Back to GetFilings.com

HUDSON UNITED BANCORP
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          This Certification is to accompany the Annual Report of Hudson United Bancorp (the “Company”) on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission (the “Report”).

          I, Kenneth T. Neilson, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

HUDSON UNITED BANCORP
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

          This Certification is to accompany the Annual Report of Hudson United Bancorp (the “Company”) on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission (the “Report”).

          I, William A. Houlihan, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

For the transition period from _____________ to _____________

Commission file number 1-08660

Registrant’s telephone number, including area code:(201)236-2600

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark whether the registrant (l) 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.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form  10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is an accelerated filer as defined in Exchange Act Rule 126-2  x

The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 3, 2003 was $1,324,424,674.

The number of shares of Registrant’s common stock, no par value, outstanding as of March 3, 2003 was  44,678,332.

Documents incorporated by reference: Contains portions of the Registrants Definitive Proxy Statement for the 2003 Annual Meeting of Shareholders to be held April 15, 2003 will be incorporated by reference in Part III

Hudson United Bancorp (“HUB” or “Registrant” or the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”).  The Company was organized under the laws of New Jersey in 1982 by Hudson United Bank (“Hudson United” or the “Bank”) for the purpose of creating a bank holding company to take advantage of the additional powers provided to bank holding companies. 

The Company directly owns Hudson United plus four additional subsidiaries, which are HUBCO Capital Trust I, HUBCO Capital Trust II, JBI Capital Trust I and Jefferson Delaware, Inc.  In March 1999, the former Lafayette American Bank and Bank of the Hudson were merged into Hudson United. In addition, the shareholders of the Company on April 21, 1999 approved an amendment to the certificate of incorporation to change the name of the Company from HUBCO, Inc. to Hudson United Bancorp. The Company is also the indirect owner, through Hudson United, of nine subsidiaries. All of the assets and liabilities of the subsidiaries of the Company and the Bank are consolidated on the balance sheet of the Company for shareholder reporting purposes.  A further description of these subsidiaries is contained in the section “Other Subsidiaries” in this current document.

At December 31, 2002, HUB, through its subsidiaries, had total deposits of $6.2 billion, total loans and leases (“loans”) of $4.3 billion and total assets of $7.7 billion.  HUB ranked third among commercial banks and bank holding companies headquartered in New Jersey in terms of asset size at December 31, 2002. Hudson United operates over 205 branches located throughout the state of New Jersey; in the Hudson Valley area of New York State; in New York City; in southern Connecticut in the areas between Greenwich and Hartford; and in Philadelphia and surrounding areas in Pennsylvania.

Hudson United is a full service commercial bank and offers the services generally provided by commercial banks of similar size and character, including imaged checking, savings, and time deposit accounts; 24-hour telephone banking; internet banking; trust services; cash management services; merchant services; safe deposit boxes; insurance, stock, bond, and mutual fund sales; secured and unsecured personal and commercial loans; residential and commercial real estate loans; and international services including import and export financing, foreign currency purchases and letters of credit.  The Bank’s deposit accounts are competitive with those of other banks and include checking, savings, money market accounts, a variety of interest-bearing transaction accounts and time deposits.  In the lending area, the Bank primarily engages in commercial lending; commercial real estate lending; consumer lending primarily consisting of auto loans and home equity loans; and “private label” credit card programs for certain retailers and other businesses.  Most of the Company’s loans are secured by commercial real estate, residential real estate or other assets of borrowers.

The Company’s main focus is on building banking relationships with individuals, and small and medium sized businesses.  Management attempts to differentiate the Company from competitors by creating a superior “customer experience”.  In addition, the Company believes its ability to supply the services of a large institution with the personal touch of a small community bank represents a competitive advantage.

The Company makes its annual report on Form 10-K, Quarterly Reports on Form 10Q, Current Reports on Form 8-K and amendments to such reports, available on its website at www.hudsonunitedbank.com without charge as soon as reasonably practicable after filing or furnishing such reports to the SEC.

Loans:
The Company classifies its loans into five major categories: commercial and financial; commercial real estate mortgages; consumer; private label credit cards; and residential mortgages.

Loan and lease categories consisting of commercial and financial, commercial real estate mortgages, consumer, and private label credit cards totaled $4.1 billion at December 31, 2002, or 94% of total loans.  The Company emphasizes these types of loans, because they generally have more attractive yields; interest rate sensitivity; and maturity characteristics than single-family loans.  The Company also believes that these loans provide better opportunities to obtain deposit relationships and/or fee based product relationships with borrowers than do single-family loans, which tend to be transactional.

The Company emphasizes commercial loans to small and mid-sized privately owned businesses, most of which are located in its four state business area.  Most of the Company’s loans are in the form of annually renewable lines of credit, indexed to the Prime Rate or LIBOR, and term loans with either variable or fixed rates. The average size of the Company’s commercial loans is less than $1 million.  The Company does also originate commercial loans in the size range of $10 million or greater.  Most of the Company’s commercial loans are secured by assets owned by the borrower, including commercial real estate.  Most of the Company’s commercial loans are also supported by personal guarantees from the owners of those private companies.  The Company has no “shared national credits” for regulatory purposes in its commercial loans outstanding at December 31, 2002.

The Company emphasizes short maturity and intermediate maturity loans in its commercial real estate activities.  These loans may be collateralized by existing properties, or by properties acquired by a borrower in an attempt to improve the value of the property prior to

2

refinancing or sale of the property; or may be construction loans generally supported by pre-sale or pre-lease commitments for the completed properties. Most of these properties collateralizing these loans are located in the Company’s four state business area.  These loans have variable interest rates indexed to the Prime Rate or LIBOR or other indices, or have fixed interest rates generally not longer than 5 years.  The average size of the Company’s commercial real estate loans is less than $1 million.  The Company also originates some commercial real estate loans in the size range of $10 million or greater.  Most of the Company’s loans are also supported by personal guarantees by the owners of the properties.  The Company does not emphasize long term, fixed rate, non recourse loans to investors in commercial real estate.  The Company had very few purchased participations in its commercial real estate loans at December 31, 2002.

The Company emphasizes automobile loans and home equity loans in its consumer lending activities. The Company’s consumer loan portfolio also includes some recreational vehicle loans, manufactured housing loans, boat loans, unsecured consumer loans, and other miscellaneous loans.  The Company’s automobile loans generally are originated by dealers located in the Company’s four state business area, and purchased by the Company throughout the year on a periodic basis after the Company performs an independent review of the borrower’s credit worthiness and an assessment of the loan collateral.  Most of these loans have fixed interest rates and intermediate maturities.  The Company’s home equity loans are generally collateralized by properties located in the Company’s four state business area, secured by the primary residence of the borrower, and originated by the Bank’s employees.  Most of these loans have variable interest rates indexed to the Prime Rate, or may have fixed interest rates.  The Company uses FICO scores and other underwriting techniques to evaluate the credit worthiness of the borrowers for the Company’s consumer loans and leases.  The borrowers for the Company’s auto loan and home equity loans had an average FICO score of greater than 700 at December 31, 2002. Included in the loan portfolio are certain auto leases with a total residual value of $60.0 million at December 31, 2002.  The total lease receivables at December 31, 2002 were $153.1 million These residual values are guaranteed by a third party, and the guarantee is also supported by collateral up to a certain amount, which was approximately $6 million at December 31, 2002.  The auto leases were purchased in 2001.  The Company believes that the residual values are properly recorded as of December 31, 2002.

The Company emphasizes “private label” credit card activities, and it does not emphasize VISA or Mastercard credit card activities.  The Company has relationships with approximately 100 retailers located throughout the United States, which merchants offer unsecured sales financing to their customers through a private label credit card, and which merchants allow the Company to underwrite the resulting credit card receivables on a daily basis.  The Company’s relationships with its merchants are generally multi year contractual relationships.  The Company generates these merchant relationships through the marketing efforts of its employees, as well as by purchasing the right to merchant relationships from other financial institutions.  The Company receives a fee from the merchants when it underwrites a purchase, and it receives interest, late fees and credit card account insurance income from the individual customers that maintain balances on their private label credit card accounts. The Company’s credit card loans include both fixed and variable interest rates.  The average balance outstanding on the Company’s credit card loans was less than $600 at December 31, 2002.  The Company uses FICO scores and other underwriting techniques to evaluate the creditworthiness of the borrowers for its credit card loans.  The borrowers for the Company’s private label credit card loans had an average FICO score of greater than 700 at December 31, 2002.  The Company’s total credit card loans of $340.2 million at December 31, 2002 also include less than $7 million of VISA and Mastercard credit card loans.

Deposits

The Company classifies its deposits into non-interest bearing; NOW; savings; MMDA; and time deposit categories. 

Deposits consisting of non-interest bearing; NOW; savings; and MMDA accounts totaled $4.4 billion at December 31, 2002, or 71% of total deposits.  The Company emphasizes these categories of deposits because they generally have lower yields; are subject to repricing at the Company’s option; and provide more fee based product opportunities than time deposits, which tend to be transactional.

The Company primarily generates deposits from individuals, but it also obtains deposits from businesses and from municipalities and related entities (“public sector deposits”).

Most of the Company’s deposits are generated through its more than 200 branches in its four state business area.  Most of the Company’s deposits are in amounts less than $100,000, and are fully insured by the FDIC.  Deposits in amounts greater than $100,000 are primarily from businesses and public sector deposits, and are generally secured at the depositor’s request by a portion of the Company’s investment securities portfolio.

The Company’s total assets at December 31, 2002 were $7.7 billion, which represented an increase in its total assets from the prior year, which were $7.0 billion at December 31, 2001.  This increase was due to increases in investment securities of $631.6 million; an increase in commercial, commercial real estate, consumer and credit card loans of $263.6 million; partially offset by a decrease in residential mortgages of $262.6 million.  The increase in investment securities in 2002 was partly due to purchases made in connection with an increase in deposits and borrowings and partially due to a reclassification of $576.3 million in available for sale investment securities to trading assets.  The increase in commercial, commercial real estate, consumer and credit card loans in 2002 reflected the Company’s focus on its major loan categories.  The Company’s total assets at December 31, 2001 were $7.0 billion, which represented a slight increase in its total assets from the prior year, which were $6.8 billion at December 31, 2000.  This increase was due to increases in investment securities of $935.8 million and other assets of $126.6 million being offset in part by a decrease of $896.6 million in

3

residential mortgage loans.  The increase in securities and the decline in residential mortgage loans was due in part to exchanges of residential mortgages for comparable mortgage backed securities, backed by the same mortgages of $118.0 million in 2002 and $668.5 million in 2001. The increase in other assets in 2001 was also due primarily to the Company’s investment of $125 million in separate account bank owned life insurance during June 2001. 

The Company’s primary focus in 2002 and 2001 was on core business growth.  Management focused on executing its business strategies and in providing superior customer service.

HUB entered into a merger agreement in 1999 with Dime, a New York City based financial institution, under which HUB and Dime were to merge, with Dime as the surviving corporation in the merger changing its name to Dime United Bancorp, Inc. (“Dime United”).  Dime shareholders would have owned 56% of the outstanding Dime United stock and HUB shareholders would have owned 44% of the outstanding Dime United Stock following the merger.  The proposed merger with Dime would have been the largest business combination in HUB’s corporate history.

The closing of the proposed merger was initially delayed, and the merger was eventually terminated in 2000, following the announcement by North Fork Bancorporation of an unsolicited acquisition bid for Dime.  The initial delay and the eventual termination of the merger between the Company and Dime had a negative impact on the Company’s growth and profitability during 1999 and 2000.  Dime agreed to merge with Washington Mutual, Inc. in June of 2001.  The Dime/Washington Mutual merger was completed in January of 2002.

Under the terms of the merger termination agreement between Dime and the Company, Dime was required to pay the Company a minimum merger termination fee of $15 million on or before October 28, 2001.  Dime was also required to pay additional amounts to the Company, up to a maximum amount of $92 million, in the event that Dime entered into certain transactions with third parties involving a sale by Dime of a substantial portion of its assets, a significant subsidiary, Dime itself or the acquisition of a certain percentage of Dime’s outstanding common stock, on or before October 28, 2001. 

HUB recognized the minimum termination fee payable from Dime as revenue when the pending merger was terminated in 2000, which revenue was less than the expenses incurred by the Company in the terminated merger.  Pursuant to the above mentioned termination agreement, Dime was required to pay Hudson United $77 million upon the closing of the merger with Washington Mutual.  The Company recognized the additional $77 million of termination payments as revenue in the first quarter of 2002.  The Company also recorded in the first quarter of 2002 approximately $8.3 million of expenses related to the terminated merger including financial advisor fees and acceleration of employee retention awards $13.2 million of other expenses, and a $21.3 million provision for possible loan losses related to the accelerated disposition of certain non performing loans.

The Company has engaged in only limited acquisition activity in recent years, as it focused on core business growth within its four state business area.  The Company had an explicit focus on acquisitions in the 1990s, when acquisitions were its primary source of growth in those years.

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”).  The Company, in this transaction, purchased certain consumer loans that could be put back to the FDIC, and assumed certain insured deposits, of initially, $180.2 million along with an option to purchase two branches in Connecticut and to lease one branch in Connecticut and two branches in New York City.  Subsequently, the Bank put back the consumer loans, purchased the two Connecticut branches and assumed the leases of the one branch in Connecticut and two branches in New York City.  The Bank paid an acquisition premium of $17.3 million to the FDIC in this transaction, of this total $4.1 million was classified as core deposit intangible and $13.2 million was considered goodwill.

The Company entered into agreements at several times in 2002 and 2001 to purchase third party credit card assets from unaffiliated third parties.  The Company paid total consideration of $62.6 million for $66.2 million of these assets in 2002, with an associated discount of $3.6 million.  The Company paid total consideration of $161.4 million for $157.0 million of these assets in 2001, 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.

The Company did not complete any acquisitions in 2000.

4

The Company believes that its profitability and its financial condition were favorably impacted on an overall basis by its acquisition strategy and by the integration of its acquisitions.  From 1990 to 2002, the Company’s return on average assets increased from less than 1% to 1.5% and its return on average equity increased from less than 10% to 26%.

The Company intends to continue to seek opportunities to acquire other banks or financial services companies, and to acquire specific loans or other assets and/or to assume deposit or other liabilities of other banks or financial services companies, while continuing to focus on core business growth within its four state business area.  There can be no assurance that the Company will be successful in making additional acquisitions or, if additional acquisitions are made, that these acquisitions will enhance the profitability of the Company.

On January 29, 2003 the Company’s Board of Directors ( the “Board”) extended the Company’s stock repurchase program until June 2004 and authorized additional repurchases of up to 10% of the Company’s outstanding shares.

In June 2001, the Board extended the Company’s stock repurchase program until December 2002 and authorized additional repurchases of up to 10% of the Company’s outstanding shares.  During 2001, the Company purchased 2.3 million treasury shares at an aggregate cost of $56.3 million.  During 2001, 179,209 shares were reissued for stock options.

During 2002, the Company purchased 1.3 million treasury shares at an aggregate cost of $37.7 million.  During 2002, the Company reissued 434,813 shares for stock options. 

At December 31, 2002, there were 45.0 million shares of the Company’s common stock outstanding

In June 2000, the Board authorized the repurchase of up to 20% of the Company’s outstanding shares.  During 2000, the Company purchased 9.4 million treasury shares at an aggregate cost of $l93.3 million, of which 5.2  million shares were reissued for stock dividends, stock options and other employee benefit plans.

In November 1993, the Board 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 and to be used for stock option and other employee benefit plans, stock dividends, or in connection with the issuance of common stock in future acquisitions. 

In addition to Hudson United Bank, the Company directly owned four consolidated subsidiaries that were established for the purpose of issuing the capital trust securities of the Company which enhance the regulatory capital of the Company.  They are HUBCO Capital Trust I, HUBCO Capital Trust II, JBI Capital Trust I and Jefferson Delaware Inc.

The Company is also the indirect owner, through Hudson United, of the nine consolidated subsidiaries as discussed below.

In 1983, HUB formed a directly owned subsidiary called HUB Financial Services, Inc., which was a wholly owned data processing subsidiary.  In 1995, HUB sold 50% of the stock in HUB Financial Services, Inc. to United National Bank, a New Jersey based institution.  HUB simultaneously made a capital contribution of the remaining 50% to Hudson United Bank.  Simultaneously with the sale of 50% to United National Bank, the name of HUB Financial Services, Inc. was changed to United Financial Services, Inc. (“UFS”).  UFS ceased to provide data processing and imaged check processing services to both of its owner banks in October 1999.  The Company currently outsources such services to an independent third party provider of such data processing and other services.  UFS was dissolved in 2002.

In 1987, Hudson United established a directly owned subsidiary called Hendrick Hudson Corp.  Hendrick Hudson Corp. directly owns HUB Mortgage Investments Inc., which was established in 1997 and operates as a real estate investment trust.  As of December 31, 2002, Hendrick Hudson Corp. had no assets other than its investment in HUB Mortgage Investments Inc.  As of December 31, 2002, $418.3 million of mortgage loans and $1,622.0 million in mortgage related investment securities were being managed by HUB Mortgage Investments Inc.  These two entities were established to assist in managing a portion of the Company’s investment portfolio.

In 1998, Hudson United established NJ Investments of Delaware, Inc.  As of December 31, 2002, $201.1 million of Hudson United’s investment portfolio was being managed by NJ Investments of Delaware, Inc. This subsidiary was established to assist in managing a portion of the Company’s investment portfolio.

Hudson Trader Brokerage Services, Inc., which was established in 1991, is a subsidiary that was engaged in brokerage services.  This subsidiary is inactive and is expected to be officially dissolved in 2003.  The Company now provides investment securities brokerage services to its customers through a business relationship with an affiliate of John Hancock Insurance.

5

In 2002, Hudson United established Hudson Insurance Services, Inc.  This subsidiary provides a wide range of insurance risk management services as an agent; it does not engage in any insurance underwriting activities.

Hudson United owns five subsidiaries that were established for the purpose of holding real estate assets.  They are: Lafayette Development Corp., Plural Realty, Inc., PSB Associates, Inc., AMBA Realty Corporation and Riverdale Timber Ridge, Inc.

All of the assets and liabilities of the subsidiaries are consolidated in the Company’s financial statements

Hudson United Bank enjoys a good relationship with its employees and is not party to any collective bargaining agreements.

The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on HUB cannot be determined at this time. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on HUB or its banks. It is intended only to briefly summarize some material provisions.

Capital Adequacy Guidelines and Deposit Insurance

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), required each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities.  In addition, pursuant to FDICIA, each federal banking agency has promulgated regulations, specifying the levels at which a bank would be considered “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized”, and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. 

The regulations implementing these provisions of FDICIA provide that a bank will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, and (iv) meets certain other requirements.  A bank will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 4.0 percent, (iii) has a Tier 1 leverage ratio of (a) at least 4.0 percent, or (b) at least 3.0 percent if the institution was rated 1 in its most recent examination, and (iv) does not meet the definition of “well capitalized”.  A bank will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, or (iii) has a Tier 1 leverage ratio of (a) less than 4.0 percent, or (b) less than 3.0 percent if the institution was rated 1 in its most recent examination.  A bank will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 3.0 percent, or (iii) has a Tier 1 leverage ratio of less than 3.0 percent.  An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent.  An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination.

As of December 31, 2002, the Bank’s capital ratios exceed the requirements to be considered a well capitalized institution under the FDIC regulations.

Bank holding companies must comply with the Federal Reserve Board’s risk-based capital guidelines.  Under the guidelines, risk weighted assets are calculated by assigning assets and certain off-balance sheet items to broad risk categories.  The total dollar value of each category is then weighted by the level of risk associated with that category.  A minimum risk-based capital to risk based assets ratio of 8.00% must be attained.  At least one half of an institution’s total risk-based capital must consist of Tier 1 capital, and the balance may consist of Tier 2, or supplemental capital.  Tier 1 capital consists primarily of common stockholders’ equity along with preferred or convertible preferred stock and qualifying trust preferred securities, minus goodwill.  Tier 2 capital consists of an institution’s allowance for loan and lease losses, subject to limitation, hybrid capital instruments and certain subordinated debt.  The allowance for loan and lease losses which is considered Tier 2 capital is limited to 1.25% of an institution’s risk-based assets.  As of December 31, 2002, HUB’s total risk-based capital ratio was 13.07% and its Tier 1 risk-based capital ratio was 7.87%.

In addition, the Federal Reserve Board has promulgated a leverage capital standard, with which bank holding companies must comply.  Bank holding companies must maintain a minimum Tier 1 capital to total assets ratio of 3%.  However, institutions which are not among the most highly rated by federal regulators must maintain a ratio 100-to-200 basis points above the 3% minimum.  As of December 31, 2002, HUB had a leverage capital ratio of 5.82%.

HUB and its subsidiary bank 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 HUB’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, HUB and its subsidiary bank must meet specific capital guidelines that involve quantitative

6

measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk weightings, and other factors.  Quantitative measures established by regulation to ensure capital adequacy require banks to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002, that HUB and its subsidiary bank meet all capital adequacy requirements to which they are subject.

Hudson United is a member of the Bank Insurance Fund (“BIF”) of the FDIC.  The FDIC also maintains another insurance fund, the Savings Association Insurance Fund (“SAIF”), which primarily covers savings and loan association deposits but also covers deposits that are acquired by a BIF-insured institution from a savings and loan association (“Oakar deposits”).

The Economic Growth and Regulatory Reduction Act of 1996 (the “1996 Act”) included the Deposit Insurance Funds Act of 1996 (the “Funds Act”) under which the FDIC was required to impose a special assessment on SAIF assessable deposits to recapitalize the SAIF.  Under the Funds Act, the FDIC also charged assessments for SAIF and BIF deposits in a 5 to 1 ratio to pay Financing Corporation (“FICO”) bonds until January 1, 2000, at which time the assessment became equal.  The 1996 Act instituted a number of other regulatory relief provisions.

Restrictions on Dividend Payments, Loans, or Advances

The holders of HUB’s common stock will receive dividends only when, and if such dividends are declared by the Board of Directors of HUB out of funds legally available, subject to the preferential dividend rights of any preferred stock that may be outstanding from time to time. 

The only statutory limitation is that such dividends may not be paid when HUB is insolvent.  Because funds for the payment of dividends by HUB come primarily from the earnings of HUB’s bank subsidiary, as a practical matter, restrictions on the ability of Hudson United to pay dividends act as restrictions on the amount of funds available for the payment of dividends by HUB.

Certain restrictions exist regarding the ability of Hudson United to transfer funds to HUB 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.  As of December 31, 2002 the maximum amount available for distribution to HUB from Hudson United was $569.8 million, subject to regulatory capital limitations.

HUB is also subject to Federal Reserve Bank (“FRB”) policies which may, in certain circumstances, limit its ability to pay dividends.  The FRB policies require, among other things, that a bank holding company maintain a minimum capital base.  The FRB would most likely seek to prohibit any dividend payment which would reduce a holding company’s capital below these minimum amounts.

Under Federal Reserve regulations, Hudson United is limited as to the amounts it may loan to its affiliates, including HUB.  All such loans from the Bank are required to be collateralized by specific assets owned by HUB or affiliates. Loans outstanding from Hudson United to HUB were $1.4 million at December 31, 2002.

Holding Company Supervision

Under the Bank Holding Company Act, HUB may not acquire directly or indirectly more than 5 percent of the voting shares of, or substantially all of the assets of, any bank without the prior approval of the Federal Reserve Board.

In general, the Federal Reserve Board, under its regulations and the Bank Holding Company Act, regulates the activities of bank holding companies and non-bank subsidiaries of banks.  The regulation of the activities of banks, including bank subsidiaries of bank holding companies, generally has been left to the authority of the supervisory government agency, which for Hudson United is the FDIC and the New Jersey Department of Banking and Insurance (the “NJDOBI”).

Interstate Banking Authority

The Riegle-Neale Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”) enables a bank holding company to acquire banks in states other than its home state regardless of applicable state law.

The Interstate Banking and Branching Act also authorizes banks to merge across state lines, thereby creating interstate branches.  Under the legislation, each state had the opportunity to “opt out” of this provision, thereby prohibiting interstate branching in such states.  Furthermore, a state may “opt in” with respect to de novo branching, thereby permitting a bank to open new branches in a state in which the bank does not already have a branch.  Without de novo branching, an out-of-state bank can enter the state only by acquiring an existing bank.  The vast majority of states have allowed interstate banking by merger but have not authorized de novo branching.

7

Recent Legislation

As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Act”).  The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies.  Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country.  In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.

The Act also amends the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts.

The Gramm-Leach-Bliley Financial Modernization Act of 1999 became effective in early 2000.  The Modernization Act:

The Modernization Act also modified other financial laws, including laws related to financial privacy and community reinvestment.

Additional proposals to change the laws and regulations governing the banking and financial services industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such changes and the impact such changes might have on HUB cannot be determined at this time.

Cross Guarantee Provisions and Source of Strength Doctrine

Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled FDIC-insured depository institution in danger of default.  “Default” is defined generally as the appointment of a conservatory or receiver and “in danger of default” is defined generally as the existence of certain conditions, including a failure to meet minimum capital requirements, indicative that a “default” is likely to occur in the absence of regulatory assistance.  These provisions have commonly been referred to as FIRREA’s “cross guarantee” provisions.  Further, under FIRREA the failure to meet capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC.

According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary.  This support may be required at times when a bank holding company may not be able to provide such support.  Furthermore, in the event of a loss suffered or anticipated by the FDIC - either as a result of default of a bank subsidiary of the Company or related to FDIC assistance provided to the subsidiary in danger of default - the other bank subsidiaries of the Company may be assessed for the FDIC’s loss, subject to certain exceptions.

HUB exists primarily to hold the stock of its subsidiaries.  At December 31, 2002, HUB had 5 wholly-owned subsidiaries including Hudson United.  In addition, HUB, through Hudson United, indirectly owns 9 additional wholly-owned subsidiaries.  The historical

8

growth of, and regulations affecting, each of HUB’s direct and indirect subsidiaries is described in Item 1(a) above, which is incorporated herein by reference.

HUB is a legal entity separate from its subsidiaries.  The stock of Hudson United is HUB’s principal asset.  Dividends from Hudson United are the primary source of income for HUB.  As explained above in Item 1(a), legal and regulatory limitations are imposed on the amount of dividends that may be paid by the Bank to HUB.

At December 31, 2002, HUB, through its subsidiaries, had total deposits of $6.2 billion, total loans of $4.3 billion and total assets of $7.7 billion.  HUB ranked third among commercial banks and bank holding companies headquartered in New Jersey in terms of asset size at December 31, 2002.  The Bank operates branch offices throughout the state of New Jersey; in the Hudson Valley area of New York State; in New York City; in southern Connecticut in the areas between Greenwich and Hartford; and in Philadelphia and surrounding areas in Pennsylvania.

Hudson United is a full service commercial bank and offers the services generally provided by commercial banks of similar size and character, including imaged checking, savings, and time deposit accounts; 24-hour telephone banking, internet banking; trust services; cash management services; merchant services; safe deposit boxes; insurance; stock, bond, and mutual fund sales; secured and unsecured personal and commercial loans; residential and commercial real estate loans; and international services including import and export financing, foreign currency purchases and letters of credit.  The Bank’s deposit accounts are competitive with those of other banks and include checking, savings, money market accounts, a variety of interest-bearing transaction accounts and time deposits.  In the lending area, the Bank primarily engages in commercial lending; commercial real estate lending; consumer lending primarily consisting of auto loans and home equity loans; and “private label” credit card programs for certain retailers and other businesses.  Most of the Company’s loans are secured by commercial real estate, residential real estate or other assets of borrowers.

The Company’s main focus is on building banking relationships with individuals, and small and medium sized businesses.  Management attempts to differentiate the Company from competitors by creating a superior “customer experience”.  In addition, the Company believes its ability to supply the services of a large institution with the personal touch of a small community bank represents a competitive advantage.

Hudson United offers a variety of trust services.  At December 31, 2002, Hudson United’s Wealth Management Department had approximately $348.9 million of assets under management and total trust assets of $689.5 million.

There are numerous commercial banks headquartered in New Jersey, Connecticut, Pennsylvania and New York, which compete in the market areas serviced by the Company.  In addition, large out-of-state banks compete for the business of residents and businesses located in the Company’s primary market.  A number of other depository institutions compete for the business of individuals and commercial enterprises including savings banks, savings and loan associations, brokerage houses, financial subsidiaries of other industries and credit unions.  Other financial institutions, such as mutual funds, consumer finance companies, factoring companies, and insurance companies, also compete with the Company for loans or deposits.  Competition for depositors’ funds, for creditworthy loan customers and for trust business is intense.

Despite intense competition with institutions commanding greater financial resources, the Bank has been able to attract deposits, extend loans, sell its services and operate at a strong level of performance.

Hudson United has focused on becoming an integral part of the communities it serves.  Officers and employees are incented to meet the needs of their customers and to meet the needs of the local communities served.

The Company had 1,898 full-time equivalent employees as of December 31, 2002.

9

The following table sets forth certain information as to each executive officer of the Company who is not a director.

The statistical disclosures for a bank holding company required pursuant to Industry Guide 3 are contained on the following pages of this Report on Form 10K, within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 2.  PROPERTIES

The corporate headquarters of the Company and the Bank is located in a three story facility in Mahwah, New Jersey.  HUB owns the building, which is approximately 64,350 square feet and houses the executive offices of the Company and its subsidiaries.  Hudson United occupied 205 branch offices as of December 31, 2002, of which 97 are owned and 108 are leased. The Company owns two additional non-branch facilities, in addition to leasing another two.

ITEM 3.  LEGAL PROCEEDINGS

In the normal course of business, lawsuits and claims may be brought by and may arise against HUB and its subsidiaries.  In the opinion of management, no legal proceedings which have arisen and which are presently pending or threatened against HUB or its subsidiaries, when resolved, will have a material adverse effect on the business or financial condition of HUB or any of its subsidiaries.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders of HUB during the fourth quarter of the year ended December 31, 2002.

10

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of December 31, 2002, the Company had approximately 7,670 shareholders of record.

The Company’s common stock is listed on the New York Stock Exchange under the symbol of “HU”.  The following represents the high and low closing sale prices from each quarter during the last two years.  The numbers have been restated to reflect all stock dividends.

The following table shows the per share quarterly cash dividends paid upon the common stock over the last two years, restated to give retroactive effect to stock dividends.

11

ITEM 6. SELECTED FINANCIAL DATA
(In Thousands Except For Per Share Amounts)

The following selected financial data should be read in conjunction with HUB’s Consolidated Financial Statements and the notes presented elsewhere herein.
Results reported in this table for years 1999 and 1998 have been restated to reflect pooling of interest transactions.  Reference should be made to footnote 2, Business Combinations, of the Financial Statements for a discussion of recent acquisitions that affect the comparability of the information contained in this table.

Cautionary Statement Regarding Forward-Looking Information

This form 10-K, 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.  Such forward-looking statements involve certain risks and uncertainties.  Actual results may differ materially from the results discussed in these forward-looking statements.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, changes in interest rates, changes in economic conditions, 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, and the effects of legal, tax 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.

12

Certain amounts from prior years have been reclassified to conform to the current year’s presentation.

The Company had net income of $123.2 million or $2.72 per fully diluted share in 2002. Operating earnings for 2002 were $106.0 million, or $2.34 per fully diluted share. Operating earnings for 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 2002 also exclude $21.5 million of one time expenses resulting from the merger resolution of $8.3 million and $13.2 million of 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.

The Company hadnet income of $94.5 million, or $2.00 per diluted share in 2001.
The Company had net income of $49.8 million, or $0.92 per fully diluted share in 2000.   Operating earnings for 2000 were $108.3 million, or $2.00 per diluted share.  Operating earnings in 2000 exclude $15.0 million in merger related and restructuring charges; $7.0 million of other nonrecurring operating charges; and $63.6 million in investment securities losses associated with the Company’s deleveraging program.

13

          Average Balances, Net Interest Income, Yields, and Rates

14

Net Interest Income

Net interest income is the difference between the interest earned on earning assets and the interest paid on interest bearing liabilities.  The principal earning assets are the loan portfolio, comprised of commercial loans to businesses, commercial mortgage loans; consumer loans (such as auto loans, home equity loans, etc.); credit card loans; and residential mortgages; and the investment securities portfolio.  The securities portfolio is invested primarily in mortgage-related securities, such as mortgage backed securities and collateralized mortgage obligations derived from mortgage backed securities; asset backed and other securities; and equity securities of the Federal Home Loan Bank, government sponsored enterprises (“GSEs”) and other entities.  Cash received from deposits and borrowings not required to fund loans and other assets are invested primarily in investment securities.  The principal interest bearing liabilities are deposit accounts and borrowings.  The Company may also receive interest income or incur interest expense on interest rate derivatives that it has entered into as hedges for certain assets and liabilities.

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%.

Net interest income on a FTE basis was $304.5 million for 2002 compared to $289.3 million for 2001 and $323.8 million for 2000.  The increase in net interest income in 2002 compared to 2001 was due to an increase in average earning assets, partially offset by a decrease in the net interest margin of 6 basis points.  The increase in average interest-earning assets was mainly due to an increase in average investment securities. This occurred due to a higher level of securities purchases in 2002, primarily associated with growth in money market deposits and long term debt.  The decline in net interest income in 2001 compared to 2000 was due to a $1.5 billion decrease in average interest-earning assets, partially offset by an increase in the net interest margin of 45 basis points.  This was primarily the result of the previously mentioned deleveraging strategy in 2000 (see Business;(a) General Development of Business; changes in asset size in recent years).  The increase in securities and the decrease in residential mortgages in 2002 and in 2001 was also attributable to the exchange of $118.0 million and $668.5 million of residential mortgages for mortgage backed securities backed by the same mortgages.  The mortgage exchanges resulted in a transfer of assets from the loan portfolio to the investment portfolio.

Net Interest Margin

Net interest margin is computed by dividing net interest income on a FTE basis by average interest-earning assets.  The Company’s net interest margin was 4.65% in 2002 compared to 4.71% in 2001 and 4.26% in 2000.  The 6 basis point decrease in net interest margin in 2002 from 2001 was due mainly to the decrease in interest rates on interest earning assets, due to the prevailing low interest rate environment, being greater than the decline in interest rates paid on deposits and borrowings.  Higher prepayments on securities and loans further negatively impacted the net interest margin due to a much lower reinvestment rate in 2002.  The 45 basis point increase in net interest margin in 2001 from 2000 was primarily due to lower interest rates paid on deposits and borrowings that exceeded the decrease in rates on interest earning assets.

15

Provision for Loan and Lease Losses

The provision for loan and lease losses was $51.3 million for the year ended December 31, 2002, compared to $34.1million for the year ended December 31, 2001.  The increase was mainly due to a provision of $21.3 million established for the accelerated disposition of certain non-performing loans during 2002.  In 2001 the Company established a provision of $10.1 million related to loans that were held for sale.  The provision established for portfolio loans increased to $30 million at December 31, 2002 from $24 million at December 31, 2001,mainly due to the current economic conditions.  The provision established for portfolio loans remained the same from year end 2000 to year end 2001 at $24 million.

Noninterest Income

Noninterest income was $185.1 million for 2002, $109.4 million for 2001 and $31.1 million for 2000. The increase in 2002 over 2001 was due mainly to the $77 million Dime termination payment received.  The increase in 2001 over 2000 was due mainly to the $10.2 million in gains on assets held for sale in 2001 compared to net securities losses of $58.6 million in 2000 associated with the Company’s deleveraging program. 

Noninterest income, excluding security gains/(losses), gains on assets held for sale and the Dime merger termination payment was $104.4 million for 2002, $98.1 million for 2001 and $89.7 million for 2000. The increase in 2002 compared to 2001 was due to higher credit card fees, commercial lending fees and increased income from separate account bank owned life insurance.  The increase in 2001 compared to 2000 was primarily due to increases in credit card fees, as a result of the Company’s growth in the private label credit card business, increased retail service fees and the Company’s investment in separate account bank owned life insurance in June 2001. 

Noninterest income, excluding securities gains/(losses), gains on assets held for sale and the Dime merger termination payment, as a percentage of total net revenue (net interest income plus non interest income, excluding securities gains (losses), gains on assets held for sale and the Dime merger termination payment), was 26% in 2002, 26% in 2001, and 22% in 2000.

Noninterest Expenses

Noninterest expense was $247.1 million in 2002, $227.2 million in 2001 and $250.0 million for 2000.  The increase in 2002 over 2001 was due in most part to $21.5 million in one time merger resolution and other charges incurred in 2002.  The Company  classified as “Expenses related to Dime termination payment” $8.3 million, and the remaining $13.2 million was classified into other expense categories.  The $13.2 million was classified 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. The decrease in 2001 compared to 2000 was due to merger related and restructuring costs of $15.0 million and other nonrecurring operating charges of $7.0 million incurred in 2000.

Noninterest expense, excluding the merger resolution, restructuring and other charges in 2002 and 2000 noted in the prior paragraph, decreased to $225.6 million in 2002 from $227.2 million in 2001 and $228.0 million in 2000.  The decline in 2002 compared to 2001 was primarily due to the elimination of amortization expense on goodwill, due to the implementation of FASB Statement No.#142, partially offset by increased salary and benefits expenses.  The decline in expense in 2001 compared to 2000 was due primarily to cost savings related to efficiencies in operations partially offset by higher business development expenses. 

Salary and benefit expense was $94.8 million in 2002, $83.5 million in 2001 and $88.9 million in 2000.  The increase in 2002 as compared to 2001 was due primarily to additional salary expense related to the CBC transaction and increased retail and commercial banking incentive payments.  The decline in 2001 compared to 2000 was due to efficiencies realized in staff and support functions, including outsourcing of the internal audit function, and consolidation of benefit plans.

Equipment expense was $20.3 million in 2002 as compared to $18.6 million in 2001 and $20.4 million in 2000.  The higher expense in 2002 as compared to 2001 was due primarily to the Company enhancing its technology infrastructure.  The lower expense in 2001 when compared to 2000 resulted mainly from efficiencies achieved after system conversions relating to the 1999 acquisitions were completed.

Outside services expense was $53.0 million in 2002 as compared to $50.4 million in 2001 and $43.9 million in 2000.  The increase in 2002 compared to 2001 was due mainly to increased processing expense to support business expansion in credit card activities, the outsourcing of the internal audit function, and higher professional service fees.  The increase in 2001 from 2000 resulted primarily from higher expenses related to developing and supporting the Company’s business lines, paid primarily to third party data and item processing companies.

Occupancy expense increased in 2002 to $29.2 million compared to $27.6 million in 2001 and $25.5 million in 2000.  The increase in 2002 over 2001 was due in most part to the CBC acquisition, which added five banking offices.  The increase in 2001 over 2000 was due mainly to general increases in real estate taxes, maintenance contracts and rents paid.

Telephone expense of $6.1 million in 2002, $8.0 million in 2001 and $9.4 million in 2000 reflects the cost reduction programs initiated by the Company to reduce and control these expenses.

Marketing expense has declined slightly to $5.5 million at December 31, 2002 from $5.9 million at December 31, 2001 and $6.3 million at December 31, 2000 due to increased management focus on cost effective marketing expenditures.

Other expenses increased to $23.7 million for 2002 compared to $15.6 million in 2001 and $22.5 million in 2000.  The increase in 2002 over 2001 includes $10.4 in one time charges, as discussed below.  Excluding this other expenses have declined due to reductions in discretionary spending and other cost controls.

Amortization of goodwill was $0 in 2002,  $11.2 million in 2001 and $11.7 million in 2000.  Refer to the Recent Accounting Standards portion of the Notes to Consolidated Financial Statements for further discussion of intangible amortization.

16

Amortization of intangibles was $4.0 million in 2002, $3.8 million in 2001 and $3.8 in 2000.

In 2002 there were $8.3 million in expenses related to the Dime termination payment.  Of this amount $4.7 million was for an investment banking advisory fee, $1.6 million was for the acceleration of restricted stock, $1.1 million was for executive and other employee bonuses and $0.9 million was for other related expenses.  There were no merger related and restructuring costs in 2001.  Merger related and restructuring costs were $15.0 million and other nonrecurring operating charges were $7.0 million in 2000 primarily related to the terminated Dime merger of equals.  These merger related and restructuring costs include the approximate amounts of $4.8 million for the recognition of severance benefits and consulting agreements, $2.0 million for stay pay obligations to current employees, $2.0 million for payments and reserves for the settlements of pre-existing litigation at acquired institutions and $4.2 million for the recognition of obligations for which the Bank will not receive future benefits.  The balance of the expenses are comprised of building writedowns and miscellaneous expenses including search fees, advisor expenses, and other miscellaneous items.  The nonrecurring operating charges include $3.7 million related to the change to a new outsource service provider, $2.0 million for planned branch consolidation, and $1.3 million for the recognition of obligations for which the Bank will not recover future benefits.

Provision for Income Taxes

The Company considers its accounting for income taxes to be a critical accounting policy.  The potential establishment of a deferred tax valuation allowance can be based in part upon subjective measurements by management as to the realization of the Company’s deferred tax asset.  In addition a potential deferred tax valuation allowance could be material in nature to the operations of the Company.  The provisioning for income taxes may involve estimates as management takes into consideration investments in assets with favorable tax treatment and current and pending tax legislation.  The Company’s policies for Federal Income Taxes is further discussed under Note (1) Summary of Significant Accounting Policies.

The Company’s provision for income taxes was $64.2 million in 2002, $38.9 million in 2001 and $27.0 million in 2000.  The Company’s effective tax rate was 34.3% in 2002, 29.2% in 2001 and 35.1% in 2000.  The increase in provision in 2002 compared to 2001, and in 2001 compared to 2000, reflected an increase in pretax income in each year compared to the prior year.

The increase in the effective tax rate in 2002 compared to 2001 was primarily the result of the utilization in 2001 of tax losses generated by sales of securities in 2000 that were done as part of the Company’s deleveraging strategy.

The Company’s effective tax rate in 2002 was also favorably impacted by the Company’s increased investment in tax advantaged securities and increased average investment in separate bank owned life insurance, unfavorably impacted by an increase in the Company’s alternative minimum tax liability as a result of State of New Jersey legislation enacted during 2002; and favorably impacted by an updated assessment of all of the Company’s tax preference income, reserves and related liabilities.  The Company’s effective tax rate in 2001 was also favorably impacted by the Company’s increased investment in separate bank owned life insurance. 

The Company’s effective tax rate in 2002, 2001 and 2000 was also favorably impacted by the Company’s use of HUB Mortgage Investments Inc. and NJ Investments of Delaware to assist in managing a portion of the Company’s investment portfolio (see Business (a) General Development of Business; Other Subsidiaries)

Financial Condition

Total assets at December 31, 2002 were $7.7 billion, an increase from total assets at December 31, 2001 of $7.0 billion. This increase was due to increases in investment securities of $631.6 million, net of the transfer of $576.3 million in available for sale securities to trading assets at December 31, 2001 and commercial, commercial mortgage, consumer and credit card loans of $263.6 million being offset in part by a decrease of $262.6 million in residential mortgage loans.  The increase in securities was due primarily to increased purchases associated with growth in money market deposits and long term borrowings.  The increase in commercial; commercial real estate; consumer; and credit card loans was due to an increased focus on core business activities.  The decline in residential mortgage loans was due to prepayments throughout the year, and an exchange of $117.7 million of residential mortgage loans for comparable mortgage backed securities, backed by the same mortgages, completed with Fannie Mae in the third quarter of 2002, now recorded in investment securities.

The Company designated $576 million of available for sale investment securities as trading account assets in the fourth quarter of 2001. The change in designation of securities resulted in a $10.2 million pretax gain in the fourth quarter of 2001. All of these securities were subsequently sold in the first quarter of 2002.  The designation of securities was done as part of an investment securities portfolio restructuring strategy to reduce the overall average life of the investment portfolio and increase its cash flow, in anticipation of a stronger economy and a higher interest rate environment at some point in the future.  This strategy also involved reducing the duration of the investment portfolio, and decreasing the potential changes in the market value of the underlying assets.  This restructuring strategy resulted in reduced interest income from its investment portfolio, but positioned the Company to have higher interest income when interest rates rise.

The Company also designated certain non-performing commercial and residential mortgage loans as held for sale assets in the fourth quarter of 2001.  The designation was done as part of a strategy to accelerate the resolution of such assets in 2002, to enable the Company to allocate more resources to new business activities.  The non-performing loans prior to designation had a net book value of $26.3 million.  The designation resulted in a $10.1 million provision for loan and lease losses relating to non-performing loans held for sale in the fourth quarter of 2001, and a corresponding charge off in the same amount.  These non-performing loans were sold during 2002 at a gain of $0.2 million

17

Total liabilities at December 31, 2002 were $7.2 billion, an increase from total liabilities at December 31, 2001 of $6.6 billion.  The increase was primarily due to a $216.2 million increase in deposits; a $157.7 million increase in borrowings; and a $159.3 million increase in subordinated debt.

Total Stockholders’ Equity was $432.5 million at December 31, 2002, an increase of $48.6 million from Stockholders’ Equity of $383.9 million at December 31, 2001. This increase was due primarily due to net income of $123.2 million and other comprehensive income of $4.4 million, partially offset by cash dividends declared and paid of  $50.2 million and purchases of treasury stock of $37.7 million.

Investment Securities

The securities portfolio serves as a source of liquidity, earnings, and a means of managing interest rate risk along with other asset liability management strategies.  Consequently, the securities portfolio is managed over time in response to changes in market conditions and loan demand. The securities portfolio comprised 34% of the total assets of the Company at December 31, 2002 and 28% of the total assets of the Company at December 31, 2001.

          The following tables summarize the composition of the investment securities as of December 31, 2002 and 2001 (in thousands):

The following table summarizes trading assets at December 31, 2001 (in thousands):