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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM l0-K/A
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/X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ___________________
Commission file number 0-l0699
HUBCO, INC.
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(Exact name of registrant as specified in its Charter)
New Jersey 22-2405746
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
1000 MacArthur Blvd.
Mahwah, New Jersey 07430
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 236-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value Series A Preferred Stock
-------------------------- ------------------------
(Title of Class) (Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 12, 1996 was $276,528,553.
The number of shares of Registrant's Common Stock, no par value,
outstanding as of March 12, 1996 was 13,655,731.
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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part(s) Into
Documents Which Incorporated
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Annual Report to Shareholders Part I
for the fiscal year ended Part II
December 31, 1995 ("HUBCO's 1995
Annual Report"), pages 6 through 29
With the exception of information specifically incorporated by reference,
HUBCO's 1996 Annual Report is not to be deemed part of this report.
2
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
HUBCO's Certificate of Incorporation and By-laws authorize a minimum of 5
and a maximum of 25 directors, but leave the exact number to be fixed by
resolution of the HUBCO Board of Directors. The HUBCO Board is presently
comprised of 10 members and, by Resolution of the HUBCO Board, the number of
HUBCO Directors will be 9 effective upon the date of the Meeting.
Pursuant to the HUBCO Certificate of Incorporation, the directors of HUBCO
are divided into three classes and each class is elected to serve for a
staggered three-year term.
Messrs. McBride, Malcolm and Schierloh are each being nominated for a
three-year term extending to the 1999 Annual Meeting. If, for any reason, any of
the nominees become unavailable for election, the proxy solicited by the HUBCO
Board will be voted for a substitute nominee selected by the HUBCO Board. The
HUBCO Board has no reason to believe that any of the named nominees is not
available or will not serve if elected.
The names of the nominees for election, the directors whose terms extend
beyond the HUBCO Meeting and certain information about each of them are set
forth in the tables below. Years of service on the HUBCO Board includes prior
service on the Board of Directors of HUB prior to the formation of the holding
company.
<TABLE>
<CAPTION>
TABLE I--NOMINEES FOR 1996 ANNUAL MEETING
Name, Age & Position Principal Occupation Director Term
with HUBCO During Past Five Years Since Expiring
- --------------------- ---------------------- -------- --------
<S> <C> <C> <C>
James E. Chairman of the Board of HUBCO and HUB since 1972 1999
Schierloh,66, September 1990; formerly self-employed
Chairman Certified Public Accountant.
W. Peter McBride,50 President of McBride Enterprises, Inc. and 1995 1999
President of Urban Farms, Inc. (real estate
development and investment companies)
Bryant Malcolm, 61 President, B.D. Malcolm Company, Inc. 1995 1999
(general contractors)
</TABLE>
<TABLE>
<CAPTION>
TABLE II--DIRECTORS WHOSE TERMS CONTINUE
BEYOND THIS ANNUAL MEETING
Name, Age & Position Principal Occupation Director Term
with HUBCO During Past Five Years Since Expiring
- --------------------- ---------------------- -------- --------
<S> <C> <C> <C>
Robert J. Burke, 62 President and Chief Operating Officer, Union 1979 1997
Dry Dock and Repair Co., Hoboken, N.J. (ship
repair facility).
Joan David, 57 Substitute Teacher, Board of Cooperative 1994 1998
Educational Services of Rockland County
(1989 to present).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Name, Age & Position Principal Occupation Director Term
with HUBCO During Past Five Years Since Expiring
- --------------------- ---------------------- -------- --------
<S> <C> <C> <C>
Thomas R. Farley, 69 Retired February 1995, formerly a Partner in 1994 1997
the law firm of Farley & Isles (1980 - 1995).
Kenneth T. Neilson, President and CEO of HUBCO and HUB. 1989 1998
47, President & CEO
Charles F.X. Poggi, President and Chief Operating Officer, The 1973 1997
65 Poggi Press (general printing business).
Sister Grace Frances Chairperson, Franciscan Health System of 1979 1998
Strauber, 68 N.J. (1991 - 1993), Member (1991 - present);
Administrative Post on the Leadership Team for
the U.S. region of the Franciscan Sisters of the
Poor (1993 - present); Management Consultant, Health
System, Inc., Brooklyn, N.Y., Franciscan Sisters
of the Poor (1986 - present).
</TABLE>
No director of HUBCO is also a director of any other company registered
pursuant to Section 12 of the Exchange Act or subject to the requirements of
Section 15(d) of the Exchange Act or any company registered as an investment
company under the Investment Company Act of 1940.
During the past year Mr. Henry G. Hugelheim retired from the HUBCO Board
due to ill health. Mr. Edwin Wachtel retired upon relocation to Florida.
Effective upon the date of the HUBCO Meeting, Mr. Harry J. Leber will retire
having attained the mandatory retirement age.
BOARD OF DIRECTORS' MEETINGS; COMMITTEES OF THE HUBCO BOARD
The HUBCO Board held 8 board meetings during 1995 and 26 board committee
meetings. The HUBCO Board holds regularly-scheduled meetings each quarter and
special meetings as circumstances require. At present, all of the directors of
HUBCO also serve as directors of HUB.
HUBCO has a standing Audit Committee of the Board of Directors. This
committee arranges for HUB's directors' examinations through its independent
public accountants, reviews and evaluates the recommendations of the directors'
examiners, receives all reports of examination of HUBCO and HUB by bank
regulatory agencies, analyzes such regulatory reports, and reports to HUB's
Board the results of its analysis of the regulatory reports. This committee also
receives reports directly from HUBCO's internal auditing department and
recommends any action to be taken in connection therewith. The Audit Committee
met seven times during 1995. During 1995, Sr. Grace Frances Strauber served as
Chairperson of the Audit Committee. The other HUBCO member of the Audit
Committee is Mr. Farley. Messrs. Joseph Pfeiffer and Joseph A. Tighe, Directors
of HUB, also serve on the Audit Committee.
During 1995, HUBCO established a Nominating Committee consisting of Messrs.
McBride, Neilson, Poggi and Schierloh. The committee will consider
recommendations from shareholders received sufficiently in advance of the
mailing of the proxy statement for the annual meeting. The committee reviews
qualifications of and recommends to the Board as potential candidates for
election as directors business people from within the community served by HUB
who are willing to commit time and dedicate effort to the success of HUBCO and
HUB. During 1995, the committee met one time.
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<PAGE>
HUBCO also created its Compensation Committee during 1995. The members are
Mrs. David and Messrs. Burke, McBride and Poggi. The committee met five times
during 1995. The Compensation Committee replaced the former Personnel Committee
of HUB. During 1995, the Personnel Committee met one time. The Personnel
Committee consisted of Mrs. David, Sister Grace Francis Strauber and Messrs.
Burke and Poggi.
During 1995, no incumbent director of HUBCO attended fewer than 75% of the
total meetings of the HUBCO Board and meetings of committees of the HUBCO Board
on which such director served.
Certain additional information regarding executive officers of HUBCO, who
are not also directors, appears under subsection (e) of Item 1 of this Form
10-K/A.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation is described below in the tabular format mandated by
the Commission. The letters in parentheses above each column heading are the
letters designated by the Commission for such columns, and are provided to make
inter-company comparisons easier.
SUMMARY COMPENSATION TABLE
The following table summarizes all compensation earned in the past three
years for services performed in all capacities for HUBCO and its subsidiaries
with respect to the HUBCO Named Officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
(a) (b) (c) (d) (f) (g) (l)
Name Restricted Securities All Other
and Principal Stock Underlying Compensation
Position Year Salary ($) Bonus ($) Award(s)(1)($) Options/SARs # (2) ($)
-------- ---- ---------- --------- -------------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Kenneth T. Neilson, 1995 250,000 250,000 -0-(3) -0- 7,446
President and CEO 1994 250,000 250,000 217,000(4) 135,000 4,500
HUBCO & HUB 1993 250,000 187,500 92,250(5) n/a 7,500
D. Lynn Van 1995 145,000 72,500 -0-(6) -0- 7,446
Borkulo-Nuzzo, 1994 130,000 67,000(7) 20,750(8) 52,500 3,443
Executive Vice 1993 100,000 53,000 38,500(9) n/a 3,000
President and
Corporate Secretary
HUBCO & HUB
Richard Linhart, 1995 36,250(10) 10,000(11) -0- 20,000 192
Executive Vice 1994 n/a n/a n/a n/a n/a
President and Chief 1993 n/a n/a n/a n/a n/a
Financial Officer
HUBCO & HUB
Robert Mangano, 1995 173,280(12) 30,000(13) -0- 32,550 3,962
Executive Vice 1994 n/a n/a n/a n/a n/a
President-Branch 1993 n/a n/a n/a n/a n/a
Administration HUB
Thomas Shara, 1995 145,000 72,500(14) -0- -0- 7,014
Executive Vice 1994 135,000 69,500(15) 51,875(16) 52,500 5,210
President-Senior 1993 124,000 62,000 38,500(17) -0- 4,754
Lending Officer
HUB
</TABLE>
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NOTES:
(1) The dollar amounts listed represent the number of shares of restricted
stock granted, multiplied by the fair market value of each share of stock
on the date of the grant. Dividends are paid on all shares of restricted
stock. Cash dividends are paid directly to the officer holding the
restricted stock. Stock dividends are added to the restricted stock and are
subject to the same restrictions. Restricted stock has been awarded with
various vesting schedules described below. The number of shares reflected
in the footnotes below have been adjusted for the 3 for 2 stock split
effected January 15, 1995.
(2) All amounts in this column represent employer contributions to 401(k) plans
on behalf of the HUBCO Named Officers and premiums for life insurance in
excess of $50,000.
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<PAGE>
(3) At December 31, 1995, Mr. Neilson held a total of 23,250 shares of
restricted stock with an aggregate value of $309,250. None of these shares
were awarded in 1995.
(4) Includes 3,000 shares awarded on June 16, 1994 to vest on June 16, 1996 and
13,500 shares awarded on November 14, 1994 to vest on November 14, 1996.
(5) Includes 4,500 shares awarded on June 9, 1993 to vest on June 9, 1996 and
2,250 shares awarded on December 13, 1993 to vest on December 13, 1996.
(6) At December 31, 1995, Ms. Van Borkulo-Nuzzo held a total of 7,882 shares of
restricted stock with an aggregate value of $83,440. None of these shares
were awarded in 1995.
(7) Of this amount, $2,000 represents a special performance bonus paid in
connection with specific projects.
(8) Includes 1,500 shares awarded on June 16, 1994 to vest on June 16, 1996.
(9) Includes 3,000 shares awarded on June 9, 1993 to vest on June 9, 1996.
(10) This amount is from the date of hire on October 2, 1995 through December
31, 1995. Mr. Linhart's annualized compensation would have been $145,000.
(11) This amount represents a special performance bonus paid in connection with
specific projects
(12) Of this total, $85,780 represents the amount paid by Urban National Bank
("Urban") for the period of January 1, 1995 through June 30, 1995 and
$87,500 represents the amount paid by HUB for the period July 1, 1995
through December 31, 1995.
(13) This amount represents a bonus paid by Urban.
(14) Of this amount, $500 represents a special performance bonus paid in
connection with specific projects.
(15) Of this amount, $2,000 represents a special performance bonus paid in
connection with specific projects.
(16) Includes 3,750 shares awarded on June 16, 1994 to vest on June 16, 1996.
(17) Includes 3,000 shares awarded on June 9, 1993 to vest on June 9, 1996.
STOCK GRANT TABLE
The following table provides certain information about options awarded to
HUBCO Named Officers in the last fiscal year. HUBCO does not utilize stock
appreciation rights ("SARs") in its compensation package, although the
Commission rules require that SARs be reflected in Table headings.
31
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise Grant Date
Options/SARs Employees In or Base Expiration Present
Name Granted (#) Fiscal Year Price ($/SH) Date Value($)(1)
---- ------------ ------------ ------------ ----------- -------------
(a) (b) (c) (d) (e) (f)
<S> <C> <C> <C> <C> <C>
Richard I. Linhart 20,000 21.84 19.625 12/12/04 $114,740
Robert Mangano(2) 10,850(2) 11.85 4.608(2) 6/1/02 $142,591
21,700(2) 23.70 4.147(2) 9/13/03 $295,185
</TABLE>
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NOTES:
(1) The Black-Scholes option pricing model was chosen to estimate the grant
date present value of the options set forth in this table. HUBCO's use of
this model should not be construed as an endorsement of its accuracy at
valuing options. All stock option valuation models, including the
Black-Scholes model, require a prediction about the future movement of the
stock price. The following assumptions were made for purposes of
calculating the grant date present value:
<TABLE>
<CAPTION>
Interest
Days to Expiration Volatility Dividend Yield Rate
------------------ ---------- -------------- --------
<S> <C> <C> <C> <C>
Richard Linhart 2,557 29.80% 3.46% 6.10%
Robert Mangano (10,850) 2,557 29.18% 3.83% 6.22%
(21,700) 2,922 29.18% 3.83% 6.30%
</TABLE>
In addition, the present value calculated pursuant to the Black-Scholes
model was discounted at 5% per vesting year under risk of forfeiture to the
extent applicable. The real value of the options in this table depends upon
the actual performance of HUBCO Common Stock during the applicable period.
(2) These options were originally granted several years ago to Mr. Mangano by
Urban. These non-qualified options were then issued by HUBCO in connection
with HUBCO's acquisition of Urban in 1995 to replace earlier awards made by
Urban. The terms of the HUBCO option awards are those established by Urban
when the awards originally were made.
STOCK EXERCISE TABLE
The following table is intended to show options exercised during the last
fiscal year and the value of unexercised options held at year-end 1995 by the
HUBCO Named Officers. HUBCO does not use SARs as part of its compensation
package.
32
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SAR at Options/SARs at
FY-End(#) FY-End ($)(1)
Shares ------------- -------------
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Kenneth T. Neilson -0- -0- 67,500/67,500 $627,412/$627,413
D. Lynn Van -0- -0- 7,500/45,000 $69,713/$418,275
Borkulo-Nuzzo
Richard I. Linhart -0- -0- -0-/20,000 $ -0-/$50,000
Robert Mangano(2) -0- -0- 32,550/-0- $580,182/$-0-
Thomas Shara -0- -0- 7,500/45,000 $69,713/$418,275
</TABLE>
- -----------------
NOTES:
(1) Options are "in the money" if the fair market value of the underlying
security exceeds the exercise price of the option at year end.
(2) Mr. Mangano's options were issued by HUBCO as part of the acquisition of
Urban and replaced grants made by Urban.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
HUBCO and HUB jointly entered into an employment agreement with Mr. Neilson
upon his appointment as President in 1989. The agreement continues Mr. Neilson's
salary as in effect on September 5, 1989 and provides annual increases to be
decided by the HUBCO Board. For 1996, Mr. Neilson's annual base salary is
$325,000. If HUBCO changes Mr. Neilson's title to a lesser position, reduces his
compensation, forces him to relocate, or materially alters his duties,
responsibilities or authority, Mr. Neilson can resign and continue to receive
his compensation under the agreement until the expiration of the agreement.
After a change-in-control, if Mr. Neilson's employment is terminated by HUBCO
(except for cause or as a result of his death or disability), or if Mr. Neilson
resigns for any reason whatsoever after giving 60 days' notice of his intent to
do so, he is entitled to receive two times his highest W-2 compensation in
effect during the three years preceding the termination or resignation in a lump
sum. The employment agreement, as amended, will expire on the date of HUBCO's
1998 annual meeting.
HUBCO and HUB jointly have entered into Change-in-Control Employment
Agreements with each of Ms. Van Borkulo-Nuzzo, Mr. Linhart and Mr. Shara. After
a change-in-control (as defined in the Agreements), if the executive's
employment is terminated by HUBCO or HUB (except for cause or as a result of
death or disability), or if HUBCO or HUB changes the executive's title,
position, duties or responsibilities, and the executive resigns as a result of
the change, the executive is entitled to receive a lump sum payment equal to the
executive's highest W-2 compensation in effect during the three years preceding
the termination or resignation. Each agreement will expire on December 31, 1998
unless a change-in-control occurs prior to that date.
33
<PAGE>
Upon the merger of Urban into HUB, Mr. Mangano, Executive Vice President of
HUB (formerly President of Urban) entered into an Employment Agreement with
HUBCO and HUB as of July 1, 1995. The contract is for a term of 3 years,
expiring June 30, 1998, and provides Mr. Mangano with a base salary of $175,000
per year, 4 weeks vacation per year, country club membership, use of a company
car and such other benefits and perquisites as other senior officers may be
entitled to receive. Upon a termination by HUBCO of Mr. Mangano other than for
cause (as defined in the Agreement) or if Mr. Mangano terminates his employment
for "good reason" (as defined in the Agreement), which includes a
change-in-control of HUBCO, Mr. Mangano will receive 36 months' salary reduced
by the number of months elapsing since July 1, 1995, but in any event, not less
then 24 months' salary. In addition, Mr. Mangano would receive "Special
Retirement Benefits" including full vesting in all pension, savings, retirement
and other benefit plans and an additional 36 months of credited service. If an
excise tax under the provisions of Section 280G of the Internal Revenue Code is
imposed on Mr. Mangano by virtue of such compensation, HUBCO will pay Mr.
Mangano an additional amount that is generally intended to cover the excise tax
payable by Mr. Mangano plus the additional federal and state taxes due on that
amount.
Under HUBCO's restricted stock plan, each share of stock awarded is subject
to a "Restricted Period" of from two to ten years, as determined by the
committee administering the plan when it awards the shares. Effective upon the
date of grant, the officer or employee is entitled to all the rights of a
shareholder with respect to the shares, including dividend and voting rights.
However, if a share recipient leaves the employment of HUBCO or its subsidiaries
during the Restricted Period for any reason, his or her shares may be forfeited
to HUBCO. Upon the occurrence of a change in control of HUBCO, every Restricted
Period then in existence of five years or less will automatically expire.
Under the HUBCO, Inc. 1995 Stock Option Plan, options are granted with a
term not to exceed ten years from the grant date. Each option is granted with a
vesting schedule as determined by the Stock Committee. In the event of a change
in control, as defined in the Plan, any option which has not, as of the date of
the change in control, become exercisable, becomes fully vested.
PENSION PLANS
PENSION PLANS. HUBCO has two non-contributory, defined benefit pension
plans: The Employees' Retirement Plan of HUBCO, Inc. (the "BASE PLAN") and the
Retirement Plan for Non-Bargaining Employees of HUBCO, Inc. (the "NON-BARGAINING
RETIREMENT PLAN"), both of which apply to employees of HUBCO and its designated
subsidiaries. The Board has authorized the consolidation of these plans into one
plan; this consolidation is expected to be finalized during the second quarter
of 1996.
BASE PLAN. The Base Plan covers any employee of HUBCO or it subsidiaries
who works over 1,000 hours per year, is over age 20 1/2 and has completed 6
months of service. The annual retirement benefit for the HUBCO Named Officers is
the sum of (i) 1.25% of the employee's base year-end compensation during the
year he or she joins the Base Plan multiplied by the number of years of service
with HUBCO or HUB prior to joining the Base Plan; plus (ii) 1.25% of the
employee's base year-end compensation during each year of a participant's
service after joining the Base Plan. Retirement benefits normally commence when
an employee reaches age 65.
NON-BARGAINING RETIREMENT PLAN. The Non-Bargaining Retirement Plan provides
additional retirement benefits for non-bargaining employees of HUBCO and its
subsidiaries. It covers each non-bargaining employee who works over 1,000 hours
per year, is over age 20 1/2 and has completed 6 months of service. The annual
retirement benefit for covered employees is calculated by taking 1% of an
employee's base average annual earnings (determined by averaging the highest
five continuous years of credited service, excluding the last year of service)
multiplied by the years of credited service under the Non-Bargaining Retirement
Plan, adding 1/2% of an employee's base average annual earnings in excess of the
average Social Security Wage Base (calculated based upon the year of birth)
multiplied by the years of credited service, and subtracting the pension benefit
the employee will receive from the
34
<PAGE>
Base Plan. Retirement benefits normally commence when an employee reaches age
65. The Non-Bargaining Retirement Plan also provides for disability pension
benefits.
In each of the above plans, compensation in the form of a bonus is excluded
from benefit calculations. Thus, for each Named Officer, only the amounts which
are shown each year under the heading "Salary" in the Summary Compensation Table
in this Proxy Statement are covered.
The table below shows an employee's estimated annual retirement benefits
from both pension plans, assuming retirement at age 65 for an individual
reaching such age before January 1, 1995 and assuming a straight life annuity
benefit, for the specified compensation levels and years of service. The
benefits listed in the table are not subject to any deduction for social
security or other offset amounts. Mr. Neilson has approximately 12 years of
credited service under the pension plans as of January 1, 1996 and, at age 65,
would have 30 years of credited service. Ms. Van Borkulo-Nuzzo has approximately
29 years of credited service under the pension plans as of January 1, 1996, and,
at age 65, would have approximately 48 years of credited service. Mr. Shara has
approximately 14 years of credited service under the pension plans as of January
1, 1996 and, at age 65, would have approximately 42 years of credited service.
Neither Mr. Linhart nor Mr. Mangano had any credited service in the pension
plans as of January 1, 1996. At age 65, their anticipated credited service would
be approximately 13 years and 15 years respectively.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
Salary 15 20 25 30 35
-------- ---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C>
$125,000 $26,181 $34,907 $43,634 $52,361 $61,088
$150,000 $31,806 $42,407 $53,009 $63,611 $74,213
</TABLE>
For the current plan year, the compensation for computing benefits under
the pension plans cannot exceed $150,000, which is indexed for inflation as
limited by Congress.
The HUBCO Board has authorized the purchase of a supplemental benefit in
the form of Corporate Owned Life Insurance to offset the effect of the IRS
imposed limitations on pension benefits for Mr. Neilson.
DIRECTORS' COMPENSATION
The HUBCO Board has established directors' retainer and fees effective
January 1, 1995 as follows:
(1) Chairman's Retainer $26,000
Chairman of Audit Committee, Retainer $ 5,000
Chairman of Personnel Committee, Retainer $ 5,000
(2) Annual Director's Retainer $12,000
(3) HUBCO, HUB and subsidiary Board Meetings $ 500
(4) Committee Meetings $ 400
The President and CEO does not receive any retainer or Board fees.
RETIREMENT. Non-employee directors with at least 36 months of service upon
retirement will receive a retirement benefit each year for life (but not to
exceed 10 years) equal to 10% of the director's retainer in effect at the date
of his or her retirement, multiplied by the number of years of service as a
director (not to exceed 10 years).
35
<PAGE>
At present, the maximum benefit payable per director is $12,000 per year for 10
years.
Deferred Compensation. The HUBCO Board adopted a nonqualified Deferred
Compensation Plan for directors covering the retainer and committee fees
effective January 1, 1995. Participation is optional. Interest is paid on
deferred fees at the highest rate paid by HUB on passbook savings. The
provisions of the Deferred Compensation Plan are designed to comply with certain
rulings of the Internal Revenue Service under which the deferred amounts are not
taxed until received. Under the Deferred Compensation Plan, the directors who
elect to defer their fees will receive the fees over time after they retire.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation payable to executive officers of HUBCO and of HUB is
determined by the Compensation Committee, except that restricted stock awards
and stock option grants are determined by HUBCO's Stock Committee (the "Stock
Committee") and bonuses are based upon parameters established by the full HUBCO
Board. All actions of the Compensation Committee are subject to review and
ratification by the Boards of Directors of HUBCO and HUB. Thus, this report is
being issued over the names of all the directors of HUBCO and is concurred in by
all members of the relevant committees.
The Committee members are: Compensation Committee: Charles F.X. Poggi
(Chairman), Robert Burke, Joan David and W. Peter McBride; Stock Committee:
Robert Burke (Chairman), Sister Grace Frances Strauber and Bryant Malcolm.
This report shall not be deemed incorporated by reference by any general
statement incorporating by reference this Proxy Statement into any filing under
the Securities Act, or under the Exchange Act, except to the extent that HUBCO
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
EXECUTIVE COMPENSATION POLICY
HUBCO's policy is to compensate its executives fairly and adequately for
the responsibility assumed, for the success and direction of HUBCO, for the
effort expended in discharging that responsibility, and for the results achieved
directly or indirectly from each executive's performance. "Fair and adequate
compensation" is established after careful review of:
1. HUBCO's earnings;
2. HUBCO's performance as compared to other companies of similar size and
market area; and
3. Comparison of what the market demands for compensation of similarly
situated experienced executives.
Total compensation takes into consideration a mix of base salary, bonus,
perquisites, restricted stock awards and stock options. The particular mix is
established in order to competitively attract competent professionals, retain
those professionals, and reward extraordinary achievement.
The Compensation Committee also considers net income for the year and
earnings per share of HUBCO Common Stock before finalizing officer increases for
the coming year.
Based upon its current levels of compensation, HUBCO is not affected by the
provisions of the Code which limit the deductibility to a company of
compensation in excess of $1 million paid to any of its top five executives.
36
<PAGE>
Since the grant of options under the 1995 Stock Option Plan may, in subsequent
years, result in total compensation to an officer in excess of $1 million, the
1995 Stock Option Plan has been designed so that compensation payable under the
Option Plan conforms to the Code requirements and will be deductible by HUBCO.
In certain instances, compensation decisions take into account contractual
commitments assumed by or agreed to by HUBCO as a result of an acquisition.
BASE SALARY
Subject to HUBCO Board review and ratification, the responsibility for
establishing base salary for executives is delegated to the Compensation
Committee.
Salary is minimum compensation for any particular position and is not tied
to any performance formula or standard. However, that is not to say that poor
performance will not result in termination. Superior performance is expected of
all executive officers.
To establish salary, the following criteria are used:
1. Position description.
2. Direct responsibility assumed.
3. Comparative studies of peer group compensation. Special weight is
given to local factors as opposed to national averages.
4. Earnings performance of HUBCO resulting in availability of funds for
payment of salary expense.
5. Competitive level of salary to attract and retain qualified and
experienced executives.
ANNUAL BONUSES
Each year the HUBCO Board establishes the parameters for the award of
bonuses. The current parameters involve HUBCO's performance specifically related
to return on equity and minimum loan loss reserve levels.
Under the bonus program the bonus pool may not exceed 10% of after tax
profits of HUBCO and the creation of the bonus pool may not cause the year-end
results to fall below the targeted return on equity or the loan loss reserve to
fall below the targeted loan loss reserve percentage. If the targeted results
are not achieved, no bonuses will be paid under the program. Even if the
targeted level is achieved, each department must meet its budget in order to be
eligible for a bonus and each employee must achieve key goals established for
him or her in order to be personally eligible.
RESTRICTED STOCK
The responsibility for establishing restricted stock awards is delegated to
the Stock Committee.
Twice annually the Stock Committee meets to evaluate meritorious
performance of all officers and employees for consideration to receive
restricted stock awards.
37
<PAGE>
The Stock Committee makes awards based upon the following criteria:
1. Position of the officer or employee in HUBCO and/or HUB.
2. The benefit which HUBCO or HUB has derived as a result of the efforts
of the award candidate under consideration.
3. HUBCO's desire to encourage long term employment of the award
candidate.
STOCK OPTIONS
The 1995 Stock Option Plan was approved by HUBCO's shareholders at the 1995
Annual Meeting.
The responsibility for recommending awards of stock options to the full
HUBCO Board rests with the Stock Committee.
The Stock Committee makes recommendations for awards based upon the
following criteria:
1. Position of the officer or employee in HUBCO and/or HUB.
2. The benefit which HUBCO or HUB has derived as a result of the efforts
of the award candidate under consideration.
3. HUBCO's desire to encourage long term employment of the award
candidate.
PERQUISITES
Perks, such as company automobiles and their related expenses, country club
memberships, auxiliary insurance benefits and other perks which the HUBCO Board
may approve from time to time are determined and awarded pursuant to evaluation
under the same criteria used to establish base salary or, in certain
circumstances pursuant to contractual commitments assumed by or agreed to by
HUBCO as a result of an acquisition.
* * * * *
HUBCO has long believed that a strong, explicit link should exist between
executive compensation and the value delivered to shareholders. The bonus
program, restricted stock awards and stock option awards all provide competitive
compensation which increase based on HUBCO's performance. Since each bonus is
based on a direct, explicit link to HUBCO's performance, it is directly and
explicitly linked to the value received by shareholders. HUBCO's profitability
inures to the benefit of shareholders, and is a direct result of the direction
established by management. The general compensation philosophy is that base
salary for executives should place compensation at the twenty-fifth percentile
of the peer group but that total compensation (including bonus, restricted stock
and options) should place compensation over the seventy-fifth percentile in line
with HUBCO's performance.
IN 1995 THE COMMITTEES RESPONSIBLE FOR THE VARIOUS COMPONENTS OF EXECUTIVE
COMPENSATION UTILIZED TWO SALARY SURVEYS TO ESTABLISH EXECUTIVE COMPENSATION.
THE FIRST REPORT, "N.J. BANKERS' SALARY SURVEY", PREPARED BY KPMG PEAT MARWICK,
IDENTIFIED COMPENSATION IN INSTITUTIONS IN THE $1 TO $3 BILLION CATEGORY IN THE
NEW YORK, NEW JERSEY, PENNSYLVANIA TRI-STATE AREA. THE SECOND SURVEY, CONDUCTED
BY WYATT DATA SERVICES, ENTITLED "FINANCIAL INSTITUTIONS BENCHMARK COMPENSATION
REPORT", WAS NATIONWIDE FOR THE FINANCIAL INDUSTRY.
MR. NEILSON, THE PRESIDENT OF HUBCO, DID NOT RECEIVE AN INCREASE IN BASE
PAY FOR 1993, 1994, OR 1995 BUT RECEIVED AN INCREASE OF $75,000 EFFECTIVE FOR
1996. HE IS ELIGIBLE FOR BONUSES EQUAL TO 100% OF HIS BASE
38
<PAGE>
SALARY. MR. NEILSON'S BASE SALARY IS $325,000. THE HUBCO BOARD BELIEVES THAT
THIS PACKAGE REPRESENTS FAIR COMPENSATION IN VIEW OF HUBCO'S 1995 PERFORMANCE
AND PEER GROUP COMPARISONS.
For 1995, Mr. Schierloh, Chairman of HUBCO, received a base salary of
$36,000 and was eligible for a 50% bonus. In addition, he was paid a quarterly
retainer of $6,500 as director and Chairman. Mr. Schierloh is retiring as
Chairman after the HUBCO Meeting although he will continue as a director of
HUBCO. The HUBCO Board has elected Mr. Neilson as Chairman effective immediately
following the HUBCO Meeting.
THE BOARD OF DIRECTORS OF HUBCO
Robert J. Burke
Joan David
Thomas R. Farley
Harry J. Leber
Bryant Malcolm
W. Peter McBride
Kenneth T. Neilson
Charles F.X. Poggi
James E. Schierloh
Sister Grace Frances Strauber
PERFORMANCE GRAPH
The following graph compares the cumulative total return on a hypothetical
$100 investment made at the close of business on December 31, 1990 in: (a) HUBCO
Common Stock; (b) the Standard & Poor's ("S&P") 500 Index; and (c) an index of
peer group performance. The graph is calculated assuming that all dividends are
reinvested during the relevant periods. The graph shows how a $100 investment
would increase or decrease in value over time, based on dividends (stock or
cash) and increases or decreases in the market price of the stock.
--The graph is represented by the following plot points--
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
HUBCO Inc. 100 196.50 400.76 562.90 567.54 879.82
S&P 500 Index 100 130.47 140.41 154.56 146.60 215.45
Peer Group 100 176.12 292.00 317.65 336.97 583.07
</TABLE>
39
<PAGE>
Four of HUBCO's "peer group" have been acquired. While their performance is
included in the above graph, it should be noted that the fact of acquisition
has, in all likelihood, resulted in improved investment results for those
institutions which were acquired.
PEER GROUP POPULATION:
Commerce Bancorp Inc. N.J.
First Fidelity Bancorporation
Midlantic Corp.
Summit Bancorporation
Trust Co. N.J. Jersey City - Name change from Trustcompany Bancorporation
Summit Bancorp - Name change from UJB Financial Corp.
Valley National Bancorp
Prepared from data supplied by Standard & Poor's Compustat Services.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER TRANSACTIONS
As noted above under the caption "Board Compensation Committee Report on
Executive Compensation," various aspects of the compensation of the HUBCO Named
Officers are determined by the Compensation Committee and the Stock Committee.
The Compensation Committee members are: Charles F.X. Poggi (Chairman), Robert
Burke, Joan David and W. Peter McBride. The Stock Committee members are: Robert
Burke (Chairman), Sister Grace Frances Strauber and Bryant D. Malcolm.
Mr. Schierloh and Mr. Neilson, each of whom serves on the Board of
Directors of both HUBCO and HUB, are officers of HUBCO and HUB. Each of Messrs.
Schierloh and Neilson absented themselves from all discussions, and abstained
from all voting, on the Boards on which they served with respect to their own
compensation.
Charles F.X. Poggi, who serves on the Board of Directors of both HUBCO and
HUB, and who is the Chairman of the Compensation Committee and is involved in
setting executive compensation, is President of Poggi Press, a general printing
company. During 1995, Poggi Press was paid $343,145.51 for printing work for
HUBCO and its subsidiaries. Management believes the terms and conditions of this
transaction to be equivalent to terms available from an independent third party.
W. Peter McBride, a Director of HUBCO and HUB serves on the Compensation
Committee. Various companies with which Mr. McBride is affiliated have business
relationships with HUBCO or HUB. The Franklin Lakes office of HUB (obtained
through merger with Urban) is leased from Urban Farms Shopping Center, Inc., a
New Jersey corporation of which W. Peter McBride is the President and a
shareholder. The lease was originally executed in 1979 and extended on November
1, 1994 to December 31, 1999. Contiguous space is also leased from Urban Farms
Shopping Center, Inc. for the term February 1, 1993 to January 31, 1996.
Management believes the terms and conditions of these leases to be equivalent to
terms available from an independent third party. The annual aggregate lease
payments through December 31, 1995 were $75,365.61. Urban Farms, Inc., a
McBride-owned company, does landscape work for HUB. In 1995, $7,600.81 was paid
for such services. Albert P. Schmidt Construction Co., a McBride-owned company,
does renovations and repairs at 1000 MacArthur Blvd., Mahwah, New Jersey. In
1995, $319,078.58 was paid for such services. Independent Electric Co. does
subcontracting work at 1000 MacArthur Blvd., Mahwah. Any amounts due to this
subcontractor were included in amounts paid to Albert P. Schmidt Construction
Co. reflected above. F.A. McBride Co. does heating and air conditioning work at
various locations previously a part of Urban. In 1995, this company was paid
$49,911.62 for such services. Urban Planing and Engineering Associates, a
McBride-owned company, was paid $600.00 by HUB in 1995 for excavation work at
the Ringwood office which was formerly a part of Urban.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table furnishes information known by HUBCO as to the
beneficial owners of more than 5% of HUBCO Common Stock as of December 31, 1995.
Name and Address of Amount and Nature
Beneficial Owner of Beneficial Ownership Percent of Class
- ---------------------- ----------------------- ----------------
FMR Corp.; Fidelity 672,170 (1) 5.13
Management & Research
Company; Edward C. Johnson
3d and Abigail P. Johnson,
82 Devonshire Street,
Boston, MA 02109
- -------------
NOTES:
(1) Fidelity Management & Research Company ("Fidelity"), 82 Devonshire Street,
Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR Corp. and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 495,220 shares or 3.78% of the
outstanding shares of HUBCO Common Stock as a result of acting as
investment adviser to various investment companies registered under the
Investment Company Act of 1940.
Fidelity Management Trust Company, 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR Corp. is the
beneficial owner of 176,950 shares or 1.35% of the outstanding shares of
HUBCO Common Stock as a result of serving as investment manager of certain
institutional accounts.
HUBCO obtained all information set forth herein with respect to Fidelity's,
FMR Corp's, Mr. Johnson's and Ms. Johnson's beneficial ownership from a
Schedule 13G filing made by them on February 14, 1996.
The following table sets forth information concerning the beneficial
ownership of HUBCO Common Stock as of March 19, 1996, by each executive officer
of HUBCO for whom individual information is required to be set forth in this
Proxy Statement pursuant to the rules of the Commission (the "HUBCO NAMED
Officers"), by each director, and by all directors and executive officers as a
group.
41
<PAGE>
No. of Common Shares Percent
Name of Beneficial Owner Beneficially Owned(1) of Class
------------------------ -------------------- --------
Robert J. Burke 73,096 (2) .52%
Joan David 154,174 (3) 1.10%
Thomas R. Farley 42,721 (4) .31%
Richard Linhart 4,000 (5) .03%
Bryant Malcolm 17,937 (6) .13%
Robert Mangano 34,772 (7) .25%
W. Peter McBride 3,906 .03%
Kenneth T. Neilson 237,804 (8) 1.70%
Charles F. X. Poggi 212,653 1.52%
James E. Schierloh 81,047 (9) .58%
Thomas Shara 89,373 (10) .64%
Sister Grace Frances Strauber 994 .01%
D. Lynn Van Borkulo-Nuzzo 73,680 (11) .53%
Directors and Executive Officers of
HUBCO as a group (13 persons) 1,026,157(12) 7.35%
- -------------
NOTES:
(1) Beneficially owned shares include shares over which the named person
exercises either sole or shared voting power or sole or shared investment
power. It also includes shares owned (i) by a spouse, minor children or by
relatives sharing the same home, (ii) by entities owned or controlled by
the named person, and (iii) by other persons if the named person has the
right to acquire such shares within 60 days by the exercise of any right or
option. Unless otherwise noted, all shares are owned of record and
beneficially by the named person, either directly or through the HUBCO
dividend reinvestment plan.
(2) Of this total, 12,505 shares are held by Mr. Burke's wife, and 22,500 are
held by Union Dry Dock & Repair Co. Mr. Burke disclaims beneficial
ownership of the shares held by his wife.
(3) Of this total 9,715 are held in an IRA and 27,843 are held by Mrs. David
and Mr. Lawrence David as trustees for The David Foundation.
(4) Of this total, 1,125 shares are held by Mr. Farley's wife. Mr. Farley
disclaims beneficial ownership of the shares owned by his wife.
(5) Of this total, 4,000 shares represent vested options.
(6) Of this total, 889 shares are held by Mr. Malcolm's wife. Mr. Malcolm
disclaims beneficial ownership of the shares held by his wife.
(7) Of this total, 21,700 shares represent vested options.
42
<PAGE>
(8) Of this total, 20,746 shares are held in Mr. Neilson's account in HUBCO's
401(k) plan, which he directs, 23,250 shares are held for Mr. Neilson under
HUBCO's restricted stock plan, 3,589 shares are held in an IRA, 2,550
shares are held by Mr. Neilson's wife, and 135,000 shares represent vested
options. 14,496 shares are held for minor children. Mr. Neilson disclaims
beneficial ownership of the shares owned by his wife.
(9) Of this total, 4,936 shares are held by Mr. Schierloh's wife individually,
and 13,500 shares are held for Mr. Schierloh under HUBCO's restricted stock
plan.
(10) Of this total, 12,554 shares are held in Mr. Shara's account in HUBCO's
401(k) plan, which he directs, 11,782 shares are held for Mr. Shara under
HUBCO's restricted stock plan, and 52,500 shares represent vested options.
(11) Of this total, 10,460 shares are held in Ms. Van Borkulo-Nuzzo's account in
HUBCO's 401(k) plan, which she directs, 7,882 shares are held for Ms. Van
Borkulo-Nuzzo under HUBCO's restricted stock plan, and 52,500 shares
represent vested options.
(12) Of this total, 43,760 shares are held in HUBCO's 401(k) plans for specified
individuals, 42,914 shares are held for executive officers under HUBCO's
restricted stock plan, and 265,700 shares represent vested options.
Excluded from the shares reported in the Table are 39,600 shares held by
HUB's Trust Department as trustee for HUB's two pension plans. These
additional shares held by HUB's Trust Department are not reported as
beneficially owned by HUBCO's directors or executive officers, although by
virtue of the officers' and directors' service on HUB's Trust Committee it
may be asserted that the directors and officers have beneficial ownership
of such shares. The directors and executive officers disclaim beneficial
ownership of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HUB has made in the past and, assuming continued satisfaction of generally
applicable credit standards, expects to continue to make, loans to directors,
executive officers and their associates (i.e. corporations or organizations for
which they serve as officers or directors or in which they have beneficial
ownership interests of 10% or more). These loans have all been made in the
ordinary course of the banking business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and do not involve more than the
normal risk of collectability or present other unfavorable features. HUB's
directors, executive officers and their associates did not during 1995 or during
1996 through the date of this Form 10-K/A borrow from HUB an amount in
excess of 10% of HUB's equity capital for any one director or executive officers
(together with their associates) or an amount in excess of 20% of HUB's equity
capital for all directors and executive officers and their associates as a
group.
Certain additional information regarding certain relationships and related
transactions appears under Item II of this Form 10-K/A under the caption
"Compensation Committee Interlocks and Insider Participation".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) & (2) List of Financial Statements and Financial
Statement Schedules
The below listed consolidated financial statements and report of
independent public accountants of
43
Five Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
In Thousands, Except Per Share Data) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31
Interest and fee income $ 120,711 $ 103,353 $ 86,550 $ 88,296 $ 76,887
Interest expense 39,609 32,257 27,511 35,361 38,844
Net interest income 81,102 71,096 59,039 52,935 38,043
Provision for possible loan losses 4,200 3,550 4,874 7,432 3,672
Noninterest income 16,844 12,248 10,496 9,434 7,570
Securities gains/(losses) 947 (420) 83 1,283 --
Noninterest expense 60,164 51,050 42,313 46,612 33,017
Income before income taxes 34,529 28,324 22,431 9,608 8,924
Net income 23,684 17,432 13,871 8,971 6,278
Common shares outstanding 13,106 12,355 12,832 12,173 10,222
- ------------------------------------------------------------------------------------------------------------------------------------
Per Common Share
Net income--fully diluted $ 1.79 $ 1.33 $ 1.06 $ 0.76 $ 0.62
Cash dividends declared 0.60 0.36 0.31 0.27 0.22
Book value at year end 9.92 7.83 7.63 7.20 5.98
Average common shares outstanding-fully diluted 13,251 13,098 13,109 11,881 10,177
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31
Securities available for sale $ 300,721 $ 111,604 $ 56,816 $ 15,430 $ --
Securities held to maturity 265,703 562,567 499,479 397,722 198,843
Total loans 853,984 862,384 663,588 666,141 641,949
Total assets 1,613,194 1,709,384 1,363,674 1,233,910 981,297
Deposits 1,425,001 1,491,544 1,213,336 1,111,681 887,425
Long-term debt 25,000 25,000 -- -- 763
Total stockholders' equity 129,966 115,551 97,654 87,585 61,154
- ------------------------------------------------------------------------------------------------------------------------------------
Performance Ratios
Net interest margin 5.46% 4.96% 4.99% 4.88% 4.73%
Efficiency ratio 61.7% 54.9% 53.2% 69.6% 67.6%
Return on average assets 1.46% 1.11% 1.07% 0.74% 0.69%
Return on average equity 19.49% 16.57% 14.95% 11.90% 10.66%
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Ratios
Tier 1 leverage ratio 7.56% 6.28% 7.22% 7.38% 6.11%
Total risk-based capital ratio 17.21% 16.71% 14.85% 14.10% 9.58%
</TABLE>
5
<PAGE>
Management's Discussion and Analysis
Acquisition Summary
In April 1995, Jefferson National Bank was merged with the Company and on June
30, 1995, Urban National Bank was merged with the Company. Both acquisitions
were accounted for on the pooling-of-interests accounting method and
therefore, the financial statements for periods prior to the merger have been
restated to include the assets and earnings of these banks. Jefferson was a $90
million bank headquartered in Passaic, New Jersey, that operated 4 branches and
Urban National was a $230 million bank headquartered in Franklin Lakes, New
Jersey, that had 9 branches.
In 1994, the Company completed three acquisitions that were accounted for on the
purchase method of accounting. In May 1994, the Company purchased four branches
of the Polifly Federal Savings & Loan Association from the Resolution Trust
Company (RTC). These branches held $104 million in deposits in Bergen county. In
July 1994, the acquisition of Washington Bancorp was consummated. Washington
was a $272 million savings institution serving Hudson and Bergen counties. In
December 1994, Shoppers Charge Accounts Co. was acquired for $16.3 million in
cash. Shoppers is a private label credit card issuer with approximately $63
million in high yielding credit card receivables at the time of the acquisition.
It serves approximately 258 stores with 498 locations in 35 states. The earnings
from the 1994 acquisitions are included in the Company's consolidated results
only from the dates of acquisition.
In addition, the Company had two pending acquisitions that were consummated in
the first quarter of 1996. Growth Financial, a $125 million bank with 3
branch locations in Somerset and Morris counties was acquired on January 12 in a
stock-for-stock transaction and accounted for on the pooling-of-interests
method. On February 29 the Company completed the acquisition of three branches
from CrossLand Federal Savings Bank. The branch deposits acquired total
approximately $61 million and will compliment the Company's current branches in
Bergen and Middlesex counties.
During 1995, the Company continued its strategy of growing earnings, enhancing
shareholder value, and building increased market share through both internal and
external growth. As part of the strategy of external growth through
acquisitions, it is the Company's philosophy that acquisitions must become
accretive to earnings within a very short time frame.
Net Income Summary
In 1995, the Company earned $23.7 million or $1.79 per share. This represents a
35.9% increase over the $17.4 million earned in 1994. On an earnings per share
basis, 1995 increased 34.6% over the $1.33 earnings per share for 1994. The
earnings and earnings per share for 1994 represented a 25% increase over the
$13.9 million or $1.06 per share earned in 1993.
Return on assets for 1995, 1994, and 1993 were 1.46%, 1.11%, and 1.07%,
respectively and return on average equity were 19.49%, 16.57%, and 14.95%. It
should be noted that the return on assets for 1994 and 1993 before restatement
for the poolings had been reported as 1.35% and 1.44% and the return on equity
had been 19.44% and 19.34%. This indicates that the Company acquired banks which
had earned at a much lower rate prior to being acquired and the Company improved
the performance of the acquired banks.
The main component to earnings, the net interest margin, increased to 5.46% in
1995 from 4.96% in 1994. The other two contributing factors to earnings were the
50% increase in noninterest income and the reduction in expenses at the acquired
companies. A more detailed analysis of these components will be discussed later.
Net Interest Income
Net interest income is the difference between the interest earned on
earning assets and the interest paid on deposits and borrowings. The principal
earning assets are the loan portfolio, comprised of commercial loans for
businesses, mortgage loans to
Return on Average Assets
[The following table was represented by a graph in the printed material.]
[INSERT CHART]
Return on Average Equity
[The following table was represented by a graph in the printed material.]
[INSERT CHART]
6
<PAGE>
Average Balances, Net Interest Income, Yields, and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------- ------------------------------- ------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits with banks $ -- $ -- --% $ 4,182 $ 177 4.23% $ 5,275 $ 163 3.09%
Federal funds sold 19,152 1,143 5.97% 25,378 1,066 4.20% 49,092 1,399 2.85%
Securities-taxable 599,005 37,973 6.34% 642,645 38,412 5.98% 449,330 27,535 6.13%
Securities-tax exempt 30,000 1,827 6.09% 43,795 2,354 5.38% 29,880 1,901 6.36%
Loans 850,536 80,503 9.46% 734,371 62,250 8.48% 665,349 56,305 8.46%
---------- -------- ----- ---------- -------- ----- ---------- ------- -----
Total Earning Assets 1,498,693 121,446 8.10% 1,450,371 104,259 7.19% 1,198,926 87,303 7.28%
Cash and due from banks 67,535 70,729 58,393
Allowance for possible
loan losses (16,874) (16,112) (12,595)
Premises and equipment 33,568 27,704 20,347
Other assets 39,889 40,243 31,702
---------- ---------- ----------
Total Assets $1,622,811 $1,572,935 $1,296,773
========== ========== ==========
Taxable-equivalent
adjustment $ 735 $ 906 $ 753
-------- -------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearning
transaction accounts $ 233,000 $ 6,417 2.75% $ 240,002 $ 5,969 2.49% $ 203,118 $ 5,141 2.53%
Savings accounts 475,000 11,606 2.44% 510,517 12,808 2.51% 396,183 10,268 2.59%
Time deposits 442,014 17,534 3.97% 369,222 10,491 2.84% 328,116 11,195 3.41%
---------- -------- ---------- -------- ---------- -------
Total Interest-Bearing
Deposits 1,150,014 35,557 3.09% 1,119,741 29,268 2.61% 927,417 26,604 2.87%
Short-term borrowings 38,736 1,899 4.90% 41,467 1,253 3.02% 34,320 907 2.64%
Long-term debt 25,000 2,153 8.61% 24,110 1,736 7.20% 0 0
---------- -------- ---------- -------- ---------- -------
Total Interest-Bearing
Liabilities 1,213,750 39,609 3.26% 1,185,318 32,257 2.72% 961,737 27,511 2.86%
-------- -------- -------
Demand deposits 275,915 273,491 232,746
Other liabilities 11,621 8,808 9,504
Stockholders' equity 121,525 105,318 92,786
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity $1,622,811 $1,572,935 $1,296,773
========== ========== ==========
Net Interest Income $ 81,837 $ 72,002 $59,792
======== ======== =======
Net Interest Margin 5.46% 4.96% 4.99%
===== ===== =====
</TABLE>
- --------------------------------------------------------------------------------
businesses and individuals, consumer loans (such as car loans, home equity
loans, etc.) and credit card loans, along with the investment portfolio. The
investment portfolio represents the liquidity of the Company. Deposits and
borrowings not required to fund loans or other assets are invested primarily in
government and government agency securities.
Net interest income is affected by a number of factors including the level,
pricing, and maturity of earning assets and interest-bearing liabilities,
interest rate fluctuations, asset quality, and the amount of noninterest-bearing
deposits and capital. In the following discussion, interest income is presented
on a fully taxable-equivalent basis ("FTE"). Fully taxable-equivalent interest
income restates reported interest income on tax-exempt loans and securities as
if such interest were taxed at the statutory Federal income tax rate of 35% in
1995 and 1994 and 34% in 1993.
In 1995, net interest income on a FTE basis was $81.8 million, a 13.6% increase
over the $72.0 million for 1994. The $72.0 million for 1994 increased 20.4% over
1993. Explanations for the changes in net interest income between years is
divided into two components. One is the change in the balances of earning assets
and interest-bearing liabilities, or the change due to "Volume". The second
component of the change is the yield/rate on these balances. Yield/rate changes
are attributable to either the Company changing rates from time-to-time or to
changes due to the general level of interest rates.
As indicated by the table, Changes in Taxable Equivalent Net Interest Income,
the increase in net interest income between 1995 and 1994 was due to the
increase in the volume of earning assets and due to rates.
- --------------------------------------------------------------------------------
7
<PAGE>
Changes in Taxable Equivalent Net Interest Income--Rate/Volume Analysis
<TABLE>
<CAPTION>
Increase/(Decrease) Increase/(Decrease)
------------------------------------ ------------------------------------
1995 over 1994 1994 over 1993
------------------------------------ ------------------------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest and fee income:
Loans $ 10,543 $ 7,710 $ 18,253 $ 5,851 $ 94 $ 5,945
Securities-taxable (2,692) 2,253 (439) 11,571 (694) 10,877
Securities-tax exempt (811) 284 (527) 782 (329) 453
Federal funds sold (302) 379 77 (837) 504 (333)
Interest bearing deposits (177) -- (177) (38) 52 14
------------------------------------ ------------------------------------
Total interest and fee income 6,561 10,626 17,187 17,329 (373) 16,956
------------------------------------ ------------------------------------
Interest expense:
Interest bearing transaction accounts (178) 626 448 919 (91) 828
Savings (874) (328) (1,202) 2,878 (338) 2,540
Time deposits 2,341 4,702 7,043 1,302 (2,006) (704)
Short-term borrowings (87) 733 646 205 141 346
Long-term debt 66 351 417 1,736 -- 1,736
------------------------------------ ------------------------------------
Total interest expense 1,268 6,084 7,352 7,040 (2,294) 4,746
------------------------------------ ------------------------------------
Net Interest Income $ 5,293 $ 4,542 $ 9,835 $ 10,289 $ 1,921 $ 12,210
==================================== ====================================
</TABLE>
The growth in net interest income was realized predominately through
acquisitions, primarily Shoppers Charge Accounts Co. in December 1994 and
Washington and Polify in mid-1994. As the table also shows, the change in net
interest income due to rate changes was positive in both periods. This is
significant in that the acquired companies offered higher rates on deposit
products than the Company. Upon acquisition, the Company's rate structure was
implemented. This sometimes causes run-off in time deposits, particularly when a
savings bank is acquired. In addition, interest rates were at their lowest level
in 25 years at the end of 1993 and then rates increased during 1994. Rates
declined somewhat in 1995 but remain well above the December 1993 level. Despite
these movements in interest rates and the acquisitions of banks with a higher
rate structure, the Company was able to manage rate volatility with only minor
effects on net interest income.
Net Interest Margin
The net interest margin is computed by dividing net interest income on a FTE
basis by average earning assets. The Company's net interest margin was 5.46%,
4.96%, and 4.99% for 1995, 1994, and 1993, respectively. The yield on earning
assets increased 91 basis points in 1995 over 1994. The rising interest rates
and the addition of the credit card receivables from Shoppers were the
contributing factors along with a lower level of nonperforming assets. The cost
of interest-bearing deposits increased 48 basis points during this same period
resulting in a significantly improved net interest margin. By comparison,
between 1994 and 1993, the increase in net interest income was due predominately
to growth in earning assets and a reduction in rates at the acquired
institutions which resulted in a positive impact on the net interest margin.
The Company focuses on the cost side of the net interest margin resulting in a
modest change in the cost of interest-bearing liabilities during a rising rate
period.
The Company's average cost of all deposits for 1995 was 2.49%, very modest by
bank comparisons. Approximately 42% of the Company's deposits are in transaction
accounts, another 30% in savings accounts, and only 28% of its deposits are in
the higher cost certificates of deposit based accounts at year-end 1995.
The Company also has a very conservative philosophy in managing its securities
portfolio. Most of the securities are either U.S. Treasury or U.S. Government
Agency securities. Maturities are generally less than 5 years to final maturity.
The weighted average life of the portfolio is three and one-half years. The
Company does not invest in exotic securities or derivatives. The mortgage-backed
securities are agency obligations with monthly principal and interest payments.
- --------------------------------------------------------------------------------
8
<PAGE>
Provision and Allowance for Loan Losses
Management determines the provision and adequacy of the allowance for loan
losses based on a number of factors including an in-house loan review program
conducted throughout the year. The loan portfolio is reviewed to identify
potential problem loans, credit concentrations, and other risk factors such as
current and projected economic conditions locally or nationally. General
economic trends can greatly affect loan losses and there are no assurances that
future charges to the loan loss allowance may not be significant in relation to
the amount provided during a particular period. Management does, however,
consider the allowance for loan losses to be adequate for the reporting periods
based on evaluation and analysis of the loan portfolio. The accompanying tables
reflect the three-year history of charge-offs and the allocation of the
allowance by loan category.
The provision for loan losses was $4.2 million for 1995 compared with $3.6
million and $4.9 million in 1994 and 1993, respectively. The allowance for loan
losses as a percentage of loans outstanding for the last three years was 1.99%,
1.92%, and 2.13%.
The following is a summary of the activity in the Allowance for Loan Losses, by
loan category:
Allowance for Loan Losses
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount of Loans Outstanding at End of Year $853,984 $862,384 $663,588
======== ======== ========
Daily Average Amount of Loans Outstanding $850,536 $734,371 $665,349
======== ======== ========
Allowance for Loan Losses
Balance at beginning of year $ 16,559 $ 14,109 $ 11,354
Loans charged off:
Real estate mortgages 1,011 5,833 860
Commercial 3,037 653 1,563
Consumer 1,200 324 650
-------- -------- --------
Total loans charged off 5,248 6,810 3,073
-------- -------- --------
Recoveries:
Real estate mortgages 668 129 120
Commercial 300 660 197
Consumer 472 204 237
-------- -------- --------
Total recoveries 1,440 993 554
-------- -------- --------
Net loans charged off 3,808 5,817 2,519
-------- -------- --------
Allowance of acquired companies -- 4,717 400
Provision for loan losses 4,200 3,550 4,874
-------- -------- --------
Balance at end of year $ 16,951 $ 16,559 $ 14,109
======== ======== ========
Allowance for loan losses as a percentage of
loans outstanding at year end 1.99% 1.92% 2.13%
Net charge offs as a percentage of average
loans outstanding 0.45% 0.79% 0.38%
======== ======== ========
</TABLE>
The following is the allocation of the Allowance for Loan Losses, by loan
category:
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
----------------------- ----------------------- -------------------------
Category Category Category
Percent Percent Percent
(Dollars in thousands) Allowance of Loans Allowance of Loans Allowance of Loans
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages $ 3,898 49.6% $ 2,766 53.3% $ 2,273 48.8%
Commercial and industrial 5,762 29.9% 7,570 24.5% 9,080 30.2%
Consumer 1,515 20.5% 2,013 22.2% 1,276 21.0%
Unallocated 5,776 4,210 1,480
----------------------- ----------------------- -------------------------
Total $16,951 100.0% $16,559 100.0% $14,109 100.0%
======================= ======================= =========================
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
The allowance for loan losses as a percentage of nonperforming loans for the
last three years was 104%, 82%, and 81% representing an improving coverage of
problem loans.
Noninterest Income
Noninterest income, excluding securities gains or losses, was $16.8 million for
1995, a 38% increase over 1994. Noninterest income for 1994 was $12.2 million, a
14.9% increase over 1993. The significant growth reported by the Company for
1995 is a result of a strategic initiative to add new fee based products and
services along with several nonrecurring items. Excluding the nonrecurring
items, noninterest income increased 18%. Service charges on deposit accounts
decreased 6.5% as a result of the competitive environment, whereas fees for
other services increased 28.9%, and Trust department fee income increased 20.7%.
New services, such as International Services generated $.4 million of fee income
and fees from Shoppers Charge Accounts added $2.5 million of fee income.
Included in noninterest income for 1995 are one-time receipts of $2.4 million of
which $1.6 million represents the collection of a legal claim arising from the
Urban National acquisition and $.8 million arises from the sale of a 50%
interest in the Company's data processing subsidiary to another financial
institution. This joint venture will reduce future data processing costs and
will spread the cost of future technology investments.
The Company realized $.9 million in securities gains in 1995 compared with $.4
million of losses in 1994 and a very modest security gain in 1993. Of the 1995
gain $.6 million occurred in the first half of the year when two financial
institutions which the Company held positions in were acquired. In the fourth
quarter, however, with the FAS #115 window to realign the held to maturity and
available for sale portfolios without accounting penalty, the Company sold
nearly 300 small security issues that had been acquired through acquisitions
over the past two years. The proceeds were reinvested in several larger
securities with similar maturities and a large portion of the portfolio was
allocated to available for sale. This will allow the Company to better manage
the investment portfolio.
Noninterest Expenses
Noninterest expense increased 17.8% or $9.1 million to $60.2 million in 1995
from $51.1 million for 1994. The $51.1 million noninterest expense for 1994
increased over 1993 by $8.7 million. Comparability between 1995 and 1994 and
between 1994 and 1993 is impacted by purchased acquisitions (Polify, Washington
and Shoppers during 1994 and Pilgrim in 1993). As indicated earlier, the
Jefferson and Urban acquisitions were accounted for as poolings and, therefore,
all periods presented have been restated although expense structures are
different after acquisition than they were before.
Salary expense for each of the last three years was $21.7, $18.5, and $16.2
million. Although the growth in salary expense from 1993 to 1995 is $5.5
million, salary expense of the last four acquisitions has been reduced from
$10.3 million pre-acquisition to $4.6 million post acquisition, or a reduction
of $5.7 million. Staffing has been reduced from 375 full time equivalent
employees at the time of acquisition to 215 currently. Thus, salary expense has
increased only $.9 million (5.6%) between 1993 and 1995, exclusive of the
effects of acquisitions.
Occupancy expense amounted to $5.7 million, $5.3 million, and $4.2 million for
1995, 1994, and 1993, respectively. The increase from 1993 to 1994 was due to
the acquisitions and the relocation to new corporate headquarters. The increase
in occupancy expense from 1994 to 1995 is primarily attributable to Shoppers
Charge occupancy costs at its original headquarters, where the last rental
payment was December, 1995. Equipment expense amounted to $3.2 million, $3.0
million, and $2.6 million in 1995, 1994 and 1993, respectively. There were no
significant changes in expense during this period other than from acquisitions.
OREO expense for the three year period has declined from $1.7 million in 1993,
to $1.2 million in 1994, and to $.3 million in 1995. The decline is due to the
disposition and decline in the amount of OREO assets.
Outside services expense has increased from $3.9 million in 1993 to $4.2 million
in 1994 and to $5.7 million for 1995. The increase between 1993 and 1994 is
primarily due to the costs associated with the issuance and registration of the
subordinated debentures and preferred stock. Of the $1.5 million increase from
1994 to 1995, marketing and advertising increased $.5 million, stationery and
supplies increased $.2 million, loan origination costs increased $.2 million,
and external professional fees increased $.6 million. These increases are
primarily due to the growth of the Company.
The increase in the amortization of intangibles from 1994 to 1995 is
attributable to the full year amortization applicable to the 1994 acquisitions.
Other expenses amounted to $9.5 million, $6.5 million, and $5.0 million for
1995, 1994, and 1993, respectively. Of the $3.0 million increase from 1994 to
1995, $2.7 million is attributable to acquisition costs which includes printing,
legal, accounting, mailing costs, conversion costs, consulting fees, and other
like costs associated with the acquisitions. The increase from 1993 to 1994 of
$1.5 million is attributable to $.8 million of acquisition costs, and increases
in postage and communication costs as a result of the growth in the Company.
Federal Income Taxes
The income tax provision for Federal and state taxes approximates 31% for 1995
and 38% for 1994 and 1993. The reduction in the overall rate in 1995 is due to
the reversal of a tax reserve no longer deemed necessary primarily as a result
of an IRS settlement during the second quarter which covered the tax years 1991,
1992, and 1993.
- --------------------------------------------------------------------------------
10
<PAGE>
Financial Condition
Total assets at December 31, 1995, decreased to $1.6 billion primarily due to a
reduction in deposits and short-term borrowings. The reduction in deposits
occurred in the higher cost time deposit products. Due to soft loan demand and a
strong liquidity position, the Company did not aggressively price time deposits.
At the same time, noninterest-bearing transaction accounts increased $32 million
from the end of 1994 to the end of 1995.
The Company is in a strong financial condition in terms of liquidity and
capital. At the end of 1995, the Company had $46.7 million in Federal funds sold
and $566 million in the securities portfolio that is available to meet future
loan demand. With the FAS #115 window, the Company moved securities
from the Held to Maturity to the Available for Sale category. When all
proceeds are reinvested approximately 60% of the security portfolio will be in
the Available for Sale category and 40% in the Held to Maturity category. This
will enable management to more effectively manage liquidity, the portfolio, and
the net interest margin.
Capital increased from 1994 to 1995 by $14.4 million to $130 million. Net income
less dividends paid to stockholders added $16 million to capital, the
mark-to-market of the securities in the available for sale portfolio changed
from a $3.0 million loss to a $2.4 gain which added $5.4 million to capital, and
the redemption of preferred stock utilizing cash and stock reduced capital by
$7.5 million. The accounting for restricted stock increased capital $.5 million.
At the end of 1995, the Tier 1 Leverage ratio was 7.56%.
Securities Held to Maturity and Securities Available for Sale
The securities portfolios primarily serve as an adjunct to the management of
interest rate risk and as a source of liquidity. Consequently, the portfolios
are managed over time as financial market conditions and loan demand conditions
change. In 1993, with the adoption of FAS #115, the Company had approximately
17% of the portfolio in Available for Sale ("AFS") and 83% in Held to Maturity
("HTM"). After a year of experience and with the FAS #115 "window" to reclassify
securities within the portfolio, the Company realigned the portfolio to
approximately 60% in the AFS portfolio and 40% in the HTM portfolio.
At December 31, 1995, 1994, and 1993, the portfolios comprised 35%, 39%, and 41%
of the total assets of the Company. The amount of securities as a percentage of
earning assets is a function of the amount of loans. The Company does not have a
policy with respect to the size of the portfolio.
The Company's philosophy with respect to managing the portfolio is to purchase
primarily government and agency securities with maturities laddered over a five
year period. As mentioned previously, the Company sold approximately 300
individual small holdings in December 1995, and reinvested in 3 new purchases,
realizing a gain of $.3 million. The purpose was to decrease the number of small
securities in the portfolio.
The following table summarizes the composition of the portfolios as of December
31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------- ----------------------------------------------
Estimated Estimated
Amortized Gross Unrealized Market Amortized Gross Unrealized Market
---------------- ----------------
Cost Gains (Losses) Value Cost Gains (Losses) Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to Maturity
Portfolio
U. S. Government $ 95,521 $ 2,438 $ (18) $ 97,941 $ 248,926 $ 4 $ (7,022) $ 241,908
U.S. Government
Agencies 170,182 1,939 (1,160) 170,961 273,529 35 (17,739) 255,825
States and Political
Subdivisions -- -- -- -- 33,986 58 (631) 33,413
Other securities -- -- -- -- 6,126 20 (202) 5,944
----------------------------------------------- -----------------------------------------------
$ 265,703 $ 4,377 $ (1,178) $ 268,902 $ 562,567 $ 117 $ (25,594) $ 537,090
=============================================== ===============================================
Available for Sale
Portfolio
U. S. Government $ 144,496 $ 1,662 $ (402) $ 145,756 $ 51,455 $ 11 $ (935) $ 50,531
U.S. Government
Agencies 126,626 723 (819) 126,530 53,480 -- (3,411) 50,069
States and Political
Subdivisions 9,217 29 (10) 9,236 580 -- (2) 578
Other securities 16,505 2,959 (265) 19,199 9,278 1,271 (123) 10,426
----------------------------------------------- -----------------------------------------------
$ 296,844 $ 5,373 $ (1,496) $ 300,721 $ 114,793 $ 1,282 $ (4,471) $ 111,604
=============================================== ===============================================
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
Loan Portfolio
Distribution of Loans by Category
December 31,
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Loans secured by real estate:
Residential mortgage
loans-fixed $118,719 $154,499 $139,509
Residential mortgage
loans-variable 144,450 155,266 67,842
Residential home
equity loans 45,690 57,706 62,452
Construction loans 15,082 9,804 8,075
Commercial mortgage
loans 161,145 137,832 108,036
------------------------------------
485,086 515,107 385,914
------------------------------------
Commercial and
industrial loans:
Secured by real estate 115,533 123,861 60,260
Other 115,518 83,694 154,116
------------------------------------
231,051 207,555 214,376
------------------------------------
Shoppers Charge
credit cards 57,915 67,577 --
Other loans to individuals
for household,family
and other personal
expenditures 79,932 72,145 63,298
------------------------------------
Total Loan Portfolio $853,984 $862,384 $663,588
====================================
Overall loans declined $8 million during 1995 to $854 million at the end of the
year. Commercial and financial loans were the only category of loans to
increase. These loans grew by $37.5 million for the year which represents an 18%
increase. The Company has experienced success in originating commercial loans in
the markets served. Declines were experienced in the real estate portfolio and
the consumer loan portfolio for a number of reasons. In the real estate
portfolio, many loans were refinanced due to the low interest rate level
compared with prior years and there is a preference for fixed rate loans by
consumers today. The Company makes such loans but sells all fixed rate
residential mortgage loans into the secondary market. As a result of these
factors, the portfolio declined. In the consumer portfolio, the Company elected
to decrease indirect consumer lending as a strategy. Therefore, the outstanding
balance in this portfolio declined by over $4.2 million. The Shoppers Charge
credit card portfolio, which the Company acquired in December, 1994, declined by
$9.7 million. The portfolio is seasonal in nature and was expected to be higher
at the end of the year but is reflective of the weak retail selling season
experienced nationally this year.
Asset Quality
The Company's principal earning assets are its loans, which are primarily to
businesses and individuals located in New Jersey with the exception of the
credit card loans which are originated in 35 states. Inherent in the lending
business is the risk of deterioration in a borrower's ability to repay loans
under existing loan agreements. Other risk elements include the amount of
nonaccrual and past-due loans, amount of potential problem loans, industry or
geographic loan concentrations, and the level of other real estate owned (OREO)
that must be managed and disposed of.
The following table shows the loans past due 90-days or more and still accruing
and applicable asset quality ratios:
December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
Commercial $ 579 $ 727 $2,190
Real estate 4,007 1,765 1,257
Consumer 295 51 113
Credit card 592 644 --
-------------------------------------
Total Loans
Past-Due 90-Days
or More and Still
Accruing $5,473 $3,187 $3,560
=====================================
As a percent of
Total Loans 0.64% 0.37% 0.54%
=====================================
As a percent of
Total Assets 0.34% 0.19% 0.26%
=====================================
These ratios have increased from the Company's historical levels due to the
asset quality of the banks acquired.
The amount of interest income on nonperforming loans which would have been
recorded had these loans continued to perform under their original terms
amounted to $1.1, $1.5, and $1.7 million for the years 1995, 1994, and 1993,
respectively. The amount of interest income recorded on such loans for each of
the years was $.2, $.2, and $.3 million. The Company has no outstanding
commitments to advance additional funds to borrowers whose loans are in a
nonperforming status.
Nonaccruing loans consist of commercial and commercial mortgage loans past-due
90-days or more. Residential real estate loans are generally put on nonaccrual
status after 180 days of delinquency and consumer loans after 90 days of
delinquency and are generally charged off after 120 days of delinquency except
for home equity loans. Any loan may be put on nonaccrual status earlier if the
Company has concern about the future collectability of the loan or its ability
to return to current status.
Nonaccrual real estate loans are principally loans in the foreclosure process
secured by real estate, including single family residential, multi-family, and
commercial properties.
Nonaccruing consumer loans are loans to individuals. Excluding the credit card
receivables, these loans are principally secured by automobiles or real estate.
- --------------------------------------------------------------------------------
12
<PAGE>
The following table summarizes the Company's nonperforming assets:
Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 15,593 $ 19,456 $ 15,244
Renegotiated loans 745 732 2,177
------------------------------------------
Total Nonperforming Loans 16,338 20,188 17,421
Other Real Estate Owned 4,479 8,528 9,766
------------------------------------------
Total Nonperforming Assets $ 20,817 $ 28,716 $ 27,187
==========================================
Ratios:
Nonaccrual Loans to Total Loans 1.83% 2.26% 2.30%
Nonperforming Assets to Total Assets 1.29% 1.68% 1.99%
Allowance for Loan Losses to Nonaccrual Loans 109% 85% 93%
Allowance for Loan Losses to Nonperforming Loans 104% 82% 81%
</TABLE>
- --------------------------------------------------------------------------------
Renegotiated loans are loans which are renegotiated as to the term or rate or
both to assist borrowers after the borrower has suffered an adverse effect in
their financial condition. Terms are tailored to fit the ability of the borrower
to repay in line with the Company's objective of obtaining full repayment. The
Company has $.7 million that are considered renegotiated loans.
Other real estate owned (OREO) consists of properties on which the Bank has
foreclosed or taken a deed in lieu of the loan obligation. OREO properties are
carried at fair value at all times. The cost to dispose of OREO properties, the
cost of maintenance during ownership, and any declines in fair value from the
inception of ownership are charged to current earnings. The Company has been
successful in disposing of OREO properties. See Noninterest Expense discussion.
At December 31, 1995, 1994, and 1993, Other Real Estate Owned amounted to $4.5
million, $8.5 million, and $9.8 million. The decline from year to year reflects
the Company's efforts to dispose of these properties.
At December 31, 1995, nonperforming loans had decreased to $16.3 million from
$20.2 million at the end of 1994 and $17.4 million at the end of 1993. The
acquired companies have added significantly to the Company's level of
nonperforming assets. Pilgrim added $5.3 million in 1993, Washington added $15.2
million in 1994 and Jefferson and Urban added $11.3 million in 1995 in
nonperforming loans as of the date of the acquisitions. Combined, these
companies added $32 million in nonperforming loans. With the balance at December
31, 1995 at $16.3 million, the Company has been able to either dispose of or
return the loans to current status on the majority of the problem loans
acquired.
The allowance at December 31, 1995, 1994, and 1993 as a percentage of total
loans was 1.99%, 1.92%, and 2.13%, respectively. Management formally reviews the
loan portfolio and evaluates credit risk on at least a quarterly basis
throughout the year. Such review takes into consideration the financial
condition of the borrowers, fair market value of collateral, level of
delinquencies, historical loss experience by loan category, industry trends, and
the impact of local and national economic conditions. The table on page 9 showed
the allowance by loan category and the level of unallocated allowance. The
unallocated, which is available to absorb loan losses but which is not deemed
necessary for any specific loan or loan category, has increased in each of the
years 1993, 1994, and 1995.
Measures to control and improve the level of nonperforming loans are continuing.
Efforts are made to identify slow paying loans and generally collection
procedures are instituted. After identification, steps are taken to understand
the problems of the borrower and to work with the borrower toward resolving the
problem, if practicable. Continuing collection efforts are a priority for the
Bank.
Deposits
Following the Growth Financial and Crossland Savings acquisitions in the first
quarter of 1996, the Company will have 62 branch offices located primarily in
Bergen, Essex, Hudson, and Passaic counties with other locations in Middlesex,
Morris, Somerset and Union counties. The Company manages the distribution system
by regionalizing into 4 regions with each managed by a regional president.
- --------------------------------------------------------------------------------
13
<PAGE>
The Company focuses on the cost side of the net interest margin emphasizing the
generation of the lowest cost deposits. The following table summarizes the
deposit base:
December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
Noninterest-
bearing
deposits $ 310,588 $ 278,737 $ 258,063
NOW/MMDA
deposits 286,687 292,232 210,320
Savings deposits 432,653 500,872 436,479
Time deposits 395,073 419,703 308,474
Total Deposits $1,425,001 $1,491,544 $1,213,336
As noted earlier, 42% of the deposit base is in transaction accounts and another
30% is in low cost savings accounts. This funding base provides a very low cost
funding source for the Company.
Liquidity
Liquidity is a measure of the Company's ability to meet the needs of depositors,
borrowers, and creditors at a reasonable cost and without adverse financial
consequences. The Company uses several liquidity measurements that are evaluated
on a frequent basis. The Company has adequate sources of liquidity such as the
securities available for sale, federal funds lines, and the ability to
borrow funds from the Federal Home Loan Bank. In addition, the security
portfolio maturities are generally spread over 5 years which provides
continuous maturities of securities. The effective management of balance sheet
volumes, mixes, and maturities enables the bank to maintain adequate levels of
liquidity while maximizing profitability.
The liquidity requirements of the Parent company, primarily for dividends to
stockholders, debt servicing, and other corporate purposes are met through cash
and short-term money market investments and regular periodic dividends from the
subsidiary bank. The Parent also has the ability, when and if necessary, to
access the capital markets. Management considers the liquidity of the Parent and
the subsidiary bank to be adequate to meet current anticipated funding
requirements.
Capital
Capital adequacy is a measure of the amount of capital needed to support asset
growth, absorb unanticipated losses, and provide safety for depositors. The
regulators also establish minimum capital ratio guidelines for the banking
industry. The amount of capital also impacts the performance of the Company in
that capital ratios are factored into the FDIC deposit insurance rate which a
bank must pay. In recent years deposit insurance has become a significant
operating cost. The following table sets forth the regulatory minimum capital
ratios and the current capital ratios of the Company.
Regulatory Company
Capital Capital
Guidelines Ratios
- --------------------------------------------------------------------------------
Tier 1 Leverage Ratio 3 - 5% 7.56%
Tier 1 Risk-Based
Capital Ratio 4% 13.20%
Total Risk-Based Capital 8% 17.21%
At December 31, 1995, 1994, and 1993 the Company exceeded all regulatory capital
guidelines.
In January 1995, the Company issued a 3-for-2 stock split and prior to that a
10% stock dividend was declared on June 1, 1993. Following the January stock
split, the $.15 per quarter cash dividend was retained which effectively
resulted in a 50% increase in the cash dividend. Based on 1995 fully diluted
earnings of $1.79 per share, the dividend payout ratio is 33% compared
with 27% in 1994 and 29% in 1993.
In 1994, the Company issued $19.1 million in convertible preferred stock in
connection with the Washington acquisition. Based on the terms the stock was
redeemed and became convertible in 1995. Approximately $2 million in preferred
stock which was not converted and was redeemed for cash. Following the November
1993 Board authorization to repurchase up to 10% of the shares outstanding per
year, the Company acquired approximately 1.16 million shares of common stock
that were then utilized for the 1.2 million shares issued in the conversion of
the preferred stock.
On January 14, 1994, the Company sold $25 million of subordinated debt in a
private placement. The subordinated debentures bear interest at 7.75% per annum
payable semi-annually and mature in 2004. Proceeds of the issuance were used for
general corporate purposes including the funding of a bank stock portfolio. The
debt has been structured to comply with the Federal Reserve Bank rules regarding
debt qualifying as Tier 2 capital.
At the end of the reporting period, there were no known uncertainties that will
have or that are reasonably likely to have a material effect on the Company's
liquidity, capital resources or operations; nor is the Company aware of any
current regulatory pronouncements which, if implemented, would have such an
effect.
- --------------------------------------------------------------------------------
14
<PAGE>
Liquidity and Interest Rate Sensitivity Management.
The primary objectives of asset/liability management are to provide for the
safety of depositor and investor funds, assure adequate liquidity and maintain
an appropriate balance between interest sensitive earning assets and
interest-bearing liabilities. Liquidity management involves the ability to meet
the cash flow requirements of customers who may be either depositors wanting to
withdraw funds or borrowers needing assurance that sufficient funds will be
available to meet their credit needs. Interest rate sensitivity management seeks
to avoid widely fluctuating net interest margins and to ensure consistent net
interest income through periods of changing economic conditions.
Given the above, liquidity for HUBCO is defined as the ability to raise cash
quickly at a reasonable cost without principal loss. The Company uses several
measurements of liquidity in monitoring its liquidity position. In addition, the
Company has a number of borrowing facilities with other banks and with the
Federal Home Loan Bank that are or can be used as sources of liquidity without
having to sell assets to raise cash. At December 31, 1995, the Company's
liquidity ratios exceeded all minimum standards set forth by internal policies.
The Company's Asset and Liability Committee is responsible for monitoring and
managing the Company's exposure to changes in market interest rates. The
Committee attempts to maintain a stable net interest margin by repricing and
reallocating assets and liabilities within the competitive banking environment.
Interest rate risk is determined by the relative sensitivities of earning assets
and interest-bearning liabilities to changes in interest rates. Overnight
Federal Funds on which rates change daily and loans which are tied to the prime
rate differ considerably from long-term securities and fixed rate loans.
Similarly, time deposits and money market deposit accounts are much more rate
sensitive than NOW and Savings accounts.
The Company uses a number of tools in evaluating its risk to changes in interest
rates. Critical to any analysis are the assumptions used to evaluate the
interest sensitivity of noninterest-bearing deposit accounts, NOW, and Savings
accounts, or other core deposits. What core deposit customers do in changing
interest rate environments depends on the overall rate environment, the
Company's strategy in adjusting interest rates, and adjustments in interest
rates by competitive financial institutions. The following "gap" analysis
utilizes certain maturity distribution limits set forth in FDICIA Section 305
for nonmaturity deposit accounts.
The Company is asset sensitive with respect to assets versus liabilities that
reprice immediately when interest rates change. Approximately 19% of assets, or
$314 million of assets in excess of liabilities reprice immediately. On a
cumulative basis, the Company is slightly positive from three months out. This
is consistent with the Company's strategy of keeping the investment portfolio
laddered to five years, focusing on variable rate loans, and emphasizing growth
in core deposits. The Company has managed its overall asset/liability
sensitivity through balance sheet pricing strategies. The following table
indicates that the Company would have a short term negative impact on net
interest income in a declining rate environment and a positive impact in a
rising rate environment. However, because the Company has a high percentage of
funding from core deposits and a high level of liquidity, the effect of changes
in interest rates are mitigated in less than one year.
Interest Rate Sensitivity Analysis
December 31, 1995
<TABLE>
<CAPTION>
Immediate Due Within Due Within Due Within Over
($ in millions) Repricing 3 Months 6 Months 1 Year 1 Year
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Interest Rate
Sensitive GAP $ 314 $ 55 $ 41 $ 71 $ --
% of Assets 19% 3% 3% 4% --
</TABLE>
In 1996, the Company has enhanced its Asset/Liability process by implementing an
interest rate risk process that includes market value of equity concepts to
compliment the current process of simulation and gap analysis.
- --------------------------------------------------------------------------------
15
<PAGE>
Consolidated Balance Sheets
HUBCO, INC. and Subsidiaries
<TABLE>
<CAPTION>
December 31, (in thousands, except share data) 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 85,670 $ 71,498
Federal funds sold 46,700 33,530
----------- -----------
TOTAL CASH AND CASH EQUIVALENTS 132,370 105,028
Securities available for sale, at market value (amortized cost of
$296,844 and $114,793 for 1995 and 1994, respectively) 300,721 111,604
Securities held to maturity, at cost (market value of $268,902
and $537,090 for 1995 and 1994, respectively) 265,703 562,567
Loans:
Real estate mortgage 424,996 457,042
Commercial and financial 245,451 207,914
Consumer credit 125,622 129,851
Credit card 57,915 67,577
----------- -----------
TOTAL LOANS 853,984 862,384
Less: Allowance for possible loan losses (16,951) (16,559)
----------- -----------
NET LOANS 837,033 845,825
Premises and equipment, net 30,111 35,330
Other real estate owned 4,479 8,528
Intangibles, net of amortization 7,572 9,645
Other assets 35,205 30,857
----------- -----------
TOTAL ASSETS $ 1,613,194 $ 1,709,384
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 310,588 $ 278,737
Interest bearing 1,114,413 1,212,807
----------- -----------
TOTAL DEPOSITS 1,425,001 1,491,544
Short-term borrowings 21,654 50,658
Other liabilities 11,573 26,631
----------- -----------
TOTAL LIABILITIES 1,458,228 1,568,833
Subordinated debt 25,000 25,000
Commitments and contingencies
Stockholders' Equity:
Convertible Preferred stock--Series A, no par value; authorized
3,300,000 shares, 797,811 shares issued and 788,811
shares outstanding in 1994 -- 19,147
Common stock, no par value; authorized 25,000,000
shares; issued 13,145,059 and outstanding
13,105,627 shares in 1995 and issued 13,145,059
and outstanding 12,355,391 in 1994 23,372 23,372
Additional paid-in capital 49,741 49,289
Retained earnings 55,716 39,699
Treasury stock, at cost, 39,432 shares in 1995
and 789,668 common shares and 9,000
preferred shares in 1994 (606) (11,723)
Restricted stock award (688) (1,266)
Unrealized gain/(loss) on securities available
for sale, net of income taxes 2,431 (2,967)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 129,966 115,551
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,613,194 $ 1,709,384
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
16
<PAGE>
Consolidated Statements of Income
HUBCO, INC. and Subsidiaries
<TABLE>
<CAPTION>
Year ended December 31, (in thousands, except share data) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND FEE INCOME:
Loans--taxable $ 80,230 $ 61,660 $ 55,834
Loans--tax-exempt 273 371 306
Securities--taxable 37,973 38,310 27,474
Securities--tax-exempt 1,092 1,648 1,260
Other 1,143 1,364 1,676
--------- --------- ---------
TOTAL INTEREST AND FEE INCOME 120,711 103,353 86,550
INTEREST EXPENSE:
Deposits 35,557 29,268 26,604
Short-term borrowings 1,899 1,253 907
Subordinated debt 2,153 1,736 --
--------- --------- ---------
TOTAL INTEREST EXPENSE 39,609 32,257 27,511
--------- --------- ---------
NET INTEREST INCOME 81,102 71,096 59,039
PROVISION FOR POSSIBLE LOAN LOSSES 4,200 3,550 4,874
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 76,902 67,546 54,165
NONINTEREST INCOME:
Trust department income 761 630 525
Service charges on deposit accounts 8,506 9,082 7,428
Securities gains (losses) 947 (420) 83
Other income 7,577 2,536 2,543
--------- --------- ---------
TOTAL NONINTEREST INCOME 17,791 11,828 10,579
NONINTEREST EXPENSE:
Salaries 21,708 18,541 16,156
Pension and other employee benefits 9,126 7,132 5,512
Occupancy expense 5,683 5,313 4,150
Equipment expense 3,249 3,002 2,618
Deposit insurance and other insurance 2,726 3,835 3,279
Outside services 5,690 4,188 3,891
Other real estate owned expense 307 1,227 1,691
Amortization of intangibles 2,181 1,299 40
Other 9,494 6,513 4,976
--------- --------- ---------
TOTAL NONINTEREST EXPENSE 60,164 51,050 42,313
--------- --------- ---------
INCOME BEFORE INCOME TAXES 34,529 28,324 22,431
PROVISION FOR INCOME TAXES 10,845 10,892 8,560
--------- --------- ---------
NET INCOME $ 23,684 $ 17,432 $ 13,871
========= ========= =========
INCOME PER COMMON SHARE:
Primary $1.82 $1.36 $1.06
Fully diluted 1.79 1.33 1.06
WEIGHTED AVERAGE SHARES OUTSTANDING:
Common 12,743 12,496 13,109
Preferred 508 602 --
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
17
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
HUBCO, INC. and Subsidiaries For the Years Ended December 31, 1995, 1994, and 1993
Unrealized
Holding Gain
Convertible (Loss) On
Preferred Stock Common Stock Additional Restricted Securities
---------------- ------------------- Paid-in Retained Treasury Stock Available
(in thousands, except share data) Shares Amount Shares Amount Capital Earnings Stock Award for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December, 1992 -- -- 12,174,530 $21,646 $34,318 $31,924 $(6) $(566) $--
Net income-- 1993 -- -- -- -- -- 13,871 -- --
Cash dividends-- -- -- -- -- -- (3,267) -- -- --
10% stock dividend -- -- 942,017 1,675 14,653 (16,328) -- -- --
Return of 1,122 shares of
restricted stock -- -- -- -- -- -- (11) 10 --
Issuance of restricted stock -- -- 28,512 51 318 1 280 (668) --
Amortization of restricted stock -- -- -- -- -- 19 -- 278 --
Purchase of 221,000 shares of
treasury stock -- -- -- -- -- -- (4,834) -- --
Unrealized holding gains (losses) on
available for sale securities -- -- -- -- -- -- -- -- $4,290
------- ------ ---------- ------- ------- ------- ------- ------ ------
Balance at December, 1993 -- -- 13,145,059 23,372 49,289 26,220 (4,571) (946) 4,290
Net income-- 1994 -- -- -- -- -- 17,432 -- -- --
Cash dividends -- -- -- -- -- (3,512) -- -- --
Cash dividends --
$.54 per share, preferred -- -- -- -- -- (447) -- -- --
Issuance of preferred stock,
net of expenses 797,811 $19,147 -- -- -- -- -- -- --
Return of 4,446 shares of
restricted stock -- -- -- -- -- 6 (43) 37 --
Issuance of restriced stock -- -- -- -- 746 (746) --
Amortization of restricted stock -- -- -- -- -- -- -- 389 --
Purchase of 9,000 shares of
preferred treasury stock -- -- -- -- -- -- (190) -- --
Purchase of 526,621 shares of
common treasury stock -- -- -- -- -- -- (7,665) -- --
Change in unrealized holding -- --
gains (losses) on
available for sale securities -- -- -- -- -- -- -- -- (7,257)
------- ------ ---------- ------- ------- ------- ------- ------ ------
Balance at December, 1994 797,811 19,147 13,145,059 23,372 49,289 39,699 (11,723) (1,266) (2,967)
Net income-- 1995 -- -- -- -- -- 23,684 -- -- --
Cash dividends -- -- -- -- -- (7,146) -- -- --
Cash dividends --
$.90 per share, preferred -- -- -- -- -- (521) -- -- --
Return of 11,610 shares of
restricted stock -- -- -- -- -- -- (141) 141 --
Issuance of restricted stock -- -- -- -- -- -- -- (18) --
Amortization of
restricted stock -- -- -- -- -- -- -- 455 --
Purchase of 302,000 shares of
common treasury stock -- -- -- -- -- -- (4,885) -- --
Purchase of 3,000 shares of
preferred treasury stock -- -- -- -- -- -- (71) -- --
Redemption of preferred
stock and conversion of
preferred stock to
common stock (797,811) (19,147) -- -- 452 -- 16,214 -- --
Change in unrealized
holding gains (losses) on
available for sale securities -- -- -- -- -- -- -- -- 5,398
------- ------ ---------- ------- ------- ------- ------- ------ ------
Balance at December, 1995 -- $-- 13,145,059 $23,372 $49,741 $55,716 $(606) $(688) $2,431
======= ====== ========== ======= ======= ======= ======= ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
18
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
HUBCO, INC. and Subsidiaries For the Years Ended December 31, 1995, 1994, and 1993
(in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $23,684 $17,432 $13,871
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Provision for possible loan losses 4,200 3,550 4,874
Provision for depreciation and amortization 5,025 4,189 2,446
Amortization of securities premiums, net 294 2,482 1,132
Securities (gains) losses (947) 420 (83)
Gain on sale of interest in subsidiary (817) -- --
Deferred income tax provision (benefit) 4,757 3,192 (536)
(Increase) decrease in other assets (9,105) (8,941) 7,610
(Decrease) increase in other liabilities (15,058) (50,283) 1,226
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 12,033 (27,959) 30,540
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities:
Available for sale 101,097 85,758 --
Held to maturity -- -- 52,595
Proceeds from maturities of securities:
Available for sale 5,849 30,459 --
Held to maturity 103,807 97,249 121,439
Purchases of securities:
Available for sale (30,150) (3,917) --
Held to maturity (66,805) (246,599) (282,371)
Net cash acquired through acquisitions -- 117,773 43,134
Net cash paid for acquisitions -- (26,660) (227)
Net decrease in loans 4,592 30,609 47,599
Purchases of premises and equipment (694) (10,128) (4,157)
Decrease in other real estate 4,049 2,671 2,328
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 121,745 77,215 (19,660)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts and
savings accounts (41,913) (20,326) (6,369)
Net decrease in certificates of deposit (24,630) (47,853) (14,862)
Net (decrease) increase in short-term borrowings (29,004) 7,884 15,615
Proceeds from the issuance of subordinated debt -- 25,000 --
Redemption of convertible preferred stock (2,481) -- --
Cash dividends (7,667) (3,959) (3,267)
Acquisition of treasury stock (4,956) (7,855) (4,834)
Proceeds from sale of interest in subsidiary 4,215 -- --
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (106,436) (47,109) (13,717)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 27,342 2,147 (2,837)
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 105,028 102,881 105,718
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $132,370 $105,028 $102,881
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for--
Interest $39,408 $30,858 $27,954
Income taxes 10,735 8,545 9,762
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
19
<PAGE>
Notes To Consolidated Financial Statements
HUBCO, INC. and Subsidiaries
DECEMBER 31, 1995 (in thousands, except share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HUBCO, Inc. (the Company) provides a full range of banking services to
individual and corporate customers through its subsidiary and branch locations
in New Jersey. The Company is subject to the regulations of certain Federal and
State banking agencies and undergoes periodic examinations by those regulatory
authorities.
Basis Of Presentation And Consolidation:
The consolidated financial statements include the accounts of HUBCO, Inc. and
its subsidiaries, all of which are wholly owned.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent liabilities, as of the date of the
financial statements and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
All significant intercompany accounts and transactions are eliminated in
consolidation.
Securities:
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115),
effective December 31, 1993. In accordance with the pronouncement, the Company
classified its securities as held to maturity, available for sale and held for
trading purposes.
Securities for which the Company has the ability and intent to hold until
maturity are classified as held to maturity. These securities are carried at
cost adjusted for amortization of premiums and accretion of discounts on a
straight-line basis which is not materially different from the interest method.
Management reviews its intent to hold securities to maturity as a result of
changes in circumstances including major business combinations. A sale or
transfer of held to maturity securities may be necessary to maintain the
Company's existing interest rate risk position or credit risk policy.
Securities which are held for indefinite periods of time which 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 risk or other
similar factors, are classified as available for sale and are carried at fair
value. Differences between available for sale securities' amortized cost and
fair value are charged/credited directly to stockholders' equity, net of income
taxes. The cost of securities sold is determined on a specific identification
basis.
The Company has no securities held for trading purposes at December 31, 1995 and
1994.
Loans:
Loans are recorded at their principal amounts outstanding. Interest income on
loans not made on a discounted basis is credited to income based on principal
amounts outstanding at applicable interest rates. Interest income on consumer
credit loans is recorded primarily using the simple interest method.
Recognition of interest on the accrual method is discontinued when based on
contractual delinquency and when timely payment is not expected. A nonaccrual
loan is not returned to an accrual status until interest is received on a
current basis and other factors indicate collection ability is no longer
doubtful.
The net amount of loan origination fees, direct loan origination costs and loan
commitment fees are deferred and recognized over the estimated life of the
related loans as an adjustment of yield.
Allowance For Possible Loan Losses:
The allowance is maintained at a level believed adequate by management to absorb
potential losses in the loan portfolio. Management's determination of the
adequacy of the allowance is based on an evaluation of the portfolio, past loan
loss experience, current economic conditions, volume, growth and composition of
the loan portfolio and other relevant factors. The allowance is increased by
provisions charged to expense and reduced by net charge-offs.
While management uses available information to estimate potential losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions, particularly in New Jersey. In addition, various regulatory
agencies, as an integral part of their examination processes, periodically
review the Company's allowance for possible loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Premises And Equipment:
Land, buildings and furniture, fixtures and equipment are carried at cost.
Depreciation on substantially all buildings and furniture, fixtures and
equipment is provided using the straight-line method based on estimated useful
lives. Maintenance and repairs are expensed as incurred and additions and
improvements are capitalized.
Other Real Estate:
Other real estate (ORE) includes loan collateral that has been formally
repossessed. These assets are transferred to ORE and recorded at the lower of
carrying cost or fair value of the properties. Subsequent provisions that result
from ongoing periodic evaluations of these ORE properties are charged to expense
in the period in which they are identified. ORE is carried at the lower of cost
or fair value, less estimated costs to sell. Carrying costs, such as maintenance
and property taxes, are charged to expense as incurred.
Investment in Joint Venture:
The Company owns 50% of the common stock of United Financial Services Inc., a
third-party data processing service provider. The investment is being accounted
for by the equity method. During 1995, the Company sold the other 50% interest,
resulting in a realized gain of $817.
Intangibles:
Intangible assets resulting from acquisitions under the purchase method of
accounting consist of goodwill and core deposit intangibles. Goodwill is being
amortized on a straight-line basis over five years. Core deposit intangibles are
being amortized, on a straight-line basis, over the estimated average remaining
lives of such intangible assets (primarily five years).
- --------------------------------------------------------------------------------
20
<PAGE>
NOTES -- (continued)
- --------------------------------------------------------------------------------
Federal Income Taxes:
In 1992, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which
changed the method of accounting for income taxes from the deferred method to
the liability method. Certain income and expense items are recorded differently
for financial reporting purposes than for Federal income tax purposes and
provisions for deferred taxes are made in recognition of these temporary
differences.
The Company and its subsidiaries file a consolidated Federal income tax return.
Under tax sharing agreements, each subsidiary provides for and settles income
taxes with the Company as if they would have filed on a separate return basis.
Per Share Amounts:
Primary income per common share is computed by dividing net income, less
dividends on any convertible preferred stock, by the weighted average number of
common shares outstanding during the year. Fully diluted income per share is
computed by dividing net income by the weighted average number of common shares
plus the number of shares issuable on conversion of the preferred stock. Shares
issuable upon the exercise of options are not included in the calculation of
income per common share since their effect is not material. All per share
amounts have been retroactively adjusted for the three-for-two common stock
split on January 14, 1995.
Cash Equivalents:
Cash equivalents include amounts due from banks and Federal funds sold.
Reclassifications:
Certain reclassifications have been made to the 1994 and 1993 amounts in order
to conform with the 1995 presentation.
(2) ACQUISITIONS
On April 5, 1995, the Company acquired all of the outstanding shares of
Jefferson National Bank (Jefferson), based in Passaic, New Jersey. Each share of
Jefferson common stock outstanding was converted into 2.697 shares of the
Company's common stock, for a total of 609,842 shares. At the time of the
acquisition, Jefferson had approximately $90,000 in assets.
On June 30, 1995, the Company acquired all of the outstanding shares of Urban
National Bank (Urban), based in Franklin Lakes, New Jersey. Each share of Urban
common stock outstanding was converted into 2.17 shares of the Company's common
stock, for a total of 2,135,175 shares. At the time of the acquisition, Urban
had approximately $230,000 in assets.
The Jefferson and Urban acquisitions have been accounted for by the pooling of
interests method of accounting. Accordingly, the accompanying consolidated
financial statements include the accounts of Jefferson and Urban for all periods
presented.
Separate results of the combining entities are as follows:
1994 1993
- --------------------------------------------------------------------------------
Net interest income-
The Company $58,021 $47,018
Jefferson 3,775 3,808
Urban 9,300 8,213
------- -------
$71,096 $59,039
======= =======
Net income (loss):
The Company $16,931 $14,202
Jefferson (983) (1,356)
Urban 1,484 1,025
------- -------
$17,432 $13,871
======= =======
On June 30, 1993, the Company, through Hudson United Bank, acquired deposits and
certain assets of Pilgrim State Bank from Ramapo Financial. On May 6, 1994, the
Company, through Hudson United Bank, acquired deposits and certain assets of
Polifly Federal Savings & Loan Association from the Resolution Trust
Corporation.
A summary of these transactions is as follows:
Pilgrim Polifly
June 30, 1993 May 6, 1994
- --------------------------------------------------------------------------------
Cash paid at acquisition $227 $6,180
Balances at acquisition date:
Cash and cash equivalents 42,907 104,077
Loans 46,670 456
Total assets 123,113 98,353
Deposits 122,876 104,446
Total liabilities 123,340 104,533
On July 1, 1994, the Company acquired Washington Bancorp, Inc. (Washington) for
a combination of cash and convertible preferred stock with an aggregate
consideration of approximately $40.5 million. In the transaction, 51% of the
Washington shares were converted into preferred stock at .6708 per share and 49%
of the Washington shares were converted to cash at $16.10 per share. The Bank
assumed deposits of approximately $237.8 million, received $7.1 million in cash
and cash equivalents and acquired $91.4 million in securities and $168.5 million
in loans. The transaction has been accounted for as a purchase and, accordingly,
the results of operations have been included in the accompanying consolidated
financial statements since the date of acquisition. The excess of book value of
net assets acquired over their fair value was approximately $5.1 million, which
is being amortized over a five-year period.
On December 7, 1994, the Bank acquired Shoppers Charge Accounts Co. ("Shoppers")
for approximately $16.3 million in cash, which approximated the fair value of
the assets acquired. The Bank recorded approximately $63.4 million in assets and
$46.9 million in liabilities.
(3) CASH AND DUE FROM BANKS
Banks are required to maintain an average reserve balance with the Federal
Reserve Bank. The average 1995 amount of this reserve for the Company's
subsidiary bank was approximately $19,000.
- --------------------------------------------------------------------------------
21
<PAGE>
NOTES -- (continued)
- --------------------------------------------------------------------------------
(4) SECURITIES
The amortized cost and estimated market value of securities as of December 31
are summarized as follows:
1995
- --------------------------------------------------------------------------------
Gross Unrealized Estimated
Amortized ---------------- Market
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------
Available for Sale
U. S. Government $ 144,496 $ 1,662 $ (402) $ 145,756
U. S. Government
agencies 126,626 723 (819) 126,530
States and political
subdivisions 9,217 29 (10) 9,236
Other debt securities 3,849 70 (11) 3,908
Equity securities 12,656 2,889 (254) 15,291
--------- --------- --------- ---------
$ 296,844 $ 5,373 $ (1,496) $ 300,721
========= ========= ========= =========
Held to Maturity
U. S. Government $ 95,521 $ 2,438 $ (18) $ 97,941
U. S. Government
agencies 170,182 1,939 (1,160) 170,961
--------- --------- --------- ---------
$ 265,703 $ 4,377 $ (1,178) $ 268,902
========= ========= ========= =========
1994
- --------------------------------------------------------------------------------
Gross Unrealized Estimated
Amortized ---------------- Market
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------
Available for Sale
U. S. Government $ 51,455 $ 11 ($ 935) $ 50,531
U. S. Government
agencies 53,480 -- (3,411) 50,069
States and political
subdivisions 580 -- (2) 578
Other debt securities 1,000 -- -- 1,000
Equity securities 8,278 1,271 (123) 9,426
--------- --------- --------- ---------
$ 114,793 $ 1,282 ($ 4,471) $ 111,604
========= ========= ========= =========
Held to Maturity
U. S. Government $ 248,926 $ 4 ($ 7,022) $ 241,908
U. S. Government
agencies 273,529 35 (17,739) 255,825
States and political
subdivisions 33,986 58 (631) 33,413
Other debt securities 6,126 20 (202) 5,944
--------- --------- --------- ---------
$ 562,567 $ 117 ($ 25,594) $ 537,090
========= ========= ========= =========
The amortized cost and estimated market value of debt securities at December 31,
1995, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
- --------------------------------------------------------------------------------
Available for Sale
Due in one year or less $ 98,108 $ 98,302
Due after one year
through five years 124,205 125,833
Due after five years
through ten years 8,517 8,460
Due after ten years 3,214 3,186
-------- --------
234,044 235,781
Mortgage-backed securities 50,144 49,649
Equity securities 12,656 15,291
-------- --------
$296,844 $300,721
======== ========
Held to Maturity
Due in one year or less $ 32,977 $ 32,994
Due after one year
through five years 144,687 148,235
Due after five years
through ten years 10,065 9,888
Due after ten years 11,699 11,240
-------- --------
199,428 202,357
Mortgage-backed securities 66,275 66,545
-------- --------
$265,703 $268,902
======== ========
Securities with an amortized cost basis of $36,489 and an estimated market value
of $36,143 previously held by Urban and Jefferson and classified as
held to maturity were reclassified as available for sale upon consummation of
the acquisitions of Urban and Jefferson to maintain the Company's interest rate
risk positions.
In December 1995, the Financial Accounting Standards Board issued a special
report- "A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities". This special report allowed
the Company to make a one-time reclassification of securities within the
categories without tainting other securities held-to-maturity. In December 1995,
the Company reclassified securities with an amortized cost basis of $229, 310
and an estimated market value of $223,425 from held-to-maturity to available for
sale.
In July, 1994, the Company transferred securities with an amortized cost basis
of $117,393 and an estimated market value of $116,696 from available for sale to
held to maturity. The transfer resulted from the Company's review of its
interest rate risk position in connection with the Washington business
combination (see Note 2). As of December 31, 1995 and 1994 these securities are
included in held to maturity at the estimated fair value at the transfer date,
and the unrealized loss is being accreted over the remaining life of the
securities.
In December 1994, the Company transferred securities with an amortized cost
basis of $98,505 and an estimated market value of $97,482 from held to maturity
to available for sale. Securities with an amortized cost of $50,295 and an
estimated market value of $49,996 were immediately sold resulting in a realized
loss of $299. The purpose of the transfer and sale was to fund the purchase
price and repay assumed debt related to the
- --------------------------------------------------------------------------------
22
<PAGE>
NOTES -- (continued)
- --------------------------------------------------------------------------------
Shoppers business combination (see Note 2). As a result of the Shoppers business
combination, the Company transferred securities with an amortized cost basis of
$48,210 and an estimated fair value of $47,486 from held to maturity to
available for sale. The purpose of the transfer was to maintain the Company's
interest rate risk position and to adjust for the credit risk associated with
the purchase of credit card receivables.
Sales of securities are summarized as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Proceeds from sales $ 101,097 $ 85,758 $ 52,595
Gross gains from sales 1,621 22 275
Gross losses from sales (674) (442) (96)
Securities with a book value of $72,412 and $62,420 at December 31, 1995 and
1994, respectively, are pledged to secure public funds, securities sold under
agreements to repurchase and for other purposes as required by law.
(5) LOANS
The Company's loan portfolio is diversified with no industry comprising greater
than 10% of the total outstanding. Real estate loans are primarily made in the
local lending area, defined as Northern New Jersey. The Company requires
collateral on all real estate loans and generally requires loan to value ratios
of not greater than 67% for commercial mortgages and 75% for residential
mortgages.
(6) ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based on estimates, and ultimate
losses may vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reflected in
operations in the periods in which they become known.
A summary of the activity in the allowance for possible loan losses is as
follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Balance at January 1 $ 16,559 $ 14,109 $ 11,354
Additions (deductions):
Provision charged to
expense 4,200 3,550 4,874
Allowance acquired
through mergers
or acquisitions -- 4,717 400
Recoveries on loans
previously charged off 1,440 993 554
Loans charged off (5,248) (6,810) (3,073)
-------- -------- --------
Balance at December 31 $ 16,951 $ 16,559 $ 14,109
======== ======== ========
(7) NONPERFORMING LOANS
The following table presents information related to loans which are on
nonaccrual, contractually past due ninety days or more as to interest or
principal payments and loans which have been restructured to provide a reduction
or deferral of interest or principal for reasons related to the debtors'
financial difficulties.
1995 1994
- --------------------------------------------------------------------------------
Nonaccrual loans $15,593 $19,456
Renegotiated loans 745 732
------- -------
Total nonperforming loans $16,338 $20,188
======= =======
90 days or more past due
and still accruing $5,473 $3,187
======= =======
Gross interest income which
would have been recorded
under original terms $1,109 $1,491
Gross interest income recorded
during the year 199 181
Commitments for additional funds 0 0
======= =======
In May 1993 and October 1994, the Financial Accounting Standards Board issued
SFAS 114, "Accounting by Creditors for Impairment of a Loan" and SFAS 118,"
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure." As defined in SFAS 114 and SFAS 118, a loan is impaired when, based
on current information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. SFAS 114 and SFAS 118 require that the measurement of impairment of a
loan be based on the present value of expected future cash flows, net of
estimated costs to sell discounted at the loan's effective interest rate.
Impairment can also be measured based on a loan's observable market price or the
fair value of collateral, if the loan is collateral dependent. If the measure of
the impaired loan is less than the recorded investment in the loan, the Bank
will be required to establish a valuation allowance, or adjust existing
valuation allowances, with a corresponding charge or credit to the provision for
possible loan losses.
The Company adopted SFAS 114 as of January 1, 1994. The effect of adopting this
new accounting standard was not material.
At December 31, 1995 and 1994 impaired loans, comprised principally of
nonaccruing loans totaled $16,338 and $20,188 , respectively. The allowance for
possible loan losses related to such impaired loans was $2,667 and $2,899 at
December 31, 1995 and 1994, respectively.
(8) LOANS TO RELATED PARTIES
In the ordinary course of business, the Company and its subsidiaries have
extended credit to various directors, officers and their associates.
The aggregate extension of this credit is summarized below for the year ended
December 31, 1995:
Balance at January 1 $ 6,458
New loans issued --
Repayment of loans (741)
Loans to former directors (3,081)
-------
Balance at December 31 $ 2,636
=======
(9) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
1995 1994
- --------------------------------------------------------------------------------
Land $ 7,739 $ 8,666
Premises 25,693 26,766
Furniture, fixtures and equipment 12,417 14,195
------- -------
45,849 49,627
Less- Accumulated depreciation (15,738) (14,297)
------- -------
$30,111 $35,330
======= =======
- --------------------------------------------------------------------------------
23
<PAGE>
Depreciation and amortization expense for premises and equipment for 1995, 1994
and 1993 amounted to $2,515, $2,541 and $2,148, respectively.
(10) INCOME TAXES
The components of the provision for income taxes are as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Federal:
Current $ 4,348 $ 5,873 $ 8,054
Deferred 4,757 3,192 (536)
State 1,740 1,827 1,042
------- ------- -------
Total provision for
income taxes $10,845 $10,892 $ 8,560
======= ======= =======
A reconciliation of the provision for income taxes, as reported, with the
Federal income tax at the statutory rate of 35 percent is as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Tax at statutory rate $ 12,085 $ 9,917 $ 7,850
Increase (decrease) in taxes
resulting from:
Tax-exempt income (482) (707) (548)
State income taxes, net of
Federal income tax benefit 1,131 1,187 677
Reversal of reserves no
longer deemed necessary (2,076) -- --
Other, net 187 495 581
-------- -------- --------
Provision for income
taxes $ 10,845 $ 10,892 $ 8,560
======== ======== ========
Significant components of Federal deferred tax assets and liabilities as of
December 31, 1995 and 1994 were as follows:
1995 1994
- --------------------------------------------------------------------------------
Deferred Tax Assets (Liabilities):
Allowance for possible loan losses $ 5,745 $ 2,140
Available for sale securities (1,357) 1,483
Other 500 (652)
------- -------
$ 4,888 $ 2,971
======= =======
In order to fully realize its deferred tax assets, the Company will need to
generate future taxable income during periods in which existing deductible
temporary differences reverse. Based upon the Company's historical and current
pretax earnings, management believes it is more likely than not that the Company
will generate future net taxable income in sufficient amounts to realize its net
deferred tax asset at December 31, 1995, however, there can be no assurance that
the Company will generate earnings or a specific level of continuing earnings.
The Company did not record any valuation allowances against its deferred tax
assets at December 31, 1995 and 1994.
(11) PENSION PLANS AND POSTRETIREMENT BENEFITS
The Company has two noncontributory pension plans which cover eligible employees
(a base plan and a nonbargaining plan). The plans provide for payments to
qualified employees based on salary and years of service. The Company's funding
policy for these plans is to make the maximum annual contributions allowed by
the applicable regulations.
Net pension cost (income) includes the following:
1995 1994 1993
- --------------------------------------------------------------------------------
Service cost -- benefits earned
during the year $ 543 $ 383 $ 231
Interest cost on projected
benefit obligation 982 630 550
Actual return on plan assets (3,391) (670) (674)
Net amortization and deferral 2,510 15 12
------- ------- -------
Net periodic pension
cost $ 644 $ 358 $ 119
======= ======= =======
Assumptions used in the accounting for the plans in 1995, 1994 and 1993 were:
1995 1994 1993
- --------------------------------------------------------------------------------
Weighted average
discount rate 7.0% 7.0% 7.0%
Rate of increase
in compensation 4.0% 4.0% 4.0%
Expected long-term
rate of return on assets 8.0% 8.0% 8.0%
The following table sets forth the funded status and amounts recognized in the
consolidated balance sheets at December 31 for the Company's plans:
1995 1994
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of
$12,710 and $7,435 for 1995
and 1994, respectively $ 13,106 $ 6,057
Projected benefit obligation for
service rendered to date (14,951) (9,637)
Plan assets at fair value 15,522 9,359
Projected benefit obligation
(greater than) less than plan assets 571 (278)
Unrecognized portion as of
December 31, of net asset
existing at date of adoption of
FASB Statement No. 87 31 15
Prior service cost not yet
recognized in net periodic
pension cost 1,171 805
Unrecognized net asset
at December 31 (536) 616
Prepaid pension costs included
in other assets $ 1,237 $ 1,158
The Company has two 401(k) savings plans covering substantially all employees.
Under the Plans, the Company matches varying percentages of the first 6% of the
employee's contribution. The Company's contributions under these Plans were
approximately $427, $184 and $130 in 1995, 1994 and 1993, respectively.
Except for the pension plan, the Company does not provide any post-retirement
benefits.
- --------------------------------------------------------------------------------
24
<PAGE>
NOTES -- (continued)
- --------------------------------------------------------------------------------
(12) SUBORDINATED DEBT
In January 1994, the Company sold $25,000 aggregate principal amount of
subordinated debentures. The debentures, which matures in 2004, bear interest at
7.75% per annum payable semiannually.
(13) COMMON STOCK
On October 13, 1994, the Company announced that its Board of Directors had
approved a 3-for-2 stock split payable January 14, 1995 to record holders of
HUBCO Common Stock on January 3, 1995. As a result, all share data and per share
data has been retroactively restated.
In December 1994, the Board of Directors adopted the 1995 Stock Option Plan
which provides for the issuance of up to 525,000 stock options to employees of
the Company. The option price cannot be less than the fair market value of the
common stock at the date of the grant and options are granted by the Company's
restricted stock committee.
Transactions under the plan are summarized as follows:
Number Option Price
of Shares Per Share
- --------------------------------------------------------------------------------
Outstanding, December 31, 1993 0 $--
Granted 450,000 12.83
------- -----
Outstanding, December 31, 1994 450,000 12.83
Granted 59,000 17.50-21.00
Cancelled (52,500) 12.83
------- -----
Outstanding, December 31, 1995 456,500 $12.83-$21.00
------- -------------
As of December 31, 1995, 114,000 shares are exercisable. In connection with the
Urban acquisition, options to purchase Urban common stock were converted into
options to purchase 32,550 shares of the Company's common stock at exercise
prices ranging from $4.15 to $4.61. These options are in addition to the above
plan.
During 1989, the Company adopted a restricted stock plan in which 150,000 shares
of the Company's common stock may be granted to officers and key employees.
During 1992, the Company amended the Plan to increase the maximum number of
shares of common stock which may be awarded to 495,000 shares, after giving
retroactive effect to stock dividends and the stock split. During 1995 and 1994,
3,800 and 54,450 shares of common stock were awarded which vest between two to
five years from the date of grant. The value of shares issued that have not been
earned ($688) and ($1,266) has been recorded as a reduction of stockholders'
equity for 1995 and 1994, respectively. Amortization of restricted stock awards
charged to expense amounted to $455, $389 and $278 in 1995, 1994 and 1993,
respectively.
On November 8, 1993, the Company's Board of Directors authorized management to
repurchase up to 10 percent of its outstanding common stock each year. The
program may be discontinued or suspended at any time, and there is no assurance
that the Company will purchase the full amount authorized. The acquired shares
are to be held in treasury to be used for stock option and other employee
benefit plans, preferred stock conversion or in connection with the issuance of
common stock in pending or future acquisitions accounted for under the purchase
method of accounting. During 1995, the Company purchased 302,000 shares at an
aggregate cost of $4.9 million.
(14) RESTRICTIONS ON BANK DIVIDENDS, LOANS
OR ADVANCES
Certain restrictions exist regarding the ability of the Hudson United Bank (the
Bank) to transfer funds to the Company in the form of cash dividends, loans or
advances. State banking regulations allow for the payment of dividends in any
amount provided that capital stock will be unimpaired and there remains an
additional amount of paid-in capital of not less than 50 percent of the capital
stock amount. As of December 31, 1995, $107,492 was available for distribution
to the Company.
Under Federal Reserve regulations, the Bank is also limited as to the amount it
may loan to its affiliates, including the Company. All such loans are required
to be collateralized. During 1994, the Company obtained a loan from the Bank for
$4,000 in order to finance the purchase of its new administrative facility. The
loan has been collateralized by the property and certain investment securities.
(15) LEASES
Total rental expense for all leases amounted to approximately $1,798, $1,717
and, $1,393 in 1995, 1994 and 1993, respectively. At December 31, 1995, the
minimum total rental commitments under all noncancellable leases on bank
premises with initial or remaining terms of more than one year were as follows-
1996 $1,125
1997 1,007
1998 816
1999 739
2000 655
Thereafter 1,802
(16) COMMITMENTS AND CONTINGENT LIABILITIES
In 1994, the Company entered into an interest rate exchange agreement for the
purpose of hedging the interest rate related to the subordinated debt. The
agreement is a contractual agreement between the Company and its counterparty to
exchange fixed and floating rate interest obligations without exchange of the
underlying notional amount of $25,000. Such agreement involves interest rate
risk. If interest rates increase, the benefit resulting from the agreement will
be diminished. The notional principal amount is used to express the volume of
the transaction involved in this agreement; however this amount does not
represent exposure to credit loss. The counterparty to the agreement is the
fixed rate payor on the agreement and the Company is the floating rate payor on
the agreement. The floating rate is reset every three months. The term of this
agreement is three years. Management does not anticipate any material loss as a
result of this transaction.
The Company and its subsidiaries, from time to time, may be defendants in legal
proceedings. In the opinion of management, based upon consultation with legal
counsel, the ultimate resolution of these legal proceedings will not have a
material effect on the consolidated financial statements. In the normal course
of business, the Company and its subsidiaries have various commitments and
contingent liabilities such as commitments to extend credit, letters of credit
and liability for assets held in trust which are not reflected in the
accompanying financial statements.
Loan commitments and standby letters of credit are made to customers in the
ordinary course of business. Both arrangements have credit risk essentially the
same as that involved in extending loans to customers and are subject to the
Company's normal credit policies. The Company's maximum exposure to credit loss
for loan commitments, primarily unused credit card lines of credit and standby
letters of credit outstanding at December 31, 1995 was $208,418 and $14,763,
respectively. Commitments under commercial letters of credit used to facilitate
customers trade transactions were $1,414 at December 31, 1995.
- --------------------------------------------------------------------------------
25
<PAGE>
NOTES-- (continued)
- --------------------------------------------------------------------------------
(17) HUBCO, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION:
<TABLE>
<CAPTION>
December 31
BALANCE SHEETS 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 3,538 $ 3,543
Securities:
Available for sale 12,157 7,760
Held to maturity -- 11,904
Investment in subsidiaries 121,583 109,669
Accounts receivable 7,572 1,121
Premises and equipment, net 5,600 8,066
Other assets 10,069 4,076
-------- --------
TOTAL ASSETS $160,519 $146,139
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 499 $ 378
Notes payable-subsidiary 3,566 3,938
Accrued taxes and other liabilities 1,488 1,272
-------- --------
TOTAL LIABILITIES 5,553 5,588
-------- --------
Subordinated debt 25,000 25,000
Stockholders' equity 129,966 115,551
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $160,519 $146,139
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
STATEMENTS OF INCOME 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Cash dividends from bank subsidiary $ 17,908 $ 14,261 $ 11,381
Interest 725 1,155 124
Securities gains 813 -- --
Rental income 1,714 238 238
Other 744 -- --
-------- -------- --------
21,904 15,654 11,743
Expenses:
General and administrative 1,581 1,587 581
Interest 2,420 1,914 --
-------- -------- --------
4,001 3,501 581
-------- -------- --------
Income before income tax benefit
and equity in undistributed
net income of subsidiaries 17,903 12,153 11,162
-------- -------- --------
Income tax benefit (2) (742) (73)
17,905 12,895 11,235
Equity in undistributed net income of subsidiaries 5,779 4,537 2,636
-------- -------- --------
NET INCOME $ 23,684 $ 17,432 $ 13,871
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
HUBCO, INC. (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31
STATEMENTS OF CASH FLOWS 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $23,684 $17,432 $13,871
Adjustments to reconcile net income to
net cash provided by operating activities-
Provision for depreciation 184 294 81
Amortization of restricted stock 455 389 278
Securities gains (813) -- --
Gain on sale of interest in subsidiary (817) -- --
Increase in investment in subsidiaries (11,914) (865) (2,635)
Increase in accounts receivable (6,451) (644) (140)
Increase in other assets (6,011) (4,011) (65)
(Decrease) in notes payable (372) -- --
Increase (decrease) in accounts payable 121 (1,847) 2,225
Increase (decrease) in accrued taxes
and other liabilities 216 952 (38)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,718) 11,700 13,577
------- ------- -------
Investing activities:
Purchase of securities (5,191) (15,351) (4,373)
Proceeds from sale of securities 18,909 -- --
Capital expenditures (1,116) (7,077) --
------- ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 12,602 (22,428) (4,373)
------- ------- -------
Financing activities:
Proceeds from sale of interest in subsidiary 4,215 -- --
Issuance of subordinated debt -- 25,000 --
Decrease in amount due to Hudson
United Bank -- -- (21)
Dividends paid (7,667) (3,959) (3,267)
Redemption of convertible preferred stock (2,481) -- --
Acquisition of treasury stock (4,956) (7,855) (4,834)
------- ------- -------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES (10,889) 13,186 (8,122)
------- ------- -------
INCREASE (DECREASE) IN CASH (5) 2,458 1,082
CASH AT BEGINNING OF YEAR 3,543 1,085 3
------- ------- -------
CASH AT END OF YEAR $ 3,538 $ 3,543 $ 1,085
======= ======= =======
</TABLE>
(18) SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following quarterly financial information for the two years ended December
31, 1995 is unaudited. However, in the opinion of management, all adjustments,
which include only normal recurring adjustments necessary to present fairly the
results of operations for the periods are reflected. Results of operations for
the periods are not necessarily indicative of the results of the entire year or
any other interim period.
- --------------------------------------------------------------------------------
27
<PAGE>
NOTES -- (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Net interest income $20,470 $20,243 $20,047 $20,342
Provision for possible loan losses 1,050 1,050 1,050 1,050
Income before income taxes 8,353 6,738 9,537 9,901
Net income 5,480 5,924 5,973 6,307
Net income per share-primary .42 .46 .46 .48
Net income per share-fully diluted .40 .45 .46 .48
1994
Net interest income $15,434 $16,325 $19,201 $20,136
Provision for possible loan losses 600 515 1,135 1,300
Income before income taxes 6,653 6,771 7,711 7,189
Net income 4,130 4,332 4,755 4,215
Net income per share - primary .33 .35 .37 .31
Net income per share - fully diluted .33 .35 .34 .31
</TABLE>
(19) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board issued Statement No. 107, "Disclosures
About Fair Value of Financial Instruments." Financial instruments encompassing
this standard's definition include cash, loan agreements, accounts receivable
and payable, debt securities, deposit liabilities, loan commitments, standby
letters of credit and financial guarantees, among others. The fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than a forced or
liquidation sale.
Estimated fair values have been determined by the Company using the best
available data and estimation methodology suitable for each category of
financial instruments. For those loans and deposits with floating rates, it is
presumed that estimated fair values generally approximate their recorded book
balances. The estimation methodologies used, the estimated fair values and
recorded book balances of the Company's financial instruments at December 31,
1995 and 1994 were as follows:
Cash and cash equivalents include cash and due from bank balances, Federal funds
sold and securities purchased under agreements to resell. For these instruments,
the recorded book balance approximates their fair value.
For securities in the Company's portfolio, fair value was determined by
reference to quoted market prices. In the few instances where quoted market
prices were not available, prices for similar securities were used. Additional
detail is contained in Note 4 to these consolidated financial statements
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Value Fair Value Book Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $132,370 $132,370 $105,028 $105,028
Securities 569,623 566,424 648,694 674,171
</TABLE>
The Company aggregated loans into pools having similar characteristics when
comparing their terms, contractual rates, type of collateral, risk profile and
other pertinent loan characteristics. Since no active market exists for these
pools, fair values were estimated using the present value of future cash flows
expected to be received. Loan rates currently offered by the Bank were used in
determining the appropriate discount rate.
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Value Fair Value Book Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, net $855,699 $ 837,033 $ 860,506 $ 845,825
</TABLE>
The fair value of demand deposits, savings deposits and certain money market
accounts approximate their recorded book balances. The fair value of fixed
maturity certificates of deposit was estimated using the present value of
discounted cash flows based on rates currently offered for deposits of similar
remaining maturities.
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Value Fair Value Book Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits $1,417,289 $ 1,425,001 $ 1,494,038 $ 1,491,544
</TABLE>
The fair value for accrued interest receivable and for the other borrowed funds
approximates their respective recorded book balance.
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Value Fair Value Book Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued interest receivable $15,232 $15,232 $16,072 $16,072
Short-term borrowings 21,654 21,654 50,658 50,658
</TABLE>
The fair value of the subordinated debt was determined by reference to quoted
market prices.
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Value Fair Value Book Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinated debt $24,621 $25,000 $21,813 $25,000
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
NOTES -- (continued)
- --------------------------------------------------------------------------------
The Company's remaining assets and liabilities which are not considered
financial instruments have not been valued differently than has been customary
with historical cost accounting. There is no material difference between the
notional amount and estimated fair value of off-balance sheet items which are
primarily comprised of unfunded loan commitments which are generally priced at
market at the time of funding.
For certain homogeneous categories of loans, such as some residential mortgages,
fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
(20) SUBSEQUENT EVENTS
On January 12, 1996, the Company acquired all of the outstanding shares of
Growth Financial Corp. (Growth) based in Basking Ridge, New Jersey. Each share
of Growth common stock was converted into .69 shares of the Company's common
stock for a total of 1,234,500 shares issued. At the time of the acquisition,
Growth had approximately $125 million in assets. The acquisition has been
accounted for as a pooling of interests. On February 29 the Company completed
the acquisition of three branches from CrossLand Federal Savings Bank. The
branch deposits acquired total approximately $61 million and will compliment the
Company's current branches in Bergen and Middlesex counties.
Unaudited pro forma results of the combining entities are as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Net interest income:
The Company $81,102 $71,096 $59,039
Growth 5,969 5,298 3,712
------- ------- -------
$87,071 $76,394 $62,751
======= ======= =======
Net income:
The Company $23,684 $17,432 $13,871
Growth 199 1,120 312
------- ------- -------
$23,883 $18,552 $14,183
======= ======= =======
On February 6, 1996, the Company and Lafayette American Bank and Trust Company
signed a definitive agreement under which the Company will acquire Lafayette in
a merger which is intended to be a tax free transaction and which the Company
anticipates will be accounted for as a pooling-of-interests. Each of the
outstanding shares of Lafayette will be exchanged for .588 shares of the
Company's common stock.
At December 31, 1995, Lafayette had total assets of $735 million, deposits of
$636 million, and shareholders' equity of $59 million, and net income of $19
million for the year ended December 31, 1995.
The merger is conditioned upon necessary bank regulatory approvals, the approval
of stockholders of the Company and Lafayette, and other customary conditions. It
is anticipated that the merger will be consummated in the Third Quarter of 1996.
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
HUBCO, Inc.:
We have audited the accompanying consolidated balance sheets of HUBCO, Inc. (a
New Jersey corporation) and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the 1993 consolidated financial
statements of Urban National Bank and subsidiary, a company acquired during 1995
in a transaction accounted for as a pooling of interests, as discussed in Note
2. Such statements are included in the 1993 consolidated statements of income,
changes in stockholders' equity and cash flows of HUBCO, Inc. and reflect net
interest income of 14 percent of the consolidated total. These statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for Urban National Bank and
subsidiary, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of HUBCO, Inc. and subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for investments in debt and equity
securities.
Roseland, New Jersey
January 11, 1996 (except with respect to the matters
discussed in Note 20, as to which the date is February 6, 1996)
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