10-Q 1 e89547_10-q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________________to________________ Commission File Number 0-010699 HUDSON UNITED BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) New Jersey 22-2405746 -------------------------------------- --------------------------------------- (State of other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1000 MacArthur Blvd, Mahwah, NJ 07430 -------------------------------------- ---------- (Address of principal executive office) (Zip Code) (201)-236-2600 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable ---------------------------------------------------- Former name, former address, and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: 45,127,838 shares, no par value, outstanding as of August 6, 2002. HUDSON UNITED BANCORP INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets At June 30, 2002 and December 31, 2001 ........................... 2 Consolidated Statements of Income For the three-months ended June 30, 2002 and 2001............................................ 3 Consolidated Statements of Income For the six-months ended June 30, 2002 and 2001............................................ 4 Consolidated Statements of Comprehensive Income For the three-months ended and six-months ended June 30, 2002 and 2001............................................ 5 Consolidated Statements of Changes in Stockholders' Equity For the six-months ended June 30, 2002 and for the Year ended December 31, 2001............ 6 Consolidated Statements of Cash Flows For the six-months ended June 30, 2002 and 2001............................................ 7 Notes to Consolidated Financial Statements........................ 8-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 17-25 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............... 26 Item 6. Exhibits and Reports on Form 8-K.................................. 27 Signatures........................................................ 28 1
HUDSON UNITED BANCORP ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, (in thousands, except per share data) 2002 2001 ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks (primarily non-interest bearing) ............................................. $ 327,114 $ 231,641 Federal funds sold and other ......................................................................... 25,222 557 ----------- ----------- TOTAL CASH AND CASH EQUIVALENTS $ 352,336 $ 232,198 Investment securities available for sale, at market value ............................................ $ 2,385,952 $ 1,408,510 ($746,960 and $369,646 pledged at June 30,2002 and December 31, 2001 respectively) Trading assets, at market value ...................................................................... -- 576,308 Assets held for sale (loans and other real estate owned) ............................................. 312 16,185 Loans and leases: Commercial and financial ........................................................................ 1,684,353 1,728,793 Commercial real estate mortgages ................................................................ 866,931 826,151 Consumer ........................................................................................ 1,030,184 947,195 Credit card ..................................................................................... 315,561 299,295 ----------- ----------- Sub-total ................................................................................... $ 3,897,029 $ 3,801,434 Residential mortgages ........................................................................... 448,260 537,055 ----------- ----------- TOTAL LOANS AND LEASES $ 4,345,289 $ 4,338,489 Less Allowance for possible loan and lease losses .............................................. (71,999) (70,046) ----------- ----------- NET LOANS AND LEASES $ 4,273,290 $ 4,268,443 Premises and equipment, net .......................................................................... 106,913 115,273 Other real estate owned .............................................................................. 1,096 3,381 Goodwill and intangibles, net of amortization ........................................................ 101,552 86,157 Investment in separate account bank owned life insurance ............................................. 133,316 129,375 Other assets ......................................................................................... 129,643 163,705 ----------- ----------- TOTAL ASSETS $ 7,484,410 $ 6,999,535 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest bearing .............................................................................. $ 1,239,929 $ 1,215,367 NOW, money market and savings ................................................................... 3,083,759 2,551,937 Time deposits ................................................................................... 1,956,116 2,216,241 ----------- ----------- TOTAL DEPOSITS $ 6,279,804 $ 5,983,545 Borrowings ........................................................................................... 288,378 311,966 Other liabilities .................................................................................... 87,092 71,820 Subordinated debt .................................................................................... 292,000 123,000 Company-obligated mandatory redeemable preferred capital securities of three subsidiary trusts holding solely junior subordinated debentures of the Company ....................................................................................... 120,300 125,300 ----------- ----------- TOTAL LIABILITIES $ 7,067,774 $ 6,615,631 Stockholders' Equity: Common stock, no par value; authorized 103,000,000 shares; ......................................... 92,796 92,796 52,186,866 shares issued and 45,275,938 shares outstanding in 2002 and 52,186,866 shares issued and 45,814,227 shares outstanding in 2001 Additional paid-in capital ......................................................................... 313,772 320,309 Retained earnings .................................................................................. 147,958 104,570 Treasury stock, at cost, 6,910,928 shares in 2002 and 6,372,639 shares in 2001 ..................... (163,590) (146,560) Restricted stock ................................................................................... (2,590) (3,795) Accumulated other comprehensive income ............................................................. 28,290 16,584 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY $ 416,636 $ 383,904 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,484,410 $ 6,999,535 =========== ===========
See Notes to Consolidated Financial Statements 2
HUDSON UNITED BANCORP ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, (in thousands, except per share data) 2002 2001 ------------------------------------------------------------------------------------------------------------------------------------ INTEREST AND FEE INCOME: Loans and leases ............................................................................................ $ 73,380 $100,587 Investment securities ....................................................................................... 30,458 17,009 Other ....................................................................................................... 5,561 2,301 -------- -------- TOTAL INTEREST AND FEE INCOME $109,399 $119,897 -------- -------- INTEREST EXPENSE: Deposits .................................................................................................... $ 25,698 $ 40,972 Borrowings .................................................................................................. 1,604 1,747 Subordinated and other debt ................................................................................. 6,784 5,218 -------- -------- TOTAL INTEREST EXPENSE $ 34,086 $ 47,937 -------- -------- NET INTEREST INCOME $ 75,313 $ 71,960 PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES, PORTFOLIO LOANS 7,500 6,000 -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES $ 67,813 $ 65,960 -------- -------- NONINTEREST INCOME: Service fees ................................................................................................ $ 8,845 $ 8,694 Credit card fee income ...................................................................................... 5,935 5,848 Trust income ................................................................................................ 793 864 ATM and debit card fees ..................................................................................... 1,937 1,773 Separate account bank owned life insurance income ........................................................... 2,050 424 Other income ................................................................................................ 6,495 5,313 Securities gains ............................................................................................ 127 281 Gain on assets held for sale ................................................................................ 160 -- -------- -------- TOTAL NONINTEREST INCOME $ 26,342 $ 23,197 -------- -------- NONINTEREST EXPENSE: Salaries and benefits ....................................................................................... $ 23,520 $ 19,752 Occupancy expense ........................................................................................... 6,771 6,598 Equipment expense ........................................................................................... 4,649 4,775 Deposit and other insurance ................................................................................. 605 643 Outside services - data processing .......................................................................... 7,012 7,233 Outside services-other ...................................................................................... 6,471 6,747 Amortization of intangibles ................................................................................. 952 952 Amortization of goodwill .................................................................................... -- 2,699 Marketing expense ........................................................................................... 1,616 1,725 Telephone expense ........................................................................................... 1,274 1,919 Other expense ............................................................................................... 3,730 3,320 -------- -------- TOTAL NONINTEREST EXPENSE $ 56,600 $ 56,363 -------- -------- INCOME BEFORE INCOME TAXES $ 37,555 $ 32,794 PROVISION FOR INCOME TAXES 12,018 9,510 -------- -------- NET INCOME $ 25,537 $ 23,284 ======== ======== NET INCOME PER COMMON SHARE Basic ....................................................................................................... $ 0.56 $ 0.50 Diluted ..................................................................................................... $ 0.56 $ 0.49 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic ....................................................................................................... 45,237 46,968 Diluted ..................................................................................................... 45,538 47,304
See Notes to Consolidated Financial Statements 3
HUDSON UNITED BANCORP ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended June 30, (in thousands, except per share data) 2002 2001 ----------------------------------------------------------------------------------------------------------------------------------- INTEREST AND FEE INCOME: Loans and leases ............................................................................................ $147,845 $205,745 Investment securities ....................................................................................... 57,281 34,605 Other ....................................................................................................... 10,566 2,492 -------- -------- TOTAL INTEREST AND FEE INCOME $215,692 $242,842 -------- -------- INTEREST EXPENSE: Deposits .................................................................................................... $ 53,730 $ 84,412 Borrowings .................................................................................................. 3,350 5,602 Subordinated and other debt ................................................................................. 11,737 10,440 -------- -------- TOTAL INTEREST EXPENSE $ 68,817 $100,454 -------- -------- NET INTEREST INCOME $146,875 $142,388 PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES, PORTFOLIO LOANS 15,000 12,000 PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES, ACCELERATED DISPOSITION 21,333 -- -------- -------- TOTAL PROVISION FOR POSSIBLE LOAN AND 36,333 12,000 LEASE LOSSES -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES $110,542 $130,388 -------- -------- NONINTEREST INCOME: Service fees ................................................................................................ $ 18,383 $ 17,616 Credit card fee income ...................................................................................... 11,129 10,056 Trust income ................................................................................................ 1,577 1,814 ATM and debit card fees ..................................................................................... 3,633 3,296 Separate account bank owned life insurance income ........................................................... 3,941 424 Other income ................................................................................................ 12,838 11,278 Securities gains ............................................................................................ 402 417 Gain on assets held for sale ................................................................................ 22 -- Dime merger termination payment ............................................................................. 77,000 -- -------- -------- TOTAL NONINTEREST INCOME $128,925 $ 44,901 -------- -------- NONINTEREST EXPENSE: Salaries and benefits ....................................................................................... $ 46,089 $ 41,646 Occupancy expense ........................................................................................... 14,627 14,476 Equipment expense ........................................................................................... 10,418 9,444 Deposit and other insurance ................................................................................. 1,172 1,208 Outside services - data processing .......................................................................... 13,638 13,646 Outside services-other ...................................................................................... 12,300 10,791 Amortization of intangibles ................................................................................. 1,904 1,904 Amortization of goodwill .................................................................................... -- 5,569 Marketing expense ........................................................................................... 3,573 3,450 Telephone expense ........................................................................................... 2,938 3,409 Expenses related to Dime termination payment ................................................................ 8,293 -- Other expense ............................................................................................... 15,922 5,463 -------- -------- TOTAL NONINTEREST EXPENSE $130,874 $111,006 -------- -------- INCOME BEFORE INCOME TAXES $108,593 $ 64,283 PROVISION FOR INCOME TAXES 40,775 18,956 -------- -------- NET INCOME $ 67,818 $ 45,327 ======== ======== NET INCOME PER COMMON SHARE Basic ....................................................................................................... $ 1.50 $ 0.96 Diluted ..................................................................................................... $ 1.49 $ 0.95 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic ....................................................................................................... 45,242 47,368 Diluted ..................................................................................................... 45,532 47,676
See Notes to Consolidated Financial Statements 4
HUDSON UNITED BANCORP ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended June 30 -------------------- (In thousands) 2002 2001 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 25,537 $ 23,284 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized securities gains (losses) arising during period ................................................. $ 28,986 $ (3,756) Change in valuation of derivative contracts ................................................................ (2,921) 207 Less: reclassification for gains (losses) included in net income ........................................... 82 (1,106) -------- -------- Other comprehensive income (loss) .......................................................................... $ 25,983 $ (2,443) -------- -------- COMPREHENSIVE INCOME $ 51,520 $ 20,841 ======== ======== Six Months Ended June 30 --------------------- (In thousands) 2002 2001 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 67,818 $ 45,327 OTHER COMPREHENSIVE INCOME, NET OF TAX: Unrealized securities gains (losses) arising during period ................................................. $ 14,313 $ 7,062 Unrealized holding loss from securities transferred from held to maturity to available for sale ..................................................................................... -- (4,069) Change in valuation of derivative contracts ................................................................ (6,075) 207 Less: reclassification for losses included in net income ................................................... (3,468) (323) -------- -------- Other comprehensive income ................................................................................. $ 11,706 $ 3,523 -------- -------- COMPREHENSIVE INCOME $ 79,524 $ 48,850 ======== ========
See Notes to Consolidated Financial Statements 5 HUDSON UNITED BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (in thousands, except shares)
Accumulated Common Stock Additional Other --------------------- Paid-in- Retained Treasury Restricted Comprehensive Shares Amount Capital Earnings Stock Stock Income (Loss) Total ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000.. 47,964,579 $92,762 $322,131 $ 56,759 $ (92,293) $(5,759) $(5,127) $368,473 ------------------------------------------------------------------------------------------------------------------------------------ Net income ................... -- -- -- 94,461 -- -- -- 94,461 Cash dividends ............... -- -- -- (47,410) -- -- -- (47,410) Stock options exercised ...... 179,209 -- (1,762) -- 4,123 -- -- 2,361 Other transactions ........... (77,331) 34 (60) 760 (734) -- -- Purchase of treasury stock ... (2,252,230) -- -- -- (56,275) -- -- (56,275) Effect of compensation plans.. -- -- -- -- (1,381) 1,964 -- 583 Other comprehensive income ... -- -- -- -- -- -- 21,711 21,711 ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2001.. 45,814,227 $92,796 $320,309 $104,570 $(146,560) $(3,795) $16,584 $383,904 ------------------------------------------------------------------------------------------------------------------------------------ Net income ................... -- -- -- 67,818 -- -- -- 67,818 Cash dividends ............... -- -- -- (24,430) -- -- -- (24,430) Stock options exercised ...... 424,153 -- (6,537) -- 11,848 -- -- 5,311 Purchase of treasury stock ... (1,003,192) -- -- -- (29,821) -- -- (29,821) Effect of compensation plans.. 44,750 -- -- -- 943 1,205 -- 2,148 Other comprehensive income ... -- -- -- -- -- -- 11,706 11,706 ------------------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2002 ..... 45,279,938 $92,796 $313,772 $147,958 $(163,590) $(2,590) $28,290 $416,636 ===================================================================================================================================
See Notes to Consolidated Financial Statements 6
HUDSON UNITED BANCORP ------------------------------------------------------------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 2002 2001 ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ......................................................... $ 67,818 $ 45,327 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan and lease losses ............ 36,333 12,000 Provision for depreciation and amortization ............. 14,388 15,652 Amortization of investment security premiums, net ....... 11,183 80 Securities gains ........................................ (402) (417) Gain on sales of premises and equipment ................. (70) (66) Decrease (increase) in other assets ..................... 7,166 (91,277) Increase in other liabilities ........................... 15,272 6,979 ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ....... $ 151,688 $ (11,722) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investment securities: Available for sale ............................................... $ 661,751 $ 295,645 Proceeds from repayments and maturities of investment securities: Available for sale ............................................... 349,622 165,631 Purchases of investment securities: Available for sale ............................................... (1,406,027) (601,557) Net (increase) decrease in loans other than purchases and sales .... (20,122) 258,096 Decrease in loans due to securitization ............................ -- 335,676 Proceeds from sales of loans ....................................... 15,873 -- Acquisition of credit card assets .................................. (21,058) (118,446) Proceeds from sales of premises and equipment ...................... 653 1,000 Purchases of premises and equipment ................................ (2,458) (4,189) Decrease (increase) in other real estate ........................... 2,285 (2,293) ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ........ $ (419,481) $ 329,563 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits ........................................... $ 296,259 $ 86,410 Net decrease in borrowings ......................................... (23,588) (172,845) Redemption of debt securities ..................................... (35,800) -- Proceeds from issuance of debt securities .......................... 200,000 -- Proceeds from exercise of stock options ............................ 5,311 1,765 Cash dividends ..................................................... (24,430) (23,782) Acquisition of treasury stock ...................................... (29,821) (30,145) ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........ $ 387,931 $ (138,597) ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS ....................... $ 120,138 $ 179,244 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 232,198 295,539 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 352,336 $ 474,783 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period Interest ............................................................ $ 68,433 $ 99,554 Taxes ............................................................... 31,103 -- Additional Disclosures: Residential mortgage securitization ................................ -- 335,676 Securities Transferred from Held to Maturity to Available for Sale.. -- 520,192
See Notes to Consolidated Financial Statements 7 HUDSON UNITED BANCORP -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (in thousands, except per share data) NOTE A -- BASIS OF PRESENTATION The accompanying unaudited financial statements of Hudson United Bancorp and Subsidiaries ("Hudson United" or "the Company") include the accounts of the parent company, Hudson United Bancorp, and its wholly-owned subsidiaries: Hudson United Bank ("the Bank"), HUBCO Capital Trust I, HUBCO Capital Trust II, and JBI Capital Trust I. 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 and 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 Company's Annual Report on Form 10-K for the year ended December 31, 2001. Reclassification of Certain Assets, Revenues and Expenses Assets previously classified by the Company as Commercial and Industrial Loans have been reclassified as of June 30, 2002 and December 31, 2001 as Investment Securities Available for Sale. These assets were $116.1 million at June 30, 2002 and $106.1 million at December 31, 2001. Certain assets previously classified by the Company as part of "other assets"; certain revenues previously classified as part of "other income"; and certain expenses previously classified as part of "other expense" have been listed as separate line items in the Consolidated Balance Sheet and in the Consolidated Statements of Income. In addition, certain one-time expenses totaling $21.5 million, classified by the Company in the first quarter of 2002 as "Effect of merger resolution", have been reclassified by the Company in the first half of 2002 to "Expenses related to Dime termination payment" of $8.3 million and the remaining $13.2 million was reclassified into other expense categories. The $13.2 million was reclassified as follows: $0.2 million to salaries and benefits, $1.3 million to occupancy expenses, $1.1 million to equipment expense, $0.2 million to outside services-other and $10.4 million to other expenses. 8 NOTE B -- EARNINGS PER SHARE Basic earnings per share is computed by dividing net income 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 preferred stock (when outstanding) and the incremental number of shares issuable from the exercise of stock options, calculated using the treasury stock method. A reconciliation of weighted average common shares outstanding to weighted average shares outstanding assuming dilution follows (in thousands, except per share data): ACTUAL Three Months Ended June 30, ---------------- 2002 2001 -------------------------------------------------------------------------------- Basic Earnings Per Share Net Income ................................................... $25,537 $23,284 Weighted average common shares outstanding ................... 45,237 46,968 Basic earnings per share ..................................... $ 0.56 $ 0.50 Diluted Earnings Per Share Net Income ................................................... $25,537 $23,284 Weighted average common shares outstanding ................... 45,237 46,968 Effect of dilutive securities: Stock options ............................................... 301 336 ------- ------- Weighted average common shares outstanding assuming dilution.. 45,538 47,304 Diluted earnings per share ................................... $ 0.56 $ 0.49 ACTUAL Six Months Ended June 30, ----------------- 2002 2001 -------------------------------------------------------------------------------- Basic Earnings Per Share Net Income ................................................... $67,818 $45,327 Weighted average common shares outstanding ................... 45,242 47,368 Basic earnings per share ..................................... $ 1.50 $ 0.96 Diluted Earnings Per Share Net Income ................................................... $67,818 $45,327 Weighted average common shares outstanding ................... 45,242 47,368 Effect of dilutive securities: Stock options ............................................... 290 308 ------- ------- Weighted average common shares outstanding assuming dilution.. 45,532 47,676 Diluted earnings per share ................................... $ 1.49 $ 0.95 OPERATING BASIS (1) Six Months Ended June 30, ----------------- 2002 2001 -------------------------------------------------------------------------------- Basic Earnings Per Share Net Income ................................................... $50,602 $45,327 Weighted average common shares outstanding ................... 45,242 47,368 Basic earnings per share ..................................... $ 1.12 $ 0.96 Diluted Earnings Per Share Net Income ................................................... $50,602 $45,327 Weighted average common shares outstanding ................... 45,242 47,368 Effect of dilutive securities: Stock options ............................................... 290 308 ------- ------- Weighted average common shares outstanding assuming dilution.. 45,532 47,676 Diluted earnings per share ................................... $ 1.11 $ 0.95 9 (1) 2002 figures exclude $77 million cash payment received from Dime representing the final termination payment relating to the uncompleted merger of the Company and Dime, $21.5 million of one-time expenses resulting from the merger resolution and other charges, and an additional $21.3 million provision for possible loan and lease losses relating to the accelerated disposition of certain nonperforming commercial and industrial loans. 10 NOTE C - ACQUISITIONS The Company announced, on June 26, 2002, a purchase and assumption transaction with the FDIC as the receiver for the failed Connecticut Bank of Commerce ("the CBC transaction"). Hudson United Bank ("the Bank"), in this transaction, assumed certain insured deposits, along with an option to purchase two branches in Connecticut and to lease two branches in New York City and one in Connecticut. The Bank paid an acquisition premium of $17.3 million to the FDIC in this transaction. The determination of the breakdown of the premium between goodwill and core deposit intangibles has not yet been made. The Bank received cash from the FDIC at closing, along with certain consumer loans, which the Bank can put back to the FDIC within 30 days. The initial deposits assumed and initial assets acquired in the CBC transaction are included in the Company's balance sheet as of June 30, 2002. During the first half of 2002 the Company paid total consideration of $21.1 million for $22.9 million of credit card receivables, with an associated discount of $1.8 million. The Company entered into agreements at several times in 2001 to purchase third party credit card assets from a subsidiary of Transamerica Finance Co. As of December 31, 2001, the Company had paid total consideration of $161.4 million for $157.0 million of these assets, with an associated premium of $4.4 million. In August 2001, the Company assumed deposit liabilities from First International Bank in the amount of $272.8 million at a discount of $0.5 million. These deposit liabilities were primarily short term brokered deposits. 11 NOTE D - INVESTMENT SECURITIES The following table presents the amortized cost and estimated market value of investment securities available for sale at the dates indicated (in thousands):
June 30, 2002 ------------------------------------------------------- Gross Unrealized Estimated Amortized -------------------------- Market Cost Gains (Losses) Value ----------- ----------- ----------- ----------- Available for Sale U.S. Government securities .......... $ 60,278 $ 128 $ (1) $ 60,405 Mortgage-backed securities .......... 1,552,005 25,797 (741) 1,577,061 Asset backed and corporate securities .......................... 677,519 7,553 (7,115) 677,957 Obligations of states and political subdivisions ........................ 35,087 511 -- 35,598 FHLB stock .......................... 14,214 -- -- 14,214 Common stocks ....................... 14,918 5,847 (48) 20,717 ----------- ----------- ----------- ----------- $ 2,354,021 $ 39,836 $ (7,905) $ 2,385,952 =========== =========== =========== =========== December 31, 2001 ------------------------------------------------------- Gross Unrealized Estimated Amortized -------------------------- Market Cost Gains (Losses) Value ----------- ----------- ----------- ----------- Available for Sale U.S. Government securities .......... $ 12,904 $ 147 $ -- $ 13,051 Mortgage-backed securities .......... 1,032,993 14,670 (1,068) 1,046,595 Asset backed and corporate securities .......................... 276,860 314 (31) 277,143 Obligations of states and political subdivisions ........................ 26,992 363 (6) 27,349 FHLB stock .......................... 21,877 -- -- 21,877 Common stocks ....................... 22,571 614 (690) 22,495 ----------- ----------- ----------- ----------- $ 1,394,197 $ 16,108 $ (1,795) $ 1,408,510 =========== =========== =========== ===========
The following table summarizes trading assets at December 31, 2001: (in thousands) Estimated Market Value -------------------------------------------------------------- Trading Asset Portfolio Mortgage-backed securities .................. $ 575,007 Other debt securities ....................... 1,301 ---------- Total $ 576,308 ========== These assets were subsequently sold in January 2002. Investment securities with a market value of $746,960 at June 30, 2002 and $369,646 at December 31, 2001 were pledged as collateral for public sector deposits, customer repurchase agreements, borrowings from the Federal Home Loan Bank and for other purposes. 12 NOTE E -- COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF THREE SUBSIDIARY TRUSTS 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, which is the obligor on the Series B Capital Securities, is $51.5 million principal amount of 8.98% Junior Subordinated Debentures due 2027 of the Company. The 8.98% Capital securities are redeemable by the Company on or after February 1, 2007, or earlier in the event the deduction of related interest for federal income tax is prohibited, treatment as Tier 1 capital is no longer permitted or certain other contingencies arise. As of June 30, 2002, $45.0 million of the 8.98% Capital Securities remained outstanding. On February 5, 1997, Jeff Banks, Inc. placed $25.0 million in aggregate liquidation amount of 9.25% Capital Securities due March 2027, using JBI Capital Trust I, a statutory business trust formed under the laws of the State of Delaware. The Company acquired JeffBanks, Inc. in 1999. The sole asset of the trust, which is the obligor on the Series B Capital Securities, is $25.3 million principal amount of 9.25% Junior Subordinated Deferrable Debentures due 2027 of the Company. The 9.25% Trust Capital Securities became redeemable by the Company on March 31, 2002. At this time the Company does not plan to redeem this issue but will review it on an ongoing basis. 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, which is the obligor on the Series B Capital Securities, is $51.5 million principal amount of 7.65% Junior Subordinated Debentures due 2028 of the Company. The 7.65% Capital Securities are redeemable by the Company on or after June 15, 2008, or earlier in the event the deduction of related interest for federal income taxes is prohibited, treatment as Tier 1 capital is no longer permitted or certain other contingencies arise. NOTE F - SUBORDINATED DEBT In January, 1994, the Company sold $25.0 million aggregate principal amount of subordinated debentures. The debentures, which mature in 2004, bear interest at a fixed rate of 7.75% per annum payable semi-annually. The Company repurchased $7.8 million of this debt during the second quarter of 2002. In March 1996, JeffBanks, Inc. issued $23.0 million aggregate principal amount of subordinated debentures which mature in 2006 and bear interest at a fixed interest rate of 8.75% per annum payable semi-annually. The Company acquired JeffBanks, Inc. in 1999. These notes were redeemable at the option of the Company, in whole or in part, at any time after April 1, 2001, at their stated principal amount plus accrued interest, if any. On January 7, 2002, the Company announced redemption of this issue. The notes were redeemed in February 2002. In September 1996, the Company sold $75 million aggregate principal amount of subordinated debentures. The debentures, which mature in 2006, bear interest at a fixed interest rate of 8.20% per annum payable semi-annually. On May 6, 2002 Hudson United Bank issued $200 million of 7.00% subordinated notes due May of 2012. The net proceeds of the offering of $197.9 million were invested in interest earning assets. The subordinated notes will qualify as Tier 2 capital of the Bank and will assist the Bank in maintaining its well capitalized status. 13 NOTE G -COMPREHENSIVE INCOME The Company displays 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 Accumulated Other Comprehensive Income (Loss). The following is a reconciliation of the tax effect allocated to each component of comprehensive income for the periods presented.
Three-Months Ended June 30, 2002 ----------------------------------------------------------- Before tax amount Tax Benefit (Expense) Net of Tax Amount ----------------- --------------------- ----------------- Unrealized net security gains arising during the period.. $ 46,475 $(17,489) $ 28,986 Change in valuation of derivative contracts.............. (4,939) 2,018 (2,921) Less: reclassification adjustment for net gains realized in net income................................. 138 (56) 82 -------- -------- -------- Net change during period................................. $ 41,398 $(15,415) $ 25,983 ======== ======== ======== Three Months Ended June 30, 2001 ----------------------------------------------------------- Before tax amount Tax Benefit (Expense) Net of Tax Amount ----------------- --------------------- ----------------- Unrealized net security losses arising during the period.. $(6,360) $ 2,604 $(3,756) Change in valuation of derivative contracts............... 345 (138) 207 Less: reclassification adjustment for net losses.......... (1,874) 768 (1,106) realized in net income ------- ------- ------- Net change during period.................................. $(4,141) $ 1,698 $(2,443) ======= ======= ======= Six-Months Ended June 30, 2002 ----------------------------------------------------------- Before tax amount Tax Benefit (Expense) Net of Tax Amount ----------------- --------------------- ----------------- Unrealized net security gains arising during the period.. $ 21,668 $ (7,355) $ 14,313 Change in valuation of derivative contracts.............. (10,270) 4,195 (6,075) Less: reclassification adjustment for net losses realized in net income................................. (5,863) 2,395 (3,468) -------- -------- -------- Net change during period................................. $ 17,261 $ (5,555) $ 11,706 ======== ======== ======== Six Months Ended June 30, 2001 ----------------------------------------------------------- Before tax amount Tax Benefit (Expense) Net of Tax Amount ----------------- --------------------- ----------------- Unrealized net security gains arising during the period ...... $ 10,964 $ (3,902) $ 7,062 Unrealized net security holding loss arising from securities transferred from held to maturity to available for sale .... (6,782) 2,713 (4,069) Change in valuation of derivative contracts .................. 345 (138) 207 Less: reclassification adjustment for net losses realized in net income (547) 224 (323) -------- -------- -------- Net change during period ..................................... $ 5,074 $ (1,551) $ 3,523 ======== ======== ========
14 NOTE H - RECENT ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishing standards for the accounting and reporting of derivatives. The Company adopted SFAS No. 133 effective January 1, 2001. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. The FASB issued SFAS No. 141 "Business Combinations" during 2001. The Company adopted SFAS No. 141 effective July 2001. The adoption of SFAS No. 141 did not have a material effect on the Company's financial position or results of operations. The FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets" during 2001. Under this standard, intangible assets must continue to be amortized, but goodwill is no longer amortized starting January 1, 2002. Goodwill that is determined to be impaired must be written-off when that determination is made. The Company has concluded as of June 30, 2002 that no impairment charge is currently required. The Company is required to perform an impairment test of its goodwill on at least an annual basis. Core deposit intangibles, with a carrying value of $24.4 million at June 30, 2002 and original amortization periods of ten years, are being amortized and the related amortization expense for the second quarter of 2002 was $1.0 million and for the first half of 2002 was $1.9 million. Goodwill, with a carrying value of $59.8 million at June 30, 2002 is no longer being amortized beginning January 1, 2002. Total goodwill and intangible assets, including the premium paid in the CBC transaction, was $101.6 million at June 30, 2002. Amortization of goodwill was $2.7 million in the second quarter of 2001, $5.6 million in the first half of 2001 and $11.3 million for all of 2001 (see footnote I for additional details). The FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations" in June 2001. This statement will be effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company expects that the adoption of this statement will not have material effect on its operations. 15 NOTE I: Core deposit intangibles (excluding the premium paid in the Connecticut Bank Of Commerce transaction) is as follows for the periods indicated ($ in thousands): Gross Carrying Accumulated Net Carrying At June 30, 2002 Amount Amortization Amount -------------- ------------ ------------ Core deposit intangibles .... $ 37,899 $ 13,496 $ 24,403 -------- -------- --------- Gross Carrying Accumulated Net Carrying At December 30, 2001 Amount Amortization Amount -------------- ------------ ------------ Core deposit intangibles .... $ 37,899 $ 11,591 $ 26,308 -------- -------- --------- The following is the estimated amortization expense on core deposit intangibles (excluding any potential impact from the Connecticut Bank of Commerce transaction) for the years indicated ($ in thousands): 2002 ................ $ 3,809 2003 ................ 3,809 2004 ................ 3,809 2005 ................ 3,809 2006 ................ 3,809 The following table discloses the effect on net income and earnings per share of excluding amortization expense on goodwill for the 2001 periods indicated ($ in thousands, except per share amounts) Three months ended June 30 2002 2001 ---------- ---------- Reported net income ...................... $ 25,537 $ 23,284 Goodwill amortization .................... -- 2,318 ---------- ---------- Adjusted net income ................. $ 5,537 $ 25,602 ========== ========== Basic earnings per share ................. $ 0.56 $ 0.50 Goodwill amortization .................... -- 0.05 ---------- ---------- Adjusted basic earnings per share ... $ 0.56 $ 0.55 ========== ========== Diluted earnings per share ............... $ 0.56 $ 0.49 Goodwill amortization .................... -- 0.05 ---------- ---------- Adjusted diluted earnings per share.. $ 0.56 $ 0.54 ========== ========== Six months ended June 30 2002 2001 ---------- ---------- Reported net income ...................... $ 67,818 $ 45,327 Goodwill amortization .................... -- 4,746 ---------- ---------- Adjusted net income ................. $ 67,818 $ 50,073 ========== ========== Basic earnings per share ................. $ 1.50 $ 0.96 Goodwill amortization .................... -- 0.10 ---------- ---------- Adjusted basic earnings per share ... $ 1.50 $ 1.06 ========== ========== Diluted earnings per share ............... $ 1.49 $ 0.95 Goodwill amortization .................... -- 0.10 ---------- ---------- Adjusted diluted earnings per share.. $ 1.49 $ 1.05 ========== ========== 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This financial review presents management's discussion and analysis of financial condition and results of operations. It should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes. All dollar amounts, other than per share information, are presented in thousands unless otherwise noted. STATEMENTS REGARDING FORWARD-LOOKING INFORMATION This document, both in the Management Discussion & Analysis and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities, technology and market conditions. These statements may be identified by such forward-looking terminology as "expect", "look", "believe", "anticipate", "consider", "may", "will", or similar statements or variations of such terms. Actual results may differ materially from the results discussed in these forward-looking statement. Factors that may cause actual results to differ materially from such forward-looking statements include, but are not limited to, changes in interest rates, changes in economic conditions, especially as they have been affected by recent developments, deposit and loan volume trends, continued levels of loan quality, trends in loan loss provisions, changes in relationships with customers, failure to realize expected cost savings or revenue enhancements from changes in business models and acquisitions, an adverse trend in capital ratios causing the Company to change its business model and the effects of legal and regulatory provisions applicable to the Company and its competitors. The Company assumes no obligation for updating any such forward-looking statements at any time. RESULTS OF OPERATIONS OVERVIEW The Company had net income of $25.5 million, or $0.56 per diluted share, for the second quarter of 2002 compared to $23.3 million, or $0.49 per diluted share for the comparable period in 2001. Net income as reported for the first six months of 2002 was $67.8 million or $1.49 per diluted share. Operating earnings (as defined in the third paragraph below) for the first six months of 2002 were $50.6 million, or $1.11 per diluted share, compared to net income of $45.3 million, or $0.95 per diluted share, for the comparable period in 2001. The Company's return on average equity was 26.41% and return on average assets was 1.45% for the second quarter of 2002. Both ratios improved from the second quarter of 2001. The net interest margin was 4.75%, noninterest income as a percent of net revenue was 26%, and the efficiency ratio was 54.34%, based on the Company's net income for the second quarter 2002. The Company's return on average equity and return on average assets, as reported, for the six months ended June 30, 2002 were 34.94% and 1.95% respectively. For the six months ended June 30, 2002 the Company's operating return on average equity was 26.07% and operating return on average assets was 1.46%. The net interest margin was 4.74%, operating noninterest income as a percent of net revenue was 26%, and the operating efficiency ratio was 53.45%, based on the Company's operating earnings for the six months ended June 30, 2002. Operating earnings for the first six months of 2002 and for the first quarter of 2002 exclude the $77 million cash payment received from Dime Bancorp, Inc. ("Dime") on January 7, 2002, representing the final termination payment relating to the uncompleted merger of the Company and Dime. Operating earnings for the first half of 2002 also excludes $21.5 million of one time expenses resulting from the merger resolution and other charges ($8.3 million in expenses directly related to the Dime termination payment and other expenses including, $0.2 million in salaries and benefits, $1.3 million in occupancy expenses, $1.1 million in equipment expenses, $0.2 million in expenses classified as outside services - other, and $10.4 million in other expense) and an additional $21.3 million provision for possible loan and lease losses relating to the accelerated disposition of certain nonperforming commercial and industrial loans. 17 NET REVENUE Net revenue, which is the sum of net interest income and noninterest income, was $101.7 million for the second quarter of 2002. This was comprised of net interest income of $75.3 million and noninterest income of $26.3 million. Net revenue for the second quarter of 2002 increased by 6.8% compared to the second quarter of 2001, due mainly to increases in noninterest income and a decrease in interest expense during the period. Net revenue, as reported, for the first six months of 2002 was $275.8 million as compared to $187.3 million for the same period in 2001. The increase of $88.5 million was due in most part to the $77 million Dime payment supplemented by increases in noninterest income. Net revenue, on an operating basis, for the first six months of 2002 was $198.8 million, with net interest income of $146.9 million and noninterest income of $51.9 million. Net revenue for the first half of 2002 increased by 6.1% compared to the first half of 2001, due to increases in net interest income and noninterest income. NET INTEREST INCOME Net interest income for the second quarter of 2002 was $75.3 million and the net interest margin was 4.75%. Net interest income was $72.0 million with a net interest margin of 4.81% for the comparable second quarter of 2001. Net interest income increased by 4.7% compared to the second quarter of 2001. This increase resulted primarily from a higher level of average interest earning assets and a more favorable deposit mix, with an increase in NOW, money market and savings deposits and a decrease in higher cost time deposits. Net interest income for the first six months of 2002 was $146.9 million and the net interest margin was 4.74%, compared to the net interest income of $142.4 million and a net interest margin of 4.78% for the first six months of 2001. Net interest income increased over this time period primarily due to an increase in the Company's average investment securities. NONINTEREST INCOME (excluding security gains (losses)) Noninterest income was $26.2 million for the second quarter of 2002. This represented an increase of 14.4 % compared to $22.9 million of noninterest income in the second quarter of 2001. The increase in the second quarter of 2002 was primarily due to the Company's investment in bank owned life insurance in June of 2001, and higher commercial service fees. Noninterest income as reported was $128.9 million at June 30, 2002 compared to $44.9 million at June 30, 2002. The increase resulted primarily from the recognition of the $77.0 million Dime merger termination payment. Operating noninterest income was $51.9 million for the six months ended June 30, 2002 compared to $44.9 million for the comparable period in 2001. The increase from 2001 to 2002 was due to increases in service fees collected and income collected on bank owned life insurance. NONINTEREST EXPENSE Noninterest expense was $56.6 million for the second quarter of 2002 compared to $56.4 million for the comparable period in 2001. Noninterest expense as reported was $130.9 million for the six months ended June 30, 2002 compared to $111.0 million for the six months ended June 30, 2001. The increase in noninterest expense resulted mainly from $21.5 million of one time expenses resulting from merger resolution and other charges. Operating noninterest expense for the six months ended June 30, 2002 was $109.4 million compared to $111.0 million for the same period in 2001. The flat noninterest expense for the second quarter and the decrease in operating noninterest expense year to date was due primarily to lower amortization expense on intangibles, resulting from the Company's no longer amortizing goodwill due to the adoption of FASB 142, partially offset by increased compensation and other expenses relating to business development initiatives and expanded infrastructure to support the Company's business lines. The efficiency ratio was 54.34% for the second quarter of 2002 and 55.16% for the second quarter of 2001. The favorable variance in 2002 was due to higher net revenue in 2002 when compared to the same period in 2001. The efficiency ratio as reported for the first six months of 2002 was 46.35% compared to 54.84%. The favorable efficiency ratio was mainly due to the recognition of the $77.0 million Dime merger termination payment. On an operating basis, the efficiency ratio was 53.45% for the first six months of 2002 compared to 54.84% for 2002. 18 INCOME TAXES The Company's effective tax rate for the three months ended June 30, 2002 was 32.0% compared to 29.0% for the same period in 2001. The lower effective tax rate in 2001 was primarily the result of the utilization of tax losses generated by sales of securities in 2000 which were part of the Company's balance sheet restructuring. The Company's effective tax rate as reported for the six months ended June 30, 2002 was 37.5% compared to 29.5% for the same period in 2001. The higher effective tax rate resulted mainly from provision for income taxes associated with the recognition of the $77.0 million Dime merger termination payment. The Company's effective tax rate for the first half of 2002 on an operating basis, was 32.0% compared to 29.5% in the first half of 2001. The lower effective tax rate in 2001 was primarily the result of the utilization of tax losses generated by sales of securities in 2000 which were part of the Company's balance sheet restructuring. 19 PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES AND ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES Introduction The provision for possible loan and lease losses, portfolio loans was $7.5 million for the second quarter of 2002 and $6.0 million for the second quarter of 2001. The provision for possible loan and lease losses, portfolio loans was $15.0 million for the first half of 2002 and $12.0 million for the first half of 2001. The higher provisions in 2002 compared to 2001 reflect the level of net charge offs in 2002 and the uncertain economic environment. The total provision for possible loan and lease losses was $36.3 million for six months ended June 30, 2002, which included a $21.3 million provision for the accelerated disposition of certain commercial and industrial loans. The Allowance for Possible Loan and Lease Losses ("the Allowance") was $72.0 million at June 30, 2002 and $70.0 million at December 31, 2001. The Allowance at June 30, 2002 represented 412% of nonperforming loans and 1.66% of total loans. The Allowance at year-end 2001 represented 158 % of nonperforming loans and 1.61 % of total loans. The determination of the adequacy of the Allowance and the periodic provisioning for estimated losses included in the consolidated financial statements is the responsibility of management. The evaluation process is undertaken on a monthly basis. Methodology employed for assessing the adequacy of the Allowance consists of the following: o the establishment of reserve amounts for all specifically identified criticized loans, including those acquired in business combinations, that have been designated as requiring attention by management's internal loan review program. o the establishment of reserves for pools of homogenous types of loans both subject and not subject to specific review, including 1-4 family residential mortgages, consumer loans and leases, and credit card accounts, based upon historical loss rates. Consideration is also given to the changed risk profile brought about by business combinations, knowledge about customers, the results of ongoing credit quality monitoring processes, the adequacy and expertise of the Company's lending staff, underwriting policies, loss histories, delinquency trends, nature of economic and business conditions, and the concentration in the portfolio including real estate related loans located in the northeastern part of the United States. Since many of the loans depend upon the sufficiency of real estate collateral as a secondary source of repayment, any adverse trend in the real estate markets could affect underlying values available to protect the Company from loss. Other evidence used to determine the amount of the Allowance and its components are as follows: o regulatory and other examinations o the amount and trend of criticized loans o peer comparisons with other financial institutions o opportunities to dispose of marginally performing loans for cash consideration Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management considers the Allowance to be adequate at June 30, 2002. Non Performing Loans and Non Performing Assets At June 30, 2002, non-performing loans totaled $17.5 million, a decrease of $27.0 million when compared to $44.5 million at December 31, 2001. Non-performing assets were $ 18.6 million and $47.9 million at June 30, 2002 and December 31, 2001, respectively. The decline in nonperforming loans and nonperforming assets was primarily due to sales, in the first quarter of 2002, of nonperforming loans designated as held for sale at December 31, 2001, and charge offs to facilitate the accelerated disposition of other nonperforming loans. 20 The following table presents the composition of non-performing assets and selected asset quality ratios at the dates indicated: (in thousands) June 30, December 2002 31, 2001 -------- -------- Nonaccrual Loans: Commercial............................................... $ 7,151 $17,837 Real Estate.............................................. 8,879 25,598 Consumer................................................. 1,454 1,034 ------- ------- Total Nonaccrual Loans................................. $17,484 $44,469 Other Real Estate Owned..................................... 1,096 3,381 ------- ------- Total Nonperforming Assets............................ $18,580 $47,850 ======= ======= Nonaccrual Loans to Total Loans and Leases................. 0.40% 1.02% Allowance for Loan and Lease Losses to Nonperforming Loans.. 412% 158% Loans Past Due 90 Days and Still Accruing The following table shows loans past due 90 days or more and still accruing, along with applicable asset quality ratio: (in thousands) June 30, 2002 December 31, 2001 ------------ ----------------- Loans Past Due 90 Days or More and Accruing Commercial ............................ $ 2,156 $ 2,600 Real Estate ........................... 4,560 6,053 Consumer .............................. 2,189 3,287 Credit card ........................... 8,619 9,068 ------- ------- Total Past Due Loans .............. $17,524 $21,008 ======= ======= As a percent of Total Loans and Leases ...... 0.40% 0.48% 21 Allowance for Possible Loan and Lease Losses The following table presents the activity in the allowance for possible loan and lease losses for the periods indicated:
Summary of Activity in the Allowance By Loan Category --------------------------------------- Six Months Ended Year Ended June 30, 2002 December 31, 2001 ---------------- ----------------- (Dollars in thousands) Amount of Loans and Leases Outstanding at Period End ...................... $ 4,345,289 $ 4,338,489 =========== =========== Daily Average Amount of Loans and Leases Outstanding ...................... $ 4,261,167 $ 4,793,998 =========== =========== Allowance for Loan and Lease Losses Balance at beginning of the period ........................................ $ 70,046 $ 95,180 Loans charged off: Real estate .......................................................... (1,726) (6,851) Commercial ........................................................... (4,140) (21,323) Consumer ............................................................. (12,946) (33,584) Accelerated disposition (1) ............................................... (21,333) -- Assets held for sale (2) .................................................. -- (10,147) ----------- ----------- Total loans charged off ......................................... $ (40,145) $ (71,905) ----------- ----------- Recoveries: Real estate .......................................................... 598 935 Commercial ........................................................... 1,396 1,625 Consumer ............................................................. 3,344 5,353 ----------- ----------- Total recoveries ................................................ $ 5,338 $ 7,913 ----------- ----------- Net loans charged off ..................................................... $ (34,807) $ (63,992) Provision for possible loan and lease losses, portfolio loans ............. 15,000 24,000 Provision for possible loan and lease losses, accelerated disposition (1).. 21,333 10,147 ----------- ----------- Total provision for possible loan and lease losses ........................ $ 36,333 $ 34,147 Net change in acquired reserves of credit card portfolios ................. 427 4,711 ----------- ----------- Balance at end of period .................................................. $ 71,999 $ 70,046 =========== =========== Allowance for Loan and Lease Losses to Total Loans and Leases ............. 1.66% 1.61% =========== =========== Annualized provision for possible loan and lease losses, portfolio loans as a percentage of average loans and leases outstanding ............................................... 0.70% 0.50% =========== =========== Annualized net loans charged off during period to average loans and leases outstanding ............................................... 1.56% 1.33% =========== ===========
(1) Relates primarily to the planned accelerated disposition of certain nonperforming commercial and industrial loans at March 31, 2002 and June 30, 2002. (2) The writedown of assets held for sale in 2001 pertained to the disposal of $16.2 million of non-accrual loans in 2002. 22 FINANCIAL CONDITION Loan and lease categories consisting of commercial and financial; commercial real estate; consumer; and credit card loans totaled $3.9 billion at June 30, 2002, compared to $3.8 billion at December 31, 2001. These four categories, which exclude residential mortgages represented 90% of loans and leases at June 30, 2002, an increase from 88% of loans and leases at December 31, 2001. Residential mortgage loans decreased by $88.8 million to $448.3 million at June 30, 2002, as compared to December 31, 2001. The decrease resulted from prepayments throughout the quarter and the Company's practice of selling new originations in the secondary market. Certain assets that had been previously classified by the Company as Commercial and Industrial Loans have been reclassified by the Company as of June 30, 2002 and December 31, 2001 as Investment Securities Available for Sale. These assets totaled $116.1 million at June 30, 2002 and $106.1 million at December 31, 2001. Total investment securities were $2.4 billion at June 30, 2002, compared to $2.0 billion at December 31, 2001. The increase in investment securities resulted from cash received from increased deposits and borrowings, as described later in this section. Investment securities pledged as collateral for public sector deposits, borrowings and other purposes increased by $377 million in the first half of 2002. The majority of the increase related to public sector deposits. Investment securities designated as trading assets of $576 million at December 31, 2001 were sold in January 2002. The proceeds from the sales were invested in securities with shorter average lives and durations and resultant lower current yields than the securities that were sold. The Company had no trading assets as of June 30, 2002. The Company's total assets were $7.5 billion at June 30, 2002, compared to $7.0 billion at year-end 2001. Total deposits were $6.3 billion at June 30, 2002, compared to $6.0 billion at December 31, 2001. Total deposits at June 30, 2002 include deposits assumed on June 26, 2002 in the CBC transaction. The increase in total deposits was primarily due to an increase in NOW, money market and savings deposits of $532 million, partially offset by a decrease in time deposits of $260 million. Time deposits as a percent of total deposits declined from 37% at year end 2001 to 31% at June 30, 2002. The Bank issued, in May of 2002, $200 million of 7.00% subordinated debt due in 2012. The net proceeds of the offering was $197.9 million. The Company repurchased, in May of 2002, $7.8 million of its 7.75% subordinated debt due in January 2004. The total cash allocated for this repurchase was $8.1 million. The Company redeemed, in the first quarter of 2002, $23 million of holding company 8.75% subordinated debt due in 2006. The redemption was at par. Total stockholders' equity was $416.6 million at June 30, 2002 and $383.9 million at December 31, 2001. The change in stockholders' equity resulted primarily from $67.8 million of net income, offset by declaration of cash dividends of $24.4 million, total stock repurchases of $29.8 million and an increase in accumulated other comprehensive income of $11.7 million. The Company repurchased in the open market a total of 977,488 shares in the first half of 2002, at an average price of $29.72 per share. The total cash allocated for these repurchases was $29.1 million. Other share repurchases of 25,704 shares were also completed by the Company in the first half of 2002. The cash allocated for these repurchases was $0.7 million. Total shares outstanding at June 30, 2002 were 45.3 million shares, compared to 45.8 million shares at December 31, 2001. MARKET RISK Interest Rate Risk The primary objectives of asset-liability management are to provide for the safety of depositor and investor funds, assure adequate liquidity, maintain an appropriate balance between interest-sensitive earning assets and interest-sensitive liabilities and enhance earnings. Interest rate sensitivity management ensures that the Company maintains acceptable levels of net interest income throughout a range 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. 23 The Company evaluates on a monthly basis its simulation model to measure the sensitivity of net interest income to changes in market interest rates. There have been no material changes in these monthly simulations from the Company's results outlined in its form 10-K for year end December 31, 2001. The Company enters into interest rate derivative contracts (interest rate swaps; interest rate floors; and interest rate caps) from time to time for asset liability management purposes. In the second quarter of 2001, the Company entered into a series of two year maturity interest rate swaps and floors and caps to limit the variability of the interest income of a pool of $700 million of its prime rate-based loans. In the fourth quarter of 2001, the Company entered into 10 year and 15 year maturity interest rate swaps in connection with $35 million of fixed rate certificates of deposits with comparable maturities, to effectively convert these deposits to variable rate liabilities indexed to LIBOR. In the second quarter of 2002, the Company entered into 10 year maturity interest rate swaps, in connection with the issuance of fixed rate subordinated debt with a comparable maturity, to effectively convert $105 million of the debt to a variable rate liability indexed to LIBOR. The notional amount of the derivative contracts totals $840 million at June 30, 2002. The purpose of these contracts is to limit the volatility in the Company's net interest income and net interest margin in the event of changes in interest rates, in the context of the management of the Company's overall asset liability risk. Management did not enter into these contracts for speculative purposes. Under SFAS No. 133, the Company has adopted hedge accounting for these contracts. The derivative contracts hedging the pool of prime rate-based loans are being accounted for as "cash flow hedges" under SFAS No. 133, whereby the net payments under the contracts are recorded in interest income and the change in valuation of the contracts should be recorded in "accumulated other comprehensive income (loss)" in total stockholders' equity. Changes in interest rates will impact the cash flows and valuation of the derivative contracts, but management does not expect the overall financial statement impact to be material under any interest rate scenario. The derivative contracts hedging the fixed rate certificates of deposit and the fixed rate subordinated debt are accounted for as "fair value" hedges using the "short-cut method" under SFAS No. 133. Under the short-cut method, any changes in value of the hedged item is assumed to be exactly as much as the change in the value of the derivative contract. Therefore, in a fair value hedge, the hedged item is adjusted by exactly the same amount as the derivative, with no impact on earnings. Liquidity Liquidity is a measure of the Company's ability to meet the needs of depositors, borrowers, and creditors at a reasonable cost and without adverse financial consequences. The Company has several liquidity measurements that are evaluated on a frequent basis. The Company has adequate sources of liquidity including the ability to attract deposits from businesses and individuals through its branches; brokered deposits from securities firms, cash flow from interest; prepayments and principal repayments on investment securities and loans; Securities Available for Sale, and the ability to borrow funds on a collateralized basis from the Federal Home Loan Bank and Federal Reserve discount window, repurchase agreements collateralized by securities with securities firms, and other sources. The management of balance sheet volumes, mixes and maturities enables the Company to maintain adequate levels of liquidity. Capital The Company is not aware of any current recommendations by the regulatory authorities that would have a material adverse effect on the Company's capital resources or operations. The capital ratios for the Company at June 30, 2002 and the minimum regulatory guidelines for such capital ratios for qualification as a well-capitalized institution are as follows: 24
Holding Company Capital Ratios Ratios at Minimum Regulatory June 30, 2002 Guidelines for Well-Capitalized ------------- ------------------------------- Total Risk-Based Capital .......................... 12.80% 10.0% Tier 1 Risk-Based Capital ......................... 7.67% 6.0% Tier 1 Leverage Ratio ............................. 5.80% 4.0% Bank Capital Ratios Ratios at Minimum Regulatory June 30, 2002 Guidelines for Well-Capitalized ------------- ------------------------------- Total Risk-Based Capital .......................... 13.51% 10.0% Tier 1 Risk-Based Capital ......................... 8.45% 6.0% Tier 1 Leverage Ratio ............................. 6.37% 4.0%
The issuance in 2002 of subordinated debt by the Bank, and the repurchase and redemption in 2002 of subordinated debt by the Company, reflected a strategy to increase total capital and the ratio of total capital to risk weighted assets; to reduce the amount of debt outstanding at the holding company; to decrease the average cost of subordinated debt; and to lengthen the average maturity of subordinated debt. State of New Jersey Corporate Income Tax Legislation Approved in July of 2002 The State of New Jersey approved, in July of 2002, new tax legislation that changes the calculation of income taxes payable by corporations located in the state. Certain of these changes decrease the benefit of tax planning strategies used by corporations to reduce tax liability. Other changes include an alternative minimum tax. The Company is reviewing its alternatives to minimize the effect of the new tax legislation. The Company believes that the net impact of the new legislation will not have a material impact on its future earnings or financial position. Change in Independent Accountants The Company announced, on May 22, 2002, that it had appointed Ernst & Young LLP and dismissed Arthur Andersen LLP as its independent accountants. 25 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders A. The Annual Meeting of shareholders of Hudson United Bancorp was held April 17, 2002. B. The names of the directors who are nominees for election for the 2002 Annual Meeting and the names of the directors whose terms extend beyond the 2002 Annual Meeting are set forth in the tables below. Nominees for the 2002 Annual Meeting: Bryant D. Malcolm W. Peter McBride Charles F.X. Poggi John H. Tatigian, Jr. Directors whose terms extend beyond the 2002 Annual Meeting: Donald P. Calcagnini Kenneth T. Neilson David A. Rosow Robert J. Burke Joan David James E. Schierloh C. The following is a brief description as well as the tabulation of votes for each of the matters which were voted upon at the 2002 Annual Meeting: 1. Election of the following four persons as directors of Hudson United Bancorp: Director For Authority Withheld -------- --- ------------------ Bryant D. Malcolm 36,527,656 1,513,915 W. Peter McBride 36,731,772 1,309,799 Charles F.X. Poggi 36,532,324 1,509,248 John H. Tatigian, Jr. 36,649,648 1,391,924 2. Approval of the Hudson United Bancorp 2002 Stock Option Plan with authority to grant options for up to 1,250,000 shares: For Against Authority Withheld --- ------- ------------------ 35,010,706 2,645,582 385,266 3. No other matters were voted upon at the meeting. 26 Item 6: Exhibits and Reports on Form 8-K - a.) Exhibits (99) Additional Exhibits 99.1 Certification of Chief Executive Officer Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer Pursuant to U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b.) Current Reports on Form 8-K 1. Current Report on Form 8-K dated April 26, 2002. (Announcing that Hudson United Bancorp reported net income of $42.3 million for the quarter ended 3/31/02) 2. Current Report on Form 8-K dated April 18, 2002. (Announcing that Hudson United Bancorp declared a $0.28 per share dividend) 3. Current Report on Form 8-K dated May 2, 2002. (Announcing that Hudson United Bank issued $200 million of 7% subordinated debt) 4. Current Report on Form 8-K dated May 22, 2002. (Announcing the engagement of Ernst & Young, replacing Arthur Anderson as outside auditors) 5. Current Report on Form 8-K dated June 26, 2002. (Announcing the acquisition of certain assets and liabilities of Connecticut Bank of Commerce) 27 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Hudson United Bancorp August 14, 2002 /s/ KENNETH T. NEILSON ------------------ ----------------------------------------------------- Date Kenneth T. Neilson Chairman, President and Chief Executive Officer August 14, 2002 /s/ WILLIAM A. HOULIHAN ------------------ ----------------------------------------------------- Date William A. Houlihan Executive Vice President and Chief Financial Officer 28