bank's real estate and lending activity is concentrated in
real estate and loans secured by real estate located in the State
of New Jersey, which has experienced a significant downturn in
real estate values. There is no assurance with respect to the
time at which the market for such real estate will improve.
Bank premises and equipment
Bank premises and equipment are comprised of land, at cost, and
buildings and improvements, furniture, fixtures and equipment and
leasehold improvements, at cost, less accumulated depreciation
and amortization. Depreciation and amortization charges are
computed on the straight-line method over the following estimated
useful lives:
Buildings and improvements 5 to 37 years
Furniture, fixtures and equipment 3 to 10 years
Leasehold improvements Term of lease
Significant renewals and betterments are charged to the property
and equipment account. Maintenance and repairs are charged to
expense in the year incurred. Rental income is netted against
occupancy costs in the consolidated statements of income.
Other real estate owned
Other real estate owned consists of real estate acquired by
foreclosure or by deed in lieu of foreclosure and loans
foreclosed in-substance. Loans foreclosed in-substance consists
of loans accounted for as foreclosed property even though actual
foreclosure has not taken place. These assets are carried at the
lower of cost or fair value less estimated selling costs.
Operating results from other real estate owned, including rental
income, operating expenses, provision for loss and gains and
losses realized from sales, are recorded in other real estate
owned expense within the period incurred.
F-10
<PAGE>
Notes to Consolidated Financial Statements
Federal income taxes
The Bank uses the accrual basis of accounting for financial and
federal income tax reporting. Provisions for income taxes in the
consolidated financial statements differ from the amounts
reflected in the Bank's income tax returns due to temporary
differences in the reporting of certain items for financial
reporting and tax reporting purposes. The income tax provision
shown in the consolidated financial statements relates to items
of income and expense in those statements irrespective of
temporary variances for income tax reporting purposes. The tax
effect of these temporary variances is accounted for as deferred
federal income taxes applicable to future years.
The Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("Statement") No.
109, "Accounting for Income Taxes", which required that the Bank
compute income tax expense and deferred taxes differently
beginning on January 1, 1993. Specifically, Statement 109
specifies the "liability method" of accounting for income taxes
and thus requires that deferred taxes in the consolidated
statement of condition be adjusted each year to reflect the
cumulative deductible temporary differences and net operating
loss and tax credit carry forwards at the then existing income
tax rates. Adoption of the new standard did not have a material
effect on the consolidated financial position or results of
operations of the Bank. Previous consolidated financial
statements have not been restated.
Net income per common share
Net income per common share is calculated by dividing net income
by the weighted average number of common shares outstanding
during the periods.
Interest-rate risk
The Bank is principally engaged in the business of attracting
deposits from the general public and using these deposits,
together with borrowings and other funds, to make loans secured
by real estate and, to a lesser extent, commercial and consumer
loans. The potential for interest-rate risk exists as a result of
the shorter duration of the Bank's interest-sensitive liabilities
compared to the generally longer duration of interest-sensitive
assets. In a rising rate environment, liabilities will reprice
faster than assets, thereby reducing the market value of
long-term assets and net interest income. For this reason,
management regularly monitors the maturity structure of the
Bank's assets and liabilities in order to measure its level of
interest-rate risk and plan for future volatility.
Reclassification
Certain amounts for the years ended December 31, 1992 and 1991
have been reclassified to conform to the current year's
presentation.
- ------------------------------------------------------------------------------
IMPACT OF In May 1993, the FASB issued Statement No. 114, "Accounting by
NEW Creditors for Impairment of a Loan." Statement No. 114 generally
ACCOUNTING would require all creditors to account for impaired loans, except
STANDARDS those loans that are accounted for at fair value or at the lower
of cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest
rate. Statement No. 114 is effective for fiscal years beginning
after December 15, 1994, though earlier application is
encouraged. Statement No. 114, when adopted, is not expected to
have a material effect on financial condition or results of
operations. Statement No. 114 also provides that in-substance
foreclosed loans should not be included in real estate owned for
financial reporting purposes, but rather should be included in
the loan portfolio. The Bank currently does not intend to adopt
the provisions of this statement early.
In May 1993, the FASB issued No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Statement No. 115
generally requires that debt and equity securities that have
readily determinable fair values be carried at fair value unless
they are classified as held to maturity. Securities can be
classified as held to maturity and carried at amortized cost only
if the reporting entity has a positive intent and ability to hold
those securities to maturity. If not classified as held to
maturity, such securities must be classified as trading
securities or securities available for sale. Unrealized holding
gains or losses for securities available for sale are to be
excluded from earnings and reported as a separate component of
stockholders' equity. Unrealized holding gains and losses for
trading securities are to be included in earnings. The
statement's effective date is for fiscal years beginning after
December 15, 1993. The initial application of Statement 115,
effective January 1, 1994, resulted in an extraordinary gain, net
of income taxes, of approximately $45,000, but had no effect on
stockholders equity.
F-11
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
CASH AND Cash balances restricted for purposes of maintaining required
DUE FROM reserve balances in accordance with Federal Reserve Bank
BANKS regulations amounted to approximately $2,407,000 and $3,792,000
at December 31, 1993 and 1992, respectively. The level of such
reserves is based principally upon deposits.
- -------------------------------------------------------------------------------
SECURITIES A summary of investment securities available for sale by
AVAILABLE scheduled maturity, which includes mortgage-backed securities by
FOR SALE final maturity date, follows:
<TABLE>
<CAPTION>
December 31, 1993
--------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due in one year or less $ 3,014,023 $ 4,415 $ - $ 3,018,438
Due after one year through five years 17,055,619 84,351 67,495 17,072,475
Due after five years through ten years 5,541,413 124,366 - 5,665,779
--------------------------------------------------------------------------------------------------
25,611,055 213,132 67,495 25,756,692
--------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Due after one year through five years 1,938,421 6,698 959 1,944,160
Due after five years through ten years 6,261,386 222 82,788 6,178,820
Due after ten years 23,080,222 43,580 187,907 22,935,895
--------------------------------------------------------------------------------------------------
31,280,029 50,500 271,654 31,058,875
--------------------------------------------------------------------------------------------------
$56,891,084 $263,632 $339,149 $56,815,567
==================================================================================================
</TABLE>
At December 31, 1993, gross unrealized losses, net of gross
unrealized gains, have been recognized in the consolidated
statements of income.
<TABLE>
<CAPTION>
December 31, 1992
-------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government:
Due in one year or less $ 4,016,439 $113,249 $ - $ 4,129,688
Due after one year through five years 11,413,629 224,183 - 11,637,812
-------------------------------------------------------------------------------------------------
$15,430,068 $337,432 $ - $15,767,500
=================================================================================================
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------------
1993 1992 1991
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $29,664,643 $41,853,156 $ -
Gross gains 271,433 1,341,236 -
Gross losses 91,793 27,005 -
</TABLE>
Securities available for sale with carrying values aggregating
approximately $1,038,000 and $1,013,000 were pledged to secure
public deposits at December 31, 1993 and 1992, respectively.
Also, see "SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND
TREASURY, TAX AND LOAN DEPOSITS".
F-12
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
SECURITIES A summary of securities held for investment by scheduled
HELD FOR maturity, which includes mortgage-backed securities by final
INVESTMENT maturity date, follows:
<TABLE>
<CAPTION>
December 31, 1993
-----------------------------------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due after one year through five years $ 6,983,950 $ 10,919 $ 20,493 $ 6,974,376
Due after five years through ten years 11,709,896 20,075 118,590 11,611,381
-----------------------------------------------------------------------------------------------------
18,693,846 30,994 139,083 18,585,757
-----------------------------------------------------------------------------------------------------
Obligations of states
and political subdivisions:
Due in one year or less 2,164,065 - 5,917 2,158,148
Due after one year through five years 6,059,429 48,048 39,425 6,068,052
Due after five years through ten years 1,167,920 7,553 13,884 1,161,589
Due after ten years 117,123 6,149 - 123,272
-----------------------------------------------------------------------------------------------------
$ 9,508,537 $ 61,750 $ 59,226 $ 9,511,061
-----------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Due after five years through ten years 9,120,587 64,080 107,898 9,076,769
Due after ten years 11,445,573 - 209,216 11,236,357
-----------------------------------------------------------------------------------------------------
20,566,160 64,080 317,114 20,313,126
-----------------------------------------------------------------------------------------------------
Certificate of deposit due
after one year through five years 100,000 - - 100,000
-----------------------------------------------------------------------------------------------------
$48,868,543 $156,824 $515,423 $48,509,944
=====================================================================================================
<CAPTION>
December 31, 1992
-----------------------------------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Estimated
Value Gains Losses Fair Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government agencies:
Due in one year or less $ 1,024,667 $ - $ 12,477 $ 1,012,190
Due after one year through five years 23,322,239 28,112 305,801 23,044,550
Due after five years through ten years 8,274,729 46,925 113,149 8,208,505
Due after ten years 1,001,094 - 4 1,001,090
----------------------------------------------------------------------------------------------------
33,622,729 75,037 431,431 33,266,335
-----------------------------------------------------------------------------------------------------
Obligations of states
and political subdivisions:
Due in one year or less 1,937,411 - - 1,937,411
Due after one year through five years 150,000 - - 150,000
-----------------------------------------------------------------------------------------------------
2,087,411 - - 2,087,411
-----------------------------------------------------------------------------------------------------
Mortgage-backed securities:
Due after one year through five years 955,675 - 21,578 934,097
Due after five years through ten years 3,170,132 32,010 32,058 3,170,084
Due after ten years 11,493,293 41,067 35,639 11,498,721
-----------------------------------------------------------------------------------------------------
15,619,100 73,077 89,275 15,602,902
-----------------------------------------------------------------------------------------------------
$51,329,240 $148,114 $520,706 $50,956,648
=====================================================================================================
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------------
1993 1992 1991
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $26,660,889 $7,201,220 $20,519,219
Gross gains 134,779 14,734 934,344
Gross losses 156,414 20,357 -
=====================================================================================================
</TABLE>
Securities held for investment with a carrying value of
approximately $502,000 at December 31, 1992 were pledged to
secure public deposits. Also, see "SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE AND TREASURY, TAX AND LOAN DEPOSITS"
regarding securities held for investment pledged as collateral.
F-13
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LOANS, NET December 31,
--------------------------------------------------------------------------
1993 1992
--------------------------------------------------------------------------
<S> <C> <C>
Commercial:
Demand $ 5,253,699 $ 6,026,567
Time and term 17,123,820 16,650,688
Consumer 5,285,450 4,316,852
Mortgage:
First 39,389,607 48,175,182
Second 17,106,809 17,329,853
Construction 630,000 532,746
--------------------------------------------------------------------------
84,789,385 93,031,888
--------------------------------------------------------------------------
Deferred loan fees 74,142 24,478
Allowance for loan losses 1,615,896 1,553,439
--------------------------------------------------------------------------
1,690,038 1,577,917
--------------------------------------------------------------------------
$83,099,347 $91,453,971
==========================================================================
</TABLE>
Non-performing loans include loans which are accounted for on a
non-accrual basis and troubled debt restructurings.
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1993 1992 1991
--------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $3,942,276 $3,869,484 $2,593,479
Restructured loans - - 436,288
--------------------------------------------------------------------------
$3,942,276 $3,869,484 $3,029,767
==========================================================================
</TABLE>
The total amount of interest received on non-performing loans
outstanding amounted to approximately $70,000, $129,000 and
$19,000 for the years ended December 31, 1993, 1992 and 1991,
respectively. Had such loans performed in accordance with their
original contract terms, interest income of approximately
$387,000, $388,000 and $153,000 would have been recognized during
the years ended December 31, 1993, 1992 and 1991, respectively.
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1993 1992 1991
--------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - beginning $1,553,439 $1,366,311 $1,005,542
Provisions
charged to operations 118,000 1,598,000 780,000
Recoveries of loans 130,577 113,992 43,689
Loans charged off (186,120) (1,524,864) (462,920)
--------------------------------------------------------------------------
Balance - ending $1,615,896 $1,553,439 $1,366,311
==========================================================================
</TABLE>
The Bank has lending transactions in the ordinary course of
business with directors, executive officers and their affiliates
on the same terms as those prevailing for comparable transactions
with other borrowers. These loans, which were current as to
principal and interest payments at December 31, 1993, and do not
involve more than normal risk of collectibility, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1993 1992
--------------------------------------------------------------------------
<S> <C> <C>
Balance - beginning $2,773,731 $3,784,339
Collections of principal (899,987) (974,554)
Loans disbursed 735,854 490,201
Other reductions (10,059) (526,255)
--------------------------------------------------------------------------
Balance - ending $2,599,539 $2,773,731
==========================================================================
</TABLE>
At December 31, 1993, 1992 and 1991, loans serviced for the
benefit of others totalled approximately $347,000, $-0-, and
$300,000, respectively.
F-14
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
PREMISES December 31,
AND -----------------------------------------------------------------------------
EQUIPMENT 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C>
Land $ 112,620 $ 112,620
Buildings and improvements 1,832,360 1,830,042
Leasehold improvements 454,900 439,575
Furniture, fixtures and equipment 1,720,856 1,589,436
Construction in progress 77,708 -
-----------------------------------------------------------------------------
4,198,444 3,971,673
Less accumulated depreciation and amortization 2,342,839 1,945,674
-----------------------------------------------------------------------------
$1,855,605 $2,025,999
=============================================================================
</TABLE>
Depreciation and amortization charged against income amounted to
$397,166, $410,138 and $422,086, for the years ended December 31,
1993, 1992 and 1991, respectively.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OTHER REAL December 31,
ESTATE OWNED -----------------------------------------------------------------------------
1993 1992
-----------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired in settlement of loans $2,683,451 $3,972,677
-----------------------------------------------------------------------------
In-substance foreclosure 1,842,042 4,704,304
-----------------------------------------------------------------------------
4,525,493 8,676,981
Less allowance for losses 406,000 459,000
-----------------------------------------------------------------------------
$4,119,493 $8,217,981
=============================================================================
</TABLE>
The following is an analysis of the allowance for losses:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1993 1992 1991
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - beginning $459,000 $ - $ -
Provision charged to operations 487,632 1,046,477 351,657
Charged off (540,632) (587,477) (351,657)
-----------------------------------------------------------------------------
Balance - ending $406,000 $ 459,000 $ -
=============================================================================
</TABLE>
The following is an analysis of other real estate owned expense,
net:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1993 1992 1991
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for losses $487,632 $1,046,477 $351,657
Depreciation expense - 48,632 98,240
Operating expenses,
net of rental income 364,988 83,255 16,429
(Gain) loss on sales
of other real estate owned (78,904) 41,048 7,821
-----------------------------------------------------------------------------
$773,716 $1,219,412 $474,147
=============================================================================
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECURITIES
SOLD UNDER
AGREEMENTS
TO REPURCHASE
AND TREASURY, December 31,
TAX AND -----------------------------------------------------------------------------
LOAN DEPOSITS 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C>
Securities sold under agreements to repurchase $17,145,366 $ 6,553,241
Treasury, tax and loan deposits 6,000,000 6,472,646
-----------------------------------------------------------------------------
$23,145,366 $13,025,887
=============================================================================
</TABLE>
Securities sold under agreements to repurchase are generally for
terms from one to 364 days, while borrowings on Treasury, tax and
loan deposits are generally for periods which do not exceed
ninety days.
The carrying values of the securities available for sale and held
for investment pledged to secure the above borrowings were
approximately $19,599,000 and $10,525,000, respectively, at
December 31, 1993, and approximately $9,146,000 and $8,687,000,
respectively, at December 31, 1992.
In addition to the above, the Bank has pledged securities
available for sale with a carrying value of approximately
$2,500,000 with the Federal Reserve Bank (the "FRB") in return
for the ability to borrow up to $2,500,000. Interest on such
borrowings would be assessed at the FRB discount rate (3.00% at
December 31, 1993). There were no borrowings under this facility
as of December 31, 1993.
F-15
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
INCOME TAXES The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1993 1992 1991
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense $1,076,618 $ 396,661 $250,873
Deferred tax (benefit) (429,794) (143,110) (34,013)
-----------------------------------------------------------------------------
$ 646,824 $ 253,551 $216,860
==============================================================================
</TABLE>
The following table presents a reconciliation between the
reported income taxes and the income taxes which would be
computed by applying the normal federal income tax rate (34%) to
income before income taxes:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1993 1992 1991
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes $568,397 $ 238,682 $ 360,045
Non-taxable interest income, net (50,366) (133,739) (182,388)
State income taxes,
net of federal income tax effect 110,098 95,701 37,474
Other 18,695 52,907 1,729
-----------------------------------------------------------------------------
Effective federal income taxes $646,824 $ 253,551 $ 216,860
=============================================================================
</TABLE>
Income taxes refundable, deferred and payable are included in the
consolidated statements of financial condition under the captions
"Other Assets" or "Other Liabilities".
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1993 1992
-----------------------------------------------------------------------------
<S> <C> <C>
Refundable income taxes $168,215 $ 5,234
=============================================================================
Deferred tax assets (liabilities) $400,986 $(28,808)
=============================================================================
Income taxes payable $224,075 $159,271
=============================================================================
</TABLE>
The tax effects of existing temporary differences that give rise
to significant portions of the deferred tax assets and deferred
tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1993 1992
-----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and real estate
losses in excess of tax reserves $ 276,376 $ 10,604
Non-accrual interest 133,515 58,676
Depreciation 13,600 37,621
Deferred fees 34,537 8,323
Unrealized losses on securities 25,676 -
Other 5,099 -
-----------------------------------------------------------------------------
488,803 115,224
-----------------------------------------------------------------------------
Deferred tax liabilities:
Pension 87,817 84,784
Bond discount - 9,415
Other - 49,833
-----------------------------------------------------------------------------
87,817 144,032
-----------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 400,986 $ (28,808)
=============================================================================
</TABLE>
F-16
<PAGE>
- ------------------------------------------------------------------------------
RETIREMENT The Bank has a non-contributory pension plan covering
PLAN substantially all of its employees. The plan is a defined benefit
plan which provides benefits based on a participant's years of
service and average compensation. Annual contributions are made
to the plan equal to the maximum amount deductible for federal
income tax purposes.
The following table sets forth the plan's funded status and
components of net periodic pension cost:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1993 1992
--------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit
obligation including vested benefits
of $682,281 (1993) and $594,042 (1992) $(708,952) $(605,209)
================================================================================
Projected benefit obligation $(864,597) $(806,485)
Plan assets at fair value 981,078 876,600
--------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 116,481 70,115
Unrecognized net obligation at
January 1, 1990 being amortized over fifteen years 183,577 200,266
Unrecognized net (gain) (41,667) (38,953)
Unrecognized prior service cost (105) (113)
--------------------------------------------------------------------------------
Prepaid pension costs included in other assets $ 258,286 $ 231,315
================================================================================
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1993 1992 1991
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net periodic pension cost
included the following components:
Service cost $62,408 $ 75,296 $ 73,846
Interest cost 57,738 69,165 68,702
Actual return on plan assets (67,392) (113,797) (103,107)
Net amortization and deferral 20,275 65,071 66,859
--------------------------------------------------------------------------------
Net periodic pension cost $73,029 $ 95,735 $ 106,300
================================================================================
</TABLE>
Assumptions used in accounting for the pension plan are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1993 1992 1991
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7.5%
Rate of increase in compensation 4.5% 4.5% 4.5%
Long-term rate of return on plan assets 7.5% 7.5% 7.5%
</TABLE>
- -------------------------------------------------------------------------------
PROFIT- The Bank has a non-contributory profit-sharing plan covering all
SHARING AND eligible employees. Contributions are determined by the Bank's
401(K) PLANS Board of Directors and are allocated to participants based on the
ratio of the participant's compensation to the compensation of
all participants. No contributions were made to the
profit-sharing plan for the years ended December 31, 1993, 1992
and 1991.
Effective January 1, 1993, the Bank implemented a 401(k) plan
within the existing profit sharing plan. Under the 401(k) plan,
which covers all eligible employees, participants may elect to
contribute up to 25% of their salaries, not to exceed the
applicable limitations as per the Internal Revenue Code. The
Bank, on an annual basis, may elect to match a specified
percentage of the employees' contribution, not to exceed 6% of
applicable compensation. Total 401(k) expense for the year ended
December 31, 1993 was approximately $20,000.
- -------------------------------------------------------------------------------
RETAINED Banking regulations limit the amount of dividends that may be
EARNINGS paid in a year without prior approval of the Bank's regulatory
agency to the net profits as defined for that year combined with
retained net profits of the preceding two years. Retained
earnings against which dividends may be charged were
approximately $1,473,000 at December 31, 1993 (see "REGULATORY
PROCEEDINGS").
F-17
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
CAPITAL Banking regulations provide that the Bank must adhere to three
REQUIREMENTS minimum capital requirements. These regulations require, at a
minimum, Tier 1 capital of 4% of risk-weighted assets, total
capital of at least 8% of risk-weighted assets, and a leverage
ratio of at least 3% of adjusted assets. At December 31, 1993,
the Bank had Tier 1 capital, total capital and leverage ratios of
11.73%, 12.99% and 5.75%, respectively (see "REGULATORY
PROCEEDINGS").
- -------------------------------------------------------------------------------
COMMITMENTS Rentals under long-term operating leases for certain branch
AND offices amounted to $423,259, $409,675 and $398,309 for the years
CONTINGENCIES ended December 31, 1993, 1992 and 1991, respectively. At December
31, 1993, the minimum rental commitments under all noncancellable
leases with initial or remaining terms of more than one year and
expiring through 1999 are as follows:
Year Ending
December 31, Minimum Rent
--------------------------------------------------------------
1994 $ 422,675
1995 298,812
1996 240,759
1997 208,757
1998 180,232
Thereafter 170,371
--------------------------------------------------------------
$1,521,606
==============================================================
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount
recognized in the statement of financial position. The contract
or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit written is
represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for
on-balance-sheet instruments.
At December 31, 1993, commitments under standby letters of credit
aggregated approximately $1,223,000, of which $993,000 were fully
secured primarily by cash, marketable securities or mortgages.
Standby letters of credit written are conditional commitments
issued by the Bank to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial
paper, bond financing, and similar transactions. $1,195,000 of
such guarantees expire in 1994, with the remaining $28,000
expiring in 1995. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds collateral supporting
those commitments for which collateral is deemed necessary.
Undisbursed funds from approved lines of credit at December 31,
1993, were as follows (in thousands):
Homeowners equity $ 6,113
Overdraft checking 1,569
Commercial 5,835
Construction loans in process 20
---------------------------------------------------------------
$13,537
===============================================================
The interest rate charged under the overdraft checking program
was 14.5% at December 31, 1993, while the homeowners equity,
commercial and construction lines are assessed interest at rates
which fluctuate in relation to the prime rate. Unless they are
specifically cancelled by notice from the Bank, these funds
represent firm commitments available to respective borrowers on
demand.
The Bank, at December 31, 1993, has commitments, all of which
expire within three months, to originate approximately $2,377,000
in loans. Of these commitments, $692,000 are for fixed rate loans
at rates ranging from 6.50% to 7.75% and $1,685,000 are for loans
whose rates will float in relation to the prime rate.
F-18
<PAGE>
Notes to Consolidated Financial Statements
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of
the counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
The Bank, at December 31, 1993, has commitments to purchase
investment securities aggregating approximately $1,006,000.
Management does not anticipate losses on any of these
transactions.
The Bank is one of several defendants in a lawsuit, brought by an
alleged class of plaintiffs, presently comprised of former
employees, alleging, among other things, violations of the
Employee Retirement Income Security Act of 1974. The allegations
arise out of an alleged failure to diversify the Profit Sharing
Plan's (the "Plan") assets and the alleged making of prohibited
investments by the Plan. Further, plaintiffs allege violations of
New Jersey law in that defendants knowingly failed to inform the
plaintiffs of their acts and omissions with regard to prohibited
transactions. The plaintiffs allege damages of approximately
$1,110,000 in losses of the Plan, approximately $500,000 in
contributions the Bank allegedly failed to make to the Plan and
unspecified amounts for punitive damages, attorney fees,
penalties and prejudgment interest. The discovery process with
regard to this lawsuit has just recently begun. Although the
ultimate outcome of this proceeding cannot presently be
determined, management believes that there are meritorious
defenses to the allegations as they pertain to the Bank and,
accordingly, intends to vigorously contest this matter.
In addition to the foregoing, in the conduct of the Bank's
business, it is involved in normal litigation matters. In the
opinion of management, the ultimate disposition of such
litigation should not have a material adverse effect on the
financial position of the Bank.
- -------------------------------------------------------------------------------
REGULATORY On January 14, 1992, the Bank's Board of Directors entered into
PROCEEDINGS an agreement with the Comptroller of the Currency (the "OCC")
wherein the Bank agreed to: (i) develop and implement various
policies and procedures relating to operations and management of
the Bank; (ii) update the three-year capital plan; (iii) maintain
a leverage capital ratio of at least 5%; and (iv) pay dividends
only when certain requirements, including obtaining the prior
permission of the OCC, are met. The Bank is currently in full
compliance with twelve of the fifteen articles of the agreement,
in partial compliance with the remaining three articles, and, in
the opinion of management, is in the process of reaching full
compliance with all articles of the agreement.
- -------------------------------------------------------------------------------
ESTIMATED The fair value of a financial instrument is defined as the amount
FAIR VALUE at which the instrument could be exchanged in a current
OF FINANCIAL transaction between willing parties, other than a forced or
INSTRUMENTS liquidation sale. Significant estimations were used by the Bank
for the purposes of this disclosure. Estimated fair values have
been determined by the Bank using the best available data and
estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest
rates, it is presumed that estimated fair values generally
approximate their recorded book balances. The estimation
methodologies used and the estimated fair values and carrying
values of the Bank's financial instruments are set forth below:
Cash and cash equivalents and accrued interest receivable
The carrying amounts for cash and cash equivalents and accrued
interest receivable approximate fair value.
Securities available for sale and held for investment
The fair values for securities available for sale and held for
investment are based on quoted market prices or dealer prices, if
available. If quoted market prices are not available, fair value
is estimated using quoted market prices for similar securities.
F-19
<PAGE>
Notes to Consolidated Financial Statements
Loans receivable
The fair value of loans receivable is estimated by discounting
the future cash flows, using the current rates at which similar
loans with similar remaining maturities would be made to
borrowers with similar credit ratings.
Deposits
For demand and savings accounts, fair value is the carrying
amount reported in the consolidated financial statements. For
certificates of deposit, fair value is estimated using the rates
currently offered for deposits of similar remaining maturities.
Securities sold under agreements to repurchase and treasury, tax
and loan deposits
Fair value is estimated using rates currently offered for
liabilities of similar remaining maturities, or when available,
quoted market prices.
Commitments to extend credit, standby letters of credit, and
financial guarantees written
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The
fair value of guarantees and letters of credit is based on fees
currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
The carrying values and estimated fair values of the Bank's
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1993 1992
--------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 25,272 $ 25,272 $ 30,460 $ 30,460
Securities available for sale 56,816 56,816 15,430 15,768
Securities held for investment 48,869 48,510 51,329 50,957
Mortgage loans held for sale 919 924 - -
Loans 83,099 84,503 91,454 95,400
Accrued interest receivable 1,584 1,584 1,391 1,391
Financial liabilities
Deposits 189,678 189,855 175,410 175,771
Securities sold under agreements
to repurchase and treasury,
tax and loan deposits 23,145 23,145 13,026 13,026
Commitments
Loan origination 2,377 2,377 1,425 1,425
Unused lines of credit 13,537 13,537 8,482 8,482
Standby letters of credit 1,223 1,223 1,286 1,286
Purchase of securities 1,006 1,006 - -
</TABLE>
F-20
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
LIMITATIONS Fair value estimates are made at a specific point in time based
on relevant market information and information about the
financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale at one time
the entire holdings of a particular financial instrument. Because
no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature, involve uncertainities and matters of judgment and,
therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
In addition, fair value estimates are based on existing
on-and-off balance sheet financial instruments without attempting
to estimate the value of anticipated future business, and exclude
the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities
that are not considered financial assets and liabilities include
premises and equipment and other real estate owned. In addition,
the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of the
estimates.
Finally, reasonable comparability between financial institutions
may not be likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the
absence of active secondary markets for many of the financial
instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated
fair values.
F-21
