SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT
---------------------------------
(Date of earliest event reported)
AUGUST 14 1998
HUBCO, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
NEW JERSEY
----------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-10699 22-2405746
------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
1000 MACARTHUR BOULEVARD, MAHWAH, NEW JERSEY 07430
---------------------------------------------------
(Address of Principal Executive Offices)
(201) 236-2600
-------------------------------
(Registrant's Telephone Number)
<PAGE>
Item 5 - Other Events
As reported by HUBCO, Inc. ("HUBCO") on previous Form 8-Ks (as amended),
HUBCO acquired IBS Financial ("IBS") on August 14, 1998, Community Financial
Holding Corporation ("CFHC") on August 14, 1998, and Dime Financial ("DFC") on
August 21, 1998 (the "MERGERS"). The Mergers were accounted for as a "pooling of
interests" under generally accepted accounting principles.
The following consolidated financial statements of HUBCO restating HUBCO's
historical consolidated financial statements as of and for the three years ended
December 31, 1997 to reflect the Mergers and the acquisition of The Bank of
Southington, which closed January 8, 1998, Poughkeepsie Financial Corp., which
closed on April 24, 1998 and MSB Bancorp, Inc. which closed on May 29, 1998, all
of which were accounted for as a pooling of interests and are incorporated
herein by reference to Exhibit 99.1 and 99.2 filed herewith.
1. Consolidated Financial Statements for June 30, 1998 and 1997
(unaudited).
2. Notes to the Consolidated Financial Statements for June 30, 1998 and
1997 (unaudited).
3. Management's Discussion and Analysis for the three years ended December
31, 1997, 1996 and 1995.
4. Consolidated Balance Sheets as of December 31, 1997 and 1996.
5. Consolidated Statements of Income for the three years ended December 31,
1997, 1996 and 1995.
6. Consolidated Statements of Changes in Stockholders' Equity for the three
years ended December 31, 1997, 1996 and 1995.
7. Consolidated Statements of Cash Flows for the three years ended December
31, 1997, 1996 and 1995.
8. Notes to the Consolidated Financial Statements as of December 31, 1997
and 1996 and for the three years ended December 31, 1997, 1996, and 1995.
The report of Arthur Andersen LLP, independent accountants, on the
consolidated financial statements of HUBCO as of December 31, 1997 and 1996 and
for the three years ended December 31, 1997 is filed herewith as part of Exhibit
99.2.
Item 7 - Exhibits
Exhibit 99.1 Consolidated Financial Statements of HUBCO, Inc. for June 30,
1998 and 1997 (unaudited).
Exhibit 99.2 Consolidated Financial Statements of HUBCO, Inc. as of December
31, 1997 and 1996 and for the three years ended December 31,
1997, 1996, and 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: September 30, 1998 By: /s/ JOSEPH F. HURLEY
----------------------------------
Joseph F. Hurley
<PAGE>
<TABLE>
<CAPTION>
HUBCO, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (Unaudited)
JUNE 30, DECEMBER 31,
(in thousands, except share data) 1998 1997
=================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 234,176 $ 240,229
Federal funds sold 115,801 277,930
----------- -----------
TOTAL CASH AND CASH EQUIVALENTS 349,977 518,159
Securities available for sale, at market value 1,943,323 1,499,306
Securities held to maturity, at cost (market value of $927,217 and $772,740 for
1998 and 1997, respectively)
919,356 764,831
Loans:
Real estate mortgage 2,495,241 2,519,529
Commercial and financial 615,607 640,930
Consumer credit 333,723 348,555
Credit card 78,946 91,047
----------- -----------
TOTAL LOANS 3,523,517 3,600,061
Less: Allowance for possible loan losses (66,396) (65,858)
----------- -----------
NET LOANS 3,457,121 3,534,203
Premises and equipment, net 86,001 82,511
Other real estate owned 9,708 11,483
Intangibles, net of amortization 82,504 55,573
Other assets 168,934 140,074
----------- -----------
TOTAL ASSETS $ 7,016,924 $ 6,606,140
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 861,575 $ 831,579
Interest bearing 4,578,020 4,421,377
----------- -----------
TOTAL DEPOSITS 5,439,595 5,252,956
Short-term borrowings 812,142 626,405
Other liabilities 86,308 69,678
----------- -----------
TOTAL LIABILITIES 6,338,045 5,949,039
Subordinated debt 100,000 100,000
Company-obligated mandatorily redeemable preferred series B capital securities
of a subsidiary trust holding solely junior subordinated debentures of the
company 100,000 50,000
----------- -----------
Commitments and contingencies
Stockholders' Equity:
Convertible Preferred stock - Series B, no par value;
authorized 10,300,000 shares; 500 shares issued and outstanding
in 1998; 1,250 shares issued and outstanding in 1997 50 125
Common stock, no par value; authorized 53,045,000 shares;
42,583,566 shares issued and 40,845,144 shares outstanding in
1998; and 42,607,964 shares issued and 41,602,118 shares
outstanding in 1997 73,508 73,551
Additional paid-in capital 286,565 291,916
Retained earnings 170,169 164,612
Treasury stock, at cost 1,738,422 shares in 1998
and 1,005,844 shares in 1997 (47,648) (19,133)
Employee stock awards and unallocated shares
held by ESOP, at cost (8,464) (9,609)
Unrealized gain on securities available
for sale, net of income taxes 4,699 5,639
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 478,879 507,101
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,016,924 $ 6,606,140
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HUBCO,Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three-Months Ended June 30,
(in thousands, except share data) 1998 1997
========================================================================================
<S> <C> <C>
INTEREST AND FEE INCOME:
Loans $ 75,257 $ 77,199
Securities 41,289 41,075
Other 1,849 1,219
--------- --------
TOTAL INTEREST AND FEE INCOME 118,395 119,493
--------- --------
INTEREST EXPENSE:
Deposits 41,227 43,518
Short-term borrowings 9,978 7,882
Subordinated and other debt 3,327 3,183
--------- --------
TOTAL INTEREST EXPENSE 54,532 54,583
--------- --------
NET INTEREST INCOME 63,863 64,910
PROVISION FOR POSSIBLE LOAN LOSSES 2,821 2,496
--------- --------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 61,042 62,414
--------- --------
NONINTEREST INCOME:
Trust department income 865 955
Service charges on deposit accounts 5,298 5,692
Securities gains 784 1,867
Shoppers Charge fee income 3,291 2,033
Other income 4,843 2,125
--------- --------
TOTAL NONINTEREST INCOME 15,081 12,672
--------- --------
NONINTEREST EXPENSE:
Salaries 14,409 16,507
Pension and other employee benefits 5,343 4,691
Occupancy expense 4,250 3,930
Equipment expense 2,637 2,753
Deposit and other insurance 437 907
Outside services 6,520 6,723
Other real estate owned expense 559 717
Amortization of intangibles 2,413 2,276
Merger related and restructuring costs 25,217 35
Other expense 5,367 6,016
--------- --------
TOTAL NONINTEREST EXPENSE 67,152 44,555
--------- --------
INCOME BEFORE INCOME TAXES 8,971 30,531
PROVISION FOR INCOME TAXES 4,421 12,259
--------- --------
NET INCOME $ 4,550 $ 18,272
========= ========
NET INCOME PER SHARE:
Basic $ 0.11 $ 0.44
Diluted $ 0.11 $ 0.42
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 40,963 41,387
Diluted 42,271 43,747
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HUBCO, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Six-Months Ended June 30,
(in thousands, except share data) 1998 1997
========================================================================================
<S> <C> <C>
INTEREST AND FEE INCOME:
Loans $151,565 $152,452
Securities 77,795 80,720
Other 4,017 2,131
-------- --------
TOTAL INTEREST AND FEE INCOME 233,377 235,303
-------- --------
INTEREST EXPENSE:
Deposits 84,470 87,244
Short-term borrowings 15,977 14,692
Subordinated and other debt 6,527 6,021
-------- --------
TOTAL INTEREST EXPENSE 106,974 107,957
-------- --------
NET INTEREST INCOME 126,403 127,346
PROVISION FOR POSSIBLE LOAN LOSSES 9,099 4,964
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 117,304 122,382
-------- --------
NONINTEREST INCOME:
Trust department income 1,729 1,547
Service charges on deposit accounts 10,536 11,257
Securities gains 3,171 3,166
Shoppers Charge fee income 5,562 3,362
Other income 7,963 4,864
-------- --------
TOTAL NONINTEREST INCOME 28,961 24,196
-------- --------
NONINTEREST EXPENSE:
Salaries 29,870 31,256
Pension and other employee benefits 11,418 10,826
Occupancy expense 8,346 8,024
Equipment expense 5,454 5,262
Deposit and other insurance 1,214 1,712
Outside services 13,302 12,849
Other real estate owned expense 1,224 1,620
Amortization of intangibles 4,834 4,551
Merger related and restructuring costs 27,847 121
Other expense 10,495 11,466
-------- --------
TOTAL NONINTEREST EXPENSE 114,004 87,687
-------- --------
INCOME BEFORE INCOME TAXES 32,261 58,891
PROVISION FOR INCOME TAXES 12,777 23,328
-------- --------
NET INCOME $ 19,484 $ 35,563
======== ========
NET INCOME PER SHARE:
Basic $ 0.47 $ 0.85
Diluted $ 0.46 $ 0.81
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 41,066 41,542
Diluted 42,393 44,023
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HUBCO, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
THREE MONTHS ENDED
----------------------
JUNE 30,
----------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME $ 4,550 $ 18,272
======== ========
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains arising during period $ 1,166 $ 9,459
Less: reclassification adjustment for gains included in net
income (482) (1,117)
-------- --------
Other comprehensive income 684 8,342
-------- --------
COMPREHENSIVE INCOME $ 5,234 $ 26,614
======== ========
<CAPTION>
SIX MONTHS ENDED
----------------------
JUNE 30,
----------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME $ 19,484 $ 35,563
======== ========
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains arising during period $ 975 $ 1,914
Less: reclassification adjustment for gains included in net
income (1,915) (1,912)
-------- --------
Other comprehensive income/(loss) (940) 2
-------- --------
COMPREHENSIVE INCOME $ 18,544 $ 35,565
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HUBCO, INC. and Subsidiaries
- -----------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(in thousands)
Convertible
Preferred Stock Common Stock
-------------------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 39,600 $ 3,960 40,994,058 $72,887
=============================================================================
Net income - - - -
Cash dividends paid:
Common - - - -
Preferred - - - -
3% stock dividend - - 321,046 571
Issuance of common stock for:
Stock options exercised - - 48,407 87
Warrants exercised - - - -
Dividend reinvestment and
stock purchase plan - - 3,444 6
Preferred stock conversion (38,350) (3,835) - -
Cash in lieu of fractional
shares - - - -
Purchase of treasury stock - - - -
Effect of compensation plans - - - -
Change in unrealized
gain(loss) on securities
available for sale - - - -
- -----------------------------------------------------------------------------
Balance at December 31, 1997 1,250 $ 125 41,366,955 $73,551
- -----------------------------------------------------------------------------
Net income - - - -
IBSF fiscal year adjustement - - - -
Cash dividends paid-common - - - -
Issuance of common stock for:
Stock options exercised - - 204,868 364
Warrants exercised - - 7,158 13
Preferred stock conversion (750) (75) 16,608 30
Issuance and retirement of
treasury stock - - (267,196) (476)
Cash in lieu of fractional
shares - - - -
Purchase of treasury stock - - - -
Effect of compensation plans - - 14,875 26
Other Transactions - - - -
Change in Unrealized
gain(loss) on securities
available for sale - - - -
- -----------------------------------------------------------------------------
Balance at June 30, 1998 500 $ 50 41,343,268 $73,508
- -----------------------------------------------------------------------------
<CAPTION>
HUBCO, INC. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(in thousands)
Employee
Stock
Awards and Unrealized
Unallocated Gain (loss)
Additional Shares Held on Securities
Paid-in- Retained Treasury in ESOP, at Available for
Capital Earnings Stock Cost Sale Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $324,045 $168,003 $(21,195) $(11,980) $(2,356) $533,364
=========================================================================================================================
Net income - 69,827 - - - 69,827
Cash dividends paid:
Common - (27,508) - - - (27,508)
Preferred - (650) - - - (650)
3% stock dividend 9,858 (45,066) 34,723 - - 86
Issuance of common stock for:
Stock options exercised (6,299) - 10,074 - - 3,862
Warrants exercised (48) - 65 - - 17
Dividend reinvestment and
stock purchase plan 77 - - - - 83
Preferred stock conversion (36,513) - 40,348 - - -
Cash in lieu of fractional
shares (97) - - - - (97)
Purchase of treasury stock - - (83,448) - - (83,448)
Effect of compensation plans 893 6 300 2,371 - 3,570
Change in unrealized
gain(loss) on securities
available for sale - - - - 7,995 7,995
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $291,916 $164,612 $(19,133) $ (9,609) $ 5,639 $507,101
- -------------------------------------------------------------------------------------------------------------------------
Net income - 19,484 - - - 19,484
IBSF fiscal year adjustment - 1,539 - - - 1,539
Cash dividends paid-common - (15,418) - - - (15,418)
Issuance of common stock for:
Stock options exercised 1,049 - 2,009 - - 3,422
Warrants exercised 37 - - - - 50
Preferred stock conversion (130) - 175 - - -
Issuance and retirement of
treasury stock (7,287) - 7,763 - - -
Cash in lieu of fractional
shares (142) - - - - (142)
Purchase of treasury stock - - (38,530) - - (38,530)
Effect of compensation plans 1,199 - 68 1,145 - 2,438
Other Transactions (77) (48) - - - (125)
Change in Unrealized
gain(loss) on securities
available for sale - - - - (940) (940)
- -------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $286,565 $170,169 $(47,648) $ (8,464) $ 4,699 $478,879
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HUBCO, INC. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands) SIX MONTHS ENDED
JUNE 30,
---------------------------------
1998 1997
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 19,484 $ 35,563
Adjustments to reconcile net income to net
cash provided by operating activities:
IBSF Fiscal Year Adjustment 1,539 -
Provision for possible loan losses 9,099 4,965
Provision for depreciation and amortization 9,227 9,078
Amortization of security premiums, net 413 577
Securities gains (3,171) (3,166)
Loss (gain) on sale of premises and equipment 510 (119)
Gain on sale of loans (974) (94)
Market adjustment on ESOP 728 359
MRP earned 909 604
Deferred income tax provision 3 4,759
Net change in loans originated for sale - (398)
(Increase) decrease in other assets (24,474) 4,188
Increase in other liabilities 14,154 15,723
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 27,447 72,039
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities:
Available for sale 180,589 85,407
Proceeds from repayments and maturities of securities:
Available for sale 395,914 350,103
Held to maturity 217,951 101,537
Purchase of securities
Available for sale (1,086,331) (501,144)
Held to maturity (281,759 (75,836)
Net cash acquired through acquisitions 209,498 -
Loan originations net of repayments 42,755 (27,346)
Proceeds from sales of premises and equipment 25 36
Proceeds from sales of loans 73,838 32,996
Purchases of premises and equipment (3,586) (5,762)
Decrease in other real estate 1,685 6,523
---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (249,421) (33,486)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease)/increase in demand deposits, NOW accounts,
and savings accounts (45,153) 98,876
Net decrease in certificates of deposits (85,419) (174,438)
Net increase in short term borrowings 185,394 44,509
Net proceeds from issuance of debt securities 709 335
Repayment of ESOP loan 48,737 49,250
Proceeds from issuance of common stock 3,472 2,516
Cash dividends (15,418) (14,853)
Acquisition of treasury stock (38,530) (30,229)
---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 53,792 (24,034)
---------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (168,182) 14,519
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 518,159 278,027
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 349,977 $ 292,546
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 111,618 $ 105,358
Income Taxes 16,288 16,243
========== =========
</TABLE>
See note to Consolidated Financial Statements.
<PAGE>
HUBCO, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
HUBCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying financial statements of HUBCO, Inc. and Subsidiaries ("HUBCO"
or "the Company") include the accounts of the parent company, HUBCO, Inc. and
its wholly-owned subsidiaries: Hudson United Bank ("Hudson United"), Lafayette
American Bank ("Lafayette"), Bank of the Hudson ("BOTH"), HUB Capital Trust I
and HUB Capital Trust II. All material intercompany balances and transactions
have been eliminated in consolidation. These unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
information presented includes all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation, in all material
respects, of the interim period results. The results of operations for periods
of less than one year are not necessarily indicative of results for the full
year. The consolidated financial statements should be read in conjunction with
the Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE B -- EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share and requires dual presentation of basic and diluted earnings
per share. Basic earnings per 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 period. Diluted earnings per share is
computed by dividing net income by the weighted average number of common shares
plus the number of shares issuable upon conversion of the preferred stock and
the incremental number of shares issuable from the exercise of stock options,
stock warrants, and includes the impact of the Management Recognition Plan
("MRP"), calculated using the treasury stock method. All per share amounts have
been retroactively restated to reflect all stock splits and stock dividends. All
prior periods presented have been restated in this new format.
<PAGE>
A reconciliation of net income to net income available to common stockholders
and of weighted average common shares outstanding to weighted average shares
outstanding assuming dilution follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net Income $ 4,550 $ 18,272
Less Preferred Stock Dividends -- 216
-------- --------
Net Income Available To Common Stockholders 4,550 18,056
Weighted Average Common Shares Outstanding 40,963 41,387
Basic Earnings Per Share $ 0.11 $ 0.44
======== ========
DILUTED EARNINGS PER SHARE
Net Income $ 4,550 $ 18,272
Weighted Average Common Shares Outstanding 40,963 41,387
Effect Of Dilutive Securities:
Convertible Preferred Stock 23 1,254
Warrants 24 26
Unearned MRP 108 188
Stock Options 1,153 892
-------- --------
Total Weighted Average Common Shares Outstanding Assuming
Dilution 42,271 43,747
Diluted Earnings Per Share $ 0.11 $ 0.42
======== ========
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net Income $ 19,484 $ 35,563
Less Preferred Stock Dividends -- 435
-------- --------
Net Income Available To Common Stockholders 19,484 35,128
Weighted Average Common Shares Outstanding 41,066 41,542
Basic Earnings Per Share $ 0.47 $ 0.85
======== ========
DILUTED EARNINGS PER SHARE
Net Income $ 19,484 $ 35,563
Weighted Average Common Shares Outstanding
Effect Of Dilutive Securities: 41,066 41,542
Convertible Preferred Stock 28 1,304
Warrants 25 26
Unearned MRP 116 197
Stock Options 1,158 954
-------- --------
Total Weighted Average Common Shares Outstanding Assuming
Dilution 42,393 44,023
Diluted Earnings Per Share $ 0.46 $ 0.81
======== ========
</TABLE>
NOTE C -- ACQUISITIONS
On January 8, 1998, the Company acquired The Bank of Southington ("BOS"), and
merged it into Lafayette. BOS was a $135 million asset state bank and trust
company with 3 branch locations, headquartered in Southington, Connecticut. In
the merger, each share of BOS common stock was converted into .637 shares of
HUBCO common stock. The acquisition was treated as a pooling of interests for
accounting purposes. The financial statements have been restated to include BOS
for all periods presented.
<PAGE>
On February 5, 1998, the Company acquired Security National Bank & Trust Company
of New Jersey ("SNB"), and merged it into Hudson United. Security was a $86
million asset bank and trust company with 4 branch locations, headquartered in
Newark, New Jersey. In the merger, shareholders of SNB received $34.00 in cash
for each share of SNB common stock. The merger was accounted for under the
purchase method of accounting and therefore, SNB's results of operations have
been included in the accompanying financial statements subsequent to February 5,
1998.
On April 24, 1998, the Company completed its acquisition of Poughkeepsie
Financial Corp. ("PFC"). PFC's wholly-owned subsidiary, Bank of the Hudson
became HUBCO's New York-based bank subsidiary. In the merger, each share of PFC
common stock was converted into .309 shares of HUBCO common stock. PFC had $875
million in assets and was treated as a pooling of interests for accounting
purposes. The financial statements have been restated to include PFC for all
periods presented.
On May 29, 1998, the Company completed its acquisition of MSB Bancorp ("MSB"),
and merged MSB Bank, MSB's wholly-owned subsidiary into Bank of the Hudson. In
the merger, each share of MSB common stock was converted into 1.052 shares of
HUBCO common stock. MSB had $765 million in assets and was treated as a pooling
of interests for accounting purposes. The financial statements have been
restated to include MSB for all periods presented.
On June 25, 1998, the Company completed its acquisition of 21 branches of First
Union National Bank located in New Jersey and Connecticut with deposits of
approximately $243 million, in the aggregate. On July 24, 1998, the Company
completed its acquisition of 2 branches of First Union National Bank located in
New York with deposits of approximately $25 million, in the aggregate. These
acquisitions were accounted for under the purchase method of accounting.
On August 14, 1998, the Company completed its acquisition of IBS Financial
("IBS"). IBS was merged into HUBCO and IBS's wholly-owned subsidiary was merged
into Hudson United. In the merger each share of IBS common stock was converted
into .550 shares of HUBCO common stock. IBS had $734 million in assets and was
treated as a pooling interests for accounting purposes. The financial statements
have been restated to include IBS for all periods presented.
On August 14, 1998, the Company completed its acquisition of Community Financial
Holding Corporation ("CFHC"). CFHC was merged into HUBCO and CFHC's wholly-owned
subsidiary was merged into Hudson United. In the merger each share of CFHC
common stock was converted into .716 shares of HUBCO common stock. CFHC had $150
million in assets and was treated as a pooling interests for accounting
purposes. The financial statements have been restated to include CFHC for all
periods presented.
On August 21, 1998, the Company completed its acquisition of Dime Financial
Corporation ("DFC"). DFC was merged into HUBCO and DFC's wholly-owned subsidiary
into Lafayette. In the merger each share of DFC common stock was converted into
1.0815 shares of HUBCO common stock. DFC had $961 million in assets and was
treated as a pooling interests for accounting purposes. The financial statements
have been restated to include DFC for all periods presented.
<PAGE>
NOTE D -- SECURITIES
The following table presents the amortized cost and estimated market value of
securities available-for sale and held-to maturity at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------------------
Gross Unrealized Estimated
Amortized ----------------------- Market
Cost Gains (Losses) Value
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government $ 90,481 $ 767 $ (6) $ 91,242
U.S. Government
agencies 354,426 1,073 (236) 355,263
Mortgage-backed
securities 1,377,902 5,731 (1,289) 1,382,344
States and political
subdivisions 13,757 58 (35) 13,780
Other debt securities 33,791 311 (3) 34,099
Equity securities 65,153 1,874 (432) 66,595
---------- ------- ------- ----------
$1,935,510 $ 9,814 $(2,001) $1,943,323
========== ======= ======= ==========
<CAPTION>
June 30, 1998
----------------------------------------------------------
Gross Unrealized Estimated
Amortized ----------------------- Market
Cost Gains (Losses) Value
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government $ 49,718 $ 520 $ (1) $ 50,237
U.S. Government
agencies 294,270 1,736 (390) 295,616
Mortgage-backed
securities 557,763 7,060 (1,019) 563,804
States and political
subdivisions 16,455 - (47) 16,408
Other debt securities 1,150 2 - 1,152
---------- ------- ------- ----------
$ 919,356 $ 9,318 $(1,457) $ 927,217
========== ======= ======= ==========
</TABLE>
<PAGE>
NOTE D -- SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------
Gross Unrealized Estimated
Amortized ----------------------- Market
Cost Gains (Losses) Value
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government $ 110,485 $ 890 $ (340) $ 111,035
U.S. Government
agencies 274,555 1,745 (301) 275,999
Mortgage-backed
securities 1,016,627 5,292 (3,028) 1,018,891
States and political
subdivisions 10,619 59 (26) 10,652
Other debt securities 41,850 306 (8) 42,148
Equity securities 35,718 4,925 (62) 40,581
---------- ------- ------- ----------
$1,489,854 $13,217 $(3,765) $1,499,306
========== ======= ======= ==========
<CAPTION>
December 31, 1997
----------------------------------------------------------
Gross Unrealized Estimated
Amortized ----------------------- Market
Cost Gains (Losses) Value
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government $ 45,585 $ 611 $ - $ 46,196
U.S. Government
agencies 266,066 1,799 (480) 267,385
State and political subdivisions 10,981 89 - 11,070
Mortgage-backed
securities 442,199 7,827 (1,937) 448,089
---------- ------- ------- ----------
$ 764,831 $10,326 $(2,417) $ 772,740
========== ======= ======= =========
</TABLE>
NOTE E -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SERIES B CAPITAL
SECURITIES OF A SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
OF THE COMPANY
On January 31, 1997, the Company placed $50.0 million in aggregate liquidation
amount of 8.98% Capital Securities due February 2027, using HUBCO Capital Trust
I, a statutory business trust formed under the laws of the State of Delaware.
The sole asset of the trust, that is the obligor on the Series B Capital
Securities, is $51.5 million principal amount of 8.98% Junior Subordinated
Debentures due 2027 of HUBCO. The net proceeds of the offering are being used
for general corporate purposes and to increase capital levels of the Company and
its subsidiaries. The securities qualify as Tier I capital under the capital
guidelines of the Federal Reserve.
On June 19, 1998, the Company placed $50.0 million in aggregate liquidation
amount of 7.65% Capital Securities due June 2028, using HUBCO Capital Trust II,
a statutory business trust formed under the laws of the State of Delaware. The
sole asset of the trust, that is the obligor on the Series B Capital Securities,
is $51.5 million principal amount of 7.65% Junior Subordinated Debentures due
2028 of HUBCO. The net proceeds of the offering are being used for general
corporate purposes and to increase capital levels of the Company and its
subsidiaries. The securities qualify as Tier I capital under the capital
guidelines of the Federal Reserve.
<PAGE>
NOTE F -- RECENT ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for the reporting of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company has elected to display Consolidated Statements
of Income and Consolidated Statements of Comprehensive Income separately for the
disclosed periods. Comprehensive income is displayed on the Consolidated Balance
Sheets and Consolidated Statements of Changes in Stockholders' Equity as a
separate item entitled unrealized gains(losses) on securities available for sale
since this is the only component of comprehensive income. The following is a
reconciliation of the tax effect allocated to each component of comprehensive
income for the periods presented (in thousands):
<TABLE>
<CAPTION>
For the three-months ended For the six-months ended
June 30, 1998 June 30, 1998
------------------------------------------- ------------------------------------------
Tax Tax
Before tax (Expense) Net of Tax Before tax (Expense) Net of Tax
amount Benefit Amount amount Benefit Amount
-------------- -------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized holding gains
arising during the period $ 1,852 $ (686) $ 1,166 $ 1,532 $ (557) $ 975
Less: reclassification
adjustment for gains
realized in net income 784 (302) 482 3,171 (1,256) 1,915
-------- -------- ------- ------- -------- ------
Net change during period $ 1,068 $ (384) $ 684 $(1,639) $ 699 $ (940)
-------- -------- ------- ------- -------- ------
<CAPTION>
For the three-months ended For the six-months ended
June 30, 1997 June 30, 1997
------------------------------------------- ------------------------------------------
Tax Tax
Before tax (Expense) Net of Tax Before tax (Expense) Net of Tax
amount Benefit Amount amount Benefit Amount
-------------- -------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized holding gains arising
during the period $ 14,963 $ (5,504) $ 9,459 $ 3,256 $ (1,342) $1,914
Less: reclassification
adjustment for gains realized in
net income 1,867 (750) 1,117 3,166 (1,254) 1,912
-------- -------- ------- ------- -------- ------
Net change during period $ 13,096 $ (4,754) $ 8,342 $ 90 $ (88) $ 2
-------- -------- ------- ------- -------- ------
</TABLE>
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. The Company's three banking subsidiaries, Hudson
United Bank, Lafayette, and BOTH, which meet the criteria of SFAS No. 131 to be
considered in the aggregate, have been aggregated for purposes of segment
reporting. HUBCO, Inc., the banks' holding company, is not a reportable segment
because it does not exceed any of the quantitative thresholds.
<PAGE>
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 twenty-five acquisitions, including eight which were
completed in 1998. Through these acquisitions, the company has grown from a $550
million asset banking company to a community banking franchise which has assets
of approximately $6.6 billion at December 31, 1997. The acquisition program has
been utilized to achieve efficiencies and to distribute the cost of new products
and technologies over a larger asset base. It is the Company's philosophy that
acquisitions become accretive to earnings within a short time frame, generally
within one year. The financial results of these acquisitions are difficult to
measure other than on an as-reported basis each quarter because pooling of
interest transactions change historical results from those actually reported by
HUBCO.
On January 12, 1996, the Company acquired Growth Financial Corp. (Growth) and
merged its subsidiary bank, Growth Bank, into Hudson United Bank (Hudson).
Growth was a $128 million asset bank with 3 branch locations, headquartered in
Basking Ridge, New Jersey.
On July 1, 1996, the Company acquired Lafayette American Bank and Trust Company
(Lafayette) and continued to operate it as an independent commercial bank
headquartered in Connecticut. Lafayette was a $700 million asset bank which
operated 19 branches, primarily in Fairfield County, Connecticut.
On December 13, 1996, the Company acquired Westport Bancorp, Inc. (Westport) and
merged its subsidiary bank, Westport Bank & Trust Company into Lafayette.
Westport Bank & Trust Company was a $317 million assetbank based in Westport,
Connecticut and operated 7 branch locations.
On August 30, 1996, the Company acquired Hometown Bancorporation (Hometown), a
$194 million assetbank 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 asset commercial bank
with 4 branch locations. Both of these acquisitions were accounted for under the
purchase method of accounting, and as such, their assets and earnings are
included in the Company's consolidated results only from the date of acquisition
and thereafter.
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 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 results of operations 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 operated 9 branch locations
The Company consummated eight acquisitions in 1998. On January 8, 1998, the
Company acquired the Bank of Southington (BOS) and merged it into Lafayette. BOS
was a $135 million assetbank with 2 branch locations, headquartered in
Southington, Connecticut.
On April 24, 1998, the Company acquired Poughkeepsie Financial Corp. (PFC) and
merged PFC into HUBCO and PFC's subsidiary bank, Bank of the Hudson, a $880
million asset institution headquartered in Poughkeepsie, New York has been
established as a separate New York banking subsidiary of HUBCO. Bank of the
Hudson has 16 branches in Rockland, Orange and Dutchess counties in New York.
On May 29, 1998, the Company acquired MSB Bancorp, Inc. (MSB) and merged MSB
into HUBCO and MSB's subsidiary bank into Bank of the Hudson. MSB was a $774
million asset institution headquartered in Goshen, New York and operates 16
branches in Orange, Putnam and Sullivan counties in New York.
On August 14, 1998, the Company acquired IBS Financial Corporation (IBS) and
merged IBS into HUBCO and IBS's subsidiary bank into Hudson. IBS was a $734
million asset institution headquartered in Cherry Hill, New Jersey and operated
10 offices in New Jersey's suburban Philadelphia communities.
On August 14, 1998, the Company acquired Community Financial Holding Corporation
(CFHC) and merged CFHC into HUBCO and CFHC's subsidiary bank into Hudson. CFHC
was a $150 million asset institution headquartered in Westmont, New Jersey and
operated 8 offices in Camden, Burlington and Gloucester counties in New Jersey.
On August 21, 1998, the Company acquired Dime Financial Corporation (DFC) and
merged DFC into HUBCO and DFC's subsidiary bank into Lafayette. DFC was a $961
million asset institution headquartered in Wallingford, Connecticut and operated
11 offices in New Haven county.
The above 1988 acquisitions were all accounted for on the pooling of interest
accounting method and, accordingly, the statements for periods prior to the
merger have been restated to include these institutions and their results of
operations.
On February 5, 1998, the Company acquired Security National Bank & Trust Company
of New Jersey (SNB) and merged SNB into Hudson. SNB was a $86 million asset bank
and trust company headquartered in Newark, New Jersey with 4 branches in Nutley,
Kearny and Newark, New Jersey.
On June 26, 1998, the Company acquired 21 branches of First Union National Bank
located in New Jersey and Connecticut. The 8 Connecticut branches representing
$99.6 million in deposits were merged into Lafayette. The 13 New Jersey branches
representing $143.3 million in deposits were merged into Hudson.
On July 24, 1998, the Company acquired two additional branches of First Union
National Bank located in Hyde Park and Woodstock, New York. The branches
representing $25.2 million in deposits were merged into Bank of the Hudson.
The Security National Bank & Trust Company of New Jersey and First Union
National Bank branches were accounted for under the purchase method of
accounting and, accordingly, the statements for periods prior to the merger have
not been restated to include these institutions and their operations.
<PAGE>
1996 SPECIAL CHARGES SUMMARY
In 1996, the Company incurred one-time charges ("special charges") as detailed
below. Further details relative to the special charges are discussed in the
Noninterest Expense category.
CHARGE PRE-TAX AFTER-TAX
- -------------------------------------------------
Special SAIF assessment $ 10,074 $ 6,265
Merger related and
restructuring
charges -
Lafayette 13,018 9,016
Westport 8,986 5,901
Dime 77 77
--------------------------
Total special charges
in noninterest
expense $ 32,155 $ 21,259
--------------------------
Special provision for
possible loan losses 4,000 2,340
Total special charges $ 36,155 $ 23,599
==========================
RESULTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996
HUBCO, Inc. and Subsidiaries reported net income of $69.8 million for the year
ended December 31, 1997 compared to $36.9 million for the year 1996 as reported,
$60.5 million for the year 1996 excluding special charges and $48.3 million for
1995. Diluted earnings per share was $1.60 for 1997 compared to $0.82 for 1996
as reported and represents a 20% increase from $1.34 for 1996, excluding special
charges. Excluding special charges, 1996 diluted earnings per share increased
22% from $1.10 for 1995. Basic earnings per share was $1.67 for 1997 compared to
$0.85 as reported for 1996 and represents an 17% increase from $1.43 for 1996,
excluding special charges. Excluding special charges, 1996 basic earnings per
share increased 25% from $1.14 for 1995.
Return on average assets was 1.08% for 1997 compared to 0.60% for 1996 as
reported, 0.99% for 1996 excluding special charges and 0.88% for 1995. Return on
average equity was 13.56% for 1997 compared to 6.93% for 1996 as reported,
11.36% for 1996 excluding special charges and 9.79% for 1995.
The following table presents a summary of HUBCO's average balances, the yields
earned on average assets and the cost of average liabilities and stockholders'
equity for the years ended December 31, 1997, 1996 and 1995 (in thousands):
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS, AND RATES
1997 1996 1995
----------------------------------- ----------------------------------- ---------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------------------------------- ----------------------------------- ---------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
deposits with banks $ 154 $ 4 2.60% $ 1,039 $ 53 5.10% $ 4,941 $ 186 3.76%
Federal funds sold 76,853 4,791 6.23% 74,989 3,934 5.25% 74,609 4,324 5.80%
Securities-taxable 2,332,863 158,715 6.80% 2,263,772 149,992 6.63% 1,886,931 124,855 6.62%
Securities-tax exempt 20,812 1,392 6.69% 20,594 1,329 6.45% 41,265 2,480 6.01%
(1)
Loans (2) 3,579,797 306,896 8.57% 3,374,580 287,788 8.53% 3,145,558 276,168 8.78%
----------------------------------- ----------------------------------- ---------------------------------
Total Earning Assets 6,010,479 471,798 7.85% 5,734,974 443,096 7.73% 5,153,304 408,013 7.92%
Cash and due from banks 200,903 172,987 159,493
Allowance for loan
losses (62,427) (55,668) (63,120)
Premises and equipment 66,731 64,774 67,068
Other assets 228,524 220,367 155,662
------------ ------------ -------------
TOTAL ASSETS $6,444,210 $6,137,434 $5,472,407
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
transaction accounts $ 904,941 $ 25,514 2.82% $1,017,217 $ 22,648 2.23% $ 755,380 $ 22,078 2.92%
Savings accounts 1,217,070 27,501 2.26% 1,078,993 29,587 2.74% 1,271,151 31,998 2.52%
Time deposits 2,352,867 122,630 5.21% 2,308,057 121,286 5.25% 1,893,421 93,936 4.96%
----------------------------------- ----------------------------------- ---------------------------------
Total Interest-Bearing
Deposits 4,474,878 175,645 3.93% 4,404,267 173,521 3.94% 3,919,952 148,012 3.78%
Short-term borrowings 489,756 28,202 5.76% 416,809 23,140 5.55% 380,587 23,530 6.18%
Long-term debt 145,206 12,433 8.56% 47,483 3,905 8.22% 25,000 2,153 8.61%
----------------------------------- ----------------------------------- ---------------------------------
Total Interest-Bearing
Liabilities 5,109,840 216,280 4.23% 4,868,559 200,566 4.12% 4,325,539 173,695 4.02%
Demand deposits 749,504 669,882 604,618
Other liabilities 70,087 66,373 48,684
Stockholders' equity 514,779 532,620 493,566
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,444,210 $6,137,434 $5,472,407
============ ============ ============
NET INTEREST INCOME $ 255,518 $ 242,530 $ 234,318
============ =========== ===========
NET INTEREST MARGIN (3) 4.25% 4.23% 4.55%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The tax equivalent adjustments for the years ended December 31, 1997, 1996
and 1995 were $487, $465 and $868, respectively, and are based on a tax
rate of 35%.
(2) The tax equivalent adjustments for the years ended December 31, 1997, 1996
and 1995 were $96, $117 and $154, respectively, and are based on a tax rate
of 35%. Average loan balances include nonaccrual loans and loans held for
resale.
(3) Represents tax equivalent net interest income divided by interest-earning
assets.
<PAGE>
The following table presents the relative contribution of changes in volumes and
changes in rates to changes in net interest income for the periods indicated.
The change in interest income and interest expense attributable to the combined
impact of both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate (in thousands):
<TABLE>
CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME-RATE/VOLUME ANALYSIS
<CAPTION>
INCREASE/(DECREASE) INCREASE/(DECREASE)
------------------------------- -------------------------------------
1997 OVER 1996 1996 OVER 1995
------------------------------- -------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
- ------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ $ 1,522 $ $ 19,694 $ (8,074) $ 11,620
17,586 19,108
Securities-taxable 4,643 4,080 8,723 24,968 169 25,137
Securities-tax exempt 14 49 63 (1,323) 172 (1,151)
Federal funds sold 100 757 857 22 (412) (390)
Interest bearing deposits (31) (18) (49) (183) 50 (133)
------------------------------- -------------------------------------
Total interest and fee income 22,312 6,390 28,702 43,178 (8,095) 35,083
------------------------------- -------------------------------------
INTEREST EXPENSE:
Interest bearing transaction (2,695) 5,561 2,866 6,572 (6,002) 570
accounts
Savings 3,506 (5,592) (2,086) (5,109) 2,698 (2,411)
Time deposits 2,341 (997) 1,344 21,530 5,820 27,350
Short-term borrowings 4,174 888 5,062 2,129 (2,519) (390)
Long-term debt 8,361 167 8,528 1,853 (101) 1,752
------------------------------- -------------------------------------
Total interest expense 15,687 27 15,714 26,975 (104) 26,871
=============================== =====================================
Net Interest Income $ 6,625 $ 6,363 $ 12,988 $ 16,203 $ (7,991) $ 8,212
=============================== =====================================
</TABLE>
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 1997,
net interest income on a FTE basis was $255.5 million, a 5.4% increase from the
$242.5 million in 1996. The $242.5 million of net interest income in 1996 was a
3.5% increase from 1995. The increase in net interest income between 1997 and
1996 was due to the increase in the balance and the yield on interest earning
assets which exceeded the effect of the increase in the balance and cost of
interest-bearing liabilities. The growth in the average balance sheet was
realized primarily through the purchases of institutions described in the
"Acquisition Summary" section of this report. The increase in net interest
income between 1995 and 1996 was due to the fact that the increase in the
balance of interest earning assets was sufficient to not only compensate for the
reduction in yield on earning assets, but also to produce income sufficient to
exceed the increased volume and cost of interest-bearing liabilities.
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 4.25%,
4.23%, and 4.55% for 1997, 1996, and 1995, respectively. The increase in net
interest margin from 1996 to 1997 is due primarily to an increase of $205.2
million or 6.0% in average loans outstanding at a yield of 4 basis points higher
than 1996. The increase in loan volume, the bank's highest yielding asset,
accounted for 74.5% of the total increase in average earning assets. The yield
on securities-taxable increased 17 basis points and, combined with the increase
in loan volume, served to offset higher interest expense resulting primarily
from short-term borrowings and long-term debt utilized to support asset growth
and enhance capital. The decrease in net interest margin from 1995 to 1996 was
primarily due to a decrease in the yield on earning assets of 19 basis points.
The primary factor in this decline is a decrease of 25 basis points on loan
yields. 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 $22.6 million in nonperforming loans. The Company's average cost of
all deposits for 1997 was 3.36% compared to 3.42% for 1996 and 3.27% for 1995.
Approximately 35% of the Company's deposits are in transaction accounts, 21% in
savings accounts, and 44% in time deposits as of year-end 1997. 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 and the weighted
average life of the portfolio is approximately three years. The mortgage-backed
securities portfolio is comprised primarily of agency passthrough and Planned
Amortization Class (PAC) obligations.
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Management determines the provision and adequacy of the allowance for loan
losses based on a number of factors including an
<PAGE>
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 $12.8 million for 1997 compared with $17.1
million and $20.1 million in 1996 and 1995, respectively. The decrease in the
provision in 1997 of $4.4 million, or 25% is primarily due to the $4 million
special provision which was taken in 1996. This special charge, reflecting the
application of the Company's reserve methodology to the new Connecticut bank
subsidiary and to address this subsidiary's problem loans, brought the allowance
for possible loan losses to a level considered by management to be adequate. The
decrease in the provision in 1996 of $2.9 million or 15% from the amount
provided in 1995 is attributable primarily to the fact that one of the
institutions acquired in 1998 had made an extraordinarily large provision of
$7.5 million in 1995 for the purpose of bringing its allowance for possible loan
losses to a level of adequacy. The allowance for possible loan losses as a
percentage of loans outstanding for the last three years was 1.83%, 1.72%, and
1.72%. The allowance for loan losses as a percentage of nonperforming loans for
the last three-years was 98%, 91%, and 124% representing consistent coverage of
problem loans.
The following is a summary of the activity in the allowance for possible loan
losses, by loan category for the years indicated (in thousands):
ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
Amount of Loans Outstanding at End of Year $ 3,600,061 $ 3,608,943 $ 3,254,872
=============================================================
Daily Average Amount of Loans Outstanding $ 3,579,797 $ 3,374,580 $ 3,145,558
=============================================================
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of year $61,995 $56,063 $62,358
Loans charged off:
Real estate mortgages 6,542 9,210 13,258
Commercial 4,508 7,084 15,738
Consumer 6,120 3,699 2,013
Other loans 384 485 73
-------------------------------------------------------------
Total loans charged off 17,554 20,478 31,082
-------------------------------------------------------------
Recoveries:
Real estate mortgages 1,407 1,528 2,241
Commercial 2,896 1,749 1,486
Consumer 1,498 1,316 877
Other recoveries 41 19 22
-------------------------------------------------------------
Total recoveries 5,842 4,612 4,626
-------------------------------------------------------------
Net loans charged off 11,712 15,866 26,456
-------------------------------------------------------------
Allowance of acquired companies 2,800 4,658 --
Transfers from OREO valuation allowance to the
allowance for possible loan losses -- -- 89
Provision for loan losses 12,775 17,140 20,072
-------------------------------------------------------------
Balance at end of year $65,858 $61,995 $56,063
=============================================================
Allowance for loan losses as a percentage of
loans outstanding at year end 1.83% 1.72% 1.72%
Net charge offs as a percentage of average
loans outstanding 0.33% 0.47% 0.84%
=============================================================
</TABLE>
<PAGE>
The following is the allocation of the allowance for possible loan losses, by
loan category (in thousands):
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------
CATEGORY CATEGORY CATEGORY
PERCENT PERCENT OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE LOANS ALLOWANCE OF LOANS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages $ 27,231 78.7% $ 26,636 79.1% $ 25,268 77.9%
Commercial and industrial 17,469 15.1% 17,293 15.0% 19,303 16.3%
Consumer 5,177 6.2% 4,661 5.9% 3,910 5.8%
Unallocated 15,981 13,405 7,582
--------------------------------------------------------------------
Total $ 65,858 100.0% $ 61,995 100.0% $ 56,063 100.0%
====================================================================
</TABLE>
NONINTEREST INCOME
Noninterest income, excluding securities gains and losses, increased 16% or to
$45.2 million for 1997 from $38.9 million in 1996. The amount in 1996 was an
increase of 41% over the $27.5 million reported in 1995. The increases for 1997
and 1996 are primarily a result of growth in fee income arising from Shoppers
Charge. The Shoppers Charge fee income increased $4.9 million, or 119% over 1996
which had been an increase of 55% over 1995. Also contributing to the increase
in total noninterest income from 1995 to 1997 were the elimination of losses
recognized by the Company in 1995 and 1996 of $7.5 million and $0.9 million,
respectively. These losses were taken to further reduce the carrying value of
certain PFC loans held for sale.
Other factors affecting the increase in 1997 is an increase in trust income of
$294, or 9%, an increase in international fees of $134, or 15% and an increase
in service charges on deposit accounts of $770, or 4%. These increases were
offset by a decrease in other income of $687 million, or 6.5% primarily due to a
$622 gain resulting from the sale of a Hudson United branch in 1996.
The Company realized $8.9 million in securities gains in 1997 and $1.4 million
in 1996 and $1.1 million in 1995. The gains realized in 1997 and 1996 resulted
primarily from the sale of equity investments in other financial institutions.
In the fourth quarter of 1995, however, with the SFAS #115 window of 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 allowed the Company more flexibility
to manage the investment portfolio.
NONINTEREST EXPENSES
Non interest expense decreased 11.4%, or $23.4 million to $181.3 million in 1997
from $204.7 million in 1996. 1996 noninterest expense had increased 20.5% or
$34.8 million from $169.9 million in 1995. Comparability between 1997 and 1996
as well as between 1996 and 1995 is impacted by the special charges in 1996,
discussed earlier and the purchase accounting acquisitions of Hometown, UST and
branch purchases during 1996. As indicated earlier, the BOS, PFC, MSB, IBS,
CFHC, DFC, Westport, Lafayette, Growth, Jefferson and Urban acquisitions were
accounted for as poolings of interests and, therefore, all periods presented
have been restated although expense structures are different after acquisition
than they were before. The full annualized effect of the anticipated cost
savings from the centralization of support functions related to the acquisitions
closed in the later part of 1996 were only fully realized in the second quarter
of 1997 as the computer conversions for Lafayette, Hometown and Westport
occurred near year-end 1996 and the UST conversion occurred in the first quarter
of 1997.
Salary expense was $63.4 million in 1997, $63.1 million and $61.7 million in
1996 and 1995, respectively. The $1.4 million, or 2.3% increase in 1996 compared
with 1995 is primarily attributable to the aforementioned purchase acquisitions.
Employee benefits as a percentage of salaries were 38% in 1997, 34% in 1996, and
37% in 1995. The $269 increase in salary expense in 1997 compared to 1996 is
attributable to programs of establishing and purchasing branches in 1996 and
1997, by two of the acquired institutions, which increased their payroll costs
by $1.4 million and was partially offset by a reduction in payroll expenses
realized from the centralization of support functions for acquired institutions.
Employee benefits include the cost of terminating the pension plans of acquired
institutions.
Occupancy expense remained stable at approximately $16.0 million in 1997
compared with $16.4 million and $16.2 million for the years 1996 and 1995,
respectively. Equipment expense increased to $10.7 million in 1997 compared to
$9.8 million in 1996 and $10.6 million in 1995. The $885 increase in 1997 is due
primarily to the implementation of a local area network and replacement of
equipment. The reduction in costs from 1995 to 1996 are attributable to the sale
of 50% of the Company's data processing subsidiary.
Deposit and other insurance expense declined significantly from $9.8 million in
1995 to $6.2 million in 1996 and $2.9 million in 1997. The cost reductions of
37% in 1996 and 53% in 1997 are primarily attributable to the decrease in the
deposit insurance assessment rate for the Company's banking subsidiaries. The
Company has also benefited from savings realized through negotiations on its
other insurance coverages.
Outside services expense has increased to $25.9 million in 1997 from $20.7
million in 1996 and $17.8 million in 1995. The $5.2 million or 25% increase from
1996 to 1997 as well as the 16% increase from 1995 to 1996 are primarily
attributable to the payments for data processing services to the Company's
jointly owned service provider and reflect increased transaction volume
resulting from acquisitions. Other less significant expense increases have
occurred for services provided by unrelated parties due to the general growth of
the Company.
Other Real Estate Owned (OREO) expense remained stable at $4.7 million in 1996
and 1997. From 1995 to 1996 OREO expense increased from $1.5 million to $4.7
million, a 213% change. The OREO expense increase from 1995 to 1996 includes an
$897 increase in the provision for possible OREO losses. The remainder of the
increase is the result of lower gains on the sale of OREO property disposition
and maintenance costs incurred during 1996.
<PAGE>
Amortization of intangibles expense increased to $9.0 million in 1997 from $7.2
million in 1996 and $2.7 million in 1995. Each of the increases is attributable
to the increases in goodwill established for the acquisitions described
previously. The increase from 1995 to 1996 is also impacted by core deposit
intangible created, and its associated amortization, as a result of a branch
purchase completed by MSB in January 1996.
Merger related and restructuring costs were $270 thousand in 1997, $22.0 million
in 1996 and $4.8 million in 1995. The costs for 1995 and 1997 included printing,
legal, accounting, mailing, conversion costs, consulting fees and other like
costs associated with the 1995 and current pending acquisitions, respectively.
For 1996, the merger related costs were comprised of the same types of expenses
as described above. The additional element in 1996--the restructuring
costs--were expensed in the then 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 increased slightly to $24.6 million in 1997 from $23.0 million in
1996 and $21.9 million in 1995. The increases were due to the general growth of
the Company.
FEDERAL INCOME TAXES
The income tax provision for Federal and state taxes approximates 39.3% for
1997, 38.9% for 1996 and 32.8% for 1995. The increase in the effective tax rates
for both 1997 and 1996 are due to the addition of intangible assets, which are
not deductible for income tax purposes, as well as reversals of deferred tax
valuation allowances and tax reserves no longer deemed necessary in 1995 and
1996.
FINANCIAL CONDITION
Total assets at December 31, 1997 were $6.61 billion, a slight increase from
assets of $6.49 billion at December 31, 1996. This increase in assets results
primarily from an increase in short term borrowings of approximately $157
million and the issuance of $50 million in capital securities offered by HUBCO
Capital Trust I on January 31, 1997. Those increases served to offset
approximately $81.7 million in reduced deposits and a $19.7 million decrease in
net stockholders' equity.
The Company considers its liquidity and capital to be adequate. At the end of
1997, the Company had $277.9 million in Federal funds sold and $2.26 billion in
securities, $1.50 billion in its available for sale portfolio, and $765 million
in its held to maturity portfolio that are available to meet future loan demand.
A net decline in total capital of $19.7 million resulted from the Company's
purchase of $83.4 million in common treasury shares and dividends paid of $28.2
million, which was partially offset by the addition of $69.8 million from net
income, and a $8.0 million increase in the mark-to-market of available for sale
securities. The purchased treasury shares were reissued in connection with the
conversion of preferred stock into common stock, the 3% stock dividend paid in
December 1997 and the exercise of stock options. Despite the decline in total
capital, the Company's Tier I Leverage ratio remained stable at 7.8% at December
31, 1997, due primarily to the issuance of $50.0 million in capital securities
offered by HUBCO Capital Trust I on January 31, 1997. The $50.0 million is
included in Tier I Capital for regulatory purposes, subject to certain
limitations.
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
The securities portfolios serve as a source of liquidity and to manage interest
rate risk. Consequently, the portfolios are managed over time in response to
changes in market conditions and as loan demand changes.
At December 31, 1997 and 1996, the portfolios comprised 34% and 36% 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's philosophy with respect to managing the portfolio is to purchase
primarily government agency and mortgage-backed securities with maturities
laddered over a five year period.
<PAGE>
The following table summarizes the composition of the portfolios as of December
31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------------------- ------------------------------------------
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 $ 45,585 $ 611 -- $ 46,196 $ 83,089 $ 394 $ (21) $ 83,462
U.S. Government
Agencies 266,066 1,799 (480) 267,385 233,846 720 (3,050) 231,516
State and Political
subdivisions 10,981 89 -- 11,070 5,652 39 -- 5,691
Mortgage-backed
securities 442,199 7,827 (1,937) 448,089 438,657 6,863 (6,975) 438,545
------------------------------------------- ------------------------------------------
$ 764,831 $ 10,326 $(2,417) $ 772,740 $761,244 $ 8,016 $(10,046) $ 759,214
=========================================== ==========================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------------------------------------------- ------------------------------------------
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>
AVAILABLE FOR SALE
PORTFOLIO
U. S. Government $ 110,485 $ 890 $ (340) $ 111,035 $ 180,711 $ 682 $ (1,276) $ 180,117
U.S. Government
Agencies 274,555 1,745 (301) 275,999 349,830 1,850 (2,413) 349,267
Mortgage-backed
securities 1,016,627 5,292 (3,028) 1,018,891 987,574 4,046 (10,289) 981,331
States and
Political
Subdivisions 10,619 59 (26) 10,652 15,490 15 (49) 15,456
Other debt
securities 41,850 306 (8) 42,148 26,778 190 (48) 26,920
Equity securities 35,718 4,925 (62) 40,581 29,160 4,116 (382) 32,894
=========================================== ==========================================
$ 1,489,854 $ 13,217 $ (3,765) $1,499,306 $1,589,543 $10,899 $ (14,457) $1,585,985
=========================================== ==========================================
</TABLE>
<PAGE>
LOAN PORTFOLIO DISTRIBUTION OF LOANS BY CATEGORY
December 31,
--------------------------------
(Dollars in 1997 1996 1995
thousands)
Loans secured by
real estate:
Residential
mortgage loans $1,736,559 $1,731,815 $1,556,371
Residential home
equity loans 216,215 230,828 181,644
Construction loans 98,925 87,152 65,169
Commercial
mortgage loans 782,970 803,634 732,868
--------------------------------
2,834,669 2,853,429 2,536,052
--------------------------------
Commercial and
industrial loans:
Secured by real 99,622 115,254 116,790
estate
Other 442,383 426,078 413,696
--------------------------------
542,005 541,332 530,486
--------------------------------
Shoppers Charge
credit cards 91,047 61,759 57,915
Other loans to
individuals for
household, family
and other personal 132,340 152,423 130,419
expenditures
================================
Total Loan
Portfolio $3,600,061 $3,608,943 $3,254,872
================================
Total loans at December 31, 1997 decreased by $8.9 million from $3.61 billion at
December 31, 1996, to $3.60 billion at December 31, 1997. The real estate loan
portfolio declined $18.8 million or 0.65% from $2.85 billion at December 31,
1996 to $2.83 billion at December 31, 1997. Commercial mortgage loans decreased
by $20.7 million or 2.6% from $803.6 million at December 31, 1996 to $783.0
million at December 31, 1997. The reduction resulted primarily from the runoff
or sale of non-owner occupied loans which were originated at acquired
institutions and did not fit the Company's credit criteria. Although the company
sold virtually all 1997 residential loan production in the secondary market,
loans originated at acquired institutions served to offset the decline in volume
and, in fact, fixed rate residential mortgage loans increased by $23.3 million
from $1.35 billion at December 31, 1996 to $1.38 billion at December 31, 1997.
Commercial loans were relatively flat, with the overall mix shifting away from
loans secured by real estate as the Company built its traditional portfolio of
commercial and industrial loans. Non real estate secured commercial loans grew
by $16.3 million or 3.8% to $442.4 million at December 31, 1997. Shoppers Charge
Credit Cards (Shoppers) showed significant growth during the year with an
increase of $29.3 million or 47.4% from $61.8 million in 1996 to $91.0 million
in 1997. Shoppers growth was fueled by the addition of several new national
chains as well as the purchase of credit card receivables and corresponding
reserves. Other loans to individuals declined by $20.1 million or 13.2%,
primarily as a result of the Company's decision to allow an acquired indirect
automobile portfolio to decrease significantly during the year.
ASSET QUALITY
The Company's principal earning assets are its loans, which are primarily to
businesses and individuals located in New Jersey, New York 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 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,
------------------------------
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------
Commercial $ 2,996 $ 3,852 $ 1,026
Real estate 8,802 9,581 6,471
Consumer 1,895 966 471
Credit card 2,749 1,486 592
------------------------------
Total Loans Past-Due
90-Days or More and
Still Accruing $ 16,442 $ 15,885 $ 8,560
==============================
AS A PERCENT OF
TOTAL LOANS 0.46% 0.44% 0.26%
==============================
AS A PERCENT OF
TOTAL ASSETS 0.25% 0.24% 0.15%
==============================
These ratios have increased from the Company's historical levels due primarily
to the growth in the Shoppers portfolio, the continued impact of the asset
quality of acquired institutions and the change in method of reporting
delinquent credit card receivables. In March
<PAGE>
1996, the credit card division switched from the recency method to the
contractual method of reporting delinquencies.
Nonaccruing loans consist of commercial loans and commercial mortgage loans
past-due 90-days or more. 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
collectibility 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 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 $16.2
million of loans which are considered renegotiated.
OREO consists of properties on which the Bank has foreclosed or has taken a deed
in lieu of the loan obligation. OREO properties are carried at fair value at all
times, net of estimated costs to sell. The cost to maintain the properties
during ownership, and any further declines in fair value are charged to current
earnings. The Company has been successful in disposing of OREO properties,
including those acquired in acquisitions. At December 31, 1997, 1996, and 1995,
OREO amounted to $11.5 million, $18.9 million, and $28.4 million. The decline
from year to year reflects the Company's success in disposing of these
properties.
At December 31, 1997, nonperforming loans decreased by $8.1 to $78.6 million in
1997 from $86.7 million in 1996. The acquired companies added significantly to
the Company's level of nonperforming loans and while the Company has been able
to either dispose of or obtain repayment on the great majority of these problem
loans acquired in previous acquisitions, they continue to impact asset quality.
The Company continues to work with classified assets from the acquired
institutions, which were identified in the due diligence process, and to conform
these existing credits to the Company's credit policy.
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 $4.9 million, $5.7 million, and $6.3 million for the years 1997,
1996, and 1995, respectively. The amount of interest income recorded on such
loans for each of the years was $1.4 million, $2.0 million, and $3.1 million,
respectively. The Company has no outstanding commitments to advance additional
funds to borrowers whose loans are in a nonperforming status.
Measures to control and reduce the level of nonperforming loans are continuing.
Efforts are made to identify slow paying loans and collection procedures are
instituted. After identification, steps are taken to understand the problems of
the borrower and to work with the borrower toward resolving the problem, if
practicable. Continuing collection efforts are a priority for the Banks.
The allowance for possible loan losses at December 31, 1997, 1996, and 1995 as a
percentage of total loans was 1.83%, 1.72%, and 1.72%, 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 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 1995,
1996, and 1997.
The following table summarizes the Company's nonperforming assets at the dates
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NONPERFORMING ASSETS December 31,
- -----------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual Loans $ 50,938 $ 55,490 $ 43,177
Renegotiated Loans 16,162 12,278 1,908
--------------------------------------------
Total Nonperforming Loans $ 67,100 $ 67,768 45,085
Other Real Estate Owned 11,483 18,907 28,396
--------------------------------------------
Total Nonperforming Assets $ 78,583 $ 86,675 $ 73,481
============================================
Ratios:
Nonaccrual Loans to Total Loans 1.41% 1.54% 1.33%
Nonperforming Assets to Total Assets 1.19% 1.33% 1.30%
Allowance for Loan Losses to Nonaccrual Loans 129% 112% 130%
Allowance for Loan Losses to Nonperforming Loans 98% 91% 124%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
As of December 31, 1997, Hudson United has 92 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 7 regions with each managed by a regional manager with a
loan staff. Lafayette American has 50 branch offices located in New Haven and
Fairfield counties. Lafayette has 2 established regions.
Bank of the Hudson has 34 branch offices located in Rockland, Orange, Dutchess,
Putnam and Sullivan counties in New York.
<PAGE>
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 at the dates indicated (in
thousands)
December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
Noninterest-
bearing deposits $ 831,579 $ 793,310 $ 693,132
NOW/MMDA deposits 980,391 956,507 849,466
Savings deposits 1,115,438 1,185,450 1,153,821
Time deposits 2,325,548 2,399,406 1,988,032
-----------------------------------
Total Deposits $5,252,956 $ 5,334,673 $ 4,684,451
===================================
The decrease in deposits from 1996 to 1997 of $81.7 million, or 1.5%, is
primarily attributable to the decline in the higher rate deposits related to the
Connecticut acquisitions. As noted earlier, 35% of the deposit base is in low or
noninterest bearing core deposits and another 21% 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. 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% 7.8%
Tier 1 Risk-Based
Capital Ratio 4% 14.0%
Total Risk-Based
Capital 8% 18.1%
At December 31, 1997, 1996, and 1995 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 $0.14 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 $0.16 to $0.18 per common share, effecting a 15% dividend
increase. On December 1, 1997, the Company paid a 3% stock dividend and
increased its regular quarterly cash dividend from $0.18 to $0.19 per common
share, effecting an 8% dividend increase. The dividend payout ratio, based on
cash dividends per share and basic earnings per share, was 43.7% for 1997
compared to 75.3% for 1996 and 48.3% in 1995. 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 44.8%.
In 1994, the Company issued $19.1 million in convertible preferred stock in
connection with the Washington acquisition. Based on the terms of the
acquisition, 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 and 1997, the Company's treasury stock was reissued for the
3% stock dividends, and also in 1996 for acquisitions and the conversion of
preferred stock into common stock.
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. In January 1994, the Company sold $25.0 million aggregate
principal amount of subordinated debentures which mature in 2004 and bear
interest at 7.75% per annum payable semi-annually. Proceeds of the issuance were
used for general corporate purposes including providing Tier I capital to the
subsidiary banks. The debt has been structured to comply with the Federal
Reserve Bank rules regarding debt qualifying as Tier 2 capital at HUBCO. On
January 31, 1997, the Company issued $50.0 million in capital securities offered
by HUBCO Capital Trust I 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 Deferrable Interest Debentures issued by HUBCO
which mature on February l1, 2007. The capital securities have preference over
the common securities under certain circumstances with respect to cash
distributions and amounts payable on liquidation and are guaranteed by the
Company. The $50.0 million
<PAGE>
is included in Tier I capital for regulatory purposes, subject to certain
limitations, but is classified as long-term debt for financial reporting
purposes.
At the end of the reporting period, there were no known uncertainties
that will have or that are reasonably likely to have a material effect on the
Company's liquidity or capital resources.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objectives of asset/liability management are to provide for the
safety of depositor and investor funds, assure adequate liquidity and maintain
an appropriate balance between interest sensitive earning assets and
interest-sensitive liabilities. Liquidity management is a planning process that
ensures that the Company has ample funds to satisfy operational needs, projected
deposit outflows, repayment of borrowing and loan obligations and the projected
credit needs of its customer base. Interest rate sensitivity management ensures
that the Company maintains acceptable levels of interest rate environments. The
Company seeks to maintain its interest rate risk within a range that it believes
is both manageable and prudent, given its capital and income generating
capacity.
Liquidity risk is the risk to earnings or capital that arises from a bank's
inability to meet its obligations when they come due, without incurring
unacceptable losses. 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, 1997, the Company's liquidity ratios exceed all
minimum standards set forth by internal policies.
The Company has an asset/liability management committee which manages the risks
associated with the volatility of interest rates and the resulting impact on net
interest income. The management of interest rate risk at the Company is
performed by: (i) analyzing the maturity and repricing relationships between
interest earning assets and interest bearing liabilities at specific points in
time (`GAP') and (ii) "income simulation analysis" which analyzes the effects of
interest rate changes on net interest income over specific periods of time and
captures the dynamic impact of interest rate changes on the Company's mix of
assets and liabilities.
The table on the following page presents the GAP position of the Company at
December 31, 1997. In preparing this table, management has anticipated
prepayments for mortgage-backed securities and mortgage loans according to
standard industry prepayment assumptions in effect at year-end. Money market
deposits and interest bearing demand accounts have been included in the due
within 90 days category. Assets with daily floating rates are included in the
due within 90 days category. Assets and liabilities are included in the table
based on their maturities or period of first repricing, subject to the foregoing
assumptions.
In analyzing its GAP position, although all time periods are considered, HUBCO
emphasizes the next twelve month period. An institution is considered to be
liability sensitive, or as having a negative GAP, when the amount of
interest-bearing liabilities maturing or repricing within a given time period
exceeds the amount of its interest-earning assets also repricing within that
time period. Conversely, an institution is considered to be asset sensitive, or
having a positive GAP, when the amount of its interest-bearing liabilities
maturing or repricing is less than the amount of its interest-earning assets
also maturing or repricing during the same period. Generally, in a falling
interest rate environment, a negative GAP should result in an increase in net
interest income, and in a rising interest rate environment this negative GAP
should adversely affect net interest income. The converse would be true for a
positive GAP.
However, shortcomings are inherent in a simplified GAP analysis that may result
in changes in interest rates affecting net interest income more or less than the
GAP analysis would indicate. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Furthermore, repricing
characteristics of certain assets and liabilities may vary substantially within
a given time period. In the event of a change in interest rates, prepayment and
early withdrawal levels could also deviate significantly from those assumed in
calculating GAP. Also, GAP does not permit analysis of how changes in the mix of
various assets and liabilities and growth rate assumptions impact net interest
income. In addition, NOW/MMDA and savings deposits, which have no contractual
maturity, have been assigned to the "due within 90 days" category despite the
fact that a number of studies on depositor behavior conclude that a significant
percentage of these accounts should be classified as less interest sensitive.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
================================================================================
The following table shows the gap position of the Company at December 31, 1997
(in thousands):
<TABLE>
GAP ANALYSIS
<CAPTION>
DUE WITHIN DUE BETWEEN
ONE YEAR ONE AND DUE OVER NON-INTEREST
OR LESS FIVE YEARS FIVE YEARS BEARING TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Federal Funds Sold $ 277,930 -- -- -- $ 277,930
Securities 944,994 1,061,339 257,804 -- 2,264,137
Total Loans 1,877,861 896,370 825,830 -- 3,600,061
Non-Interest Bearing Assets -- -- -- 464,012 464,012
-------------------------------------------------------------------
Total Assets $ 3,100,785 $1,957,709 $1,083,634 $ 464,012 $6,606,140
Percent of Total Assets 46.9% 29.6% 16.4% 7.1% 100.0%
SOURCE OF FUNDS
Interest-Bearing Deposits 3,286,313 852,019 283,045 -- 4,421,377
Short-Term Borrowings 556,402 61,386 8,617 -- 626,405
Long-Term Debt -- -- 150,000 -- 150,000
Non-Interest Bearing Deposits -- -- -- 831,579 831,579
Other Liabilities -- -- -- 69,678 69,678
Stockholders' Equity -- -- -- 507,101 507,101
-------------------------------------------------------------------
Total Source of Funds $ 3,842,715 $ 913,405 $ 441,662 $ 1,408,358 $6,606,140
Percent of Total Source of Funds 58.2% 13.8% 6.7% 21.3% 100.0%
============================================================================================================
Interest Rate Sensitivity Gap $ (741,930) $1,044,304 $ 641,972 $ (944,346) $ --
- ------------------------------------------------------------------------------------------------------------
Cumulative Interest Rate Sensitivity Gap $ (741,930) $ 302,374 $ 944,346 $ -- $ --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB), issued two
Statements. SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The Statement is effective for fiscal years beginning
after December 15, 1997; earlier application is permitted. The Company has
elected not to adopt this Statement prior to its effective date. The second
statement, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Income," requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. This Statement
become effective for fiscal years beginning after December 15, 1997; earlier
adoption is permitted. The Company has elected not to adopt this Statement prior
to its effective date.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and involve certain risks and uncertainties. Actual results may
differ materially from the results discussed in these forward-looking
statements. Factors that might cause a difference include, but are not limited
to, changes in interest rates, economic conditions, deposit and loan growth,
loan loss provisions, and customer retention, as well as the impact of announced
acquisitions and acquisitions closed on or after December 31, 1997, and factors
resulting from or exacerbated by these acquisitions. The Company assumes no
obligation for updating any such forward-looking statements at any time.
YEAR 2000 COMPLIANCE
The Company, though it servicing subsidiary, established a "Year 2000 Team"
which is responsible for ensuring implementation of the required change to the
Date of Century format for all software programs used by the Company. The
management of the Company anticipates that the Company will be in Year 2000
compliance before the beginning of the new century. The Company has not incurred
significant expenses related to this project and does not anticipate the impact
will be material.
<PAGE>
<TABLE>
<CAPTION>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM II
INVESTMENT PORTFOLIO
Book Value at End of Each Reporting Period
December 31
--------------------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
U.S. Treasury and Other U.S.
Government Agencies and
Corporations $2,159,775 $2,266,307 $1,776,384
State and Political Subdivisions 21,633 21,108 20,600
Other Debt Securities 42,148 26,920 66,865
Common Stock 40,581 32,894 7,471
-----------------------------------------------------------------
TOTAL $2,264,137 $2,347,229 $1,871,320
=================================================================
<CAPTION>
Maturities and Weighted Average Yield at End of Latest Reporting Period
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 $497,282 6.67% $1,188,346 6.55% $338,823 6.92% $135,324 6.76%
States and Political
Subdivisions 9,012 6.08 11,851 6.57 377 6.59 393 6.94
Other Debt Securities 4,639 5.56 2,621 6.63 565 5.00 34,323 8.93
Common Stock 40,581 5.58 -- -- -- -- --
---------- ----------- --------- ---------
TOTAL $ 551,514 6.54% $ 1,202,818 6.55% $ 339,765 6.92% $ 170,040 7.20%
========= =========== ========= =========
</TABLE>
Weighted average yields on tax-exempt obligations have been computed on a fully
tax-equivalent basis assuming a tax rate of 35 percent.
<PAGE>
<TABLE>
<CAPTION>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM III
LOAN PORTFOLIO
Types of Loans At End of Each Reporting Period
December 31
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, Financial,
and Agricultural $ 542,005 $ 541,332 $ 530,486 $ 498,468 $ 509,818
Real Estate -
Construction 98,925 87,152 65,169 48,319 42,671
Real Estate -
Mortgage 2,735,744 2,766,277 2,470,883 2,303,635 2,026,792
Installment 223,387 214,182 188,334 183,744 147,611
------------------------------------------------------------------------------
TOTAL $3,600,061 $3,608,943 $3,254,872 $3,034,166 $2,726,892
==============================================================================
</TABLE>
<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, 1997. Also provided are the amounts due after one year
classified according to the sensitivity to changes in interest rates.
<TABLE>
Maturities and Sensitivity to Changes in Interest Rates
<CAPTION>
MATURING
-----------------------------------------------------------------
After One After
Within But Within Five
One Year Five Years Years Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, Financial,
and Agricultural $213,531 $137,540 $182,863 $ 533,934
Real Estate Construction 39,672 39,391 8,992 88,055
Real Estate - Mortgage 67,682 281,171 489,933 838,786
-----------------------------------------------------------------
TOTAL $320,885 $458,102 $681,788 $1,460,775
=================================================================
<CAPTION>
SENSITIVITY
--------------------------------
Fixed Variable
Rate Rate
--------------------------------
Due After One But Within Five Years $418,094 $ 330,135
Due After Five Years 441,140 759,472
--------------------------------
TOTAL $859,234 $1,089,607
================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM III
LOAN PORTFOLIO
Nonaccrual, Past Due and Restructured Loans
December 31
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on
a nonaccrual basis $ 50,938 $ 55,490 $ 43,177 $ 63,230 $ 93,531
Loans contractually past
due 90 days or more as
to interest or principal
payments 16,442 15,885 8,560 7,174 27,013
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 16,162 12,278 1,908 37,742 42,187
</TABLE>
At the end of the reporting period, there were no loans not disclosed in the
above table 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 above table in the future.
At December 31, 1997 and 1996, 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 ability is no longer
doubtful.
<PAGE>
<TABLE>
<CAPTION>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM IV
SUMMARY OF LOAN LOSS EXPERIENCE
ALLOWANCE FOR POSSIBLE LOAN LOSSES ALLOCATION
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994 December 31,1993
------------------------------------------------------------------------------------------------------------
% of Loans % of Loans % of Loans % of Loans % of Loans
In Each In Each In Each In Each In Each
Category To Category To Category To Category To Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of
period applicable
to domestic loans:
Commercial
Financial and
Agricultural $17,469 15.1% $17,292 15.0% $19,303 16.3% $32,993 16.4% $42,533 18.7%
Real Estate --
Construction 482 2.7 211 2.4 338 2.0 588 1.6 1,286 1.6
Real Estate --
Mortgage 26,749 76.0 26,425 76.7 24,930 75.9 19,588 75.9 21,961 74.3
Installment 5,177 6.2 4,661 5.9 3,910 5.8 3,962 6.1 3,696 5.4
Unallocated 15,981 13,406 7,582 5,227 3,054
-------------------------------------------------------------------------------------------------------------
TOTAL $65,858 100.0% $61,995 100.0% $56,063 100.0% $62,358 100.0% $72,530 100.0%
============================================================================================================
</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.
<PAGE>
<TABLE>
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:
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Amount of Loans Outstanding at End of Year $3,600,061 $3,608,943 $3,254,872 $3,074,157 $2,755,279
=====================================================================
Daily Average Amount of Loans $3,579,797 $3,374,580 $3,145,558 $2,849,476 $2,812,602
=====================================================================
Balance of Allowance for Possible
Loan Losses at Beginning of Year $61,995 $56,063 $62,358 $72,530 $78,888
Loans Charged Off:
Commercial, Financial and Agricultural (4,508) (7,084) (15,738) (10,327) (15,404)
Real Estate - Construction -- -- (75) (474) (2,759)
Real Estate - Mortgage (6,542) (9,210) (13,183) (23,568) (36,587)
Installment (6,120) (3,699) (2,013) (1,249) (2,939)
Lease Financing and Other (384) (485) (73) (118) (434)
----------------------------------------------------------------------
Total Loans Charged Off (17,554) (20,478) (31,082) (35,736) (58,123)
----------------------------------------------------------------------
Recoveries of Loans Previously Charged Off:
Commercial, Financial and Agricultural 2,896 1,749 1,486 2,376 1,070
Real Estate-Construction -- 35 40 17 --
Real Estate-Mortgage 1,407 1,493 2,201 951 738
Installment 1,498 1,316 877 911 1,098
Lease Financing and Other 41 19 22 48 155
----------------------------------------------------------------------
Total Recoveries 5,842 4,612 4,626 4,303 3,061
----------------------------------------------------------------------
Net Loans Charged Off (11,712) (15,866) (26,456) (31,433) (55,062)
----------------------------------------------------------------------
Provision Charged to Expense 12,775 17,140 20,072 15,109 55,086
Additions Acquired Through Acquisitions 2,800 4,658 -- 4,717 400
Other -- -- 89 1,435 (6,782)
----------------------------------------------------------------------
Balance at End of Year $65,858 $61,995 $56,063 $62,358 $72,530
======================================================================
Ratios
Net Loans Charged Off to
Average Loans Outstanding 0.33% 0.47% 0.84% 1.10% 1.96%
Allowance for Possible Loan
Losses to Average Loans
Outstanding 1.84% 1.84% 1.78% 2.19% 2.58%
</TABLE>
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 economics conditions.
<PAGE>
<TABLE>
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.
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Domestic Bank Offices:
Non-interest-bearing
demand deposits $ 749,504 $ 669,882 $ 604,618
Interest-bearing
demand deposits 904,941 2.82% 1,017,217 2.23% 755,380 2.92%
Savings deposits 1,217,070 2.26% 1,078,993 2.74% 1,271,151 2.52%
Time deposits 2,352,867 5.21% 2,308,057 5.25% 1,893,421 4.96%
----------- ----------- -----------
TOTAL $5,224,382 $5,074,149 $4,524,570
========== ========== ==========
</TABLE>
Maturities of certificates of deposit and other time deposits of $100,000 or
more issued by domestic offices, outstanding at December 31, 1997 are summarized
as follows:
<TABLE>
<CAPTION>
Time Certificates Other Time
of Deposit Deposits Total
----------------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
3 months or less $163,167 $ -- $163,167
Over 3 through 6 months 62,791 -- 62,791
Over 6 through 12 month Over 56,760 -- 56,760
12 months 61,932 -- 61,932
-------- --------- --------
TOTAL $344,650 $ -- $344,650
======== ========= ========
</TABLE>
<PAGE>
<TABLE>
HUBCO, Inc. and Subsidiaries
S.E.C. GUIDE 3 - ITEM VI
RETURN ON EQUITY AND ASSETS
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Return on Average Assets 1.08% 0.60% 0.88%
Return on Average Equity 13.56 6.93 9.79
Common Dividend Payout Ratio 43.71 75.29 48.25
Average Stockholders' Equity to
Average Assets Ratio 7.99 8.68 9.02
</TABLE>
<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.
<TABLE>
<CAPTION>
Federal Funds
Purchased and
Securities Sold
Under Agreement Other Short-
to Repurchase Term Borrowings
-------------------------------------------
(In Thousands)
<S> <C> <C>
At Year end December 31:
1997 $366,902 $259,503
1996 191,586 277,378
1995 82,122 250,407
Weighted average interest rate at year end:
1997 5.64% 5.91%
1996 5.27 5.98
1995 5.67 5.96
Maximum amount outstanding at any month's end:
1997 $398,497 $355,206
1996 231,406 296,912
1995 345,097 125,979
Average amount outstanding during the year:
1997 $197,707 $292,049
1996 166,732 250,077
1995 199,982 180,605
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Federal Funds
Purchased and
Securities Sold
Under Agreement Other Short-
to Repurchase Term Borrowings
---------------------------------------
(In Thousands)
<S> <C> <C>
Weighted average interest
rate during the year:
1997 5.28% 6.08%
1996 5.08 5.87
1995 5.69 6.73
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, (in thousands, except share data) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 240,229 $ 182,791
Federal funds sold 277,930 95,236
----------------------------
TOTAL CASH AND CASH EQUIVALENTS 518,159 278,027
Investment and mortgage-backed securities available for sale, at market value 1,499,306 1,585,985
Investment and mortgage-backed securities held to maturity, at cost
(market value of $772,740 and $759,214 for 1997 and 1996, respectively) 764,831 761,244
Loans:
Real estate mortgage 2,519,529 2,535,449
Commercial and financial 640,930 628,484
Consumer credit 348,555 383,251
Credit card 91,047 61,759
----------------------------
TOTAL LOANS 3,600,061 3,608,943
Less: Allowance for possible loan losses (65,858) (61,995)
----------------------------
NET LOANS 3,534,203 3,546,948
Premises and equipment, net 82,511 81,992
Other real estate owned 11,483 18,907
Intangibles, net of amortization 55,573 64,478
Other assets 140,074 161,275
----------------------------
TOTAL ASSETS $ 6,606,140 $ 6,498,856
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 831,579 $ 793,310
Interest bearing 4,421,377 4,541,363
----------------------------
TOTAL DEPOSITS 5,252,956 5,334,673
Short-term borrowings 626,405 468,964
Other liabilities 69,678 61,855
----------------------------
TOTAL LIABILITIES 5,949,039 5,865,492
Subordinated debt 100,000 100,000
Company-obligated mandatorily redeemable preferred
Series B capital securities of a subsidiary trust
holding solely junior subordinated debentures of
the Company 50,000 --
----------------------------
Commitments and contingencies
Stockholders' Equity:
Convertible Preferred stock-Series B, no par value; authorized 10,300,000
shares; 1,250 shares issued and outstanding in 1997; 39,600 shares issued
and outstanding in 1996 125 3,960
Common stock, no par value; authorized 53,045,000 shares; 42,607,964 shares
issued and 41,602,118 shares outstanding in 1997 and 42,892,075 shares
issued and 41,768,310 shares
outstanding 1996 73,551 72,887
Additional paid-in capital 291,916 324,045
Retained earnings 164,612 168,003
Treasury stock, at cost, 1,005,844 shares in 1997 and 1,123,765 shares in
1996 (19,133) (21,195)
Employee stock awards and unallocated shares held by ESOP, at cost (9,609) (11,980)
Unrealized gain (loss) on securities
available for sale, net of income taxes 5,639 (2,356)
----------------------------
TOTAL STOCKHOLDERS' EQUITY 507,101 533,364
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,606,140 $ 6,498,856
============================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Year ended December 31, (in thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND FEE INCOME:
Loans $ 306,800 $ 287,671 $ 276,014
Investment and mortgage-backed securities 159,620 150,856 126,467
Other 4,795 3,987 4,510
----------------------------------
TOTAL INTEREST AND FEE INCOME 471,215 442,514 406,991
----------------------------------
INTEREST EXPENSE:
Deposits 175,645 173,521 148,012
Short-term borrowings 28,202 23,140 23,530
Subordinated and other debt 12,433 3,905 2,153
----------------------------------
TOTAL INTEREST EXPENSE 216,280 200,566 173,695
----------------------------------
NET INTEREST INCOME 254,935 241,948 233,296
PROVISION FOR POSSIBLE LOAN LOSSES 12,775 17,140 20,072
----------------------------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE
LOAN LOSSES 242,160 224,808 213,224
----------------------------------
NONINTEREST INCOME:
Trust department income 3,445 3,151 3,579
Service charges on deposit accounts 22,841 21,923 19,202
Securities gains 8,925 1,355 1,091
Loss on sale of commercial loans -- (894) (7,546)
Shoppers fees 9,072 4,138 2,668
Other income 9,897 10,584 9,630
----------------------------------
TOTAL NONINTEREST INCOME 54,180 40,257 28,624
NONINTEREST EXPENSE:
Salaries 63,397 63,128 61,692
Pension and other employee benefits 23,881 21,350 23,004
Occupancy expense 15,971 16,435 16,160
Equipment expense 10,711 9,826 10,604
Deposit and other insurance 2,881 6,189 9,799
Special SAIF assessment -- 10,074 --
Outside services 25,944 20,699 17,836
Other real estate owned expense 4,675 4,686 1,497
Amortization of intangibles 8,991 7,225 2,667
Merger related and restructuring costs 270 22,082 4,794
Other 24,587 22,985 21,871
----------------------------------
TOTAL NONINTEREST EXPENSE 181,308 204,679 169,924
----------------------------------
INCOME BEFORE INCOME TAXES 115,032 60,386 71,924
PROVISION FOR INCOME TAXES 45,205 23,490 23,597
==================================
NET INCOME $ 69,827 $ 36,896 $ 48,327
==================================
EARNINGS PER SHARE:
Basic $ 1.67 $ 0.85 $ 1.14
Diluted 1.60 0.82 1.10
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 41,362 42,402 41,469
Diluted 43,635 44,990 44,066
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
<TABLE>
Consolidated Statements of Changes in
Stockholders' Equity For the Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
EMPLOYEE
STOCK
AWARDS AND UNREALIZED
UNALLOCATED GAIN
CONVERTIBLE SHARES (LOSS) ON
PREFERRED STOCK COMMON STOCK ADDITIONAL HELD SECURITIES
(in thousands, except share --------------- ----------------- PAID-IN RETAINED TREASURY IN ESOP AVAILABLE
data) SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK AT COST FOR SALE TOTAL
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 841,761 $23,542 32,384,213 $ 57,642 $ 217,912 $ 135,838 $ (19,236) $ (2,940) $ (17,339) $395,419
======================================================================================================
Net income - 1995 -- -- -- -- -- 48,327 -- -- -- 48,327
Cash dividends - common -- -- -- -- -- (12,464) -- -- -- (12,464)
Cash dividends - preferred -- -- -- -- -- (901) -- -- -- (901)
Stock dividend of acquired
company -- -- 121,146 154 1,833 (1,987) -- -- -- --
Issuance of common stock for -
Stock options exercised -- -- 113,876 204 641 -- 399 -- -- 1,244
Warrants exercised -- -- 663,353 1,179 319 -- -- -- -- 1,498
Common Stock Offering -- -- 6,119,492 10,880 102,298 -- -- -- -- 113,178
Dividend reinvestment and
stock purchase plan -- -- 13,053 21 158 -- -- -- -- 179
Conversion and redemption of
preferred stock (799,911)(19,357) 69,757 124 538 - 16,214 -- -- (2,481)
Purchase of treasury stock:
Preferred -- -- -- -- -- -- (71) -- -- (71)
Common -- -- -- -- -- -- (14,674) -- -- (14,674)
Effect of compensation plans -- -- -- -- 261 63 (141) (12,231) -- (12,048)
Regulatory approved transfer
of acquired subsidiary -- -- -- -- (13,028) 13,028 -- -- -- --
Change in unrealized gain
(loss) on securities
available for sale -- -- -- -- -- -- -- -- 18,836 18,836
------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 41,850 $ 4,185 39,484,890 $ 70,204 $ 310,932 $ 181,904 $ (17,509) $(15,171) $ 1,497 $536,042
======================================================================================================
Net income - 1996 -- -- -- -- -- 36,896 -- -- -- 36,896
Cash dividends - common -- -- -- -- -- (21,751) -- -- -- (21,751)
Cash dividends - preferred -- -- -- -- -- (825) -- -- -- (825)
Stock dividend -- -- 47,662 85 1,235 (28,348) 27,028 -- -- --
Issuance of common stock for-
Stock options exercised -- -- 392,815 696 273 -- 908 -- -- 1,877
Warrants exercised -- -- 143,836 255 207 -- 74 -- -- 536
Dividend reinvestment and
stock purchase plan -- -- 7,694 14 162 -- -- -- -- 176
Common stock offering -- -- 1,230,185 2,187 17,378 -- -- -- -- 19,565
Preferred stock conversion (2,250) (225) 74,739 133 92 -- -- -- -- --
Cash in lieu of fractional
shares -- -- -- -- -- (34) -- -- -- (34)
Issuance and retirement of
treasury stock -- -- (387,763) (687) (7,219) -- 7,906 -- -- --
Purchase of treasury stock -- -- -- -- -- -- (39,600) -- -- (39,600)
Effect of compensation plans -- -- -- -- 1,498 161 (2) 3,191 -- 4,848
Change in unrealized gain
(loss) on securities -- -- -- -- -- -- -- -- (3,853) (3,853)
available for sale
Other transactions -- -- -- -- (513) -- -- -- -- (513)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 39,600 $ 3,960 40,994,058 $ 72,887 $ 324,045 $ 168,003 $ (21,195) ($ 11,980) $ (2,356) $533,364
======================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
============================
<TABLE>
<CAPTION>
EMPLOYEE
STOCK UNREALIZED
AWARDS AND GAIN
CONVERTIBLE UNALLOCATED (LOSS) ON
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK HELD SECURITIES
(in thousands, except share --------------- ----------------- PAID-IN RETAINED TREASURY IN ESOP, AVAILABLE
data) SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK AT COST FOR SALE TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income - 1997 -- -- -- -- -- 69,827 -- -- -- 69,827
Cash dividends - common -- -- -- -- -- (27,508) -- -- -- (27,508)
Cash dividends - preferred -- -- -- -- -- (650) -- -- -- (650)
Stock dividend -- -- 321,046 571 9,858 (45,066) 34,723 -- -- 86
Issuance of common stock
for -
Stock options exercised -- -- 48,407 87 (6,299) -- 10,074 -- -- 3,862
Warrants exercised -- -- -- -- (48) -- 65 -- -- 17
Dividend reinvestment and
stock purchase plan -- -- 3,444 6 77 -- -- -- -- 83
Preferred stock conversion (38,350) (3,835) -- -- (36,513) -- 40,348 -- -- --
Cash in lieu of fractional
shares -- -- -- -- (97) -- -- -- -- (97)
Purchase of treasury stock -- -- -- -- -- -- (83,448) -- -- (83,448)
Effect of compensation plans -- -- -- -- 893 6 300 2,371 -- 3,570
Change in unrealized gain
(loss) on securities
available for sale -- -- -- -- -- -- -- -- 7,995 7,995
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 1,250 $ 125 41,366,955 $ 73,551 $ 291,916 $ 164,612 $(19,133) $ (9,609) $ 5,639 $507,101
=====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
==================================================================================
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996, and 1995 (in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69,827 $ 36,896 $ 48,327
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible loan losses 12,775 17,140 20,072
Provision for depreciation and amortization 18,086 17,985 11,794
Amortization of securities premiums, net 1,806 3,102 1,054
Securities gains (8,925) (1,355) (1,091)
Loss (Gain) on sale of assets 111 (182) (891)
Premises and equipment restructuring charge -- -- 1,107
Gain on Sale of Loans (1,289) (304) (639)
Loss on sale of commercial loans -- 894 7,546
Gain on sale of interest in subsidiary -- -- (817)
Market adjustment on ESOP 894 388 197
MRP earned 1,210 1,194 872
Deferred income tax provision 11,105 1,929 7,434
Net change in loans originated for sale 456 (263) (1,255)
Decrease (increase) in other assets 7,609 20,680 (17,746)
Increase (decrease) in other liabilities 7,742 (2,058) 19,017
-------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 121,407 96,046 94,981
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment and mortgage-backed securities
Available for sale 335,660 429,587 252,692
Held to maturity -- -- 3,000
Proceeds from repayments and maturities of investment and mortgage-backed
securities:
Available for sale 378,752 253,228 144,444
Held to maturity 229,311 593,030 929,033
Purchases of investment and mortgage-backed securities:
Available for sale (615,357) (1,071,970) (347,379)
Held to maturity (226,567) (674,675) (995,620)
Net cash acquired through acquisitions -- 459,046 20,934
Net increase in loans other than purchases and sales (97,405) (291,821) (257,811)
Loans purchased (29,704) -- (8,257)
Loans sold 127,204 91,184 46,484
Proceeds from sales of premises and equipment 107 1,480 --
Purchases of premises and equipment (10,226) (12,835) (9,399)
Decrease in other real estate owned 8,869 11,885 14,101
-------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 100,644 (211,861) (207,778)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts and savings accounts (11,510) (82,393) (186,620)
Net (decrease) increase in certificates of deposit (70,208) (147) 277,815
Net increase (decrease) in short-term borrowings 157,497 119,733 (30,371)
Repayment of ESOP loan 696 837 825
Proceeds from the issuance of capital trust securities and
subordinated debt 49,250 73,738 --
Proceeds from the issuance of common stock 3,962 22,154 106,737
Redemption of convertible preferred stock -- -- (2,481)
Cash dividends paid (28,158) (22,576) (13,365)
Purchase of treasury stock (83,448) (39,600) (14,745)
Unearned MRP shares acquired -- -- (6,085)
Proceeds from sale of interest in subsidiary -- -- 4,215
-------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 18,081 71,746 135,925
-------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 240,132 (44,069) 23,128
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 278,027 322,096 298,968
=================================================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 518,159 $ 278,027 $ 322,096
=================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 217,973 $ 199,604 $ 168,881
Income taxes 31,087 22,394 17,033
================================--===============
Liabilities assumed in purchase business combinations and branch
acquisitions $ -- $ 763,580 $ 21,809
=================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
Notes To Consolidated Financial Statements
DECEMBER 31, 1997 (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 three banking subsidiaries,
Hudson United Bank (Hudson United), Lafayette American Bank (Lafayette) and Bank
of the Hudson, with branch locations in New Jersey, Connecticut and New York.
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 management 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, 1997 and
1996.
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 that collection of principal and interest 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.
In accordance with SFAS 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS 118," Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure," a loan is deemed impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. These accounting standards require that the measurement of impairment
of a loan be based on either: the present value of expected future cash flows,
net of estimated costs to sell, discounted at the loan's effective interest
rate; 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 Company 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
valuation allowance, if any, is maintained as part of the allowance for possible
loan losses. The Company's process of identifying impaired loans is conducted as
part of its review for the adequacy of the allowance for possible loan losses.
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
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
being amortized, on a straight-line basis, over the estimated average remaining
lives of such intangible assets (primarily five years).
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, all of the outstanding shares of Westport
Bancorp, Inc. (Westport) on December 13, 1996, and all of the outstanding shares
of Poughkeepsie Financial Corp. (PFC) on April 24, 1998 and all the outstanding
shares of Dime (DFC) on August 21, 1998. Lafayette, Westport, PFC and DFC
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 these valuation
allowances with respect to its deferred tax assets had the companies previously
been combined. Accordingly, the accompanying financial statements (including
quarterly financial information in Note 21) 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.
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 impact would have been had the new standard been adopted. The Company
elected the disclosure option of this standard. See Note 15.
TRANSFERS & SERVICING OF FINANCIAL ASSETS
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. Such 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. The adoption of the
standard did not have a material impact on the Company's financial position or
results of operations.
PER SHARE AMOUNTS
In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share and requires dual presentation of basic and diluted earnings
per share.
Basic earnings 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. Diluted earnings per share is
computed by dividing net income by the weighted average number of common shares
plus the number of shares issuable upon conversion of the preferred stock and
the incremental number of shares issuable from the exercise of stock options and
warrants calculated using the treasury stock method. 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. All prior annual and interim periods
presented have been restated in the new format.
RECENT ACCOUNTING STANDARDS
In June, 1997, the Financial Accounting Standards Board (FASB), issued two
Statements. SFAS No. 130, "Reporting Comprehensive Income", establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The Statement is effective for fiscal years beginning
after December 15, 1997; earlier application is permitted. The Company has
elected not to adopt this Statement prior to its effective date. The second
Statement, SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. This Statement
becomes effective for fiscal years beginning after December 15, 1997; earlier
adoption is permitted. The Company has elected not to adopt this Statement prior
to its effective date.
CASH EQUIVALENTS
Cash equivalents include amounts due from banks and Federal funds sold.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995
amounts in order to conform to 1997's 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 2.947 shares of the
Company's common stock, for a total of 666,298 shares. At the time of the
acquisition, Jefferson had approximately $90 million 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 2.369 shares of the Company's common
stock, for a total of 2,333,163 shares. At the time of the acquisition, Urban
had approximately $230 million 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 .754 shares of the
Company's common stock, for a total of 1,348,995 shares. At the time of the
acquisition, Growth had approximately $128 million 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 .643 shares
of the Company's common
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
stock, for a total of 6,248,756 shares. At the time of the acquisition,
Lafayette had approximately $741 million 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 .352 shares of the
Company's common stock for a total of 1,979,730 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 million in assets.
On January 8, 1998, the Company acquired all the outstanding shares of The Bank
of Southington (BOS) based in Southington, Connecticut. Each share of BOS
common stock outstanding was converted into .637 shares of the Company's common
stock for a total of 778,027 shares. At the time of the acquisition, BOS had
approximately $135 million in assets.
On April 24, 1998, the Company acquired all the oustanding shares of
Poughkeepsie Financial Corp. (PFC) based in Poughkeepsie, New York. Each share
of PFC's common stock outstanding was converted into .309 shares of the
Company's common stock for a total of 3,957,160 shares. At the time of the
acquisition, PFC had approximately $830 million in assets.
On May 29, 1998, the Company acquired all the oustanding shares of MSB Bancorp
(MSB) based in Goshen, New York. Each share of MSB's common stock outstanding
was converted into 1.052 shares of the Company's common stock for a total of
2,933,818 shares. At the time of the acquisition MSB had approximately $745
million in assets.
On August 14, 1998, the Company acquired all the outstanding shares of IBS
Financial (IBS) based in Cherry Hill, New Jersey. Each share of IBS common stock
outstanding was converted into 0.550 shares of the Company's common stock for a
total of 5,946,880 shares. At the time of the acquisition, IBS had approximately
$743 million in assets.
On August 14, 1998, the Company acquired all the outstanding shares of Community
Financial Holding Corporation (CFHC) based in Westmont, New Jersey. Each share
of CFHC common stock was converted into 0.716 shares of the Company's common
stock for a total of 766,144 shares. At the time of the acquisition, CFHC had
approximately $150 million in assets.
On August 21, 1998, the Company acquired all the outstanding shares of Dime
Financial Corporation (DFC) based in Wallingford, Connecticut. Each share of DFC
common stock was converted into 1.0815 shares of the Company's common stock for
a total of 5,221,614 shares. At the time of the acquisition, DFC had
approximately $961 million in assets.
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-
1997 1996 1995
---------------------------------
Net interest income-
The Company, as
previously reported(1) $ 139,110 $ 130,252 $ 81,102
Growth -- -- 5,969
Lafayette(2) -- -- 31,442
Westport(2) -- -- 14,698
BOS 6,733 5,984 5,662
PFC(2) 27,448 25,763 23,484
MSB 24,484 23,557 13,968
CFHC 6,316 5,763 4,906
IBS 22,623 24,733 26,668
DFC(2) 28,221 25,896 25,397
-------------------------------
$ 254,935 $ 241,948 $ 233,296
===============================
Net income (loss)-
The Company, as
previously reported(1) $ 48,180 $ 20,395 $ 23,684
Growth -- -- 198
Lafayette(2) -- -- 6,715
Westport(2) -- -- 3,968
BOS 327 1,138 1,043
PFC(2) 2,429 1,436 (1,585)
MSB 2,281 1,711 2,361
CFHC 630 1,006 792
IBS 5,806 4,537 9,920
DFC(2) 10,174 6,673 1,231
-------------------------------
$ 69,827 $ 36,896 $ 48,327
===============================
- ----------
1 Represents amounts previously reported by the Company as restated for the
elimination of preferred stock dividends paid by MSB to the Company of
$1.13 million in 1997 and $1.10 million in 1996.
2 Represents amounts previously reported by Lafayette, Westport, PFC and DFC
as restated for certain changes in the timing of deferred tax asset
valuation allowance changes (see Note 1 Federal Income Taxes).
Results of operations have been included for periods subsequent to the
acquisition date for business combinations that 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.
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 was a
$111 million commercial bank with 4 branch locations in Fairfield County,
Connecticut.
On February 5, 1998, the Company acquired Security National Bank & Trust Company
of New Jersey ("SNB"), and merged it into Hudson United Bank. Security was a $86
million asset bank and trust company with 4 branch locations, headquartered in
Newark, New Jersey. In the merger, shareholders of SNB received $34.00 in cash
for each share of SNB common stock.
Pro forma results of operations have not been disclosed herein because the
Hometown, UST Bank/Connecticut and SNB 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.
(3) CASH AND DUE FROM BANKS
The Company's subsidiary banks are required to maintain an average reserve
balance as established by the Federal Reserve Board. The amount of those reserve
balances for the reserve computation period, which included December 31, 1997
was approximately $17.5 million.
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of investment and mortgage-backed
securities as of December 31, are summarized as follows (in thousands):
1997
-------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------ MARKET
COST GAINS (LOSSES) VALUE
- ------------------------------------------------------------------
AVAILABLE FOR SALE
U.S. Government $ 110,485 $ 890 $ (340) $ 111,035
U.S. Government
agencies 274,555 1,745 (301) 275,999
Mortgage-backed
securities 1,016,627 5,292 (3,028) 1,018,891
States and political
subdivisions 10,619 59 (26) 10,652
Other debt securities 41,850 306 (8) 42,148
Equity securities 35,718 4,925 (62) 40,581
-------------------------------------------
$1,489,854 $13,217 $(3,765) $1,499,306
===========================================
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
1997
-------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------ MARKET
COST GAINS (LOSSES) VALUE
- ------------------------------------------------------------------
HELD TO MATURITY
U. S. Government $ 45,585 611 -- $ 46,196
U. S. Government
agencies 266,066 1,799 (480) 267,385
State & Pol
Subdivisions 10,981 89 -- 11,070
Mortgage-backed
securities 442,199 7,827 (1,937) 448,089
-------------------------------------------
$ 764,831 $10,326 $ (2,417) $ 772,740
===========================================
1996
-------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------ MARKET
COST GAINS (LOSSES) VALUE
- ------------------------------------------------------------------
AVAILABLE FOR SALE
U. S. Government $ 180,711 682 (1,276) $ 180,117
U. S. Government
agencies 349,830 1,850 (2,413) 349,267
Mortgage-backed
securities 987,574 4,046 (10,289) 981,331
States and political
subdivisions 15,490 15 (49) 15,456
Other debt securities 26,778 190 (48) 26,920
Equity securities 29,160 4,116 (382) 32,894
-------------------------------------------
$1,589,543 $10,899 $(14,457) $1,585,985
===========================================
HELD TO MATURITY
U. S. Government $ 83,089 394 (21) $ 83,462
U. S. Government
agencies 233,846 720 (3,050) 231,516
State & Pol
Subdivisions 5,652 39 -- 5,691
Mortgage-backed
securities 438,657 6,863 (6,975) 438,545
-------------------------------------------
$ 761,244 $ 8,016 $(10,046) $ 759,214
===========================================
The amortized cost and estimated market value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
ESTIMATED
AMORTIZED MARKET
(in thousands) COST VALUE
- -----------------------------------------------------------------
AVAILABLE FOR SALE
Due in one year or less $ 57,482 $ 57,465
Due after one year through five years 276,144 277,607
Due after five years through ten years 68,036 68,611
Due after ten years 35,847 36,151
--------------------------
437,509 439,834
Mortgage-backed securities 1,016,627 1,018,891
Equity securities 35,718 40,581
--------------------------
$ 1,489,854 $ 1,499,306
==========================
HELD TO MATURITY
Due in one year or less 79,266 79,629
Due after one year through five years 98,246 98,833
Due after five years through ten years 144,835 145,904
Due after ten years 285 285
--------------------------
322,632 324,651
Mortgage-backed securities 442,199 448,089
--------------------------
$ 764,831 $ 772,740
==========================
Sales of securities for the year ended December 31 are summarized as follows (in
thousands):
1997 1996 1995
- ------------------------------------------------------------------
Proceeds from sales $ 335,660 $ 429,587 $ 255,692
====================================
Gross gains from sales 9,371 2,742 3,062
====================================
Gross losses from sales (446) (1,387) (1,971)
====================================
Securities with a book value of $433.8 million and $273.6 million at December
31, 1997 and 1996, 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 (in thousands):
1997 1996 1995
- ---------------------------------------------------------------
Balance at January 1 $ 61,995 $ 56,063 $ 62,358
Additions (deductions):
Provision charged to
expense 12,775 17,140 20,072
Allowance acquired through
mergers or acquisitions 2,800 4,658 --
Recoveries on loans
previously charged off 5,842 4,612 4,626
Loans charged off (17,554) (20,478) (31,082)
Transfers from OREO
valuation allowance to
the allowance for loan
losses -- -- 89
--------------------------------
Balance at December 31 $ 65,858 $ 61,995 $ 56,063
================================
(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.
(in thousands)
DECEMBER 31,
----------------------------
1997 1996
- ---------------------------------------------------------------
Nonaccrual loans $ 50,938 $ 55,490
Renegotiated loans 16,162 12,278
----------------------------
Total nonperforming loans $ 67,100 $ 67,768
============================
90 days or more past due and
still accruing $ 16,442 $ 15,885
============================
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
----------------------------
Gross interest income which would
have been recorded under original
terms $ 4,940 $ 5,704 $ 6,298
============================
Gross interest income recorded
during the year $ 1,416 $ 1,952 $ 3,140
============================
At December 31, 1997 and 1996 impaired loans, comprised principally of
nonaccruing loans, totaled $66.2 million and $58.1 million, respectively. The
allowance for possible loan losses related
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
to such impaired loans was $11.0 million and $7.1 million at December 31, 1997
and 1996, respectively. The average balance of impaired loans for 1997 and 1996
was $60.9 million and $49.3 million, respectively.
(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, 1997 (in thousands)-
Balance at January 1 $ 16,233
New loans issued 2,502
Repayment of loans (4,086)
Loans to former directors (674)
==============
Balance at December 31 $ 13,975
==============
(8) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31 (in
thousands):
1997 1996
- -----------------------------------------------------------
Land $ 16,004 $ 14,754
Premises 83,131 81,254
Furniture, fixtures and equipment 62,123 60,647
-----------------------
161,258 156,655
Less- Accumulated depreciation (78,747) (74,663)
-----------------------
$ 82,511 $ 81,992
=======================
Depreciation and amortization expense for premises and equipment for 1997, 1996
and 1995 amounted to $9.2 million, $9.0 million and $9.1 million, respectively.
(9)INCOME TAXES
The components of the provision (benefit) for income taxes for the year ended
December 31 are as follows (in thousands):
1997 1996 1995
- -------------------------------------------------------------
Federal-
Current $ 28,060 $ 19,933 $ 12,938
Deferred 9,629 (88) 8,064
State 7,516 3,645 2,595
---------------------------------
Total provision for
income taxes $ 45,205 $ 23,490 $ 23,597
=================================
A reconciliation of the provision for income taxes, as reported, with the
Federal income tax at the statutory rate for the year ended December 31 is as
follows (in thousands):
1997 1996 1995
- ---------------------------------------------------------------
Tax at statutory rate $ 40,261 $ 21,135 $ 25,173
Increase (decrease) in taxes
resulting from-
Tax-exempt income (411) (594) (685)
State income taxes, net of
Federal income tax
benefit 4,969 2,379 1,687
Reversal of reserves no
longer deemed necessary -- -- (2,076)
Change in valuation
allowance -- (1,250) (4,822)
Bad debt deduction -- -- 1,768
Other, net 386 1,820 2,552
--------------------------------
Provision for income taxes $ 45,205 $ 23,490 $ 23,597
================================
Significant components of deferred tax assets and liabilities are as follows (in
thousands):
DECEMBER 31,
1997 1996 1995
- ---------------------------------------------------------------
Deferred Tax Assets
(Liabilities):
Allowance for possible loan
losses $ 21,836 $24,399 $26,711
Federal and state tax
operating loss carry
forwards 10,650 18,826 25,556
Director and officer
compensation plans 1,743 1,882 2,298
Purchased mortgage
servicing rights 1,046 1,067 1,140
Allowance for losses on
other real estate 804 1,189 832
Depreciation (215) (339) (520)
Unrealized (gain) loss on
available for sale
securities (3,284) 1,027 (1,300)
Acquisition expenses 3,081 3,278 95
Other 5,935 10,839 7,105
-------------------------------
Valuation Allowance -- -- (1,250)
-------------------------------
Net Deferred Tax Asset $ 41,596 $62,168 $60,667
===============================
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, 1997, the Company had approximately $47.8 million in Federal
and state carryforwards available for tax reporting purposes resulting from the
Lafayette, PFC and DFC business combinations which are subject to certain
limitations as to the amount which may be utilized in any given year.
The Company has not provided deferred inomce taxes for DFC's tax reserve for bad
debts that arose in tax years beginning before December 31, 1987, because it is
not expected that this difference will reverse in the foreseeable future. The
cumulative net amount of income tax temporary difference related to the reserve
for bad debts for which deferred taxes have not been provided was approximately
$24.4 million at December 31, 1997. This potential liability for which no
deferred income taxes have been provided was approximately $9.2 million as of
December 31, 1997.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
(10) BENEFIT 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 (in thousands):
1997 1996 1995
- ---------------------------------------------------------------
Service cost - benefits
earned during the year $ 1,408 $ 1,226 $ 1,379
Interest cost on projected
benefit obligation 1,785 1,957 2,199
Actual return on plan assets (4,598) (3,528) (5,227)
Net amortization and deferral 2,009 1,232 3,009
---------------------------------
Net periodic pension cost $ 604 $ 887 $ 1,360
=================================
Assumptions used by the Company in the accounting for its plans in 1997, 1996
and 1995 were:
1997 1996 1995
- ---------------------------------------------------------------
Weighted average discount
rate 6.5%-7.7% 7.0%-8.0% 7.0%-7.5%
Rate of increase in
compensation 3.5%-4.3% 4.0%-4.3% 4.0%-4.5%
Expected long-term rate
of return on assets 8.0%-8.5% 8.0%-8.5% 8.0%-8.8%
The following table sets forth the funded status and amounts recognized in the
consolidated balance sheets at December 31 for the Company's plans (in
thousands):
1997 1996
- ---------------------------------------------------------------
Actuarial present value of benefit
obligations-
Accumulated benefit obligation,
including vested benefits of
$25,446 and $24,815 for 1997 and
1996 respectively $ 26,831 $ 25,296
=======================
Projected benefit obligation for
service rendered to date 28,440 28,723
Plan assets at fair value 34,897 32,140
-----------------------
Projected benefit obligation less
than plan assets 6,457 3,417
Unrecognized portion as of
December 31, of net asset existing
at date of adoption of FASB
Statement No. 87 (1,226) (1,558)
Prior service cost not yet
recognized in net periodic 392 573
pension cost
Unrecognized net asset at December
31 (2,711) (584)
-----------------------
Prepaid pension costs included in
other assets $ 2,912 $ 1,848
=======================
The Company has 401(k) savings plans covering substantially all of its
employees. Under the plans, the Company matches varying percentages of the
employee's contribution. The Company's contributions under these Plans were
approximately $956, $817 and $733 in 1997, 1996 and 1995, respectively.
Deferred compensation arrangements have been established for certain members of
management. In addition, Lafayette had a deferred compensation plan for certain
directors at acquisition which did not carry forward for new Board 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.
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 $100,000, was approximately $344.7 million and $280.6
million at December 31, 1997 and 1996, respectively.
The scheduled maturities of certificates of deposit are as follows at December
31, 1997 (in thousands):
1998 $ 1,627,942
1999 349,250
2000 196,986
2001 30,976
2002 and thereafter 120,394
---------------
$ 2,325,548
===============
(12) SHORT-TERM BORROWINGS
The following is a summary of borrowings at December 31 (in thousands):
1997 1996
- ---------------------------------------------------------------
Federal Home Loan Bank advances $ 251,819 $ 271,592
Securities sold under agreements to
repurchase 366,902 174,086
Federal funds purchased -- 17,500
Treasury, Tax and Loan note 2,574 893
Other borrowings 5,110 4,893
------------------------
Total borrowings $ 626,405 $ 468,964
========================
Information concerning securities sold under agreements to repurchase is
summarized as follows at December 31 (in thousands):
1997 1996
- ----------------------------------------------------------------
Average daily balance during the year $ 178,424 $ 137,569
Average interest rate during the year 5.39% 4,92%
Maximum month-end balance during the
year 395,497 216,900
Mortgage-backed securities underlying the agreements at December 31 (in
thousands):
1997 1996
- ----------------------------------------------------------------
Carrying value $ 386,446 $ 174,888
Estimated fair value $ 387,894 $ 175,012
(13) SUBORDINATED DEBT
In September, 1996, the Company sold $75.0 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 $25.0
aggregate principal amount of subordinated debentures. The debentures, which
mature in 2004, bear interest at 7.75% per annum payable semi-annually.
(14) CAPITAL TRUST SECURITIES
On January 31, 1997, the Company issued $50.0 in capital securities offered by
HUBCO Capital Trust I 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. This wholly-owned
trust exists for the sole purpose of issuing the Trust Securities and investing
the proceeds in 8.98% Junior Subordinated Deferrable Interest Debentures issued
by the Company which mature on February 1, 2027. The capital securities have
preference over the common securities under certain circumstances with respect
to cash distributions and amounts payable on liquidation and are guaranteed by
the Company. The $50.0 million is included in Tier I capital for regulatory
purposes, subject to
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
certain limitations, but is classified as long-term debt for financial reporting
purposes.
(15) 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 as of November 4, 1996. On December
1, 1997, the Company paid a 3% stock dividend to stockholders of record as of
November 13, 1997. On September 1, 1998, the Company paid a 3% stock dividend to
stockholders of record as of August 14, 1998. As a result, all share data has
been retroactively restated.
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 July, 1996, as part of the Lafayette acquisition, the Company converted all
outstanding Lafayette warrants into HUBCO warrants. Each HUBCO warrant is
exercisable at $7.06 for one share of HUBCO common stock. The warrants are
exercisable at the option of the holder, until February 1999, at which time the
warrants expire. During 1997, 2,605 warrants were exercised, resulting in 33,285
outstanding warrants as of December 31, 1997.
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.
In connection with the PFC, MSB, DFC and IBS acquisitions, all of the
outstanding PFC, MSB, DFC and IBS options were converted into options to
purchase common stock of the Company. Transactions under these plans are
summarized as follows:
NUMBER OF OPTION PRICE
SHARES PER SHARE
- ------------------------------------------------------------------
Outstanding, December 31, 1995 2,097,141 $ 3.90-$19.22
Granted 504,319 13.34- 21.98
Exercised (238,108) 3.90- 14.91
Forfeited/Cancelled (25,830) 11.47- 14.63
Westport options converted 325,714 5.67- 17.02
------------------------------
Outstanding, December 31, 1996 2,663,236 5.67- 21.98
------------------------------
Granted 396,698 23.10- 32.82
Exercised (486,986) 5.67- 17.02
Forfeited/Cancelled (26,933) 14.29- 22.28
------------------------------
Outstanding, December 31, 1997 2,546,015 5.67- 32.82
------------------------------
As of December 31, 1997, 1,982,614 shares are exercisable. In connection with
the Lafayette, Growth, BOS and CNB acquisitions, the Company issued HUBCO common
shares to the holders of options to purchase Lafayette, Growth, BOS and CNB
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 (in thousands, except share data):
1997 1996
- ----------------------------------------------------------------
Net income As reported $ 69,827 $ 36,896
Pro forma 68,565 35,496
Basic earnings per share As reported $ 1.67 $ 0.85
Pro forma $ 1.64 $ 0.82
Diluted earnings per share As reported $ 1.60 $ 0.82
Pro forma $ 1.57 $ 0.79
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 for 1997
and 1996: dividend yield of 1.80% to 3.36% for 1997 and 1.60% to 4.00% for 1996;
risk-free interest rates of 5.50% to 7.50% for 1997 and 5.50% to 7.50% for
1996;volatility factors of the expected market price of the Company's common
stock of approximately 23% to 37% in 1997 and 28% to 37% in 1996 and an expected
life of 5 to 10 years in both 1997 and 1996.
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 1997 and 1996,
16,686 and 4,880 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 ($444) and ($279) has been recorded as a reduction of stockholders'
equity for 1997 and 1996, respectively. Amortization of restricted stock awards
charged to expense amounted to $135, $424 and $455 in 1997, 1996 and 1995,
respectively.
The Company maintains two Employee Stock Ownership Plan (ESOP) which were
originally established by MSB and IBS. Loan payments are funded principally from
the Company's contributions to the ESOP on behalf of eligible employees, which
are charged to expense as incurred. Shares purchased by the ESOP are held in a
suspense account until allocation to individual participants and are reflected
as a reduction of stockholders' equity.
The Company maintains two Bank Recognition and Retention Plan and Trusts (BRP),
which were originally established by MSB and IBS, in which shares of the
Company's common stock may be granted to plan participants. The expense
recognized for the BRP and ESOP amounted to $4,719, $3,536, and $2,689 for the
years ended December 31, 1997, 1996 and 1995, 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. During 1997, the
Company purchased shares at an aggregate cost of $83.4 million. A majority of
these shares were reissued during 1997, primarily in connection with the
conversion of preferred stock to common stock, the 3% stock dividend and the
exercise of stock options.
(16) EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." This statement established standards for computing and presenting
earnings per share and requires dual presentation of basic and diluted earnings
per share. A reconciliation of net income to net income available to common
stockholders and of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution follows (in thousands,
except share data):
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
Year Ended
December 31,
---------- ----------- ----------
1997 1996 1995
---------- ----------- ----------
Basic Earnings Per Share
- --------------------------------
Net income $ 69,827 $ 36,896 $ 48,327
Less: Preferred stock dividends 650 825 901
---------- ----------- ----------
Net income available to common
stockholders $ 69,177 $ 36,071 $ 47,426
Weighted average common shares
outstanding 41,362 42,402 41,469
Basic Earnings Per Share $ 1.67 $ 0.85 $ 1.14
========== =========== ==========
Diluted Earnings Per Share
- --------------------------------
Net income $ 69,827 $ 36,896 $ 48,327
Weighted average common shares
outstanding 41,362 42,402 41,469
Effect of Dilutive Securities:
Convertible Preferred Stock 1,008 1,354 1,468
Warrants 36 43 147
Unearned MRP 175 245 148
Stock Options 1,054 946 834
---------- ----------- ----------
43,635 44,990 44,066
Diluted Earnings Per Share $ 1.60 $ 0.82 $ 1.10
========== =========== ==========
(17) RESTRICTIONS ON BANK DIVIDENDS, LOANS OR ADVANCES
Certain restrictions exist regarding the ability of Hudson United, Lafayette and
Bank of the Hudson 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. Office of
Thrift Supervision (OTS) regulations, which apply to Bank of the Hudson, allow
for a institution that has capital in excess of all fully phased-in regulatory
capital requirements before and after a proposed capital distribution and that
is not otherwise restricted in making capital distributions, to make capital
distributions during a calendar year equal to the greater of (i) 100% of its net
earnings to date during the calendar year plus the amount that would reduce by
one-half its "surplus capital ratio" at the beginning of the calendar year, or
(ii) 75% of its net earnings for the previous four quarters. As of December 31,
1997, $163.7 million was available for distribution to the Company from Hudson
United, $48.2 million was available for distribution to the Company from
Lafayette and approximately $21.4 million was available for distribution to the
Company from Bank of the Hudson.
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 million in order to finance the
purchase of its administrative facility. The loan has been collateralized by the
property.
In conformity with the OTS regulations, a "liquidation account" was established
for Bank of the Hudson and acquired banks at the time of their conversion to the
stock form of ownership. In the unlikely event of a complete liquidation of Bank
of the Hudson, holders of savings accounts with qualifying deposits, who
continue to maintain their savings accounts, would be entitled to a distribution
from the "liquidation account" in an amount equal to their then current adjusted
savings account balance before any liquidation distribution could be made with
respect to capital stock. The balance in the "liquidation account" was $12.3
million at December 31, 1997, for Bank of the Hudson. This amount may not be
utilized for the payment of cash dividends to the Company.
(18) LEASES
Total rental expense for all leases amounted to approximately $6.0 million $6.8
million and, $6.0 million in 1997, 1996 and 1995, respectively.
At December 31, 1997, 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 (in thousands):
1998 $5,232
1999 4,598
2000 4,240
2001 3,315
2002 and Thereafter 16,580
It is expected that in the normal course of business, leases that expire will be
renewed or replaced by leases of other properties.
(19) COMMITMENTS AND CONTINGENT LIABILITIES
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 liabilities 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, 1997 was $869.5 million and $28.4 million,
respectively. Commitments under commercial letters of credit used to facilitate
customers trade transactions were $1.8 million at December 31, 1997.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
(20) HUBCO, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31
BALANCE SHEETS 1997 1996
-----------------------------
<S> <C> <C>
ASSETS:
Cash $ 13,423 $ 12,342
Federal Funds -- 400
Investment in subsidiaries 626,808 614,513
Accounts receivable 8,736 334
Premises and equipment, net 5,955 5,541
Other assets 19,947 10,113
-----------------------------
TOTAL ASSETS $ 674,869 $ 643,243
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable 5,293 412
Notes payable-subsidiary 2,822 3,194
ESOP obligation 182 432
Dividends payable 710 708
Accrued taxes and other liabilities 8,761 5,133
-----------------------------
TOTAL LIABILITIES 17,768 9,879
-----------------------------
Subordinated Debt 100,000 100,000
Company-obligated mandatorily redeemable preferred series B capital securities of
a subsidiary trustholding solely junior subordinated debentures of the Company 50,000 -
Stockholders' equity 507,101 533,364
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 674,869 $ 643,243
=============================
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
STATEMENTS OF INCOME 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Cash dividends from bank subsidiaries $ 44,797 $ 50,094 $ 18,028
Interest 5,881 1,948 5,131
Securities gains 8,601 1,063 813
Rental income 1,165 1,093 1,714
Other 9,956 2 777
---------------------------------------------
$ 70,400 $ 54,200 $ 26,463
EXPENSES:
General and administrative 19,082 5,634 3,566
Interest 13,483 4,147 2,429
---------------------------------------------
32,565 9,781 5,995
---------------------------------------------
Income before income taxes and equity in
undistributed net income (loss) of subsidiaries 37,835 44,419 20,468
Income taxes (2,214) (1,550) 759
---------------------------------------------
40,049 45,969 19,709
Equity in undistributed net income (loss) of subsidiaries 29,778 (9,073) 28,618
---------------------------------------------
NET INCOME $ 69,827 $ 36,896 $ 48,327
=============================================
</TABLE>
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
HUBCO, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31
STATEMENTS OF CASH FLOWS 1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 69,827 $ 36,896 $ 48,327
Adjustments to reconcile net income to net cash provided by (used in) operating
activities-
Amortization and depreciation 475 331 186
Amortization of restricted stock 135 424 455
Securities gains (8,601) (1,063) (813)
Gain on sale of interest in subsidiary -- -- (817)
Increase in investment in subsidiaries (36,352) (52,070) (39,104)
(Increase) decrease in accounts receivable (1,764) 7,238 (6,451)
Decrease (increase) in other assets 3,495 1,254 (1,731)
Decrease in notes payable (372) (372) (372)
Increase (decrease) in accounts payable 4,435 (517) 121
(Decrease) increase in accrued taxes and other liabilities (6,967) 2,910 982
---------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 24,311 (4,969) 783
---------------------------------------------
Investing activities:
Proceeds from sale of securities 78,174 11,742 18,909
Proceeds from maturities of securities 20,142 20,437 2,196
Purchase of securities (90,887) (29,349) (39,191)
Net decrease in loans -- 426 68
Capital expenditures (414) (302) (58,835)
---------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 7,015 2,954 (76,853)
---------------------------------------------
Financing activities:
Proceeds from sale of interest in subsidiary -- -- 4,215
Proceeds from issuance of common stock 3,962 22,154 106,737
Net proceeds from issuance of capital trust securities 49,250 -- --
Net proceeds from issuance of subordinated debt -- 73,738 --
Dividends paid (28,158) (22,576) (13,365)
Redemption of convertible preferred stock -- -- (2,481)
Purchase of treasury stock (83,448) (39,600) (14,745)
Infusion of capital into subsidiary 24,018 (33,513) --
Other 3,731 5,719 (2,932)
---------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (30,645) 5,922 77,429
---------------------------------------------
INCREASE IN CASH 681 3,907 1,359
CASH AT BEGINNING OF YEAR 12,742 8,835 7,476
---------------------------------------------
CASH AT END OF YEAR $ 13,423 $ 12,742 $ 8,835
=============================================
</TABLE>
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
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(21) SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following quarterly financial information for the two years ended December
31, 1997 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
(Dollars in thousands) March 31 June 30 September 30(a) December 31(a)
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<S> <C> <C> <C> <C>
1997
Net interest income $62,437 $64,910 $65,021 $62,567
Provision for possible loan losses 2,469 2,496 3,000 4,810
Income before income taxes 28,359 30,531 32,269 23,873
Net income 17,291 18,272 19,409 14,855
Earnings per share-basic 0.41 0.44 0.46 0.36
Earnings per share-diluted 0.39 0.42 0.44 0.35
1996
Net interest income 59,499 60,429 60,040 61,980
Provision for possible loan losses 3,458 3,958 2,959 6,765
Income before income taxes 21,917 20,881 7,291 10,297
Net income 13,057 12,398 4,373 7,068
Earnings per share-basic 0.30 0.29 0.10 0.16
Earnings per share-diluted 0.29 0.28 0.10 0.15
</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.
(22) 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,
1997 and 1996 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>
1997 1996
ESTIMATED FAIR RECORDED BOOK ESTIMATED RECORDED
VALUE VALUE FAIR VALUE BOOK VALUE
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<S> <C> <C> <C> <C>
Cash and cash equivalents $ 518,159 $ 518,159 $ 278,027 $ 278,027
Investment and mortgage-backed securities available for sale 1,499,306 1,499,306 1,585,985 1,585,985
Investment and mortgage-backed securities held to maturity 772,740 764,831 759,214 761,244
</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.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
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<TABLE>
<CAPTION>
1997 1996
ESTIMATED FAIR RECORDED BOOK ESTIMATED RECORDED
VALUE VALUE FAIR VALUE BOOK VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans, net of allowance $ 3,569,353 $ 3,534,203 $ 3,601,439 $ 3,546,948
</TABLE>
The fair value of demand deposits, savings deposits and certain money market
accounts approximate their recorded book balances. The fair value of fixed
maturity certificates of deposit was estimated using the present value of
discounted cash flows based on rates currently offered for deposits of similar
remaining maturities.
<TABLE>
<CAPTION>
1997 1996
ESTIMATED FAIR RECORDED BOOK ESTIMATED RECORDED
VALUE VALUE FAIR VALUE BOOK VALUE
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<S> <C> <C> <C> <C>
Deposits $ 5,253,687 $ 5,252,956 $ 5,331,408 $ 5,334,673
</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>
1997 1996
ESTIMATED FAIR RECORDED BOOK ESTIMATED RECORDED
VALUE VALUE FAIR VALUE BOOK VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued interest receivable $ 44,265 $ 44,265 $ 55,657 $ 55,657
Cash surrender value of life insurance 10,968 10,968 9,959 9,959
Short-term borrowings 626,672 626,405 469,382 468,964
</TABLE>
The fair value of the subordinated debt was determined by reference to quoted
market prices.
<TABLE>
<CAPTION>
1997 1996
ESTIMATED FAIR RECORDED BOOK ESTIMATED RECORDED
VALUE VALUE FAIR VALUE BOOK VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinated Debt $ 106,733 $ 100,000 $ 103,475 $ 100,000
Capital Trust Securities 54,934 50,000 -- --
</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.
(23) 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 of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), of Tier I capital (as defined) to average assets (as defined) for
Hudson United and Lafayette, and tangible and core capital (as defined) to
adjusted total assets (as defined) for Bank of the Hudson. Management believes,
as of December 31, 1997, that the Company and its subsidiary banks meet all
capital adequacy requirements to which they are subject.
<PAGE>
HUBCO, INC. AND SUBSIDIARIES
- ----------------------------
Acual capital amounts and ratios at December 31, 1997 are presented
in the following table (in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized Under
For Capital Prompt Corrective Action
Actual Adequacy Purposes Provisions
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Amount Ratio Amount Ratio Amount Ratio
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<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total Capital to Risk Weighted Assets:
HUBCO $ 640,300 18.1% $ 283,838 > 8.0% $ 354,797 > 10.0%
Hudson United Bank 282,120 19.6% 115,038 > 8.0% 143,797 > 10.0%
Lafayette American Bank 198,938 15.8% 100,951 > 8.0% 126,188 > 10.0%
Bank of the Hudson 116,726 12.6% 74,038 > 8.0% 92,547 > 10.0%
Tier I Capital to Risk Weighted Assets:
HUBCO 495,685 14.0% 141,919 > 4.0% 212,878 > 6.0%
Hudson United Bank 264,116 18.4% 57,519 > 4.0% 86,278 > 6.0%
Lafayette American Bank 182,948 14.5% 50,475 > 4.0% 75,713 > 6.0%
Bank of the Hudson 105,149 11.4% 37,019 > 4.0% 55,528 > 6.0%
Tier I Capital to Average Assets:
HUBCO 495,685 7.8% 254,488 > 4.0% 318,110 > 5.0%
Hudson United Bank 264,116 10.5% 100,425 > 4.0% 125,532 > 5.0%
Lafayette American Bank 182,948 8.2% 89,169 > 4.0% 111,461 > 5.0%
Bank of the Hudson 105,149 6.5% 64,893 > 4.0% 81,117 > 5.0%
Tangible Capital to Adjusted Total
Assets:
Bank of the Hudson 105,274 6.6% 23,991 1.5% -- --
Tangible Capital to Adjusted Total
Assets
Bank of the Hudson 105,274 6.6% 47,983 3.0% 79,971 5.0%
</TABLE>
(24) SUBSEQUENT EVENTS
On June 19, 1998, the Company issued $50.0 million in capital securities offered
by HUBCO Capital Trust II pursuant to Rule 144A under the Securities Act of
1933. The 7.65% capital securities represent a preferred beneficial interest in
the assets of HUBCO Capital Trust II, a statutory business trust. This
wholly-owned trust exists for the sole purpose of issuing the Trust Securities
and investing the proceeds in 7.65% Junior Subordinated Deferrable Interest
Debentures issued by the Company which mature on June 20, 2028. The capital
securities have preference over the common securities under certain
circumstances with respect to cash distributions and amounts payable on
liquidation and are guaranteed by the Company. The $50.0 million is included in
Tier I capital for regulatory purposes, subject to certain limitations, but is
classified as long-term debt for financial reporting purposes.
On June 26, 1998, the Company acquired 21 branches of Fist Union National Bank
located in New Jersey and Connecticut. The 13 New Jersey branches representing
$143.3 million in deposits were merged in Hudson United and the 8 Connecticut
branches representing $99.6 million in deposits were merged in Lafayette. The
purchase was accounted for under the purchase method of accounting.
On July 24, 1998, the Company acquired two additional branches of First Union
National Bank located in Hyde Park and Woodstock, New York. The branches
representing $25.2 million in deposits were merged into Bank of the Hudson.
<PAGE>
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, 1997 and 1996, 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,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Hubco, Inc. and subsidiaries as
of December 31, 1997 and 1996, and the results of their operations and their
cash flows for the each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
Roseland, New Jersey
September 28, 1998
