SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------
FORM l0-K
---
/X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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.
------------------------------------------------------
(Exact name of registrant as specified in its Charter)
New Jersey 22-2405746
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 MacArthur Blvd.
Mahwah, New Jersey 07430
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 236-2600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value Series 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 common stock held by
non-affiliates of the Registrant, as of March 26, 1997 was $477,151,051.
The number of shares of Registrant's Common Stock, no par value,
outstanding as of March 26, 1997 was 21,522,484.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part(s) Into
Documents Which Incorporated
--------- ------------------
Annual Report to Shareholders Part I
for the fiscal year ended Part II
December 31, 1996 ("HUBCO's 1996
Annual Report"), pages 6 through 34
The Registrant's Proxy Statement in
connection with the Annual Meeting
of Shareholders to be held April 18,
1997 ("HUBCO's Proxy Statement for
its 1997 Annual Meeting")under the
captions "Election of Directors",
"Executive Compensation", "Stock
Ownership of Management and
Principal Shareholders",
"Compensation Committee Interlocks
and Insider Participation" and
"Certain Transactions with
Management". Notwithstanding the
foregoing, the information contained
in HUBCO's Proxy Statement for its
1997 Annual Meeting pursuant to
Items 402(k) and 402 (1) of
Regulation S-K is not incorporated
by reference and is not to be deemed
part of this report Part III
With the exception of information specifically incorporated by reference,
HUBCO's 1997 Annual Report and HUBCO's Proxy Statement for its 1997 Annual
Meeting are not to be deemed part of this report.
2
<PAGE>
HUBCO, INC.
Form l0-K Annual Report
For The Fiscal Year Ended December 31, 1996
PART I
ITEM 1. BUSINESS
(a) General Development of Business.
HUBCO, Inc. ("HUBCO" or "Registrant" or the "Company") is a bank holding
company registered under the Bank Holding Company Act of 1956, as amended (the
"Bank Holding Company Act"). HUBCO was organized under the laws of New Jersey in
1982 by Hudson United Bank ("Hudson United") for the purpose of creating a bank
holding company for Hudson United. HUBCO directly owns Hudson United, Lafayette
American Bank and Trust Company ("Lafayette" and together with Hudson United,
the "Banks") and a brokerage subsidiary, HUB Financial Services, Inc., formerly
known as HUB Investment Services, Inc. HUBCO is also the indirect owner, through
Hudson United and Lafayette, of two investment subsidiaries and five real estate
holding companies. In addition, HUBCO, through Hudson United, holds a 50%
interest in a data processing and imaged check processing company. Each of
HUBCO's direct and indirect subsidiaries is described in Item 1.
Recent Growth of HUBCO and Subsidiaries
On January 31, 1997, the Company privately placed $50.0 million in capital
securities pursuant to Rule 144A under the Securities Act of 1933. The 8.98%
capital securities represent a preferred beneficial interest in the assets of
HUBCO Capital Trust I, a statutory business trust. The Trust exists for the sole
purpose of issuing the Trust Securities and investing the proceeds in 8.98%
Junior Subordinated Deferable Interest Debentures to be issued by HUBCO which
mature on February 1, 2027. The capital securities have preference over common
securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation. The $50.0 million will be included in Tier I
capital for regulatory purposes, subject to certain limitations, but will be
classified as long-term debt for financial reporting purposes.
The Company's acquisition philosophy is to seek in-market or contiguous
market opportunities which can be accomplished with little or no dilution to
earnings. From October 1990 through December 1996, the
3
<PAGE>
Company has acquired seventeen institutions, adding to its assets and
liabilities a total in excess of $2.7 billion and expanding its branch network
from 15 branches to 85 branches. Over $700 million of these assets and
liabilities were acquired through government assisted transactions which allowed
the Company to reprice deposits, review loans and purchase only those loans
which met its underwriting criteria. The balance of the acquisitions were
accomplished in traditional negotiated transactions.
Summary of Acquisitions
The following chart summarizes the acquisitions undertaken by the Company
since October 1990. The amounts shown as "Purchase Price" represent either cash
paid or the market value of securites issued by HUBCO to the shareholders or
owners of the acquired entity:
<TABLE>
<CAPTION>
DEPOSITS LOANS
GOVERNMENT PURCHASE ASSUMED PURCHASED BRANCHES
INSTITUTION ASSISTED PRICE (IN MILLIONS) (IN MILLIONS) ACQUIRED
- ----------- ---------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Mountain Ridge State Bank Yes $ 325,000 $ 47.0 $ 12.0 1
Meadowlands National Bank No $ 415,000 $ 35.5 $ 22.1 3
Center Savings and Loan Association Yes $ 10,000 $ 89.9 $ 78.6 1
Irving Savings and Loan Association Yes $ 5,000 $161.1 $ 62.4 5
Broadway Bank and Trust Company Yes $ 3,406,000 $345.7 $ 9.5 8
Pilgrim State Bank No $ 6,000,000 $122.9 $ 46.7 6
Polifly Savings Bank Yes $ 6,180,000 $104.4 $ .5 4
Washington Savings Bank No $ 40,500,000 $237.8 $168.5 8
Shoppers Charge Accounts No $ 16,300,000 - $ 55.6 -
Jefferson National Bank No $ 9,700,000 $ 85.0 $ 41.0 4
Urban National Bank No $ 38,200,000 $204.0 $ 90.0 9
Growth Financial Corp No $ 25,600,000 $110.0 $102.0 3
CrossLand Federal Savings Bank No $ 3,000,000 $ 60.6 - 3
Lafayette American Bank & Trust No $120,000,000 $647.0 $548.0 19
Hometown Bancorporation, Inc. No $ 31,600,000 $162.0 $ 98.9 2
UST Bank, CT No $ 13,700,000 $ 95.3 $ 70.1 4
Westport Bancorp, Inc. No $ 67,800,000 $259.0 $183.0 7
</TABLE>
The Company's profitability and its financial condition may be
significantly impacted by its acquisition strategy and by the consummation of
its recent acquisitions.
The Company intends to continue to seek acquisition opportunities. There
can be no assurance that the Company will be successful in acquiring additional
financial institutions or, if additional financial institutions are acquired,
that these acquisitions will enhance the profitability of the Company.
On November 8, 1993, the Company's Board of Directors approved a stock
repurchase plan and authorized management to repurchase up to 10%
4
<PAGE>
of its outstanding common stock per year. At that time, the Company had
approximately 10.6 million shares outstanding (adjusted for the 1995 3-for-2
stock split and all stock dividends). There is no assurance that the Company
will purchase the full amount authorized in any year. The acquired shares are to
be held in treasury and to be used for stock option and other employee benefit
plans, preferred stock conversion, stock dividends or in connection with the
issuance of common stock in pending or future acquisitions primarily accounted
for under the purchase method of accounting. During 1996, the Company purchased
971,000 shares at an aggregate cost of $19.8 million. Of these treasury shares,
578,000 were reissued in connection with the 3% stock dividend payable November
15, 1996, and 383,000 were reissued in connection with acquisitions during 1996.
Other Subsidiaries
In 1983, HUBCO formed a directly owned subsidiary called HUB Financial
Services, Inc. which was, in 1995, a wholly owned data processing subsidiary. On
November 6, 1995, HUBCO sold 50% of the stock in HUB Financial Services, Inc. to
United National Bank. HUBCO simultaneously made a capital contribution of the
remaining 50% to Hudson United Bank. The joint venture is operating pursuant to
the provisions of the Bank Service Corporation Act. Simultaneously with the sale
of 50% to United National Bank, the name of HUB Financial Services, Inc. was
changed to United Financial Services, Inc.("UFS"). UFS provides data processing
and imaged check processing services to both of its owner banks and to
Lafayette.
As of December 31, 1996 $409,680,433 of Hudson United's investment
portfolio is owned and managed by a subsidiary company, Hendrick Hudson Corp. of
New Jersey. This subsidiary was established in 1987 to operate as an investment
company under state law.
In February, 1995 HUBCO established a directly owned subsidiary called HUB
Investment Services, Inc. This wholly owned subsidiary provides full brokerage
services and products including mutual funds and annuities through an agreement
with BFP Financial Partners, Inc. which is a subsidiary of Legg Mason, Inc.
During 1996, HUBCO filed to change the name of the company to HUB Financial
Services, Inc. HUB Financial Services, Inc. has obtained a series of insurance
licenses and sells insurance products.
5
<PAGE>
Hudson United Bank owns several real estate holding companies. Lafayette
Development Corp. was incorporated by Hudson United Bank and is presently
inactive. JNB Holdings, Inc. was created by Jefferson National Bank and holds
title to OREO properties upon which Jefferson National Bank had foreclosed. UNB
Holdings, Inc. was created by Urban National Bank and holds title to OREO
properties upon which Urban National Bank had foreclosed. Sole ownership of JNB
Holdings and UNB Holdings passed to Hudson United Bank upon merger of the
respective predecessor banks into Hudson United Bank.
Lafayette owns two real estate holding companies. AMBA Realty Corporation
and AMBA II Realty Corporation were incorporated by Lafayette for the purpose of
holding, developing and disposing of properties obtained through foreclosure
proceedings. Lafayette also owns LAI Company, which was incorporated for the
purpose of investing in the common stock of other Connecticut-based financial
institutions and is currently inactive.
Unionization of Hudson United Bank
Hudson United Bank is administratively divided into four administrative
regions: the Bergen, Hudson, Passaic and Essex regions. Eleven branches,
primarily in the Hudson region, of Hudson United Bank are unionized. Local 153
of the Office and Professional Employees International Union represents the
bank's clerical staff in the bargaining unit. Effective March 1, 1996 a
three-year collective bargaining agreement was negotiated which provided for a
modest increase in wages, increased employee contributions towards the cost of
providing health care benefits and consolidation of all bargaining unit jobs
into one job description. These eleven branches operate as an open shop and
approximately 64% of the employees in these branches are members of the union.
The collective- bargaining agreement expires February 28, 1999.
Regulatory Matters
There are a variety of statutory and regulatory restrictions governing the
relations among HUBCO and its subsidiaries:
Capital Adequacy Guidelines and Deposit Insurance
6
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), requires each federal banking agency to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities. In addition, pursuant to FDICIA, each federal
banking agency has promulgated regulations, specifying the levels at which a
financial institution would be considered "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", or
"critically undercapitalized", and to take certain mandatory and discretionary
supervisory actions based on the capital level of the institution.
The regulations implementing these provisions of FDICIA provide that an
institution will be classified as "well capitalized" if it (I) has a total
risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based
capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at
least 5.0 percent, and (iv) meets certain other requirements. An institution
will be classified as "adequately capitalized" if it (I) has a total risk-based
capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital
ratio of at least 4.0 percent, (iii) has a Tier 1 leverage ratio of (a) at least
4.0 percent, or (b) at least 3.0 percent if the institution was rated 1 in its
most recent examination, and (iv) does not meet the definition of "well
capitalized". An institution will be classified as "undercapitalized" if it (I)
has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1
risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1
leverage ratio of (a) less than 4.0 percent, or (b) less than 3.0 percent if the
institution was rated 1 in its most recent examination. An institution will be
classified as "significantly undercapitalized" if it (I) has a total risk-based
capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital
ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less
than 3.0 percent. An institution will be classified as "critically
undercapitalized" if it has a tangible equity to total assets ratio that is
equal to or less than 2.0 percent. An insured depository institution may be
deemed to be in a lower capitalization category if it receives an unsatisfactory
examination.
As of December 31, 1996, Hudson United Bank had a risk weighted capital
ratio of 11.76% and a leverage capital ratio of 6.79% and Lafayette had a risk
weighted capital ratio of 11.31% and a leverage capital ratio of 8.54%. These
ratios exceed the requirements to be considered a well capitalized institution
under the FDIC regulations. See also "Management's
7
<PAGE>
Discussion and Analysis of Financial Condition and Results of Operation -
Capital".
Bank holding companies must comply with the Federal Reserve Board's
risk-based capital guidelines. Under the guidelines, risk weighted assets are
calculated by assigning assets and certain off-balance sheet items to broad risk
categories. The total dollar value of each category is then weighted by the
level of risk associated with that category. A minimum risk-based capital to
risk based assets ratio of 8.00% must be attained. At least one half of an
institution's total risk based capital must consist of Tier 1 capital, and the
balance may consist of Tier 2, or supplemental capital. Tier 1 capital consists
primarily of common stockholder's equity along with preferred or convertible
preferred stock, minus goodwill. Tier 2 capital consists of an institution's
allowance for loan and lease losses, subject to limitation, hybrid capital
instruments and certain subordinated debt. The allowance for loan and lease
losses which is considered Tier 2 capital is limited to l.25% of an
institution's risk-based assets. As of December 31, 1996, HUBCO's total
risk-based capital ratio was 14.08%, consisting of a Tier 1 ratio of 8.55% and a
Tier 2 ratio of 5.53%. Both ratios exceed the requirements under these
regulations.
In addition, the Federal Reserve Board has promulgated a leverage capital
standard, with which bank holding companies must comply. Bank holding companies
must maintain a minimum Tier l capital to total assets ratio of 3%. However,
institutions which are not among the most highly rated by federal regulators
must maintain a ratio 100-to-200 basis points above the 3% minimum. As of
December 31 1996, HUBCO had a leverage capital ratio of 5.71%.
Hudson United and Lafayette are each members of the Bank Insurance Fund
("BIF") of the FDIC. The FDIC also maintains another insurance fund, the Savings
Association Insurance Fund ("SAIF"), which primarily covers savings and loan
association deposits but also covers deposits that are acquired by a BIF-insured
institution from a savings and loan association ("Oakar deposits"). Hudson
United has approximately $115.2 million of deposits at December 31, 1996 with
respect to which Hudson United pays SAIF insurance premiums.
For the first three quarters of 1995, both SAIF-member and BIF-member
institutions paid deposit insurance premiums based on a schedule from $0.23 to
$0.31 per $100 of deposits. In August, 1995, the FDIC , in anticipation of the
BIF's imminent achievement of a required 1.25% reserve
8
<PAGE>
ratio, reduced the deposit insurance premium rates paid by BIF-insured banks
from a range of $0.23 to $0.31 per $100 of deposits to a range of $0.04 to $0.31
per $100 of deposits. The new rate schedule for the BIF was made effective June
1, 1995. On November 14, 1995, the FDIC voted to reduce annual assessments for
the semi-annual period beginning January 1, 1996 to the legal minimum of $2,000
for BIF insured institutions, except for institutions that are not well
capitalized and are assigned to the higher supervisory risk categories.
The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act"),
signed into law on September 30, 1996, included the Deposit Insurance Funds Act
of 1996 (the "Funds Act") under which the FDIC was required to impose a special
assessment on SAIF assessable deposits to recapitalize SAIF. As a result of the
Funds Act, HUB paid a special assessment of $825,000 for its SAIF deposits,
which it accrued in the third quarter of 1996. Under the Funds Act, the FDIC
also will charge assessments for SAIF and BIF deposits in a 5 to 1 ratio to pay
Financing Corporation ("FICO") bonds until January 1, 2000, at which time the
assessment will be equal. A FICO rate of approximately 1.29 basis points will be
charged on BIF deposits, and approximately 6.44 basis points will be charged on
SAIF deposits. The 1996 Act instituted a number of other regulatory relief
provisions.
Restrictions on Dividend Payments
The holders of HUBCO Common Stock are entitled to receive dividends, when,
as and if declared by the Board of Directors of HUBCO out of funds legally
available, subject to the preferential dividend rights of any preferred stock
that may be outstanding from time to time.
The only statutory limitation is that such dividends may not be paid when
HUBCO is insolvent. Because funds for the payment of dividends by HUBCO come
primarily from the earnings of HUBCO's bank subsidiaries, as a practical matter,
restrictions on the ability of Hudson United and Lafayette to pay dividends act
as restrictions on the amount of funds available for the payment of dividends by
HUBCO.
As a New Jersey chartered commercial bank, Hudson United is subject to the
restrictions on the payment of dividends contained in the New Jersey Bank
Act("NJBA"). Under the NJBA, Hudson United may pay dividends only out of
retained earnings, and out of surplus to the extent that surplus exceeds 50% of
stated capital. Under the Banking Law of Connecticut (the "BLC"), Lafayette may
pay dividends only from its net profits, and the total of all dividends in any
calendar year may not
9
<PAGE>
(unless specifically approved by the Connecticut Commissioner of Banking) exceed
the total of its net profits of that year combined with its retained net profits
of the preceding two years. Under the Financial Institutions Supervisory Act,
the FDIC has the authority to prohibit a state-chartered bank from engaging in
conduct which, in the FDIC's opinion, constitutes an unsafe or unsound banking
practice. Under certain circumstances, the FDIC could claim that the payment of
dividends or other distributions by Hudson United or Lafayette to HUBCO
constitutes an unsafe or unsound practice.
HUBCO is also subject to Federal Reserve Bank ("FRB") policies which may,
in certain circumstances, limit its ability to pay dividends. The FRB policies
require, among other things, that a bank holding company maintain a minimum
capital base. The FRB would most likely seek to prohibit any dividend payment
which would reduce a holding company's capital below these minimum amounts. At
December 31, 1996, Hudson United had $109.9 million available and Lafayette had
$13.7 million available for the payment of dividends to HUBCO. At December 31,
1996, HUBCO had $83.5 million available for shareholder dividends, the payment
of which would not reduce any of its capital ratios below the minimum regulatory
requirements.
Restrictions on Transactions Between HUBCO and its Banking Subsidiaries
The Banking Affiliates Act of 1982, as amended, severely restricts loans
and extensions of credit by the Banks to HUBCO and HUBCO affiliates (except
affiliates which are banks). In general, such loans must be secured by
collateral having a market value ranging from 100% to 130% of the loan,
depending upon the type of collateral. Furthermore, the aggregate of all loans
from each of the Banks to HUBCO and its affiliates may not exceed 20% of that
Bank's capital stock and surplus and, singly to HUBCO or any affiliate, may not
exceed 10% of each Bank's capital stock and surplus. Similarly, the Banking
Affiliates Act of 1982 also restricts the Banks in the purchase of securities
issued by, the acceptance from affiliates of loan collateral consisting of
securities issued by, the purchase of assets from, and the issuance of a
guarantee or standby letter- of-credit on behalf of, HUBCO or any of its
affiliates.
Holding Company Supervision
Under the Bank Holding Company Act, HUBCO may not acquire directly or
indirectly more than 5 percent of the voting shares of, or
10
<PAGE>
substantially all of the assets of, any bank without the prior approval of
the Federal Reserve Board.
In general, the Federal Reserve Board, under its regulations and the Bank
Holding Company Act, regulates the activities of bank holding companies and
non-bank subsidiaries of banks. The regulation of the activities of banks,
including bank subsidiaries of bank holding companies, generally has been left
to the authority of the supervisory government agency, which for Hudson United
is the FDIC and the New Jersey Department of Banking (the "NJDOB"), and for
Lafayette is the FDIC and the Connecticut Department of Banking (the "CTDOB").
Interstate Banking Authority
The Riegle-Neale Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking and Branching Act") significantly changed interstate
banking rules. Pursuant to the Interstate Banking and Branching Act, a bank
holding company is able to acquire banks in states other than its home state
beginning September 29, 1995, regardless of applicable state law.
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches, beginning June, 1997.
Under such legislation, each state has the opportunity either to "opt out" of
this provision, thereby prohibiting interstate branching in such states, or to
"opt in" at an earlier time, thereby allowing interstate branching within that
state prior to June 1, 1997. Furthermore, a state may "opt in" with respect to
de novo branching, thereby permitting a bank to open new branches in a state in
which the bank does not already have a branch. Without de novo branching, an
out-of-state bank can enter the state only by acquiring an existing bank.
On April 17, 1996, New Jersey enacted legislation to opt-in with respect to
earlier interstate banking and branching and the entry into New Jersey of
foreign country banks. New Jersey did not authorize de novo branching into the
state.
In 1995, Connecticut enacted legislation to opt-in with respect to earlier
interstate banking and branching and the entry into Connecticut of foreign
country banks. Connecticut authorizes de novo branching into the state only if
the laws of the home state of the out-of-state bank are reciprocal in that
respect.
Cross Guarantee Provisions and Source of Strength Doctrine
11
<PAGE>
Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with (I) the default of a commonly controlled FDIC-insured depository
institution in danger of default. "Default" is defined generally as the
appointment of a conservatory or receiver and "in danger of default" is defined
generally as the existence of certain conditions, including a failure to meet
minimum capital requirements, indicative that a "default" is likely to occur in
the absence of regulatory assistance. These provisions have commonly been
referred to as FIRREA's "cross guarantee" provisions. Further, under FIRREA the
failure to meet capital guidelines could subject a banking institution to a
variety of enforcement remedies available to federal regulatory authorities,
including the termination of deposit insurance by the FDIC.
According to Federal Reserve Board policy, bank holding companies are
expected to act as a source of financial strength to each subsidiary bank and to
commit resources to support each such subsidiary. This support may be required
at times when a bank holding company may not be able to provide such support.
Furthermore, in the event of a loss suffered or anticipated by the FDIC - either
as a result of default of a bank subsidiary of the Company or related to FDIC
assistance provided to the subsidiary in danger of default - the other bank
subsidiaries of the Company may be assessed for the FDIC's loss, subject to
certain exceptions.
(b) Industry Segments.
The Registrant has one industry segment -- commercial banking.
(c) Narrative Description of Business.
HUBCO exists primarily to hold the stock of its subsidiaries. During most
of 1996, HUBCO had three directly-owned subsidiaries -- Hudson United, Lafayette
and HUB Financial Services. In addition, HUBCO, through Hudson United,
indirectly owns four additional subsidiaries and through Lafayette, indirectly
owns three additional subsidiaries. The historical growth of, and regulations
affecting, each of HUBCO's direct and indirect subsidiaries is described in Item
1(a) above, which is incorporated herein by reference.
HUBCO is a legal entity separate from its subsidiaries. The stock of the
Banks is HUBCO's principal asset. Dividends from Hudson United and Lafayette are
the primary source of income for HUBCO. As
12
<PAGE>
explained above in Item 1(a), legal and regulatory limitations are imposed on
the amount of dividends that may be paid by the Banks to HUBCO.
Hudson United currently maintains its executive offices in Mahwah, New
Jersey. At December 31, 1996, Hudson United operated 58 offices primarily in
eight northern New Jersey counties. These offices are located in the northern
New Jersey counties of Bergen, Essex, Hudson, Morris, Passaic, Middlesex,
Somerset and Union. Lafayette maintains its executive offices in Bridgeport,
Connecticut. At December 31, 1996, Lafayette operated 27 offices in the
southwestern Connecticut counties of New Haven and Fairfield. In April 1994,
HUBCO purchased a 64,350 square foot building in Mahwah, New Jersey to house the
executive offices of HUBCO and the Company's data processing subsidiary (now a
joint venture), which services the Banks' data processing and check processing
needs and offers its services to smaller banks in the Connecticut, New York and
New Jersey area.
At December 31, 1996, HUBCO through its subsidiaries had deposits of $2.59
billion, net loans of $1.85 billion and total assets of $3.12 billion. HUBCO
ranked 3rd among commercial banks and bank holding companies headquartered in
New Jersey in terms of asset size.
Each Bank is a full service commercial bank and offers the services
generally performed by commercial banks of similar size and character, including
imaged checking, savings, and time deposit accounts, 24-hour telephone banking,
trust services, safe deposit boxes, secured and unsecured personal and
commercial loans, residential and commercial real estate loans, and
international services including import and export needs, foreign currency
purchases and letters of credit. The Banks' deposit accounts are competitive in
the current environment and include money market accounts and a variety of
interest-bearing transaction accounts. In the lending area, each Bank primarily
engages in consumer lending, commercial lending and real estate lending
activities.
Hudson United and Lafayette offer a variety of trust services. At December
31, 1996, Hudson's Trust Department had approximately $222.0 million of assets
under management or in its custodial control and Lafayette's Trust Department
had approximately $560.5 million of assets under management or in its custodial
control.
There are numerous commercial banks headquartered in New Jersey and
Connecticut, which compete in the market areas serviced by HUBCO. In addition,
large out-of-state banks compete for the business of New Jersey
13
<PAGE>
and Connecticut residents and businesses located in HUBCO's primary market. A
number of other depository institutions compete for the business of individuals
and commercial enterprises in New Jersey and Connecticut including savings
banks, savings and loan associations, brokerage houses, financial subsidiaries
of other industries and credit unions. Other financial institutions, such as
mutual fund companies, consumer finance companies, factoring companies, and
insurance companies, also compete with HUBCO for loans or deposits. Competition
for depositors' funds, for creditworthy loan customers and for trust business is
intense.
Despite intense competition with institutions commanding greater financial
resources, the Banks' have been able to attract deposits and extend loans. While
each Bank may not exceed fifteen percent of its capital in a loan to a single
borrower, the Bank's have a "house limit" significantly below that level. Each
bank has, on occasion, arranged for participation by other banks in larger loan
accommodations.
Hudson United and Lafayette each has focused on becoming an integral part
of the community it serves. Officers and employees are incented to meet the
needs of their customers and the needs of the local communities served.
HUBCO and its subsidiaries had 827 full-time employees and 191 part-time
employees as of December 31, 1996, compared to 967 full-time and 233 part-time
employees at the end of 1995, as restated to reflect the institutions acquired
and accounted for under the pooling of interests method.
(d) Financial Information about foreign and
domestic operations and export sales.
Not Applicable
(e) Executive Officers of the Registrant
The following table sets forth certain information as to each executive
officer of HUBCO who is not a director.
14
<PAGE>
Name, Age and
Position with Officer of Principal Occupation
HUBCO HUBCO Since During Past Five Years
- -------------- ----------- -------------------------------
D. Lynn Van Borkulo- 1988 Executive Vice President, HUBCO
Nuzzo, 48 and Hudson United,
Corporate Secretary, HUBCO.
James Liccardo, 52 1996 First Senior Vice President
Retail Lending.
Karen Foley, 49 1996 First Senior Vice President and
Director of Human Resources of
Hudson United.
Christina L. Maier, 43 1987 Assistant Treasurer of HUBCO and
Senior Vice President and
Controller of Hudson United.
John F. McIlwain, 59 President and Chief Executive
Officer Lafayette American Bank
and Trust
(f) Statistical Disclosure Required Pursuant to
Securities Exchange Act, Industry Guide 3.
The statistical disclosures for a bank holding company required pursuant to
Industry Guide 3 are contained on the following pages of this Report on Form
10-K (Item I disclosures are contained on page 5 of HUBCO's 1996 Annual Report):
PAGES(S) OF
ITEM OF GUIDE 3 THIS REPORT
--------------- -----------
II. Investment Portfolio ........................................ 16
III. Loan Portfolio .............................................. 17-19
IV. Summary of Loan Loss Experience ............................. 20-22
V. Deposits .................................................... 23
VI. Return on Equity and Assets ................................. 24
VII. Short-Term Borrowings ....................................... 25-26
15
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM II
INVESTMENT PORTFOLIO
Book Value at End of Each Reported Period
December 31
------------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands of Dollars)
U.S. Treasury and Other U.S.
Government Agencies and
Corporations $862,913 $761,376 $872,826
State and Political Subdivisions 11,579 10,115 35,185
Other Securities 4,385 16,627 21,313
Common Stock 57,529 8,320 --
-------- -------- --------
TOTAL $936,406 $796,438 $929,324
======== ======== ========
Maturities and Weighted Average Yield at End of Latest Reporting Period
<TABLE>
<CAPTION>
MATURING
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
------------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- ----- -------- ----- ------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
and other
U.S. Government
Agencies and
Corporations $ 88,582 6.63% $565,513 6.38% $76,857 7.17% $131,959 6.72%
States and Political
Subdivisions 10,964 5.32 -- -- -- -- 615 9.06
Other Securities 2,820 8.96 800 7.13 767 4.68 -- --
Common Stock 57,529 4.12 -- -- -- -- -- --
-------- -------- ------- --------
TOTAL $159,895 5.68% $566,313 6.38% $77,624 7.14% $132,574 6.73%
======== ======== ======= ========
</TABLE>
Weighted average yields on tax-exempt obligations have been computed on a
fully tax-equivalent basis assuming a tax rate of 35 percent.
16
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM III
LOAN PORTFOLIO
<TABLE>
<CAPTION>
Types of Loans At End of Each Reported Period
---------------------------------------------------------------------------
December 31
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial, Financial,
and Agricultural $ 482,064 $ 416,726 $ 401,788 $ 413,974 $ 423,530
Real Estate -
Construction 25,080 30,186 20,323 19,928 27,751
Real Estate -
Mortgage 1,206,300 1,055,071 995,921 753,042 800,052
Installment 170,911 150,039 151,027 116,453 122,298
---------- ---------- ---------- ---------- ----------
TOTAL $1,884,355 $1,652,022 $1,569,059 $1,303,397 $1,373,631
========== ========== ========== ========== ==========
</TABLE>
17
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM III
LOAN PORTFOLIO
The following table shows the maturity of loans (excluding residential mortgages
of 1-4 family residences, installment loans and lease financing) outstanding as
of December 31, 1996. Also provided are the amounts due after one year
classified according to the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
Maturities and Sensitivity to Changes in Interest Rates
MATURING
--------------------------------------------------------------
After One After
Within But Within Five
One Year Five Years Years Total
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Commercial, Financial,
and Agricultural $403,075 $ 60,711 $18,278 $482,064
Real Estate Construction 23,861 1,036 183 25,080
Real Estate - Mortgage 304,576 114,265 60,725 479,566
-------- -------- ------- --------
TOTAL $731,512 $176,012 $79,186 $986,710
======== ======== ======= ========
</TABLE>
INTEREST SENSITIVITY
----------------------------
Fixed Variable
Rate Rate
-------- -------
Due After One But Within Five Years $ 99,201 $76,811
Due After Five Years 79,082 104
-------- -------
TOTAL $110,459 $25,194
======== =======
18
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM III
LOAN PORTFOLIO
<TABLE>
<CAPTION>
Nonaccrual, Past Due and Restructured Loans
------------------------------------------------------------------------------
December 31
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis $29,029 $23,700 $35,043 $56,809 $25,965
Loans contractually past
due 90 days or more as
to interest or principal
payments 8,531 6,221 3,670 5,124 5,134
Loans whose terms have been
renegotiated to provide a
reduction or deferral of
interest or principal
because of a deterioration
in the financial position
of the borrower 2,779 1,879 6,528 16,759 8,597
</TABLE>
At the end of the reporting period, there were no loans not disclosed under
the preceding two sections where known information about possible credit
problems of borrowers causes management of the Company to have serious doubts as
to the ability of such borrowers to comply with the present loan repayment terms
and which may result in disclosure of such loans in the two preceding sections
in the future.
At December 31, 1996 and 1995, there were no concentrations of loans
exceeding 10% of total loans which are not otherwise disclosed as a category of
loans pursuant to Item III.A. of Guide 3.
Recognition of interest on the accrual method is discontinued 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 is no longer doubtful.
19
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM IV
SUMMARY OF LOAN LOSS EXPERIENCE
The following is a summary of the activity in the allowance for possible loan
losses, broken down by loan category:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Amount of Loans Outstanding at End of Year $1,884,355 $1,652,022 $1,569,059 $1,303,397 $1,373,631
========== ========== ========== ========== ==========
Daily Average Amount of Loans $1,723,335 $1,590,663 $1,405,759 $1,349,440 $1,384,978
========== ========== ========== ========== ==========
Balance of Allowance for Possible
Loan Losses at Beginning of Year $ 30,105 $ 30,958 $ 33,463 $ 32,809 $ 28,638
Loans Charged Off:
Commercial, Financial and Agricultural (6,477) (5,503) (7,099) (7,418) (17,180)
Real Estate - Construction -- (75) (474) (482) (62)
Real Estate - Mortgage (4,580) (6,055) (12,247) (16,566) (5,949)
Installment (3,164) (1,535) (776) (2,233) (2,094)
Lease Financing -- -- (13) (122) (355)
---------- ---------- ---------- ---------- ----------
Total Loans Charged Off (14,221) (13,168) (20,609) (26,821) (25,640)
---------- ---------- ---------- ---------- ----------
Recoveries of Loans Previously Charged Off:
Commercial, Financial and Agricultural 469 926 1,766 818 1,092
Real Estate-Construction -- 40 17 -- --
Real Estate-Mortgage 776 1,182 442 604 305
Installment 1,071 553 377 436 436
Lease Financing -- 10 41 82 158
---------- ---------- ---------- ---------- ----------
Total Recoveries 2,316 2,711 2,643 1,940 1,991
---------- ---------- ---------- ---------- ----------
Net Loans Charged Off (11,905) (10,457) (17,966) (24,881) (23,649)
---------- ---------- ---------- ---------- ----------
Provision Charged to Expense 12,295 9,515 9,309 31,917 26,320
Additions Acquired Through Acquisitions 4,658 -- 4,717 400 1,500
Other -- 89 1,435 (6,782) --
---------- ---------- ---------- ---------- ----------
Balance at End of Year $ 35,153 $ 30,105 $ 30,958 $ 33,463 $ 32,809
========== ========== ========== ========== ==========
Ratios
Net Loans Charged Off to
Average Loans Outstanding .69% .66% 1.28% 1.84% 1.71%
Allowance for Possible Loan
Losses to Average Loans
Outstanding 2.04% 1.89% 2.20% 2.48% 2.37%
</TABLE>
20
<PAGE>
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.
21
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM IV
SUMMARY OF LOAN LOSS EXPERIENCE
ALLOWANCE FOR POSSIBLE LOAN LOSSES ALLOCATION
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995 December 31, 1994
----------------------- ------------------------ ------------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category To Category To Category To
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable
to domestic loans:
Commercial
Financial and
Agricultural $11,454 25.6% $14,604 25.2% $17,072 25.6%
Real Estate --
Construction 188 1.3 252 1.8 375 1.3
Real Estate --
Mortgage 10,535 64.0 6,563 63.9 5,912 63.5
Installment 2,885 9.1 2,197 9.1 2,603 9.6
Unallocated 10,091 6,489 4,996
------- ------ ------- ------ ------- ------
TOTAL $35,153 100.00% $30,105 100.00% $30,958 100.00%
<CAPTION>
December 31, 1993 December 31,1992
------------------------- ------------------------
% of Loans % of Loans
In Each In Each
Category To Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Balance at end of
period applicable
to domestic loans:
Commercial
Financial and
Agricultural $22,522 31.8% $18,466 30.8%
Real Estate --
Construction 909 1.5 1,149 2.0
Real Estate --
Mortgage 5,272 57.8 6,728 58.3
Installment 1,942 8.9 2,467 8.9
Unallocated 2,818 3,999
------- ------ ------- ------
TOTAL $33,463 100.00% $32,809 100.00%
</TABLE>
The allowance for possible loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the above categories of loans at the date
indicated.
-22a-
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM V
DEPOSITS
The following table sets forth average deposits and average rates for each of
the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Amount Rate Amount Rate Amount Rate
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Domestic Bank Offices:
Non-interest-bearing
demand deposits $ 524,017 $ 487,031 $ 455,000
Interest-bearing
demand deposits 455,882 2.10% 413,185 2.50% 414,467 2.21%
Savings deposits 634,579 2.10 689,277 2.45 776,485 2.40
Time deposits 805,948 4.94 768,253 4.49 610,261 3.28
---------- ---------- ----------
TOTAL $2,420,426 $2,357,746 $2,256,213
========== ========== ==========
</TABLE>
Maturities of certificates of deposit and other time deposits of $100,000 or
more issued by domestic offices, outstanding at December 31, 1996 are summarized
as follows:
Time Certificates Other Time
of Deposit Deposits Total
------------------ ----------- ---------
(In Thousands of Dollars)
3 months or less $ 91,316 $ -- $ 91,316
Over 3 through 6 months 9,312 -- 9,312
Over 6 through 12 month 8,007 -- 8,007
Over 12 months 4,308 -- 4,308
-------- ---- --------
TOTAL $112,943 $ $112,943
======== ==== ========
23
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM VI
RETURN ON EQUITY AND ASSETS
Year Ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
Return on Average Assets 0.76% 1.27% 0.91%
Return on Average Equity 10.44 17.31 15.77
Common Dividend Payout Ratio 73.12 40.28 34.31
Average Equity to Average
Assets Ratio 7.25 7.35 5.79
24
<PAGE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM VII
SHORT-TERM BORROWINGS
The following table shows the distribution of the Company's short-term
borrowings and the weighted average interest rates thereon at the end of each of
the last three years. Also provided are the maximum amount of borrowings and the
average amounts of borrowings as well as weighted average interest rates for the
last three years. The term for each type of borrowing disclosed is one day.
Federal Funds
Purchased and
Securities Sold
Under Agreement Other Short-
to Repurchase Term Borrowings
------------- ---------------
(In Thousand of Dollars)
Year ended December 31:
1996 $ 74,411 $113,568
1995 45,858 17,124
1994 87,317 33,777
Weighted average interest
rate at year end:
1996 4.80% 6.05%
1995 5.29 5.79
1994 4.89 5.81
Maximum amount outstanding
at any month's end:
1996 $100,049 $126,653
1995 175,604 35,096
1994 125,554 42,680
Average amount outstanding
during the year:
1996 $ 87,336 $ 48,205
1995 100,327 18,229
1994 59,636 33,400
25
<PAGE>
Federal Funds
Purchased and
Securities Sold
Under Agreement Other Short-
to Repurchase Term Borrowings
------------- ---------------
Weighted average interest
rate during the year:
1996 4.76% 4.30%
1995 5.47 5.97
1994 3.51 4.42
ITEM 2. PROPERTIES
The corporate headquarters of HUBCO is located in a three story facility in
Mahwah, New Jersey. The building is approximately 64,350 square feet and houses
the executive offices of the Company and its subsidiaries. The main office of
Hudson United is located in the former corporate headquarters, a four story
facility in Union City, New Jersey, which is owned by Hudson United. Hudson
United occupies 57 additional branch offices, of which 31 are owned and 27 are
leased. Lafayette's main office is located in a leased facility in Bridgeport,
Connecticut. Lafayette occupies 26 additional branch offices, of which 4 are
owned and 22 are leased.
Of the 50 properties leased, 31 have renewal options for terms of five to
fifteen years. The remaining 19 locations have expiration dates ranging from
1997-2005.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, lawsuits and claims may be brought
by and may arise against HUBCO and its subsidiaries. In the opinion of
management, no legal proceedings which have arisen in the normal course of the
Company's business and which are presently pending or threatened against HUBCO
or its subsidiaries, when resolved, will
26
<PAGE>
have a material adverse effect on the business or financial condition of
HUBCO or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Shareholders of HUBCO during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
As of December 31, 1996, HUBCO had approximately 3,475 shareholders.
HUBCO's common stock is listed on the Nasdaq National Market. The following
represents the high and low sale prices from each quarter during the last two
years. The numbers have been restated to reflect a 3 for 2 stock split effective
January 14, 1995 and all stock dividends.
1996
------------------------
High Low
------ ------
1st Quarter $21.97 $18.87
2nd Quarter 21.12 17.84
3rd Quarter 21.00 19.17
4th Quarter 24.87 20.15
1995
------------------------
High Low
------ -------
1st Quarter $16.87 $14.24
2nd Quarter 17.48 15.02
3rd Quarter 20.51 16.75
4th Quarter 21.48 18.69
27
<PAGE>
The following table shows the per share quarterly cash dividends paid upon
the common stock over the last two years, restated to give retroactive effect to
stock dividends.
1996 1995
---- ----
March 1 $0.165 March 1 $0.145
June 1 0.165 June 1 0.145
September 1 0.165 September 1 0.145
December 1 0.190 December 1 0.145
Dividends are generally declared within 30 days prior to the payable date,
to stockholders of record l0-20 days after the declaration date.
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands Except For Per Share Amounts)
Reference should be made to pages 4-5 of this Report on Form 10-K for a
discussion of recent acquisitions which affect the comparability of the
information contained in this table.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Interest Income $131,354 $133,211 $117,803 $98,757 $96,597
Provision for Loan Losses 12,295 9,515 9,309 31,917 26,320
Net Income 21,497 34,565 23,388 (6,008) 8,484
Per Share Data(1)
Net Income - Fully
Diluted 0.93 1.44 1.02 (0.32) 0.58
Cash Dividends - Common 0.68 0.58 0.35 0.30 0.26
Balance Sheet Totals:
Total Assets-12/31 3,115,687 2,778,416 2,770,667 2,322,713 2,219,105
Long Term Debt-12/31 100,000 25,000 25,000 - -
Average Equity -
for year 205,927 199,721 148,273 120,037 112,085
Average Assets -
for year 2,838,854 2,716,612 2,561,466 2,266,235 2,231,070
</TABLE>
28
<PAGE>
(1) Per share data is adjusted retroactively to reflect a 10% stock dividend
paid November 15, 1991 to stockholders of record on November 6, 1991, a 10%
stock dividend paid June 1, 1993 to stockholders of record on May 11, 1993,
a 3 for 2 stock split payable January 14, 1995 to record holders of HUBCO
Common Stock on January 3, 1995 and a 3% stock dividend paid November 15,
1996 to stockholders of record on November 4, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
HUBCO's 1996 Annual Report contains on pages 6 through 17 the information
required by Item 7 and that information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HUBCO's 1996 Annual Report contains on pages 18 through 34 the information
required by Item 8 and that information is incorporated herein by reference.
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 Proxy Statement for its 1997 Annual Meeting under the caption
"Election of Directors", contains the information required by Item 10 with
respect to directors of HUBCO and certain information with respect to executive
officers and that information is incorporated herein by reference. 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.
29
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
HUBCO's Proxy Statement for its 1997 Annual Meeting contains, under the
caption "Executive Compensation", and under the caption "Compensation Committee
Interlocks and Insider Participation", the information required by Item 11 and
that information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
HUBCO's Proxy Statement for its 1997 Annual Meeting contains, under the
caption "Stock Ownership of Management and Principal Shareholders", the
information required by Item 12 and that information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HUBCO's Proxy Statement for its 1997 Annual Meeting under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions with Management", contains the information required by Item 13 and
that information is to be incorporated herein by reference.
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 HUBCO, Inc. and
subsidiaries, included in HUBCO's 1996 Annual Report are
incorporated by reference in Item 8:
Report of Independent Public Accountants
30
<PAGE>
Consolidated Balance Sheets at
December 31, 1996 and 1995
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Schedules to the Consolidated Financial Statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(a) (3) Exhibits
List of Exhibits
(3a) The Restated Certificate of Incorporation of HUBCO,
Inc. filed January 31, 1997.
(3b) The By-Laws of HUBCO, Inc.
(4a) Indenture dated as of January 14, 1994 between HUBCO, Inc.
and Summit Bank as Trustee for $25,000,000 7.75%
Subordinated Debentures due 2004. (Incorporated by reference
from the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, Exhibit (4))
(4b) Indenture dated as of September 13, 1996 between HUBCO,
Inc. and Summit Bank as Trustee for $75,000,000 8.20%
Subordinated Debentures due 2006. (Incorporated by
reference from the Company's Current Report on Form 8-K
dated September 16, 1996.)
31
<PAGE>
(4c) Indenture dated January 31, 1997 between HUBCO, Inc. And
the Bank of New York as Trustee for $50,000,000 8.98%
Junior Subordinated Debentures due February 1, 2027.
(Incorporated by reference from the Company's Current
Report on Form 8-K dated February 11, 1997.)
(10a) Agreement and Plan of Merger dated as of February 5, 1996,
between HUBCO, Inc. and Lafayette American Bank and Trust
Company.(Incorporated by reference from the Company's
Current Report on Form S-4 dated March 19, 1996.)
(10b) Stock Option Agreement dated as of February 5, 1996, between
HUBCO, Inc. and Lafayette American Bank and Trust Company.
(Incorporated by reference from the Company's Current Report
on Form 8-K dated February 6, 1996.)
(10c) Agreement and Plan of Merger dated as of April 28, 1996,
between HUBCO, Inc., Hudson United Bank, Lafayette American
Bank and Trust, Hometown Bancorporation, Inc. and The Bank
of Darien. (Incorporated by reference from the Company's
Current Report on Form 8-K dated May 2, 1996.)
(10d) Stock Option Agreement dated as of April 28, 1996, between
HUBCO, Inc. and Hometown Bancorporation, Inc. (Incorporated
by reference from the Company's Current Report on Form 8-K
dated February 6, 1996.)
(10e) Agreement and Plan of Merger dated as of June 21, 1996,
between HUBCO, Inc. Hudson United Bank, Lafayette American
Bank and Trust, Westport Bancorp, Inc. and The Westport
Bank & Trust Company (Incorporated by reference from the
Company's Current Report on Form 8-K dated July 2, 1996.)
(10f) Stock Option Agreement dated as of June 21, 1996, between
HUBCO, Inc. and Westport Bancorp, Inc. (Incorporated by
reference from the Company's Current Report on Form 8-K
dated July 2, 1996.)
(10g) Change in Control, Severance and Employment Agreement with
Kenneth T. Neilson dated January 1, 1997.
(10h) Change in Control, Severance and Employment Agreement with
D. Lynn Van Borkulo-Nuzzo dated January 1, 1997.
(10i) Change in Control, Severance and Employment Agreement with
John F. McIlwain dated January 1, 1997.
32
<PAGE>
(10j) Change in Control, Severance and Employment Agreement with
Karen Foley dated January 1, 1997.
(10k) HUBCO Supplemental Employees' Retirement Plan dated January
1, 1996.
(10l) Collective Bargaining Agreement with Local 153 of the
Office and Professional Employees International Union,
dated March 1, 1996. (Incorporated by reference from the
Company's Annual Report of Form 10-K for the fiscal year
ended December 31, 1995, Exhibit.)
(10m) HUBCO, Inc. Directors Deferred Compensation Plan.
(Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, Exhibit)
(10n) Agreement and Plan of Merger dated as of August 18, 1995
among HUBCO, Inc., Hudson United Bank, Growth Financial
Corp and Growth Bank. (Incorporated by reference from the
Company's Current Report on Form 8-K filed August 24,
1995.)
(10o) Agreement and Plan of Merger dated August 15, 1996, between
HUBCO, Inc., Lafayette American Bank and Trust, UST Corp. and
UST Bank/Connecticut (Incorporated by reference from the
Company's Current Report on Form 8-K filed August 22, 1996.)
(13) Those portions of HUBCO's 1996 Annual Report which are
incorporated by reference into this 10-K.
(22) List of Subsidiaries.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
On October 22, 1996, HUBCO filed a Form 8-K Item 5 as amended on
October 28, 1996(date of earliest event - October 22, 1996), containing
HUBCO's press release announcing third quarter earnings results.
On November 4, 1996, HUBCO filed a Form 8-K Item 7(date of earliest
event - November 4, 1996), containing reproductions of the text,
without exhibits, of documents initially filed with the Commission by
Westport Bancorp, Inc.
On December 6, 1996, HUBCO filed a Form 8-K Item 5 (date of earliest
event - November 22, 1996), containing HUBCO's press release announcing
that on November 22, 1996, Hudson United sold the deposits and certain
loans from its Kinnelon Branch to the Ramapo Bank, and on November 29,
1996 Lafayette consummated its previously announced acquisition of UST
Bank/Connecticut from UST Corp.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HUBCO, INC.
By: /s/ KENNETH T. NEILSON
-----------------------
Kenneth T. Neilson
Chairman of the Board
President and CEO
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ KENNETH T. NEILSON Chairman of the Board March 28, 1997
- ------------------------------ President, CEO, Director
Kenneth T. Neilson Principal Executive Officer
/s/ ROBERT J. BURKE Director March 28, 1997
- ------------------------------
Robert J. Burke
/s/ BRYANT D. MALCOLM Director March 28, 1997
- ------------------------------
Bryant D. Malcolm
/s/ CHARLES F.X. POGGI Director March 28, 1997
- ------------------------------
Charles F. X. Poggi
/s/ SR. GRACE FRANCES STRAUBER Director March 28, 1997
- ------------------------------
Sister Grace Frances Strauber
34
<PAGE>
Signature Title Date
--------- ----- ----
/s/ W. PETER MCBRIDE Director March 28, 1997
- ------------------------------
W. Peter McBride
/s/ CHRISTINA L. MAIER Assistant Treasurer March 28, 1997
- ------------------------------ Principal Accounting
Christina L. Maier Officer and Principal
Financial Officer
35
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
SUBSIDIARIES OF HUBCO, INC.:
Hudson United Bank, organized under the banking laws of the State of New Jersey.
Lafayette American Bank and Trust, organized under the banking laws of the State
of Connecticut.
HUB Financial Services, Inc., organized under the New Jersey Business
Corporation Act.
SUBSIDIARIES OF HUDSON UNITED BANK:
Hendrik Hudson Corp. of New Jersey, organized under the New Jersey Business
Corporation Act.
Lafayette Development Corp., organized under the New Jersey Business
Corporation Act.
JNB Holdings, Inc., organized under the New Jersey Business Corporation Act.
UNB Holdings, Inc., organized under the New Jersey Business Corporation Act.
SUBSIDIARIES OF LAFAYETTE AMERICAN BANK AND TRUST:
AMBA Realty Corporation, organized under the Connecticut Business Laws.
AMBA II Realty Corporation, organized under the Connecticut Business Laws.
LAI Company, organized under the Connecticut Business Laws.
36
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
(3a) The Restated Certificate of Incorporation of HUBCO,
Inc. filed January 31, 1997.
(3b) The By-Laws of HUBCO, Inc.
(4a) Indenture dated as of January 14, 1994 between HUBCO, Inc.
and Summit Bank as Trustee for $25,000,000 7.75%
Subordinated Debentures due 2004. (Incorporated by reference
from the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, Exhibit (4))
(4b) Indenture dated as of September 13, 1996 between HUBCO,
Inc. and Summit Bank as Trustee for $75,000,000 8.20%
Subordinated Debentures due 2006. (Incorporated by
reference from the Company's Current Report on Form 8-K
dated September 16, 1996.)
(4c) Indenture dated January 31, 1997 between HUBCO, Inc. And
the Bank of New York as Trustee for $50,000,000 8.98%
Junior Subordinated Debentures due February 1, 2027.
(Incorporated by reference from the Company's Current
Report on Form 8-K dated February 11, 1997.)
(10a) Agreement and Plan of Merger dated as of February 5, 1996,
between HUBCO, Inc. and Lafayette American Bank and Trust
Company.(Incorporated by reference from the Company's
Current Report on Form S-4 dated March 19, 1996.)
(10b) Stock Option Agreement dated as of February 5, 1996, between
HUBCO, Inc. and Lafayette American Bank and Trust Company.
(Incorporated by reference from the Company's Current Report
on Form 8-K dated February 6, 1996.)
(10c) Agreement and Plan of Merger dated as of April 28, 1996,
between HUBCO, Inc., Hudson United Bank, Lafayette American
Bank and Trust, Hometown Bancorporation, Inc. and The Bank
of Darien. (Incorporated by reference from the Company's
Current Report on Form 8-K dated May 2, 1996.)
(10d) Stock Option Agreement dated as of April 28, 1996, between
HUBCO, Inc. and Hometown Bancorporation, Inc. (Incorporated
by reference from the Company's Current Report on Form 8-K
dated February 6, 1996.)
(10e) Agreement and Plan of Merger dated as of June 21, 1996,
between HUBCO, Inc. Hudson United Bank, Lafayette American
Bank and Trust, Westport Bancorp, Inc. And The Westport
Bank & Trust Company (Incorporated by reference from the
Company's Current Report on Form 8-K dated July 2, 1996.)
(10f) Stock Option Agreement dated as of June 21, 1996, between
HUBCO, Inc. and Westport Bancorp, Inc. (Incorporated by
reference from the Company's Current Report on Form 8-K
dated July 2, 1996.)
(10g) Change in Control, Severance and Employment Agreement with
Kenneth T. Neilson dated January 1, 1997.
(10h) Change in Control, Severance and Employment Agreement with
D. Lynn Van Borkulo-Nuzzo dated January 1, 1997.
(10i) Change in Control, Severance and Employment Agreement with
John F. McIlwain dated January 1, 1997.
<PAGE>
(10j) Change in Control, Severance and Employment Agreement with
Karen Foley dated January 1, 1997.
(10k) HUBCO Supplemental Employees' Retirement Plan dated January
1, 1996.
(10l) Collective Bargaining Agreement with Local 153 of the
Office and Professional Employees International Union,
dated March 1, 1996. (Incorporated by reference from the
Company's Annual Report of Form 10-K for the fiscal year
ended December 31, 1995, Exhibit.)
(10m) HUBCO, Inc. Directors Deferred Compensation Plan.
(Incorporated by reference from the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, Exhibit)
(10n) Agreement and Plan of Merger dated as of August 18, 1995
among HUBCO, Inc., Hudson United Bank, Growth Financial
Corp and Growth Bank. (Incorporated by reference from the
Company's Current Report on Form 8-K filed August 24,
1995.)
(10o) Agreement and Plan of Merger dated August 15, 1996, between
HUBCO, Inc., Lafayette American Bank and Trust, UST Corp. and
UST Bank/Connecticut (Incorporated by reference from the
Company's Current Report on Form 8-K filed August 22, 1996.)
(13) Those portions of HUBCO's 1996 Annual Report which are
incorporated by reference into this 10-K.
(22) List of Subsidiaries.
(27) Financial Data Schedule.
HUBCO INC. ANNUAL REPORT 1996
=============================
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31
Interest and fee income $ 204,182 $ 203,651 $ 170,929 $ 149,528 $ 164,346
Interest expense 72,828 70,440 53,126 50,771 67,749
Net interest income 131,354 133,211 117,803 98,757 96,597
Provision for loan losses 12,295 9,515 9,309 31,917 26,320
Noninterest income 29,289 27,239 22,837 22,594 20,916
Securities gains/(losses) 987 986 (417) 1,977 4,614
Noninterest expense 116,239 102,842 94,931 97,098 93,764
Income before income taxes 33,096 49,079 35,983 (5,687) 2,043
Net income 21,497 34,565 23,388 (6,008) 8,484
- ------------------------------------------------------------------------------------------------------------------------------------
Per Common Share
Net income--fully diluted $ 0.93 $ 1.44 $ 1.02 $ (0.32) $ 0.58
Cash dividends declared $ 0.68 $ 0.58 $ 0.35 $ 0.30 $ 0.26
Book value at year end $ 9.37 $ 9.65 $ 8.62 $ 6.73 $ 7.34
Average common shares outstanding-fully diluted 23,225 24,116 22,945 18,706 14,678
Common shares outstanding 21,624 22,117 21,260 16,900 16,097
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31
Securities available for sale $ 655,492 $ 502,381 $ 213,815 $ 179,267 $ 130,789
Securities held to maturity 280,914 294,057 715,509 599,587 456,709
Loans, net of unearned and deferred fees 1,884,355 1,652,022 1,569,059 1,303,397 1,373,631
Total assets 3,115,687 2,778,416 2,770,667 2,322,713 2,219,105
Deposits 2,592,092 2,446,273 2,414,999 2,103,895 2,021,029
Long-term debt 100,000 25,000 25,000 -- --
Total stockholders' equity 206,333 216,796 187,305 117,965 122,406
- ------------------------------------------------------------------------------------------------------------------------------------
Performance Ratios
Net interest margin 5.05% 5.34% 5.03% 4.75% 4.81%
Effeciency ratio 68.1% 61.3% 63.9% 73.2% 78.0%
Return on average assets 0.76% 1.27% 0.91% -0.27% 0.38%
Return on average equity 10.44% 17.31% 15.77% -5.01% 7.57%
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Ratios *
Tier 1 Leverage Ratio 5.71% 7.56% 6.28% 7.22% 7.38%
Total Risk-Based Capital Ratio 14.08% 17.21% 16.71% 14.85% 14.10%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Capital ratios for the years 1992 through 1995 are as previously stated and
do not consider the retroactive application of pooling of interest
transactions.
- --------------------------------------------------------------------------------
5
<PAGE>
HUBCO, INC. ANNUAL REPORT 1996
================================================================================
Management's Discussion
and Analysis
ACQUISITION SUMMARY
HUBCO, Inc. began its acquisition program in the fall of 1990. Since that time
the company has completed seventeen acquisitions and has grown from a $550
million banking company to a $3.1 billion community banking franchise. The
acquisition program has been utilized to achieve efficiencies and to spread the
cost of new products and technologies over a larger asset base. The financial
results of these acquisitions are difficult to measure other than on an as
reported basis each quarter because pooling of interest transactions change
historical results from those actually reported by HUBCO.
On January 12, 1996, the Company acquired Growth Financial Corp. (Growth) and
merged its subsidiary bank, Growth Bank, into Hudson. Growth was a $128 million
bank, headquartered in Basking Ridge, New Jersey, that had 3 branches. On July
1, 1996 the Company acquired Lafayette American Bank and Trust Company
(Lafayette) and continued to operate it as an independent commercial bank.
Lafayette was a $700 million bank in Connecticut that operated 19 branches,
primarily in Fairfield County. On December 13, 1996 the Company acquired
Westport Bancorp, Inc. (Westport) and merged its subsidiary bank with Lafayette.
Westport was a $317 million bank based in Westport, Connecticut that had 7
branches. All three acquisitions were accounted for on the pooling-of-interests
accounting method, and, therefore, the financial statements for periods prior to
the mergers have been restated to include these institutions and their results
of operations.
On August 30, 1996 the Company acquired Hometown Bancorporation (Hometown), a
$194 million bank holding company headquartered in Darien, Connecticut.
Hometown's 2 -branch banking subsidiary, The Bank of Darien, was merged into
Lafayette. On November 29, 1996 Lafayette acquired UST Bank/Connecticut and
merged it into the Connecticut franchise. UST Bank was a $111 million commercial
bank with 4 branch locations. Both acquisitions were accounted for with the
purchase method of accounting and as such their assets and earnings are included
in the Company's consolidated results only from the date of acquisition.
In addition, during 1996 the Company purchased 4 New Jersey branches with total
deposits of $70.3 million and merged them into Hudson. The Company also sold 1
branch during the year with deposits of $9.7 million.
On April 5, 1995, Jefferson National Bank was merged with the Company's
wholly-owned subsidiary, Hudson United Bank (Hudson) and on June 30, 1995, Urban
National Bank was merged with Hudson. Both acquisitions were accounted for with
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 with
the purchase method of accounting. In May, 1994, the Company purchased four
branches of Polifly Federal Savings & Loan from the Resolution Trust Company
(RTC), with $104 million in deposits in Bergen county. In July, 1994, the
acquisition of Washington Savings was consummated. Washington was a $350 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 company with approximately $63 million in high
yielding credit card receivables at the time of the acquisition. It has
approximately 200 merchant customers in 44 states. The earnings from the 1994
acquisitions are included in the Company's consolidated results only from the
dates of acquisition.
It is the Company's philosophy that acquisitions become accretive to earnings
within a short time frame, generally within one year.
NET INCOME SUMMARY
In 1996, the Company incurred one-time charges ("special charges") as detailed
below:
CHARGE PRE-TAX AFTER-TAX
- --------------------------------------------------------------------------------
Special SAIF assessment $ 825 $ 512
Merger related and
restructuring charges -
Lafayette 13,018 9,016
Westport 8,986 5,901
--------------------
Total special charges
in noninterest expense $22,829 $15,429
Special provision for
possible loan losses 4,000 2,340
--------------------
Total special charges $26,829 $17,769
====================
Further details relative to the special charges are discussed in the Noninterest
Expense category. Including all special charges, earnings for 1996 declined to
$21,497 or $.93 per share fully diluted. This represents a decrease of $13,068,
or 37.8%, from 1995. The earnings and earnings per share for 1995 represented a
47.9% increase over the $23.4 million or $1.02 per share earned in 1994.
In 1996, the Company earned $39.3 million or $1.69 per share excluding special
charges. This represents a 13.6 % increase over the $34.6 million earned in
1995. On an earnings per share basis excluding special charges, 1996 increased
17.4%
- --------------------------------------------------------------------------------
6
<PAGE>
over the $1.44 earnings per share for 1995. Return on average assets
excluding special charges for 1996, 1995, and 1994 was 1.38%, 1.27%, and 0.91%,
respectively and return on average equity was 19.07%, 17.31%, and 15.77%. It
should be noted that the return on assets for 1995 and 1994 before restatement
for the poolings had been reported as 1.46% and 1.11% and the return on equity
had been 19.49% and 16.57%. This indicates that the Company acquired banks which
earned at a much lower rate prior to being acquired and the Company improved the
acquired banks' performance.
The main component to earnings, the net interest margin, decreased to 5.05% in
1996. A 7.3% increase in noninterest income offset the decline in net interest
income. The primary factor contributing to the increase in net income excluding
special charges was a reduction in noninterest expense (before special charges)
of $9,432, or 9.2%. As reflected in the summary table of one-time charges, the
decrease in net income of $13,068, or 37.8%, is entirely attributable to the
special charges disclosed therein. A more detailed analysis of these components
will be discussed later.
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS, AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------- -------------------------------- ---------------------------------
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>
ASSETS
Interest-bearing
deposits with banks $ 679 $ 30 4.42% $ 1,385 $ 60 4.33% $ 6,044 $ 235 3.89%
Federal funds sold 17,594 1,023 5.81% 27,384 1,575 5.75% 36,564 1,613 4.41%
Securities-taxable 855,021 53,141 6.22% 853,505 53,801 6.30% 869,210 50,837 5.85%
Securities-tax exempt 10,617 677 6.38% 30,844 1,735 5.63% 44,164 2,540 5.75%
Loans 1,723,335 149,664 8.68% 1,590,663 147,241 9.26% 1,405,759 116,805 8.31%
------------------------------- -------------------------------- ---------------------------------
Total Earning Assets 2,607,246 204,535 7.84% 2,503,781 204,412 8.16% 2,361,741 172,030 7.28%
Cash and due from banks 130,449 118,438 121,279
Allowance for loan losses (31,881) (31,276) (35,070)
Premises and equipment 43,484 45,761 39,387
Other assets 89,556 79,908 74,129
---------- ---------- ----------
TOTAL ASSETS $2,838,854 $2,716,612 $2,561,466
========== ========== ==========
Taxable-equivalent
adjustment $ 353 $ 761 $ 1,101
-------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
transaction accounts $ 455,882 $ 9,574 2.10% $ 413,185 $ 10,329 2.50% $ 414,467 $ 9,160 2.21%
Savings accounts 634,579 13,335 2.10% 689,277 16,858 2.45% 776,485 18,661 2.40%
Time deposits 805,948 39,795 4.94% 768,253 34,490 4.49% 610,261 20,032 3.28%
------------------------------- -------------------------------- ---------------------------------
Total Interest-Bearing
Deposits 1,896,409 62,704 3.31% 1,870,715 61,677 3.30% 1,801,213 47,853 2.66%
Short-term borrowings 135,541 6,219 4.59% 110,704 6,610 5.97% 81,536 3,031 3.72%
Long-term debt 47,483 3,905 8.22% 25,000 2,153 8.61% 36,080 2,242 6.21%
------------------------------- -------------------------------- ---------------------------------
Total Interest-Bearing
Liabilities 2,079,433 72,828 3.50% 2,006,419 70,440 3.51% 1,918,829 53,126 2.77%
-------- --------- --------
Demand deposits 524,017 487,031 455,000
Other liabilities 29,477 23,441 39,364
---------- ---------- ----------
Stockholders' equity 205,927 199,721 148,273
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $2,838,854 $2,716,612 $2,561,466
========== ========== ==========
NET INTEREST INCOME $131,707 $ 133,972 $118,904
======== ========= ========
NET INTEREST MARGIN 5.05% 5.35% 5.03%
==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE>
The following graphs depict the Company's Return on Average Assets and Return on
Average Equity, excluding the Special Charges in 1996, for the years ended
December 31, 1996, 1995, and 1994.
Return on Average Asset
1994 1995 1996
---- ---- ----
As reported 1.35% 1.46% 1.38%
Adjusted for Poolings .91% 1.27% 1.38%
Return on Average Equity
1994 1995 1996
---- ---- ----
As reported 19.44% 19.49% 19.07%
Adjusted for Poolings 15.77% 17.31% 19.07%
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 for 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 and 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 1996, net interest income on a FTE basis was $131.7 million, a 1.7% decrease
from the $134.0 million in 1995. The $134.0 million in 1995 had increased 12.7%
over 1994. Reasons for the change in net interest income between years is
divided into two components. One is the change in the balance 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 in the general level of interest rates.
CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME--RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
INCREASE/(DECREASE) INCREASE/(DECREASE)
----------------------------- ----------------------------
1996 OVER 1995 1995 OVER 1994
----------------------------- ----------------------------
(Dollars in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND FEE INCOME:
Loans $11,845 $(9,422) $ 2,423 $16,302 $14,134 $30,436
Securities-taxable 95 (755) (660) (932) 3,896 2,964
Securities-tax exempt (1,264) 206 (1,058) (750) (55) (805)
Federal funds sold (569) 17 (552) (461) 423 (38)
Interest bearing deposits (31) 1 (30) (199) 24 (175)
----------------------------- ----------------------------
Total interest and fee income 10,076 (9,953) 123 13,960 18,422 32,382
----------------------------- ----------------------------
INTEREST EXPENSE:
Interst bearing transaction accounts 1,000 (1,755) (755) (28) 1,197 1,169
Savings (1,270) (2,253) (3,523) (2,128) 325 (1,803)
Time deposits 1,748 3,557 5,305 5,974 8,484 14,458
Short-term borrowings 1,314 (1,705) (391) 1,328 2,251 3,579
Long-term debt 1,853 (101) 1,752 (806) 717 (89)
----------------------------- ----------------------------
Total interest expense 4,645 (2,257) 2,388 4,340 12,974 17,314
----------------------------- ----------------------------
Net Interest Income $5,431 $(7,696) $(2,265) $ 9,620 $ 5,448 $15,068
============================= ============================
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
As indicated by the table, Changes in Taxable Equivalent Net Interest Income,
the decrease in net interest income between 1996 and 1995 was due to the
decrease in the yield on interest earning assets and the increase in the volume
of interest bearing liabilities exceeding the effect of the increase in loan
balances and the decrease in rates paid on deposits. The volume growth on both
sides of the balance sheet was realized primarily through the purchases of
Hometown and UST Bank/Connecticut. Deposit growth was further generated by the
branch purchases completed during the year.
The increase in net interest income between 1995 and 1994 was due to the
increase in the volume of earning assets and the increase in rates on these
assets exceeding the increased volume of deposits and rates paid on deposits.
The growth was realized through acquisitions, primarily Shoppers Charge Accounts
Co. in December 1994 and Washington and Polifly in mid-1994, but also due to
internal growth. As the table indicates, the change in net interest income due
to asset yield increases exceeded the effect of deposit volume and deposit rate
increases. With acquisitions, the Company's rate structure is implemented.
Interest rates were at the lowest level in 25 years at the end of 1993 and rates
increased during 1994. Rates declined somewhat in 1995 but still remain well
above the December 1993 level. Despite these movements in interest rates and the
acquisitions of banks with different deposit rate structures, the Company was
able to control rate volatility resulting in relatively 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 5.05%,
5.35%, and 5.03% for 1996, 1995, and 1994, respectively. The yield on earning
assets decreased 32 basis points in 1996 compared to 1995. The primary reasons
for the decline are a decrease of 6 basis points in the yield on securities
which comprised one-third of the average earning assets, and a decrease of 58
basis points on loan yields. The lower yield on securities is the result of
maturities in the portfolio where funds were reinvested at a lower rate. The
decline in loan yield results from a decrease in the prime rate, from an average
of 8.83% in 1995 to an average of 8.27% in 1996 along with an increase of
$3,993, or 14.4% in nonperforming loans.
The yield on earning assets increased 88 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 the lower level of
nonperforming assets. The cost of interest-bearing deposits increased to a
lesser extent, by 74 basis points, during this period resulting in a
significantly improved net interest margin. The Company focuses on the cost side
of the net interest margin and its deposit mix moderates the change in the cost
of interest-bearing liabilities during a rising rate period.
The Company's average cost of all deposits for 1996 was 2.59%. Approximately 44%
of the Company's deposits are in transaction accounts, another 26% in savings
accounts, and only 30% of its deposits are in the higher cost certificates of
deposit as of year-end 1996.
The Company maintains a laddered investment portfolio. Most of the securities
are either U.S. Treasury or U.S. Government Agency securities. Maturities are
generally kept below 5 years for final maturity. The weighted average life of
the portfolio is three and one-half years. The Company does not generally invest
in exotic securities and does not invest in derivatives. The mortgage-backed
securities are agency obligations or Planned Amortization Classes (PAC's)
comprised of A or B traunches.
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 evaluated to
identify potential problem loans, credit concentrations, and other risk factors
such as current and projected economic conditions locally and nationally.
General economic trends can greatly affect loan losses and there are no
assurances that future changes 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 at the time.
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 $12.3 million for 1996 compared with $9.5
million and $9.3 million in 1995 and 1994, respectively. The increase in the
provision in 1996 of $2.8 million, or 29.5%, is due to the $4 million special
provision, reflecting the Company's reserve methodology and the new Connecticut
bank subsidiary. The allowance for
- --------------------------------------------------------------------------------
9
<PAGE>
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) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount of Loans Outstanding at End of Year $ 1,884,355 $ 1,652,022 $ 1,569,059
=====================================================
Daily Average Amount of Loans Outstanding $ 1,723,335 $ 1,590,663 $ 1,405,759
=====================================================
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of year $ 30,105 $ 30,958 $ 33,463
Loans charged off:
Real estate mortgages 4,580 6,130 12,721
Commercial 6,477 5,503 7,099
Consumer 3,164 1,535 789
-----------------------------------------------------
Total loans charged off 14,221 13,168 20,609
-----------------------------------------------------
Recoveries:
Real estate mortgages 776 1,222 459
Commercial 469 926 1,766
Consumer 1,071 563 418
-----------------------------------------------------
Total recoveries 2,316 2,711 2,643
-----------------------------------------------------
Net loans charged off 11,905 10,457 17,966
-----------------------------------------------------
Allowance of acquired companies 4,658 -- 4,717
Transfers from assets held for sale or
reserve for foreclosed property losses -- 89 1,435
Provision for loan losses 12,295 9,515 9,309
Balance at end of year $ 35,153 $ 30,105 $ 30,958
=====================================================
Allowance for loan losses as a percentage of
loans outstanding at year end 1.87% 1.82% 1.97%
Net charge offs as a percentage of average
loans outstanding 0.69% 0.66% 1.28%
=====================================================
</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,
1996 1995 1994
---------------------- -------------------- ---------------------
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 $ 10,723 56.3% $ 6,815 58.1% $ 6,287 56.8%
Commercial and industrial 11,454 25.6% 14,604 25.2% 17,072 25.6%
Consumer 2,885 18.1% 2,197 16.7% 2,603 17.6%
Unallocated 10,091 6,489 4,996
---------------------- -------------------- ---------------------
Total $ 35,153 100% $ 30,105 100% $ 30,958 100%
====================== ==================== =====================
</TABLE>
loan losses as a percentage of loans outstanding for the last three years was
1.87%, 1.82%, and 1.97%. The allowance for loan losses as a percentage of
nonperforming loans for the last three-years was 111%, 108%, and 73%
representing an improving coverage of problem loans.
NONINTEREST INCOME
Noninterest income, excluding securities gains and losses, was $29.3 million for
1996, a 7.5% increase over 1995. Noninterest income for 1995 was $27.2 million,
a 19.3%, increase over 1994. The reported increase for 1996 includes a $622 gain
resulting from the sale of a Hudson United branch. Excluding that gain and the
nonrecurring items in 1995 (discussed below), the increase in noninterest income
from 1995 to 1996 was $4,104, or 16.7%.
The primary factor for the increase in 1996 is increased loan fees of $2,698,
which arise from the exporting of late charges and increased discounts from
Shoppers Charge. The remaining increase is due to an increase in branch fees of
$332, an increase in international fees of $512, and an increase in gains on
sale of loans. Service charges on deposit accounts increased by $338, or 2.5%,
as a result of an increase of $79,683, or 8.9% , in the average volume of
transaction accounts. Trust income decreased by $428, or 12.0%, as a result of
the sale in September 1995 of Lafayette's trust
- --------------------------------------------------------------------------------
10
<PAGE>
business to Sachem Trust. Trust fees for Hudson United showed an increase of
$187, or 24.6%. The significant growth in fee income reported by the Company for
1995 is a result of several nonrecurring items and a strategic initiative to add
new fee based products and services. Service charges on deposit accounts
decreased 2.1% as a result of the competitive environment. Trust department fee
income decreased by $83, or 2.3%, as a result of the Lafayette sale to Sachem.
New services, such as International Services generated $.4 million of fee income
and fees from Shoppers Charge 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 instituted by Urban National
Bank, which was settled by Hudson United, as Urban's successor. In addition, the
sale of a 50% interest in the Company's data processing subsidiary to another
financial institution resulted in a gain of $.8 million. This joint venture has
reduced data processing costs and will spread the cost of future technology
investments.
The Company realized $1.0 million in securities gains in 1996 and in 1995
compared with $.4 million of losses in 1994. The 1996 gains result primarily
from the sale of equity investments in other financial institutions. Of the 1995
gains, $.6 million occurred in the first half of the year as several financial
institutions which the Company held positions in were acquired. In the fourth
quarter, however, with the FAS #115 window opportunity to realign the
held-to-maturity and available for sale portfolios, 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 13.0% or $13.4 million to $116.2 million in 1996
from the $102.8 million for 1995. The $102.8 million noninterest expense for
1995 increased over 1994 by $7.9 million. Comparability between 1996 and 1995
and between 1995 and 1994 is impacted by purchase accounting acquisitions
(Hometown, UST and branch purchases during 1996 and Polify, Washington and
Shoppers during 1994). As indicated earlier, the Westport, Lafayette, Growth,
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 $34.9, $37.9, and $34.4
million. The 7.9% reduction in salary expense from $37.9 million in 1995 to
$34.9 million in 1996 is even more significant than it appears when the purchase
accounting acquisitions are taken into account. These savings were realized
despite the 1996 addition of four branches in New Jersey and six in Connecticut.
The full annualized effect of the anticipated cost savings from the
centralization of support functions is not yet reflected as the computer
conversions for Lafayette, Hometown and Westport took place near year-end and
the UST conversion is scheduled for the first quarter of 1997. The growth in
salaries from 1994 to 1995 of $3,510, or 10.2%, is primarily attributable to the
increased staffing levels necessitated by the 1994 acquisitions of Polifly,
Washington and, to a greater extent, Shoppers Charge. Employee benefits as a
percentage of salaries were at the lowest level in 1996 (28%) due to
consolidations of acquired benefit plans.
Occupancy expense amounted to $10.1 million, $11.0 million, and $10.4 million
for 1996, 1995, and 1994, respectively. The decrease in occupancy expense from
1995 to 1996 and the increase from 1994 to 1995 are primarily attributable to
Shoppers Charge occupancy cost at its original headquarters, where the last
rental payment was December, 1995. Equipment expense amounted to $5.3 million,
$5.8 million, and $5.7 million in 1996, 1995 and 1994, respectively. There were
no significant changes in equipment expense during this period other than the
savings in 1996 from the 1995 sale of 50% of the data processing subsidiary and
a moderate increase in 1995 due to the private label credit card division.
Deposit and other insurance expense has shown significant reductions from $7.2
million in 1994 to $4.9 million in 1995 and $1.3 million in 1996. Although the
most significant portion of the savings is attributable to the reduction in the
deposit insurance assessment rate for the Company's banking subsidiaries, the
Company has also benefitted from savings realized through negotiations on its
other insurance coverages.
Outside services expense has increased from $8.8 million in 1994 to $10.2
million in 1995 and to $11.9 million for 1996. The increase from 1995 to 1996 of
$1.7 million, or 16.7%, is primarily attributable to the payments for data
processing services to the jointly owned service provider. Of the $1.4 million
increase from 1994 to 1995, correspondent bank fees increased $.5 million,
stationery and supplies increased $.4 million, loan origination costs increased
$.2 million, and external professional fees increased $.3 million. These
increases were primarily due to the growth of the Company.
Other Real Estate Owned (OREO) expense increased from $1.9 million in 1995 to
$3.2 million in 1996, an increase of $1.3 million, or 68.4%. Of that amount, $.9
million represents the increase in the provision for possible OREO losses which
management had effected in the beginning of 1996. The remaining increase of $.4
million is the result of disposition and maintenance costs during 1996. The
decrease from 1994 to 1995 of $1,309, or 41.1%, is due to a decline of $4,282 in
OREO assets.
- --------------------------------------------------------------------------------
11
<PAGE>
The increase in the amortization of intangibles from 1995 to 1996
is attributable to the increase in goodwill established for the Hometown and UST
purchases of $14.6 million and $6.2 million, respectively. The increase in the
amortization of intangibles from 1994 to 1995 is attributable to the full year
amortization applicable to the 1994 acquisitions.
Merger related and restructuring costs were $22.0 million, $2.9 million, and $.8
million for 1996, 1995 and 1994, respectively. The costs for 1994 and 1995
included printing, legal, accounting, mailing, conversion costs, consulting fees
and other like costs associated with the 1994 and 1995 acquisitions. For 1996,
the merger related costs were comprised of basically the same types of expenses
described for the two prior periods. The additional element in 1996 - the
restructuring costs - were expensed in the current period of acquisition to
provide for the ongoing cost of restructuring the payroll and rental expense of
the Connecticut franchise to meet the Company's operational strategies. Such
costs include targeted branch and operations center closings, change of control
contracts, data processing issues, demolition, moving and restoration costs and
other expenses related to the integration of the acquired companies.
Other expenses decreased $780, or 5.8%, from $13,452 in 1995 to $12,672 in 1996
due to a reduction in miscellaneous gains and losses occurring primarily from
branch operations. The increase from 1994 to 1995 of $1,102, or 8.9%, is the
result of increases in a number of miscellaneous expense categories related to
the acquisition of the Company's credit card business, as well as the
implementation of the Company's International Department, Asset Based Lending
group and Alternative Investment Products Program, all of which were established
toward the end of 1994.
FEDERAL INCOME TAXES
The income tax provision for Federal and state taxes approximates 35% for 1996,
30% for 1995 and 35% for 1994. 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.
FINANCIAL CONDITION
Total assets at December 31, 1996 increased by $337,271, or 12.1%, as a result
of the purchase of Hometown, UST and the four New Jersey branch offices.
The Company considers its liquidity and capital to be adequate. At the end of
1996, the Company had $24.2 million in Federal funds sold and $936 million in
securities that are available to meet future loan demand. During the FAS #115
window opportunity, the Company moved securities from the Held to Maturity to
Available for Sale category so that approximately 70% of the investment
portfolio is now in the Available for Sale category and only 30% is in the Held
to Maturity category. This enables management to more effectively manage
liquidity, the portfolio, and the net interest margin. A net decline in total
capital of $10.5 million resulted from the Company's purchase of $19.8 million
in common treasury shares, which was partially offset by the addition of $6.1
million from net income less dividends paid, a $.7 million increase in the
mark-to-market of available for sale securities, and other capital transactions.
The purchased treasury shares were reissued within pooling limitations in the
Growth, Lafayette and Westport transactions and in the issuance of shares
relative to the 3% stock dividend. At the end of 1996, Hubco's Tier 1 Leverage
ratio was 5.71%.
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
The securities portfolios serve to manage interest rate risk and as a source of
liquidity. Consequently, the portfolios are managed over time in response to
changes in market conditions and as loan demand changes.
At December 31, 1996 and 1995, the portfolios comprised 30 % and 29% of the
total assets of the Company. The amount of securities as a percentage of earning
assets is a function of the amount of deposits and 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 in order to decrease the number of
securities in the portfolio.
- --------------------------------------------------------------------------------
12
<PAGE>
The following table summarizes the composition of the portfolios as of December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------ ----------------------------------------
GROSS UNREALIZED ESTIMATED GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------- MARKET AMORTIZED ----------------- 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 $ 76,837 $ 326 $ (21) $ 77,142 $ 95,521 $2,438 $ (18) $ 97,941
U.S. Government
Agencies 204,077 1,508 (3,117) 202,468 198,536 2,300 (1,192) 199,644
------------------------------------------ ----------------------------------------
$280,914 $1,834 $(3,138) $279,610 $294,057 $4,738 $(1,210) $297,585
========================================== ========================================
AVAILABLE FOR SALE
PORTFOLIO
U.S. Government $ 85,403 $ 535 $ (51) $ 85,887 $153,056 $1,662 $ (408) $154,310
U.S. Government
Agencies 496,370 3,118 (3,376) 496,112 313,446 1,333 (1,770) 313,009
States and Political
Subdivisions 11,575 6 (2) 11,579 10,095 30 (10) 10,115
Other dept securities 4,344 53 (11) 4,386 16,481 198 (52) 16,627
Other securities 52,730 5,088 (290) 57,528 5,666 2,935 (281) 8,320
------------------------------------------ ----------------------------------------
$650,422 $8,800 $(3,730) $655,492 $498,744 $6,158 $(2,521) $502,381
========================================== ========================================
</TABLE>
LOAN PORTFOLIO
DISTRIBUTION OF LOANS BY CATEGORY
December 31,
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Loans secured by real estate:
Residential mortgage
loans-fixed $ 209,015 $ 197,471 $ 191,262
Residential mortgage
loans-variable 372,059 311,763 284,822
Residential home
equity loans 145,660 95,985 104,001
Construction loans 25,080 30,186 20,323
Commercial mortgage
loans 479,566 449,852 415,836
------------------------------------
1,231,380 1,085,257 1,016,244
------------------------------------
Commercial and
industrial loans:
Secured by real estate 113,102 124,568 150,469
Other 368,962 292,158 251,319
------------------------------------
482,064 416,726 401,788
------------------------------------
Shoppers Charge
credit cards 61,759 57,915 67,577
Other loans to individuals
for household, family
and other personal
expenditures 109,152 92,124 83,450
------------------------------------
Total Loan Portfolio $1,884,355 $1,652,022 $1,569,059
====================================
Total loans at December 31, 1996 increased by $232,333, or 14.1%, due to
internal growth and to the Hometown and UST acquisitions. Except for
construction loans and commercial loans secured by real estate, all other
categories increased. The largest increase in terms of volume was in commercial
loans, which grew by $76,804, or 26.3%. The Company has experienced success in
originating commercial loans in the markets served. During 1996, Hudson United
Bank achieved SBA Preferred Lender status and a centralized group was
established to underwrite small business loans which improved approval time.
Mortgage loans categorized as fixed residential, variable residential and
commercial showed increases of 5.6%, 19.3%, and 6.6%, respectively, as a result
of the portfolios acquired through acquisitions. In addition, new products and
technological advances for improved customer service contributed to the growth
in mortgage loans. Home equity loans increased by $49,675, or 51.8%, of which
approximately one-half of the increase resulted from acquisitions with the
remainder due to internal growth. The Shoppers Charge credit card portfolio
increased by $3.8 million. 1996 was a year in which Shoppers expanded its niche
by establishing private label credit card programs with several national chains,
primarily high end womens apparel retailers. In addition, the increased
effectiveness of SCA's credit marketing programs including "instant credit"
resulted in a processing sales increase in excess of 25% and a 204% increase in
new account applications processed. SCA currently services 222 merchants who
collectively have 648 stores in 44 states. Shoppers' portfolio of $61,759 at
year end represents an increase of 7% over the prior year end.
ASSET QUALITY
The Company's principal earning assets are its loans, which are primarily to
businesses and individuals located in New Jersey and Connecticut with the
exception of the credit card loans which are originated in 44 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, the amount of potential problem loans,
industry or geographic
- --------------------------------------------------------------------------------
13
<PAGE>
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,
1996 1995 1994
---------------------------
Commercial $2,921 $1,026 $1,102
Real estate 3,292 4,142 1,733
Consumer 832 461 178
Credit card 1,486 592 657
---------------------------
Total Loans
Past-Due 90-Days
or More and Still
Accruing $8,531 $6,221 $3,670
===========================
AS A PERCENT OF
TOTAL LOANS 0.45% 0.38% 0.23%
===========================
AS A PERCENT OF
TOTAL ASSETS 0.27% 0.22% 0.13%
===========================
These ratios have increased from the Company's historical levels due to the
asset quality of acquired institutions along with the reporting of delinquent
credit card receivables. In the past, if the account was on a recourse basis
with a cash reserve only the net amount was reported as delinquent. In addition,
in March of 1996 the credit card division switched from the recency method to
the contractual method of reporting delinquencies on. Comparable basis numbers
reported for 1995 would have been $2.5 million.
Nonaccruing loans consist of commercial loans and commercial mortgage loans
past-due 90-days or more and not fully secured or in the process of collection.
Residential real estate loans are generally placed on nonaccrual status after
180 days of delinquency and consumer loans after 90 days of delinquency and are
charged off after 120 days of delinquency. Any loan may be put on nonaccrual
status earlier if the Company has concern about the future collectability of the
loan or its ability to return to current status.
Nonaccrual real estate 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.
Renegotiated loans are loans which were renegotiated as to the term or rate or
both to assist the borrower after the borrower has suffered adverse
The following table summarizes the Company's nonperforming assets:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS December 31,
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual Loans $ 29,029 $ 23,700 $ 35,043
Renegotiated Loans 2,779 1,879 6,528
------------------------------------------
Total Nonperforming Loans 31,808 25,579 41,571
Other Real Estate Owned 5,651 11,564 15,846
------------------------------------------
Total Nonperforming Assets $ 37,459 $ 37,143 $ 57,417
==========================================
Ratios:
Nonaccrual Loans to Total Loans 1.54% 1.43% 2.23%
Nonperforming Assets to Total Assets 1.20% 1.34% 2.07%
Allowance for Loan Losses to Nonaccrual Loans 121% 127% 88%
Allowance for Loan Losses to Nonperforming Loans 111% 118% 74%
</TABLE>
effects in financial condition. Terms are designed to fit the ability of the
borrower to repay and the Company's objective of obtaining repayment. The
Company has $2.8 million that are considered renegotiated loans.
OREO consists of properties on which the Bank has foreclosed or has taken a deed
in lieu of the loan obligation. OREO properties are carried at fair value at all
times. The cost to dispose of OREO properties, the cost to maintain them 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, including those acquired in acquisitions. At December 31, 1996,
1995, and 1994, OREO amounted to $5.7 million, $11.6 million, and $15.8 million.
The decline from year to year reflects the Company's success in disposing of
these properties.
At December 31, 1996, nonperforming loans increased by $6.2 million, or 24.4%.
The acquired companies added significantly to the Company's level of
nonperforming loans. The Company has been able to either dispose of or return
the loan to current status on the great majority of the problem loans acquired
in previous acquisitions.
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 $2.7 million, $2.5 million, and $3.0 million for the years 1996,
1995, and 1994, respectively. The amount of interest income recorded on such
loans for each of the years was $.4 million, $.6 million, and $.3 million. The
- --------------------------------------------------------------------------------
14
<PAGE>
Company has no outstanding commitments to advance additional funds to borrowers
whose loans are in a nonperforming status.
Measures to control and reduce the level of nonperforming loans are continuing.
Efforts are made to identify slow paying loans and collection procedures are
instituted. After identification, steps are taken to understand the problems of
the borrower and to work with the borrower toward resolving the problem, if
practicable. Continuing collection efforts are a priority for the Banks.
The allowance for possible loan losses at December 31, 1996, 1995, and 1994 as a
percentage of total loans was 1.87%, 1.82%, and 1.97%, 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 10 shows
the allowance by loan category and the level of unallocated allowance. The
unallocated portion, 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 1994, 1995, and 1996.
DEPOSITS
As of December 31, 1996, Hudson United Bank has 58 branch offices located
primarily in Bergen, Essex, Hudson, and Passaic counties with other locations in
Middlesex, Morris, Union and Somerset counties. Hudson manages the branch system
by regionalizing into 4 regions with each managed by a regional manager with a
loan staff.
Lafayette American Bank has 27 branch offices located in New Haven and Fairfield
counties. Lafayette has established 2 regions.
The Company devotes as much attention to the cost side of the net interest
margin as to loans, emphasizing the generation of the lowest cost deposits. The
following table summarizes the deposit base:
December 31,
1996 1995 1994
- ----------------------------------------------------------------
Noninterest-
bearing
deposits $ 622,718 $ 555,928 $,0507,585
NOW/MMDA
deposits 520,088 477,172 481,989
Savings deposits 622,880 633,707 732,237
Time deposits 826,406 779,466 693,188
----------------------------------------
Total Deposits $2,592,092 $2,446,273 $2,414,999
========================================
The increase in deposits from 1995 to 1996 of $145,819, or 6.0%, is primarily
attributable to the New Jersey branch purchases and to the Connecticut purchases
of Hometown and UST. As noted earlier, 44% of the deposit base is in low or
noninterest bearing core deposits and another 24% is in low cost savings
deposits. 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 has several liquidity measurements that are evaluated
on a frequent basis. The Company has adequate sources of liquidity including
Securities Available for Sale, Federal funds lines, and the ability to acquire
funds from the Federal Home Loan Bank. In addition, the securities portfolio
maturities are laddered over 5 years which means there are continuous maturities
of securities. The management of balance sheet volumes, mixes, and maturities
enables the Company to maintain adequate levels of liquidity.
The liquidity requirements of the Company, primarily for dividends to
shareholders, debt service, and other corporate purposes are met through cash
and short-term money market investments and regular periodic dividends from the
subsidiary banks. The Company also has the ability, when and if necessary, to
access the capital markets. Management considers the liquidity of the Company
and the subsidiary banks to be adequate to meet current and 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 establish minimum capital ratio guidelines for the banking industry.
The capital ratios impact the performance of the Company in that these ratios
determine the FDIC deposit insurance premium rate a bank must pay. The following
table sets forth the regulatory minimum capital ratio guidelines and the current
capital ratios of the Company.
REGULATORY COMPANY
CAPITAL CAPITAL
GUIDELINES RATIOS
- --------------------------------------------------
Tier 1 Leverage Ratio 3 - 5% 5.71%
Tier 1 Risk-Based
Capital Ratio 4% 8.55%
Total Risk-Based Capital 8% 14.08%
At December 31, 1996, 1995, and 1994 the Company exceeded all regulatory capital
guidelines including those for a well capitalized institution. 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. On November 15, 1996, the Company paid a 3% stock dividend
and increased its regular quarterly cash dividend from $.17 to $.19 per common
share, effecting a 15% dividend increase. The dividend payout ratio
- --------------------------------------------------------------------------------
15
<PAGE>
was 72% for 1996 compared with 42% in 1995 and 35% in 1994. The increase in the
1996 ratio is due to the lower net income resulting from the special charges.
Excluding the special charges the payout ratio was 43%.
In 1994, the Company issued $19.1 million in convertible preferred stock in
connection with the Washington acquisition. Based on the terms the stock became
convertible in 1995. Approximately $2 million in preferred stock which was not
converted by the holders as of June 30, was redeemed for cash. Pursuant to the
November 1993 Board authorization to repurchase up to 10% of the shares
outstanding each year, the Company acquired approximately 1.16 million shares of
common stock in 1995 which were then utilized for the 1.2 million shares issued
in the conversion of the preferred stock. During 1996, the Company's treasury
stock was reissued for the 3% stock dividend and for acquisitions. At December
31, 1996, there were no common or preferred shares held in treasury.
In September , 1996, the Company sold $75 million of subordinated debt in a
private placement which was subsequently registered with the SEC. The
subordinated debentures bear interest at 8.20% per annum payable semi-annually
and mature in 2006. Proceeds of the issuance were used for general corporate
purposes including the funding of the subsidiary banks' securities portfolios.
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.
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-sensitive 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 with 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, 1996, 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-bearing 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 from 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, and 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 Company is asset sensitive with respect to assets versus liabilities that
reprice immediately when interest rates change. Approximately 36% of assets
reprice immediately versus 23% of liabilities. The 90-day gap is $411 million.
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.
- --------------------------------------------------------------------------------
16
<PAGE>
The following table shows the gap position of the Company at December 31, 1996:
GAP ANALYSIS
<TABLE>
<CAPTION>
December 31, 1996
DUE BETWEEN
DUE WITHIN 91 DAYS DUE AFTER NON-INTEREST
(In Thousands) 90 DAYS AND ONE YEAR ONE YEAR BEARING TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Federal Funds Sold $ 24,200 $ -- $ -- $ -- $ 024,200
Securities 145,592 27,358 763,456 -- 936,406
Total Loans 953,075 237,996 693,284 -- 1,884,355
Non-Interest Bearing
Assets -- -- -- 270,726 270,726
-------------------------------------------------------------------
Total Assets $ 1,122,867 $ 265,354 $ 1,456,740 $ 270,726 $ 3,115,687
Percent of
Total Assets 36.04% 8.52% 46.75% 8.69% 100.00%
=========================================================================================================
SOURCE OF FUNDS
Interest-Bearing
Deposits $ 523,595 $ 322,214 $ 1,123,564 $ -- $ 1,969,373
Short-Term Borrowings 187,979 -- -- -- 187,979
Long-Term Debt -- -- 100,000 -- 100,000
Non-Interest Bearing
Deposits 622,719 622,719
Other Liabilities -- -- -- 29,283 29,283
Stockholders' Equity -- -- -- 206,333 206,333
-------------------------------------------------------------------
Total Source of Funds $ 711,574 $ 322,214 $ 1,223,564 $ 858,335 $ 3,115,687
Percent of Total Source of Funds 22.84% 10.34% 39.27% 27.55% 100.00%
=========================================================================================================
Interest Rate Sensitivity Gap $ 411,293 $ (56,860) $ 233,176 $ (587,609)
- ---------------------------------------------------------------------------------------------------------
Cumulative Interest
Rate Sensitivity Gap $ 411,293 $ 354,433 $ 587,609
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
Consolidated
Balance Sheets
<TABLE>
<CAPTION>
December 31, (in thousands, except share data) 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 128,868 $ 156,891
Federal funds sold 24,200 64,200
TOTAL CASH AND CASH EQUIVALENTS 153,068 221,091
Securities available for sale, at market value 655,492 502,381
Securities held to maturity, at cost (market value of $279,610
and $297,585 for 1996 and 1995, respectively) 280,914 294,057
Loans:
Real estate mortgage 1,085,720 974,872
Commercial and financial 499,004 435,060
Consumer credit 237,872 184,175
Credit card 61,759 57,915
---------------------------
TOTAL LOANS 1,884,355 1,652,022
Less: Allowance for possible loan losses (35,153) (30,105)
---------------------------
NET LOANS 1,849,202 1,621,917
Premises and equipment, net 43,510 42,160
Other real estate owned 5,651 11,564
Intangibles, net of amortization 29,225 7,572
Other assets 98,625 77,674
---------------------------
TOTAL ASSETS $3,115,687 $2,778,416
===========================
LIABILITIES AND STOCKHOLDERSO EQUITY
Deposits:
Noninterest bearing $ 622,719 $ 555,928
Interest bearing 1,969,373 1,890,345
---------------------------
TOTAL DEPOSITS 2,592,092 2,446,273
Short-term borrowings 187,979 62,982
Other liabilities 29,283 27,365
---------------------------
TOTAL LIABILITIES 2,809,354 2,536,620
---------------------------
Subordinated debt 100,000 25,000
---------------------------
Commitments and contingencies
StockholdersO Equity:
Convertible Preferred stock--Series B, no par value; authorized
10,300,000 shares; 39,600 shares issued and outstanding
in 1996; 41,850 shares issued and outstanding in 1995 3,960 4,185
Common stock, no par value; authorized 51,500,000
shares; 21,624,468 shares issued and outstanding
in 1996 and issued 22,117,443 and outstanding 22,072,589 shares in 1995 38,448 38,265
Additional paid-in capital 104,233 110,229
Retained earnings 56,968 63,173
Treasury stock, at cost, 44,854 common
shares in 1995 -- (647)
Restricted stock award (279) (688)
Unrealized gain on securities available
for sale, net of income taxes 3,003 2,279
---------------------------
TOTAL STOCKHOLDERSO EQUITY 206,333 216,796
---------------------------
TOTAL LIABILITIES AND STOCKHOLDERSO EQUITY $3,115,687 $2,778,416
===========================
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
18
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
Consolidated Statements
of Income
<TABLE>
<CAPTION>
Year ended December 31, (in thousands, except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND FEE INCOME:
Loans--taxable $149,331 $146,801 $116,200
Loans--tax-exempt 217 286 393
Securities--taxable 53,141 53,801 50,837
Securities--tax-exempt 440 1,128 1,651
Other 1,053 1,635 1,848
-------------------------------------
TOTAL INTEREST AND FEE INCOME 204,182 203,651 170,929
-------------------------------------
INTEREST EXPENSE:
Deposits 62,704 61,677 47,853
Short-term borrowings 6,219 6,610 3,031
Subordinated and other debt 3,905 2,153 2,242
-------------------------------------
TOTAL INTEREST EXPENSE 72,828 70,440 53,126
-------------------------------------
NET INTEREST INCOME 131,354 133,211 117,803
PROVISION FOR POSSIBLE LOAN LOSSES 12,295 9,515 9,309
-------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 119,059 123,696 108,494
-------------------------------------
NONINTEREST INCOME:
Trust department income 3,151 3,579 3,662
Service charges on deposit accounts 13,999 13,661 13,957
Securities gains (losses) 987 986 (417)
Other income 12,139 9,999 5,218
-------------------------------------
TOTAL NONINTEREST INCOME 30,276 28,225 22,420
-------------------------------------
NONINTEREST EXPENSE:
Salaries 34,857 37,888 34,378
Pension and other employee benefits 9,874 12,708 10,816
Occupancy expense 10,089 10,985 10,391
Equipment expense 5,285 5,784 5,685
Deposit and other insurance 2,173 4,899 7,202
Special SAIF assessment 825 -- --
Outside services 11,912 10,159 8,798
Other real estate owned expense 3,189 1,879 3,188
Amortization of intangibles 3,358 2,181 1,299
Merger related and restructuring costs 22,005 2,907 824
Other 12,672 13,452 12,350
-------------------------------------
TOTAL NONINTEREST EXPENSE 116,239 102,842 94,931
-------------------------------------
INCOME BEFORE INCOME TAXES 33,096 49,079 35,983
PROVISION FOR INCOME TAXES 11,599 14,514 12,595
-------------------------------------
NET INCOME $ 21,497 $ 34,565 $ 23,388
=====================================
INCOME PER COMMON SHARE:
Primary $.93 $1.45 $1.03
Fully diluted $.93 $1.44 $1.02
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 23,225 23,608 22,343
Fully diluted 23,225 24,116 22,945
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
19
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
Consolidated Statements of Changes in
StockholdersO Equity For the Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------ --------------------
(in thousands, except share data) SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 113,585 $ 4,564 15,716,611 $ 27,944
==========================================
Net income -- 1994 -- -- -- --
Cash dividends -- common -- -- -- --
Cash dividends -- preferred -- -- -- --
Stock dividend of acquired company -- -- 53,029 94
Issuance of common stock for -
Stock options exercised -- -- 5,813 10
Warrants exercised -- -- 4,152 8
Dividend reinvestment and
stock purchase plan and
rights offerings -- -- 4,579,124 8,142
Preferred stock conversion (69,635) (169) 308,374 548
Issuance of preferred stock 797,811 19,147 -- --
Issuance and retirement of
treasury stock -- -- -- --
Purchase of treasury stock:
Preferred -- -- -- --
Sale of treasury stock -- -- -- --
Restricted stock transactions -- -- -- --
Effect of compensation plans -- -- -- --
Other equity transactions -- -- -- --
Change in unrealized holding gains
(losses) on securities available
for sale -- -- -- --
------------------------------------------
Balance at December 31, 1994 841,761 23,542 20,667,103 36,746
==========================================
Net income -- 1995 -- -- -- --
Cash dividends -- common -- -- -- --
Cash dividends -- preferred -- -- -- --
Stock dividend of acquired company -- -- 55,655 99
Issuance of common stock for -
Stock options exercised -- -- 63,825 114
Warrants exercised 663,353 1,179
Dividend reinvestment and
stock purchase plan -- -- 1,715 3
Conversion of preferred stock (2,100) (210) 69,757 124
Redemption of preferred stock and
conversion of preferred stock
to common stock (797,811) (19,147) -- --
Purchase of treasury stock:
Preferred -- -- -- --
Common -- -- -- --
Restricted stock transactions -- -- -- --
Effect of compensation plans -- -- -- --
Regulatory approved transfer of
acquired subsidiary -- -- -- --
Change in unrealized holding gains
(losses) on securities
available for sale -- -- -- --
------------------------------------------
Balance at December 31, 1995 41,850 4,185 21,521,408 38,265
==========================================
<CAPTION>
UNREALIZED
HOLDING GAIN
(LOSS) ON
ADDITIONAL RESTRICTED SECURITIES
PAID-IN RETAINED TREASURY STOCK AVAILABLE
(in thousands, except share data) CAPITAL EARNINGS STOCK AWARD FOR SALE TOTAL
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 96,392 $ 7,130 $ (4,571) $ (946) $ 4,525$ 135,038
=============================================================
Net income -- 1994 -- 23,388 -- -- -- 23,388
Cash dividends -- common -- (3,512) -- -- -- (3,512)
Cash dividends -- preferred -- (447) -- -- -- (447)
Stock dividend of acquired company 521 (615) -- -- -- --
Issuance of common stock for -
Stock options exercised 25 -- -- -- -- 35
Warrants exercised 2 -- -- -- -- 10
Dividend reinvestment and
stock purchase plan and
rights offerings 24,175 -- -- -- -- 32,317
Preferred stock conversion (379) -- -- -- -- --
Issuance of preferred stock -- -- -- -- -- 19,147
Issuance and retirement of
treasury stock (2) (1) -- -- -- (3)
Purchase of treasury stock:
Preferred -- -- (7,855) -- -- (7,855)
Sale of treasury stock 5 -- 59 -- -- 64
Restricted stock transactions -- 6 703 (320) -- 389
Effect of compensation plans 130 -- -- -- -- 130
Other equity transactions (3) -- (100) -- -- (103)
Change in unrealized holding gains
(losses) on securities available
for sale -- -- -- -- (11,293) (11,293)
-------------------------------------------------------------
Balance at December 31, 1994 120,866 25,949 (11,764) (1,266) (6,768) 187,305
=============================================================
Net income -- 1995 -- 34,565 -- -- -- 34,565
Cash dividends -- common -- (8,545) -- -- -- (8,545)
Cash dividends -- preferred -- (901) -- -- -- (901)
Stock dividend of acquired company 824 (923) -- -- -- --
Issuance of common stock for -
Stock options exercised 503 -- -- -- -- 617
Warrants exercised 319 -- -- -- -- 1,498
Dividend reinvestment and
stock purchase plan 23 -- -- -- -- 26
Conversion of preferred stock 86 -- -- -- -- --
Redemption of preferred stock and
conversion of preferred stock
to common stock 452 -- 16,214 -- -- (2,481)
Purchase of treasury stock:
Preferred -- -- (71) -- -- (71)
Common -- -- (4,885) -- -- (4,885)
Restricted stock transactions -- -- (141) 578 -- 437
Effect of compensation plans 184 -- -- -- -- 184
Regulatory approved transfer of
acquired subsidiary (13,028) 13,028 -- -- -- --
Change in unrealized holding gains
(losses) on securities
available for sale -- -- -- -- 9,047 9,047
-------------------------------------------------------------
Balance at December 31, 1995 110,229 63,173 (647) (688) 2,279 216,796
=============================================================
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
20
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
Consolidated Statements of Changes in Stockholders' Equity (Continued)
For the Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------ PAID-IN
(in thousands, except share data) SHARES AMOUNT SHARES AMOUNT CAPITAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income -- 1996 -- $ -- -- $ -- $ --
Cash dividends -- common -- -- -- -- --
Cash dividends -- preferred -- -- -- -- --
3% stock dividend -- -- 15,269 27 680
Issuance of common stock for -
Stock options exercised -- -- 256,608 455 (873)
Warrants exercised -- -- 143,836 255 207
Dividend reinvestment and
stock purchase plan -- -- 371 1 6
Preferred stock conversion (2,250) (225) 74,739 133 92
Issuance and retirement of
treasury stock -- -- (387,763) (688) (7,218)
Purchase of treasury stock:
Common -- -- -- -- --
Restricted stock transactions -- -- -- -- --
Effect of compensation plans -- -- -- -- 116
Tax effect of exercise of
nonqualifying stock options -- -- -- -- 994
Change in unrealized holding gains
(losses) on securities available
for sale -- -- -- -- --
----------------------------------------------------
Balance at December 31, 1996 39,600 $ 3,960 21,624,468 $ 38,448 $ 104,233
====================================================
<CAPTION>
UNREALIZED
HOLDING GAIN
(LOSS) ON
RESTRICTED SECURITIES
RETAINED TREASURY STOCK AVAILABLE
(in thousands, except share data) EARNINGS STOCK AWARD FOR SALE TOTAL
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income -- 1996 $ 21,497 $ -- $ -- $ -- $ 21,497
Cash dividends -- common (14,600) -- -- -- (14,600)
Cash dividends -- preferred (825) -- -- -- (825)
3% stock dividend (12,398) 11,657 -- -- (34)
Issuance of common stock for -
Stock options exercised -- 782 -- -- 364
Warrants exercised -- 74 -- -- 536
Dividend reinvestment and
stock purchase plan -- -- -- -- 7
Preferred stock conversion -- -- -- --
Issuance and retirement of
treasury stock -- 7,906 -- -- --
Purchase of treasury stock:
Common -- (19,770) -- -- (19,770)
Restricted stock transactions 17 (2) 409 -- 424
Effect of compensation plans 104 -- -- -- 220
Tax effect of exercise of
nonqualifying stock options -- -- -- -- 994
Change in unrealized holding gains
(losses) on securities available
for sale -- -- -- 724 724
---------------------------------------------------------
Balance at December 31, 1996 $ 56,968 $ -- $ (279) $ 3,003 $206,333
=========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
21
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
Consolidated Statements
of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996, 1995, and 1994 (in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,497 $ 34,565 $ 23,388
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible loan losses 12,295 9,515 9,309
Provision for depreciation and amortization 10,495 7,695 6,996
Amortization of securities premiums, net 2,436 393 3,023
Securities (gains) losses (987) (986) 417
Gain on sale of loans (153) (595) (856)
Gain on sale of interest in subsidiary -- (817) --
Deferred income tax provision (benefit) (2,818) 6,539 4,495
Net change in loans originated for sale -- (1,079) 8,939
Decrease (increase) in other assets 17,013 (17,386) (11,722)
Increase (decrease) in other liabilities 2,538 3,895 (46,336)
--------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 62,316 41,739 (2,347)
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 103,767 158,446 89,965
Proceeds from repayments and maturities of securities:
Available for sale 122,192 42,289 88,326
Held to maturity 54,677 121,074 124,024
Purchases of securities:
Available for sale (347,257) (91,452) (50,706)
Held to maturity (47,929) (87,709) (325,675)
Net cash acquired through acquisitions 78,747 -- 91,113
Net increase in loans (82,070) (108,876) (50,415)
Loans purchased -- (8,257) (2,462)
Loans sold 9,450 21,357 14,381
Proceeds from sales of premises and equipment 1,233 -- 26
Purchases of premises and equipment (4,949) (3,322) (13,540)
Decrease in other real estate owned 6,151 4,361 3,953
--------------------------------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (105,988) 47,911 (31,010)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts
and savings accounts (91,630) (55,127) (20,311)
Net (decrease) increase in certificates of deposit (80,466) 86,401 (14,972)
Net increase (decrease) in short-term borrowings 108,295 (57,113) 38,456
Proceeds from the issuance of subordinated debt 73,738 -- 24,683
Proceeds from the issuance of common stock 907 2,141 32,362
Redemption of convertible preferred stock -- (2,481) --
Cash dividends paid (15,425) (9,446) (3,959)
Proceeds from the sale of treasury stock -- -- 64
Purchase of treasury stock (19,770) (4,956) (7,855)
Proceeds from sale of interest in subsidiary -- 4,215 --
--------------------------------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (24,351) (36,366) 48,468
--------------------------------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (68,023) 53,284 15,111
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 221,091 167,807 152,696
--------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $153,068 $221,091 $167,807
=====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest $ 71,874 $ 68,706 $ 51,274
Income taxes 15,286 10,887 8,151
=====================================
Liabilities assumed in purchase business
combinations and branch acquisitions $347,104 -- $389,233
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
22
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
Notes To Consolidated Financial Statements
DECEMBER 31, 1996 (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 two banking subsidiaries, Hudson
United Bank and Lafayette American Bank and Trust Company (Lafayette), with
branch locations in New Jersey and Connecticut. The Company is subject to the
regulations of certain Federal and state banking agencies and undergoes periodic
examinations by those agencies.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of HUBCO, Inc. and
its subsidiaries, all of which are wholly owned. The financial statements of
institutions acquired which have been accounted for by the pooling of interests
method are included herein for all periods presented.
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 classifies 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. Sales or transfers 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, increases in
capital requirements 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, 1996 and
1995.
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, 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 all 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 recognize potential losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions, particularly in its market areas. In addition, various
regulatory agencies, as an integral part of their examination processes,
periodically review the allowance for possible loan losses of subsidiary banks.
Such agencies may require additions to the allowance based on their judgments of
information available to them at the time of their examinations.
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 ranging from 3-25 years. Maintenance and repairs are expensed as incurred
and additions and improvements are capitalized.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) includes loan collateral that has been formally
repossessed. These assets are transferred to OREO and recorded at the lower of
carrying cost or fair value of the properties. Subsequent provisions that result
from ongoing periodic evaluations of these OREO properties are charged to
expense in the period in which they are identified. OREO 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, a third-party data processing service provider. The investment is
being accounted for by the equity method.
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 periods ranging from five to ten 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).
PURCHASED MORTGAGE SERVICING RIGHTS
Purchased mortgage servicing rights are carried at the lower of amortized cost
or the discounted value of the related estimated future net cash flow stream.
The cost of purchased mortgage servicing rights is amortized over the estimated
period of net servicing revenues.
- --------------------------------------------------------------------------------
23
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
FEDERAL INCOME TAXES
The Company uses the liability method of accounting for income taxes. 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. A deferred tax valuation
allowance is established if it is more likely than not that all or a portion of
the Company's deferred tax asset will not be realized. Changes in the deferred
tax valuation allowance are reported through charges or credits to the income
tax provision.
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.
As discussed further in Note (2), the Company acquired all of the outstanding
shares of Lafayette on July 1, 1996, and all of the outstanding shares of
Westport Bancorp, Inc. (Westport) on December 13, 1996. Lafayette and Westport
established valuation allowances due to uncertainties surrounding their ability
to realize their deferred tax assets. Considering the combined operating results
of HUBCO, it is unlikely that the Company would have established this valuation
allowance with respect to its federal deferred tax assets had the companies
previously been combined. Accordingly, the accompanying financial statements
(including quarterly financial information in Note 18) have been restated to
reflect what the changes to the valuation allowance would have been had the
companies always been combined.
TREASURY STOCK
The Company determines the cost of treasury shares under the weighted average
cost method.
LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The adoption of the standard did not have a material
impact on the Company's financial position or results of operations.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and allows
companies to choose either 1) a fair value method of valuing stock-based
compensation plans which will affect reported net income, or 2) to continue
following the existing accounting rules for stock option accounting but disclose
what the impacts would have been had the new standard been adopted. The Company
elected the disclosure option of this standard. See Note 14.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. Management believes
that the adoption of the standard will not have a material impact on the
Company's financial position or results of operations.
PER SHARE AMOUNTS
Primary income per common share is computed by dividing net income, less
dividends on the 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 and for all stock dividends.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks and Federal funds sold.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 amounts in order
to conform with 1996 presentation.
(2) BUSINESS COMBINATIONS
The following business combinations have been accounted for using the pooling of
interests method-
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 2.778 shares of the
Company's common stock, for a total of 628,137 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 2.24 shares of the Company's common
stock, for a total of 2,199,230 shares. At the time of the acquisition, Urban
had approximately $230,000 in assets.
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 outstanding was converted into .71 shares of the
Company's common stock, for a total of 1,271,558 shares. At the time of the
acquisition, Growth had approximately $128,000 in assets.
On July 1, 1996, the Company acquired all of the outstanding shares of Lafayette
American Bank and Trust Company (Lafayette), based in Bridgeport, Connecticut.
Each share of Lafayette common stock outstanding was converted into .606 shares
of the Company's common stock, for a total of 5,890,052 shares. At the time of
the acquisition, Lafayette had approximately $741,000 in assets.
On December 13, 1996, the Company acquired all the outstanding shares of
Westport Bancorp, Inc., (Westport) based in Westport, Connecticut. Each share of
Westport common stock outstanding was converted into .332175 shares of the
Company's common stock for a total of 1,866,086 shares. Westport's convertible
preferred stock was converted into a new preferred issue with identical terms,
including equivalent dividend yield. At the time of the acquisition, Westport
had approximately $317,000 in assets.
- --------------------------------------------------------------------------------
24
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
Under the pooling-of-interests method, the accompanying consolidated financial
statements include the accounts of these acquired institutions for all periods
presented. Separate results of the combining pooled entities for the period
prior to their acquisition are as follows-
1995 1994
- ---------------------------------------------------------------
Net interest income-
The Company, as
previously reported $81,102 $58,021
Jefferson -- 3,775
Urban -- 9,300
Growth 5,969 5,298
Lafayette 31,442 28,824
Westport 14,698 12,585
----------------------
$133,211 $117,803
======================
Net income (loss)-
The Company, as
previously reported $23,684 $16,931
Jefferson -- (983
Urban -- 1,484
Growth 198 1,120
Lafayette (1) 6,715 2,474
Westport (1) 3,968 2,362
----------------------
$34,565 $23,388
======================
(1) Represents amounts previously reported by Lafayette and Westport as
restated for certain changes in the timing of deferred tax asset valuation
allowance changes (see Note 1 - Federal Income Taxes).
The following business combinations have been accounted for using the purchase
method-
On August 30, 1996, the Company acquired Hometown Bancorporation (Hometown), a
$194 million bank holding company with 2 branch locations in Fairfield County,
Connecticut, for an aggregate cash consideration of $31.6 million which was
$14.6 million in excess of the fair value of the net assets acquired. Hometown's
banking subsidiary, The Bank of Darien, was merged into Lafayette. Since this
transaction was accounted for as a purchase, Hometown's results of operations
have been included in the accompanying financial statements subsequent to August
30, 1996.
On November 29, 1996, Lafayette acquired UST Bank/Connecticut, a
subsidiary of UST Corp, for a cash purchase price of $13.7 million which was
$6.7 million in excess of the fair value of the net assets acquired. UST
Bank/Connecticut is a $111 million commercial bank with 4 branch locations in
Fairfield County, Connecticut. Since this transaction was also accounted for as
a purchase, UST Bank/Connecticut's results of operations have been included in
the accompanying financial statements subsequent to November 29, 1996.
Pro forma results of operations have not been disclosed herein because the
Hometown and UST Bank/Connecticut business combinations were not deemed to be
significant.
Merger related and restructuring charges include payouts on existing employment
contracts, branch and operations center closings, professional services related
to the business combinations and other expenses related to the integration of
the acquired companies.
In addition, during 1996, the Company purchased 4 branches with total deposits
of $70.3 million for an aggregate premium of $3.6 million. The resulting core
deposit intangible is being amortized to expense on a straight line basis over 5
years. The Company also sold 1 branch during the year with deposits of $9.7
million and recorded a gain of $622.
(3) CASH AND DUE FROM BANKS
Banks are required to maintain an average reserve balance with the Federal
Reserve Bank. The average 1996 amount of this reserve for the Company's
subsidiary banks was approximately $36,914.
(4) SECURITIES
The amortized cost and estimated market value of securities as of December 31,
are summarized as follows:
1996
------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ---------------- MARKET
COST GAINS (LOSSES) VALUE
- -----------------------------------------------------------------
AVAILABLE FOR SALE
U. S. Government $ 85,403 $ 535 $ (51) $ 85,887
U. S. Government
agencies 496,370 3,118 (3,376) 496,112
States and political
subdivisions 11,575 6 (2) 11,579
Other debt securities 4,344 53 (11) 4,386
Equity securities 52,730 5,088 (290) 57,528
------------------------------------------
$650,422 $ 8,800 $(3,730) $655,492
==========================================
HELD TO MATURITY
U. S. Government $ 76,837 $ 326 $ (21) $ 77,142
U. S. Government
agencies 204,077 1,508 (3,117) 202,468
------------------------------------------
$280,914 $ 1,834 $(3,138) $279,610
==========================================
1995
------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------- MARKET
COST GAINS (LOSSES) VALUE
- -----------------------------------------------------------------
AVAILABLE FOR SALE
U. S. Government $153,056 $ 1,662 $(408) $154,310
U. S. Government
agencies 313,446 1,333 (1,770) 313,009
States and political
subdivisions 10,095 30 (10) 10,115
Other debt securities 16,481 198 (52) 16,627
Equity securities 5,666 2,935 (281) 8,320
------------------------------------------
$498,744 $ 6,158 $(2,521) $502,381
==========================================
HELD TO MATURITY
U. S. Government $95,521 $ 2,438 $ (18) $97,941
U. S. Government
agencies 198,536 2,300 (1,192) 199,644
------------------------------------------
$294,057 $ 4,738 $(1,210) $297,585
==========================================
The amortized cost and estimated market value of debt securities at December 31,
1996, 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.
- --------------------------------------------------------------------------------
25
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
- ----------------------------------------------------------------
AVAILABLE FOR SALE
Due in one year or less $ 55,976 $ 56,211
Due after one year through five years 394,481 394,935
Due after five years through ten years 13,089 12,871
Due after ten years 35,801 34,792
-----------------------
499,347 498,809
Mortgage-backed securities 98,345 99,154
Equity securities 52,730 57,529
-----------------------
$650,422 $655,492
=======================
HELD TO MATURITY
Due in one year or less $ 39,996 $ 40,107
Due after one year through five years 146,593 145,781
Due after five years through ten years 19,579 18,754
Due after ten years 22,640 22,259
-----------------------
228,808 226,901
Mortgage-backed securities 52,106 52,709
-----------------------
$280,914 $279,610
=======================
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 $316,828 and
an estimated market value of $310,915 from held-to-maturity to available for
sale. Securities with an amortized cost of $24,998 and an estimated market
value of $24,749 were sold in December 1995, resulting in a realized loss of
$249.
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 acquisition of Washington
Bancorp, Inc. 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 $99,721 and an estimated market value of $98,698 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 a portion of the transfer and sale was to fund the
purchase price and repay assumed debt related to the acquisition of Shoppers
Charge Accounts Co. (Shoppers). 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 for the year ended
December 31 are summarized as follows:
1996 1995 1994
- ---------------------------------------------------------------
Proceeds from sales $103,767 $158,476 $89,963
Gross gains from sales 2,024 2,208 25
Gross losses from sales (1,037) (1,222) (442)
Securities with a book value of $122,562 and $107,740 at December 31, 1996 and
1995, respectively, are pledged to secure public funds, repurchase agreements
and for other purposes as required by law.
(5) LOANS AND THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company's loan portfolio is diversified with no industry comprising greater
than 10% of the total loans outstanding. Real estate loans are primarily made in
the local lending area of the subsidiary banks.
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-
1996 1995 1994
- ----------------------------------------------------------------
Balance at January 1 $30,105 $30,958 $33,463
Additions (deductions)-
Provision charged to expense 12,295 9,515 9,309
Allowance acquired through
mergers or acquisitions 4,658 -- 4,717
Recoveries on loans
previously charged off 2,316 2,711 2,643
Loans charged off (14,221) (13,168) (20,609)
Transfers from assets
held for sale or reserve for
foreclosed property losses -- 89 1,435
-------------------------------
Balance at December 31 $35,153 $30,105 $30,958
===============================
(6) NONPERFORMING ASSETS
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.
DECEMBER 31,
-----------------------
1996 1995
- -----------------------------------------------------------------
Nonaccrual loans $29,029 $23,700
Renegotiated loans 2,779 1,879
-----------------------
Total nonperforming loans $31,808 $25,579
=======================
90 days or more past due and
still accruing $ 8,531 $ 6,221
=======================
YEAR ENDED DECEMBER 31,
-----------------------
Gross interest income which
would have been recorded
under original terms $ 2,684 $ 2,519
=======================
Gross interest income recorded
during the year $ 367 $ 584
=======================
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
- --------------------------------------------------------------------------------
26
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
for Impairment of a Loan - Income Recognition and Disclosure." As defined in
SFAS 114 and 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 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 these standards as of January 1, 1994 with no material
effect on its results of operations.
At December 31, 1996 and 1995 impaired loans, comprised principally of
nonaccruing loans, totaled $31,747 and $28,637, respectively. The allowance for
possible loan losses related to such impaired loans was $6,020 and $3,519 at
December 31, 1996 and 1995, respectively.
Included in the consolidated balance sheets as of December 31, 1996 and 1995 is
$5,347 and $5,581, respectively, of net cash surrender value (net of insurance
premium loans in the amount of $1,521 and $585, respectively) pertaining to life
insurance policies issued by a company (affiliated with Confederation Life
Insurance Company of Canada) which was placed in rehabilitation during 1994.
Although uncertainties exist as a result of the rehabilitation process and
although the Company has ceased accruing interest on this asset, the information
available to the Company does not indicate that this asset (which is not
included in the preceding nonperforming asset table) is impaired.
(7) LOANS TO RELATED PARTIES
In the ordinary course of business, subsidiary banks have extended credit to
various directors, officers and their associates.
The aggregate loans outstanding to related parties are summarized below for the
year ended December 31, 1996-
Balance at January 1 $14,969
New loans issued 5,887
Repayment of loans (394)
Loans to former directors (9,249)
--------
Balance at December 31 $11,213
========
(8) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31-
1996 1995
- ----------------------------------------------------------------
Land $ 8,959 $ 8,758
Premises 41,224 37,651
Furniture, fixtures and equipment 29,468 24,773
----------------------
79,651 71,182
Less- Accumulated depreciation (36,141) (29,022)
----------------------
$43,510 $42,160
======================
Depreciation and amortization expense for premises and equipment for 1996, 1995
and 1994 amounted to $5,135, $5,015 and $5,059, respectively.
(9) INCOME TAXES
The components of the provision (benefit) for income taxes for the year ended
December 31 are as follows-
1996 1995 1994
- ---------------------------------------------------------------
Federal-
Current $13,858 $ 6,088 $ 5,712
Deferred (2,818) 6,539 4,495
State 559 1,887 2,388
------------------------------
Total provision for
income taxes $11,599 $14,514 $12,595
==============================
A reconciliation of the provision for income taxes, as reported, with the
Federal income tax at the statutory rate of 35 percent for the year ended
December 31 is as follows:
1996 1995 1994
- ----------------------------------------------------------------
Tax at statutory rate $11,584 $17,155 $12,234
Increase (decrease) in taxes
resulting from-
Tax-exempt income (424) (495) (715)
State income taxes, net of
Federal income tax benefit 363 1,226 1,552
Reversal of reserves no
longer deemed necessary -- (2,076) --
Change in valuation allowance (1,250) (2,861) (1,296)
Other, net 1,326 1,565 820
-------------------------------
Provision (benefit) for
income taxes $11,599 $14,514 $12,595
===============================
Significant components of deferred tax assets and liabilities are as follows:
DECEMBER 31,
-------------------------------
1996 1995 1994
- -----------------------------------------------------------------
Deferred Tax Assets (Liabilities):
Allowance for possible
loan losses $14,061 $10,605 $ 6,595
Federal and state tax
operating loss
carryforwards 6,349 11,288 15,711
Director and officer
compensation plans 1,189 1,212 1,245
Purchased mortgage
servicing rights 1,067 1,140 1,250
Allowance for losses on
other real estate 902 826 1,259
Depreciation 1,116 503 336
Unrealized (gain) loss on
available for sale securities (2,002) (1,471) 1,684
Acquisition expenses 2,692 -- --
Other 2,319 1,659 (304)
-------------------------------
27,693 25,762 27,776
Valuation Allowance -- (1,250) (4,726)
-------------------------------
Net Deferred Tax Asset $27,693 $24,512 $23,050
===============================
Management periodically evaluates the realizability of its deferred tax asset
and will adjust the level of the valuation allowance if it is deemed more likely
than not that all or a portion of the asset is realizable.
As of December 31, 1996, the Company had approximately $15,000 and $25,000 in
Federal and state carryforwards, respectfully, available for tax reporting
purposes resulting from the Lafayette business combination which are subject to
certain limitations as to the amount which may be utilized in any given year.
- --------------------------------------------------------------------------------
27
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
(10) PENSION PLANS AND POSTRETIREMENT BENEFITS
The Company and its acquired subsidiaries have certain pension plans which cover
eligible employees. 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 includes the following-
1996 1995 1994
- ----------------------------------------------------------------
Service cost -- benefits earned
during the year $1,055 $876 $728
Interest cost on projected
benefit obligation 1,480 1,382 996
Actual return on plan assets (2,816) (3,977) (719)
Net amortization and deferral 1,322 2,687 (351)
------------------------------
Net periodic pension cost $1,041 $968 $654
==============================
Assumptions used by HUBCO in the accounting for its plans in 1996, 1995 and 1994
were:
1996 1995 1994
- ------------------------------------------------------------------
Weighted average
discount rate 7.0%-7.75% 7.0% 7.0%
Rate of increase in
compensation 4.0%-5.0% 4.0% 4.0%
Expected long-term rate of
return on assets 8.0%-8.5% 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:
1996 1995
- ----------------------------------------------------------------
Actuarial present value of benefit
obligations-
Accumulated benefit
obligation, including vested
benefits of $18,894 and
$18,145 for 1996 and
1995, respectively $19,348 $18,679
======================
Projected benefit obligation for
service rendered to date $22,553 $15,206
Plan assets at fair value 22,806 16,035
----------------------
Projected benefit obligation
less than plan assets 253 829
Unrecognized portion as of
December 31, of net asset
existing at date of adoption of
FASB Statement No. 87 (377) (100)
Prior service cost not yet
recognized in net periodic
pension cost 1,200 920
Unrecognized net asset at
December 31 (479) (735)
----------------------
Prepaid pension costs included
in other assets $597 $914
======================
The Company and its acquired subsidiaries have five 401(k) savings plans
covering substantially all of their 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 $654, $598 and $282
in 1996, 1995 and 1994, respectively.
Except for the pension plans, the Company does not provide any significant
post-retirement benefits.
(11) DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100, was approximately $112,943 and $61,772 in 1996 and
1995, respectively.
The scheduled maturities of certificates of deposit are as follows at December
31, 1996-
1997 $671,761
1998 104,058
1999 29,551
2000 12,673
2001 and thereafter 8,363
--------
$826,406
--------
(12) BORROWINGS
The following is a summary of borrowings at December 31-
1996 1995
- ----------------------------------------------------------------
Federal Home Loan Bank advances $110,000 $ 8,315
Securities sold under agreements
to repurchase 56,911 34,542
Federal funds purchased 17,500 11,316
Treasury, Tax and Loan note 893 7,288
Other borrowings 2,675 1,521
-----------------------
Total borrowings $187,979 $62,982
=======================
Information concerning securities sold under agreements to repurchase is
summarized as follows at December 31-
1996 1995
- ---------------------------------------------------------------
Average daily balance during the year $58,734 $69,198
Average interest rate during
the year 3.43% 4.64%
Maximum month-end balance during
the year 97,649 106,801
Mortgage-backed securities underlying the agreements at
December 31-
1996 1995
- ---------------------------------------------------------------
Carrying value $57,470 $32,035
Estimated fair value $57,709 $32,496
(13) SUBORDINATED DEBT
In September, 1996, the Company sold $75,000 aggregate principal amount of
subordinated debentures. The debentures, which mature in 2006, bear interest at
8.20% per annum payable semiannually. In January, 1994, the Company sold $25,000
aggregate principal amount of subordinated debentures. The debentures, which
mature in 2004, bear interest at 7.75% per annum payable semi-annually.
(14) STOCKHOLDERS' EQUITY
On October 13, 1994, the Company announced that its Board of Directors had
approved a 3-for-2 stock split effective January 14, 1995 to record holders of
HUBCO Common Stock on January 3, 1995. On November 15, 1996, the Company paid a
3% stock dividend to stockholders of record November 4, 1996. As a result, all
share data has been retroactively restated.
- --------------------------------------------------------------------------------
28
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
In December, 1996, as part of the Westport acquisition, the Company converted
all outstanding preferred shares of Westport into a new class of preferred
stock. Holders of the preferred stock are entitled to dividends when and if
declared by the Company's Board of Directors. Each share of the preferred stock
is convertible at any time at the option of the holder thereof into 33.2175
shares of common stock, subject to certain adjustments. Each share is entitled
to 33.2175 votes.
In December, 1994 the Board of Directors adopted the 1995 Stock Option Plan
which provides for the issuance of up to 750,000 stock options or restricted
stock grants to employees of the Company in addition to restricted stock awards
previously granted. The option or grant 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, 1994 463,500 $12.46
Granted 60,770 16.99-20.39
Cancelled (54,075) 12.46
-------------------------------
Outstanding, December 31, 1995 470,195 12.46-20.39
Granted 19,570 20.04-20.87
Exercised (74,315) 4.14-12.83
Westport options converted 307,017 6.02-18.06
-------------------------------
Outstanding, December 31, 1996 722,467 $6.02-$20.87
-------------------------------
As of December 31, 1996, 656,292 shares are exercisable. In connection with the
Lafayette and Growth acquisitions, the Company issued HUBCO common shares to the
holders of options to purchase Lafayette or Growth common stock, the value of
which was based on the value of the options on the date of acquisition.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized. Had
compensation cost been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of SFAS No. 123, the
Company's net income and income per share would have been reduced to the
proforma amounts indicated below.
1996 1995
- ---------------------------------------------------------------
Net income As reported $21,497 $34,565
Pro forma 21,421 34,459
Primary earnings
per share As reported $0.93 $1.45
Pro forma 0.92 1.44
Fully diluted earnings
per share As reported $0.93 $1.44
Pro forma 0.92 1.43
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used: dividend
yield of 4%; risk-free interest rates of 5.64% to 6.84%; and expected life of 7
years.
The Company has a restricted stock plan in which 510,000 shares of the Company's
common stock may be granted to officers and key employees. During 1996 and 1995,
4,738 and 3,914 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 ($279) and ($688) has been recorded as a reduction of stockholders'
equity for 1996 and 1995, respectively. Amortization of restricted stock awards
charged to expense amounted to $423 , $455 and $389 in 1996, 1995 and 1994,
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, stock dividends, preferred stock conversion or in connection with
the issuance of common stock in pending or future acquisitions primarily
accounted for under the purchase method of accounting. During 1996, the Company
purchased 971,000 shares at an aggregate cost of $19.8 million. Of these
treasury shares, 578,000 were reissued in connection with the 3% stock dividend
payable November 15, 1996, and 383,000 were reissued in connection with
acquisitions during 1996.
Deferred compensation arrangements have been established for certain directors
and management members. These plans provide for certain annual payments upon
retirement. In conjunction with certain of these arrangements, Lafayette is the
beneficiary under life insurance policies that it has purchased on the
respective participants and other nonparticipating employees. These plans do not
hold any assets.
Deferred compensation expense related to the plans for 1996, 1995 and 1994 was
$241, $80 and $209, respectively.
(15) RESTRICTIONS ON BANK DIVIDENDS, LOANS OR ADVANCES
Certain restrictions exist regarding the ability of Hudson United Bank and
Lafayette to transfer funds to the Company in the form of cash dividends, loans
or advances. New Jersey state banking regulations allow for the payment of
dividends in any amount provided that capital stock will be unimpaired and there
remains an additional amount of paid-in capital of not less than 50 percent of
the capital stock amount. Connecticut state banking regulations allow for the
declaration and payment of cash dividends only from the current year's and the
two prior year's retained net profits. As of December 31, 1996, $109,937 was
available for distribution to the Company from Hudson United Bank and $13,667
was available for distribution to the Company from Lafayette.
Under Federal Reserve regulations, each of the Banks is limited as to the
amounts it may loan to its affiliates, including the Company. All such loans are
required to be collateralized by specific obligations. During 1994, the Company
obtained a loan from Hudson United Bank for $4,000 in order to finance the
purchase of its administrative facility. The loan has been collateralized by the
property.
(16) LEASES
Total rental expense for all leases amounted to approximately $5,203, $4,752
and, $4,638 in 1996, 1995 and 1994, respectively. At December 31, 1996, 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-
1997 $4,100
1998 3,807
1999 3,592
2000 3,198
2001 2,480
Thereafter 11,680
- --------------------------------------------------------------------------------
29
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
It is expected that in the normal course of business, leases that expire will be
renewed or replaced by leases of other properties.
(17) 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, commitments to extend lines
of credit 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 lines of credit and standby letters of credit
outstanding at December 31, 1996 was $315,925 and $17,675, respectively.
Commitments under commercial letters of credit used to facilitate customers
trade transactions were $1,485 at December 31, 1996.
(18) HUBCO, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
BALANCE SHEETS 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 12,092 $ 4,848
Securities-
Available for sale 43,130 12,387
Held to maturity 1,307 --
Investment in subsidiaries 236,639 207,043
Accounts receivable 334 7,572
Premises and equipment, net 5,541 5,600
Other assets 15,400 10,183
-------------------------
TOTAL ASSETS $314,443 $247,633
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 251 $ 768
Notes payable-subsidiary 3,194 3,566
Accrued taxes and other liabilities 4,665 1,503
-------------------------
TOTAL LIABILITIES 8,110 5,837
Subordinated debt 100,000 25,000
Stockholders' equity 206,333 216,796
-------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $314,443 $247,633
=========================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
STATEMENTS OF INCOME 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Cash dividends from bank subsidiaries $49,041 $17,908 $ 14,261
Interest 1,218 873 1,290
Securities gains 1,063 813 --
Rental income 1,093 1,714 238
Other -- 748 --
------------------------------------------
52,415 22,056 15,789
EXPENSES:
General and administrative 3,482 1,729 1,781
Interest 4,147 2,420 1,914
------------------------------------------
7,629 4,149 3,695
------------------------------------------
Income before income tax provision (benefit) and equity in
undistributed net income (loss) of subsidiaries 44,786 17,907 12,094
Income tax provision (benefit) (1,453) 46 (742)
------------------------------------------
46,239 17,861 12,836
Equity in undistributed net income (loss) of subsidiaries (24,742) 16,704 10,552
------------------------------------------
NET INCOME $21,497 $34,565 $23,388
==========================================
</TABLE>
- --------------------------------------------------------------------------------
30
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
HUBCO, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
STATEMENTS OF CASH FLOWS 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $21,497 $34,565 $23,388
Adjustments to reconcile net income to
net cash provided by (used in) operating activities-
Provision for depreciation 331 186 301
Amortization of restricted stock 424 455 389
Securities gains (1,063) (813) --
Gain on sale of interest in subsidiary -- (817) --
Increase in investment in subsidiaries (30,601) (22,380) (6,880)
Decrease (increase) in accounts receivable 7,238 (6,451) (644)
Increase in other assets (5,217) (6,116) (3,689)
Decrease in notes payable (372) (372) --
Decrease (increase) in accounts payable (517) 121 (1,847)
Increase in accrued taxes
and other liabilities 2,576 245 956
------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (5,704) (1,377) 11,974
------------------------------------------
Investing activities:
Proceeds from sale of securities 11,742 18,909 --
Proceeds from maturities of securities 1,444 196 865
Purchase of securities (42,284) (5,191) (15,651)
Net decrease (increase) in loans 426 68 (494)
Capital expenditures (272) (1,116) (7,077)
------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (28,944) 12,866 (22,357)
------------------------------------------
Financing activities:
Proceeds from sale of interest in subsidiary -- 4,215 --
Proceeds from issuance of common stock 907 2,100 45
Proceeds from issuance of subordinated debt 73,738 -- 24,683
Dividends paid (15,425) (9,446) (3,959)
Redemption of convertible preferred stock -- (2,481) --
Purchase of treasury stock (19,770) (4,956) (7,855)
Other 2,442 41 --
------------------------------------------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES 41,892 (10,527) 12,914
------------------------------------------
INCREASE IN CASH 7,244 942 2,531
CASH AT BEGINNING OF YEAR 4,848 3,886 1,355
------------------------------------------
CASH AT END OF YEAR $12,092 $ 4,848 $ 3,886
==========================================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
(19) SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following quarterly financial information for the two years ended December
31, 1996 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30(a) DECEMBER 31(a)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net interest income $32,318 $32,693 $32,431 $33,912
Provision for possible loan losses 2,253 2,743 1,679 5,620
Income before income taxes 13,512 12,658 3,075 3,851
Net income 8,317 7,732 1,988 3,460
Net income per share-primary .35 .33 .09 .16
Net income per share-fully diluted .35 .33 .09 .16
1995
Net interest income $33,294 $33,142 $33,113 $33,662
Provision for possible loan losses 2,600 2,390 2,025 2,500
Income before income taxes 11,235 10,543 13,965 13,336
Net income 7,455 9,399 9,655 8,056
Net income per share - primary .31 .40 .40 .34
Net income per share - fully diluted .31 .39 .40 .34
</TABLE>
(a) Net income and related per share amounts for these periods in 1996 were
significantly impacted by merger related and restructuring costs resulting
from the acquisitions of Lafayette and Westport (see Note 2) that were
completed in the third quarter and fourth quarter, respectively.
(20) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments 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,
1996 and 1995 were as follows:
Cash and cash equivalents include cash and due from bank balances and Federal
funds sold. 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>
1996 1995
-------------------------------- ----------------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK VALUE FAIR VALUE BOOK VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $153,068 $153,068 $221,091 $221,091
Securities 935,102 931,336 799,966 792,801
</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>
1996 1995
-------------------------------- --------------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK VALUE FAIR VALUE BOOK VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, net of allowance $1,881,553 $1,849,202 $1,587,436 $1,621,917
</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.
- --------------------------------------------------------------------------------
32
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
-------------------------------- ---------------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK VALUE FAIR VALUE BOOK VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits $2,594,386 $2,592,092 $2,439,804 $2,446,273
</TABLE>
The fair value for accrued interest receivable, the cash surrender value of life
insurance policies and for the other borrowed funds approximates their
respective recorded book balance.
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK VALUE FAIR VALUE BOOK VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued interest receivable $33,204 $33,204 $22,849 $22,849
Cash surrender value of life insurance 5,072 5,072 5,347 5,347
Short-term borrowings 187,979 187,979 62,982 62,982
</TABLE>
The fair value of the subordinated debt was determined by reference to quoted
market prices. 1996 1995
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
ESTIMATED RECORDED ESTIMATED RECORDED
FAIR VALUE BOOK VALUE FAIR VALUE BOOK VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinated debt $103,475 $100,000 $24,621 $25,000
</TABLE>
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.
(21) REGULATORY MATTERS
The Company and its subsidiary banks are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and its subsidiary banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgements by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require each of the Banks to maintain minimum amounts and ratios (set forth in
the table on page 34) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that the Company and its subsidiary banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notifications from applicable
regulatory authorities categorized the Company and Hudson United Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, Banks must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management believes
have changed the institution's category. Lafayette has not had a regulatory
examination since its acquisition by Hubco, but expects to undergo an
examination early in 1997.
- --------------------------------------------------------------------------------
33
<PAGE>
NOTES--(continued)
- --------------------------------------------------------------------------------
The Bank's actual capital amounts and ratios at December 31, 1996 are presented
in the following table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital to Risk Weighted Assets:
HUBCO $281,557 14.08% $160,003 >8.0% $200,004 >10.0%
Hudson United Bank 125,438 11.76% 85,362 >8.0% 106,703 >10.0%
Lafayette American Bank 102,933 11.31% 72,797 >8.0% 90,961 >10.0%
Tier I Capital to Risk Weighted Assets:
HUBCO 170,954 8.55% 80,002 >4.0% 120,002 >6.0%
Hudson United Bank 115,203 10.80% 42,681 >4.0% 64,022 >6.0%
Lafayette American Bank 91,478 10.05% 36,398 >4.0% 54,598 >6.0%
Tier I Capital to Average Assets:
HUBCO 170,954 5.71% 119,722 >4.0% 149,653 >5.0%
Hudson United Bank 115,203 6.79% 67,853 >4.0% 84,817 >5.0%
Lafayette American Bank 91,478 8.54% 42,826 >4.0% 53,532 >5.0%
</TABLE>
(22) SUBSEQUENT EVENT
On January 31, 1997, the Company issued $50,000 in capital securities offered by
HUBCO Capital Trust I pursuant to Rule 144A under the Securities Act of 1933.
The 8.98% capital securities will represent a preferred beneficial interest in
the assets of HUBCO Capital Trust I, a statutory business trust. The Trust
exists for the sole purpose of issuing the Trust Securities and investing the
proceeds in 8.98% Junior Subordinated Deferable Interest Debentures to be issued
by HUBCO which will mature on February 1, 2027. The capital securities will have
preference over the common securities under certain circumstances with respect
to cash distributions and amounts payable on liquidation. The $50,000 will be
included in Tier I capital for regulatory purposes, subject to certain
limitations, but will be classified as long-term debt for financial reporting
purposes.
================================================================================
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, 1996 and 1995, 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,
1996. 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.The summarized financial data for Growth
Financial Corporation are based on the financial statements of Growth Financial
Corporation for 1995 and 1994 which were audited by other auditors. Their report
has been furnished to us and our opinion, insofar as it relates to the data in
Note 2, concerning Growth Financial Corporation, is based solely on the report
of 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 provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of the other auditors
relative to 1995 and 1994 summarized financial data, the financial statements
referred to above present fairly, in all material respects, the financial
position of HUBCO, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
February 7, 1997
- --------------------------------------------------------------------------------
34
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
Market and Dividend Information
HUBCO, Inc. is traded on the Nasdaq National Market under the symbol of HUBC. At
year end, there were approximately 3,475 common stockholders of record. The
quarterly common stock and dividend information is as follows:
QUARTERLY COMMON STOCK AND DIVIDEND INFORMATION
(restated to give retroactive effect to stock dividends)
<TABLE>
<CAPTION>
1996 1995
------------------------------ --------------------------------
CASH CASH
QUARTER ENDING HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $ 21.97 $ 18.87 $ 0.165 $ 16.87 $ 14.24 $ 0.145
June 30 $ 21.12 $ 17.84 $ 0.165 $ 17.48 $ 15.02 $ 0.145
September 30 $ 21.00 $ 19.17 $ 0.165 $ 20.51 $ 16.75 $ 0.145
December 31 $ 24.87 $ 20.15 $ 0.190 $ 21.48 $ 18.69 $ 0.145
</TABLE>
HUBCO, Inc. will provide, free of charge, to any stockholders, upon written
request, a copy of the Corporation's Annual Report on Form 10-K, including the
financial statements and schedules which have been filed with the Securities &
Exchange Commission. Requests should be addressed to D. Lynn Van Borkulo-Nuzzo,
Corporate Secretary, HUBCO, Inc., 1000 MacArthur Blvd., Mahwah, New Jersey,
07430.
Duplicate accounts and mailings are costly and often unnecessary. We can
consolidate such accounts upon written request if you will notify either the
Corporate Secretary at the above address or Carolyn B. O'Neill, American Stock
Transfer and Trust Company, 40 Wall Street, New York, NY 10269.
DIVIDEND REINVESTMENT PLAN
If you are not enrolled in the Corporation's Dividend Reinvestment Plan and
would like to join the plan, you may obtain information by writing to the
Corporate Secretary at the above address.
- --------------------------------------------------------------------------------
35
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 128,868
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 24,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 655,492
<INVESTMENTS-CARRYING> 280,914
<INVESTMENTS-MARKET> 279,610
<LOANS> 1,884,355
<ALLOWANCE> 35,153
<TOTAL-ASSETS> 3,115,687
<DEPOSITS> 2,592,092
<SHORT-TERM> 187,979
<LIABILITIES-OTHER> 29,283
<LONG-TERM> 100,000
0
3,960
<COMMON> 38,448
<OTHER-SE> 163,925
<TOTAL-LIABILITIES-AND-EQUITY> 3,115,687
<INTEREST-LOAN> 149,548
<INTEREST-INVEST> 53,581
<INTEREST-OTHER> 1,053
<INTEREST-TOTAL> 204,182
<INTEREST-DEPOSIT> 62,704
<INTEREST-EXPENSE> 72,828
<INTEREST-INCOME-NET> 131,354
<LOAN-LOSSES> 12,295
<SECURITIES-GAINS> 987
<EXPENSE-OTHER> 116,239
<INCOME-PRETAX> 33,096
<INCOME-PRE-EXTRAORDINARY> 33,096
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,497
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
<YIELD-ACTUAL> 5.05
<LOANS-NON> 29,029
<LOANS-PAST> 5,651
<LOANS-TROUBLED> 2,779
<LOANS-PROBLEM> 31,808
<ALLOWANCE-OPEN> 30,105
<CHARGE-OFFS> 14,221
<RECOVERIES> 2,316
<ALLOWANCE-CLOSE> 35,153
<ALLOWANCE-DOMESTIC> 25,062
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 10,091
</TABLE>
