SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D. C. 20549





FORM
10-K




x
    ANNUAL REPORT PURSUANT TO SECTION 13 OR
      15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31,
      2004ORo
    TRANSITION REPORT PURSUANT TO SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from_____________
      to _____________Commission file number
    1-08660Hudson United Bancorp(Exact name of registrant as specified in
      its Charter)





New Jersey
    
    22-2405746(State or other jurisdiction of
      Incorporation or organization)
    
    (I.R.S.
      Employer Identification No.)1000 MacArthur Blvd.Mahwah, New Jersey
    
    07430(Address of principal executive
      offices)
    
    (Zip Code)Registrant's telephone number, including
      area code:(201)236-2600SECURITIES REGISTERED PURSUANT TO SECTION
      12(b) OF THE ACT:Common Stock, no par value
    
    New York Stock Exchange(Title of Class)
    
    (Name
      of exchange on which registered)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. YES X NO





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





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 June 30, 2004 was $1,594,937,826. The number of shares of
Registrant's common stock, no par value, outstanding as of March 3, 2005 was
45,008,567 .





Documents
incorporated by reference: Portions of the Registrants Definitive Proxy
Statement for the 2005 Annual Meeting of Shareholders to be held April 27, 2005,
are incorporated by reference in Part III








TABLE
      OF CONTENTS
    PagesPart
      IItem
      1. - Business
    14Item
      2. - Properties
    14Item
      3. - Legal Proceeding
    14Item
      4. - Submission of Matters to a Vote of Security Holders
    14Part
      IIItem
      5.- Market for Registrants Common Equity and Related Stockholder Matters
    14Item
      6. - Selected Financial Data
    15Item
      7. - Management’s Discussion and Analysis of Financial Condition &
      Results of Operations
    16
      - 35Item
      7A. -Quantitative About Qualitative and Market Risk
    35Item
      8.
      - Financial Statements and Supplementary Data
    35A.
      Management’s Report on Internal Control over Financial Reporting
    36B.
      Report of Independent Registered Public Accounting Firm on Internal
      Control over Financial Reporting
    37C.
      Report of Independent Registered Public Accounting Firm
    38D.
      Consolidated Balance Sheet - December 2003 & 2004
    39E.
      Consolidated Statement of Income - Years ended December 31,2004, 2003
      & 2002-
    40F.
      Consolidated Statement of Comprehensive Income - Years ended December 31,
      2004, 2003 & 2002
    41G.
      Consolidated Statement of Changes in Stockholder’s Equity - Years ended
      2004, 2003 & 2002
    42H.
      Consolidated Statement of Cash Flows - Years ended December 31, 2004,
      2003, and 2002-
    43I.
      Notes to Financial Statements
    44-73J.
      Quarterly Trends
    74Item
      9. - Changes in and Disagreements with Accountants on Accounting &
      Financial Disclosure Control & Procedures
    74Item
      9A. - Controls and Procedures
    74Item
      9B. - Other Information
    75Part
      IIIItem
      10. - Directors and Executive Officers of the Registrant
    75Item
      11. - Executive Compensation
    75Item
      12. - Security Ownership of Certain Beneficial Owners & Management
      & Related Stockholder Matters
    75Item
      13. - Certain Relationships and Related Transactions
    75Item
      14. - Principal Accountant Fees and Services
    75Part
      IVItem
      15. - Exhibits & Financial Statement SchedulesExhibit
      List-
    76-78Signatures
    79
 2




**P** **ART
I,**


**ITEM
1.**  **BUSINESS**





(a) General
Development of Business





Hudson
United Bancorp (“HUB”, "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 seven additional subsidiaries, which
are HUBCO Capital Trust I, HUBCO Capital Trust II, JBI Capital Trust I, Hudson
United Capital Trust I, Hudson United Capital Trust II, Hudson United Statutory
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 thirteen 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, 2004, HUB, through its subsidiaries, had total deposits of $6.3
billion, total loans and leases of $4.8 billion and total assets of $9.1
billion. HUB ranked third among commercial bank holding companies headquartered
in New Jersey in terms of asset size at December 31, 2004. Hudson United
operates over 200 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; wealth management 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 exchange 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; insurance premium finance
lending; consumer lending primarily consisting of automobile 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.





Areas
of Emphasis in Loans, and in Deposits





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 together called (“core
loans”) totaled $4.7 billion at December 31, 2004, or 97% 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 mortgage 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 mortgage 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. 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. All of these credits are considered in market.




3


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 for their use or in an
attempt to improve the value of the property prior to 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, LIBOR
or other indices, or have fixed interest rates generally not longer than 5
years. 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 does not purchase participations in its commercial real
estate loans and commercial and financial loans.
 
 The
Company emphasizes home equity loans in its consumer lending activities. The
Company’s consumer loan portfolio also includes automobile loans, recreational
vehicle loans, manufactured housing loans, boat loans, unsecured consumer loans,
and other miscellaneous loans. 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 Fair Isaacs Company
(“FICO”) scores and other underwriting techniques to evaluate the credit
worthiness of the borrowers for the Company’s consumer loans and
leases.


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
and late fees from the individual customers that maintain balances on their
private label accounts. The Company’s credit card loans primarily bear fixed
interest rates. The average balance outstanding on the Company’s credit card
loans was approximately $900 at December 31, 2004. The Company uses FICO scores
and other underwriting techniques to evaluate the creditworthiness of the
borrowers for its credit card loans. Borrowers for the Company’s private label
credit card loans are credit scored semi-annually. The most recent credit scores
resulted in an average credit score of 707, . New loans approved during 2004 had
average credit scores greater than 740. The Company, in the normal course of
business, does not approve loan applications with credit scores less than 650.
The Company’s total credit card loans were $400.7 million at December 31,
2004.





Deposits





The
Company classifies its deposits into non-interest bearing; NOW; savings; money
market deposit accounts (“MMDA”); and time deposit categories. Deposits
consisting of non-interest bearing; NOW; savings; and MMDA accounts totaled $4.5
billion at December 31, 2004, 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 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
public sector deposits are generally secured at the depositor’s request by a
portion of the Company’s investment securities portfolio.





Changes
in Asset Size in Recent Years





The
Company’s total assets at December 31, 2004 were $9.1 billion, which represented
an increase in its total assets from the prior year, which were $8.1 billion at
December 31, 2003. This increase was primarily due to increases in investment
securities of $832.7 and core loans of $208.6 million. The increase in
investment securities in 2004 was partly due to purchases made in connection
with an increase in deposits and borrowings. The increase in commercial,
commercial real estate and credit card loans in 2004 reflected the Company’s
focus on its major loan categories. The Company’s total assets at December 31,
2003 were $8.1 billion, which represented an increase in its total assets from
the prior year, which were $7.7 billion at December 31, 2002. This increase was
due to increases in investment securities of $89.7 million and core loans of
$426.8 million; partially offset by a decrease in residential mortgages of
$106.6 million. The increase in investment securities in 2003 was partly due to
purchases made in connection with an increase in deposits and borrowings. The
increase in





4


commercial,
commercial real estate and consumer loans in 2003 reflected the Company’s focus
on its major loan categories and the acquisition of the Flatiron insurance
premium finance business in October 2003. The Flatiron acquisition added $248.4
million in commercial and financial loans as of December 31, 2003.





The
Company’s primary focus in 2004 and 2003 was on core business growth. Management
focused on executing its business strategies and in providing superior customer
service.





Proposed
      Merger with Dime Bancorp, Inc. (“Dime”) which was Terminated in
      2000





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, when it was received. 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.





Acquisition
Activity by the Company





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, through its subsidiary Hudson United Bank, acquired Flatiron Credit
Company (“Flatiron”) on October 31, 2003. Flatiron is the seventh largest
insurance premium finance company in the nation. The purchase price of the
acquisition was approximately $40 million in cash based on the estimated book
value of Flatiron on the closing date of the acquisition. The Bank may also be
obligated to make additional earn-out payments, based on the increase in net
income of Flatiron in the next two years after the closing of the acquisition.
The purchase price (excluding any potential earn-out payments) represents a $3.4
million premium to Flatiron’s estimated book value (before acquisition costs),
which were $38.7 million on the closing date. The majority of Flatiron’s loans
are short-term fixed rate loans made to small business customers located
throughout the nation. The loans are secured by the remaining unearned insurance
premiums from the insurance company. At December 31, 2004, the Company recorded
an additional premium of $4.6 million representing the first earn-out payment
which is payable when finalized during 2005. The final earn-out payment , if
any, will be based upon the improvement in financial results for 2005 compared
to 2004.





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.
Subsequently in the fourth quarter of 2003 $1.9 million of the core deposit
intangible was written-off.





5


In
December 2003, the Company terminated its banking business for its correspondent
customers. This business primarily served customers organized in or operating
from South America, Central America and the Caribbean. On June 26, 2002, the
Company acquired this business as part of its assumption of the deposit
liabilities of Connecticut Bank of Commerce from the Federal Deposit Insurance
Corporation as Receiver for Connecticut Bank of Commerce. This business had been
operated out of an office located at 90 Broad Street in New York
City.





On March
2, 2004, Hudson United Bank entered into a complete settlement with the New York
County District Attorney’s Office, related to its investigation of the 90 Broad
Street office. Under the terms of the agreement, the Company agreed to pay $3.5
million to the City of New York and $1.5 million to the District Attorney’s
office for the costs of the investigation. The settlement agreement provides
that the Company will prepare enhanced written policies and procedures and
implement a Company wide compliance training program. The Company, which in the
first quarter of 2004 started to upgrade its BSA/AML compliance program, agreed
to continue its corrective actions. The $5 million was charged against fourth
quarter 2003 results of operations. Further expenses were incurred during 2004
in the amount of $2.7 million related to the terminated correspondent banking
business.





On May
28, 2004, the Bank consented to the issuance of an order to cease and desist
(Order) by the FDIC. The Bank committed to take affirmative action to complete:
an internal assessment of compliance with policies and procedures, an
independent comprehensive written review of the BSA/AML program, establish a
committee of the board of directors that is charged with the responsibility of
ensuring compliance with the provisions of the Order and the BSA plan, designate
a qualified BSA officer to monitor day-to-day compliance, provide appropriate
BSA training, enhance the level of internal and external audits of BSA
compliance, implement an enhanced system of internal processes and controls to
ensure compliance with BSA and implement an enhanced system of internal
processes and controls to ensure compliance with BSA and implement enhanced due
diligence procedures for all high risk accounts that are newly-established,
renewed or modified. The Department of Banking and Insurance of the State of New
Jersey did not participate in the Order.





The
Company entered into agreements at several times in 2004 and 2003 to purchase
third party credit card assets from unaffiliated third parties. The Company paid
total consideration of $67.9 million for $77.3 million of these assets in 2004,
with an associated discount of $10.4 million and an associated premium of $1.0
million. The Company paid total consideration of $19.0 million for $23.0 million
of these assets in 2003, with an associated discount of $4.0
million





Stock
Repurchases by the Company





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.





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.





During
2004, the Company purchased 14,980 treasury shares at an aggregate cost of $0.6
million. During 2004, 103,000 shares were reissued for stock
options.





During
2003, the Company purchased 527.1 thousand treasury shares at an aggregate cost
of $16.5 million. During 2003, the Company reissued 250,000 shares for stock
options.





At
December 31, 2004, there were 44.9 million shares of the Company’s common stock
outstanding.





Other
Subsidiaries





In
addition to Hudson United Bank, the Company directly owns seven 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 Hudson United Capital Trust I, Hudson United Capital Trust II, HUBCO
Capital Trust I, HUBCO Capital Trust II, JBI Capital Trust I, Hudson United
Statutory Trust I and Jefferson Delaware Inc.





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





In 1987,
Hudson United established a directly owned subsidiary called Hendrick Hudson
Corp. Hendrick Hudson Corp. directly owns HUB Mortgage Investments II Inc.,
which was established in 1997 and operates as a real estate investment trust. As
of December 31, 2004, Hendrick Hudson Corp. had $323.1 million of assets other
than its investment in HUB Mortgage Investments II, Inc. As of December 31,
2004, HUB Mortgage Investments II, Inc. had total assets of $4.7 billion.
Included in this total were mortgage-related loans of $1.4 billion and
mortgage-related investment securities of $2.6 billion. These two entities were
established to assist in managing a portion of the Company’s investment
portfolio.





6


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 2005. The Company now provides investment
securities brokerage services to its customers through a business relationship
with an affiliate of John Hancock Insurance.





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.





In 2003,
Hudson United acquired
ownership interests in two companies involved in landfill gas projects (“LGPs”).
These LGPs lease gas rights within landfills and own and operate the equipment
that recovers methane gas and converts the gas to electricity, and generate
revenues by selling the electricity. The Company as the owner of the LGPs is
eligible to receive tax credits under Section 29 of the Internal Revenue Code
(“Section 29 tax credits”), which are available to producers of fuel from
non-conventional sources. These Section 29 tax credits amount to approximately
$9.5 million per year, and are scheduled to expire on December 31, 2007. The
acquisition of the ownership interests was recorded at a value of $19.6 million,
which was approximately equal to the carrying value of the Company’s loan to the
LGPs on the closing date. The difference between the acquisition value and the
net asset value was recorded as a reduction of the carrying value of long lived
equipment. The acquisition occurred in connection with the satisfaction of a
loan the Company had previously made to the prior owner of LGPs. The LGPs or
predecessor entities have been in existence since 1997, and generated net income
for the previous owner of the LGPs in prior years.





In 2003,
Hudson United acquired Flatiron Credit Company, Inc. This subsidiary provides
insurance premium financing and is the seventh largest provider of such service
in the United States. Flatiron Credit Company, Inc. directly owns the following
subsidiaries: FPF, Inc. a Colorado corporation, FPCAL, Inc., a California
corporation and Flatiron Capital Corp., a Texas corporation. Flatiron Credit
Company indirectly owns the following subsidiaries through its direct
subsidiaries: Westchester Premium Acceptance Corporation of California, Inc., a
California corporation, Elite Premium Finance, Ltd, a limited partnership and
Flatiron IPF Trust, a Delaware business trust.





Hudson
United owns six 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, Riverdale Timber Ridge, Inc. and
United Cogen Fuel, LLC.





In 1998,
Hudson United established NJ Investments of Delaware, Inc. This subsidiary was
established to assist in managing a portion of the Company’s investment
portfolio. This company was dissolved after the close of business on December
31, 2004.







The FASB
issued FIN 46,”Consolidation of Variable Interest Entities” as amended in
December 2003. This interpretation provides guidance on how to identify a
variable interest entity and determine when the assets, liabilities,
noncontrolling interests and results of operations are to be included in an
entity’s consolidated financial statements. The Company applied the provisions
of FIN 46 to wholly-owned subsidiary trusts that issued capital trust securities
to third-party investors in 2003 and 2002. For purposes of financial statement
presentation, the Company has deconsolidated the trusts issuing the capital
trust preferred securities and now includes the junior subordinated debentures
under other liabilities on its consolidated balance sheet. This does not have a
material impact on the Company’s operations.







The
Company has no other subsidiaries that are not consolidated into the Company’s
financial statements.





Employee
Relations





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





Regulatory
Matters





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.





7


*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, 2004, 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, 2004, HUB's total risk-based
capital ratio was 13.89% and its Tier 1 risk-based capital ratio was
9.60%.





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, 2004, HUB had a leverage capital ratio of 6.69%.





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 3⁄4 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 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,
2004, 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.





8


*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, 2004 the maximum amount available for distribution to HUB from
Hudson United was $207.4 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. There were
no loans outstanding from Hudson United to HUB at December 31,
2004.





*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.





9







*Legislation*





The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), added new legal requirements
for public companies affecting corporate governance, accounting and corporate
reporting.


The
Sarbanes-Oxley Act provides for, among other things:





•
    a
      prohibition on personal loans made or arranged by the issuer to its
      directors and executive officers (except for loans made by a bank subject
      to Regulation O);•
    independence
      requirements for audit committee members;•
    independence
      requirements for company auditors;•
    certification
      of financial statements on Forms 10-K and 10-Q reports by the chief
      executive officer and the chief financial officer;•
    the
      forfeiture by the chief executive officer and the chief financial officer
      of bonuses or other incentive-based compensation and profits from the sale
      of an issuer’s securities by such officers in the twelve month period
      following initial publication of any financial statements that later
      require restatement due to corporate misconduct;•
    disclosure
      of off-balance sheet transactions;•
    two-business
      day filing requirements for insiders filing Form 4s;•
    disclosure
      of a code of ethics for financial officers and filing a Form 8-K for a
      change in or waiver of such code;•
    the
      reporting of securities violations “up the ladder” by both in-house and
      outside attorneys;•
    restrictions
      on the use of non-GAAP financial measures in press releases and SEC
      filings;•
    the
      formation of a public accounting oversight board;•
    Various increased
      criminal penalties for violations of securities laws; and•
    A
      certification that a company’s internal controls are adequate by the
      company's external auditor.\








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:





·**
    allows
      bank holding companies meeting management, capital and Community
      Reinvestment Act Standards to engage in a substantially broader range of
      nonbanking activities than previously permissible, including insurance
      underwriting and making merchant banking investments in commercial and
      financial companies; if a bank holding company elects to become a
      financial holding company, it files a certification, effective in 30 days,
      and thereafter may engage in certain financial activities without further
      approvals;





·
    allows
      insurers and other financial service companies to acquire
      banks;





·
    removes
      various restrictions previously applied to bank holding company ownership
      of securities firms and mutual fund advisory companies;
  and





10




·
    establishes
      the overall regulatory structure applicable to bank holding companies that
      also engage in insurance and securities
operations.





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.





(b) Industry
Segments


The
Registrant has one industry segment -- commercial banking.





(c) Narrative
Description of Business


HUB
exists primarily to hold the stock of its subsidiaries. At December 31, 2004,
HUB had eight wholly-owned subsidiaries including Hudson United. In addition,
HUB, through Hudson United, indirectly owns 13 additional wholly-owned
subsidiaries. The historical 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, 2004, HUB, through its subsidiaries, had total deposits of $6.3
billion, total loans of $4.8 billion and total assets of $9.1 billion. HUB
ranked third among commercial bank holding companies headquartered in New Jersey
in terms of asset size at December 31, 2004. 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 exchange 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; insurance premium finance; 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.





11


Hudson
United offers a variety of trust services. At December 31, 2004, Hudson United’s
Wealth Management Department had approximately $347.9 million of assets under
management and total trust assets of $575.7 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 1,900 full-time equivalent employees as of December 31,
2004.





(d)
Financial Information about foreign and domestic operations and export sales.


Not
Applicable





(e) Executive
Officers of the Registrant





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








Name, Age and
    
    Executive Officer ofPosition with the Company
    
    the
      CompanySince
    
    Principal PositionRichard
      A. Alban, 46
    
    1999
    
    Senior
      Vice President
      Controller since 1999. Joined Company in 1998Jacques
      Driscoll, 44
    
    2004
    
    Executive
      Vice President, 
      Retail
      Banking since 2004. From 2001 to joining the Company Mr. Driscoll was
      President of Spyglass Creative, a marketing firm. Prior to that Mr.
      Driscoll was Managing Director at John Ryan Company, a marketing and
      design firm from 1998 to 2001.Joined Company in
      2004.James
      Mayo, 64
    
    2000
    
    Executive
      Vice President,  
      Operations
      and Technology since 2000. Prior to that Mr. Mayo was senior account
      manager with ALLTEL Information Services, Inc. from 1996.Joined Company in
      2000.Timothy
      Matteson, 35
    
    2001
    
    Senior
      Vice President  
      General
      Counsel since 2004. Prior to that Counsel at Fleet National Bank from
      1999. Joined Company in 2001






12





Name, Age and
    
    Executive Officer ofPosition with the Company
    
    the
      CompanySince
    
    Principal PositionIrwin
      Nack,42
    
    2004
    
    First
      Senior Vice President
      Director
      of Regulatory Affairs and AML since 2003. Prior to that Investigative
      Counsel with New York State Banking Department from 1995. Joined Company
      in 2004.James
      W. Nall, 56
    
    2003
    
    Executive
      Vice President and
      Chief
      Financial Officer since 2003. Prior to that Mr. Nall was a partner at
      Arthur Andersen LLP from 1985. Joined Company in
      2003.Thomas
      R. Nelson, 60
    
    1994
    
    Executive
      Vice President; Private Label Credit Card. Joined the Company in
      1994.John
      R. Oliver,62
    
    1998
    
    First
      Senior Vice President
      Senior
      Credit Officer since 2003. Prior to that Senior Vice President ,Senior
      Credit Officer from 2001. From 1998 to 2001 Senior Vice President, Manager
      Loan Resolution. Joined Company in 1997Thomas
      J. Shara, 46
    
    1989
    
    Executive
      Vice President and
      Senior
      Loan Officer. Joined the Company in 1981Peter
      Visaggio,49
    
    2004
    
    First
      Senior Vice President
      Director
      of Human Resources since 2004. Prior to that Vice President of Human
      Resources at Crum & Forster Insurance from 2002. Prior to that Sr.
      Human Resources Leader at Metropolitan Life Insurance Co. from 1999.Joined
      Company in 2004





(f) Statistical
Disclosure Required Pursuant to


Securities
Exchange Act, Industry Guide 3





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





Available
Information


The
Company makes available free of charge on or through its website, www.hudsonunitedbank.com , all
materials that it files electronically with the Securities and Exchange
Commission (“SEC”), including its annual report on Form 10-K, quarterly reports
on Form 10Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as soon as reasonably practicable after electronically filing such
materials with, or furnishing them to, the SEC. During the period covered by
this Form 10-K, the Company made all such materials available through its
website as soon as reasonably practicable after filing such materials with the
SEC.





You may
also read and copy any materials filed by the Company with the SEC at the SEC’s
Public Reference Room at 450 Fifth Street. N.W., Washington, D.C. 20549, and you
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, www.sec.gov , that
contains reports, proxy and information statements and other information that
the Company files electronically with the SEC.





13


A copy of
the Company’s Corporate Governance Guidelines, its Code of Business Conduct and
Ethics, and the charters of the Audit Committee, Compensation Committee, and
Nominating and Governance Committee of the Board of Directors are posted on the
Company’s website, www.hudsonunitedbank.com , and are
available in print to any shareholder who requests copies by contacting Miranda
Grimm, Acting Corporate Secretary, at the Company’s principal executive offices
set forth above.





**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 204 branch offices as of December 31, 2004,
of which 89 are owned and 115 are leased. The Company owns two additional
non-branch facilities, in addition to leasing another six.





**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, 2004.





**PART
II**





**ITEM
5.** **MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED**


**STOCKHOLDER
MATTERS**





As of
December 31, 2004, the Company had approximately 7,867 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.








2004
    
    
    2003High
    
    Low
    
    
    High
    
    Low1st
      Quarter
    
    $
    39.82
    
    $
    34.12
    
    $
    32.32
    
    $
    29.802nd Quarter
    
    
    38.30
    
    
    34.95
    
    
    35.36
    
    
    30.833rd
      Quarter
    
    
    37.79
    
    
    33.09
    
    
    40.39
    
    
    34.084th
      Quarter
    
    
    41.64
    
    
    37.75
    
    
    37.56
    
    
    34.26


The
following table shows the per share quarterly cash dividends paid upon the
common stock over the last two years.




2004
    
    
    2003March
    
    $
    0.33
    
    
    March
    
    $
    0.28June
    
    
    0.33
    
    
    June
    
    
    0.30September
    
    
    0.35
    
    
    September
    
    
    0.30December
    
    
    0.35
    
    
    December
    
    
    0.30





Certain
restrictions exist regarding the ability of Hudson United to transfer funds to
the Company in the form of cash dividends, loans or advances. New Jersey state
banking regulations allow for the payment of dividends in any amount provided
that capital stock will be unimpaired and there remains an additional amount of
paid-in capital of not less than 50 percent of the capital stock amount. As of
December 31, 2004, $207.4 million, subject to regulatory capital limitations,
was available for distribution to the Company from Hudson United.




Under
Federal Reserve regulations, Hudson United is limited as to the amounts it may
loan to its affiliates, including the Company. All such loans are required to be
collateralized by specific assets.





14


**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.





Reference
should be made to “Proposed Merger with Dime Bancorp, Inc.(“Dime”) which was
terminated in 2000 and “Acquisition Activity by the Company”. for a discussion
of recent acquisitions that affect the comparability of the information
contained in this table.




2004
    
    2003
    
    2002
    
    2001
    
    2000Net
      Interest Income
    
    $
    315,652
    
    $
    299,258
    
    $
    300,757
    
    $
    285,366
    
    $
    319,726Provision
      for Loan and Lease Losses
    
    
    14,850
    
    
    26,000
    
    
    51,333
    
    
    34,147
    
    
    24,000Net
      Income
    
    
    128,083
    
    
    112,321
    
    
    123,206
    
    
    94,461
    
    
    49,821Per
      Share Data(1) Earnings Per Share:
      Basic
    
    
    2.86
    
    
    2.51
    
    
    2.73
    
    
    2.02
    
    
    0.93Diluted
    
    
    2.85
    
    
    2.50
    
    
    2.72
    
    
    2.00
    
    
    0.92Cash
      Dividends - Common
    
    
    1.36
    
    
    1.18
    
    
    1.10
    
    
    1.01
    
    
    0.93Balance Sheet Totals (at
      or for the year ended December 31):Total
      Assets
    
    
    9,079,042
    
    
    8,100,658
    
    
    7,654,261
    
    
    6,999,535
    
    
    6,817,226Long
      Term Debt
    
    
    374,010
    
    
    368,750
    
    
    402,553
    
    
    248,300
    
    
    248,300Average
      Assets
    
    
    8,594,976
    
    
    7,945,700
    
    
    7,216,121
    
    
    6,710,167
    
    
    8,207,384Average
      Deposits
    
    
    6,226,083
    
    
    6,154,645
    
    
    6,150,184
    
    
    5,825,107
    
    
    5,901,510Average
      Equity
    
    
    491,803
    
    
    437,487
    
    
    409,838
    
    
    378,647
    
    
    464,860


(1)
    Per
      share data is adjusted retroactively to reflect a 10% stock dividend paid
      December 1, 2000.










Cautionary
Statement Regarding Forward-Looking Information





This Form
10-K 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, unexpected changes in interest rates,
deterioration in economic conditions, phase out of Section 29 credits due to
increased oil prices, declines in deposit or a decline in loan volume trends,
decline in levels of loan quality, change in the trend in loan loss provisions,
the unexpected unavailability of tax credits, especially the Company’s Section
29 credits, and the unanticipated effects of legal, tax and regulatory
provisions applicable to the Company. The Company assumes no obligation for
updating any such forward-looking statements at any time.





15


ITEM 7 Management’s Discussion and
Analysis of Financial Condition and Results of
Operations





Results
of Operations for the Years


Ended
December 31, 2004, 2003 and 2002




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





The
Company had record net income of $128.1 million in 2004.Diluted earnings per
share of $2.85 for 2004 represents a 14% increase compared to $2.50 per diluted
share reported in 2003.





The
Company had net income of $112.3 million or $2.50 per Diluted share in 2003. In
2002, the Company had net income of $123.2 million or $2.72 per fully diluted
share. Earnings for 2002 include the $77 million cash payment from Dime Bancorp,
Inc. (“Dime”) on January 7, 2002, representing the final termination payment
relating to the uncompleted merger of the Company and Dime. Earnings for 2002
also include $21.5 million of certain expenses resulting from the merger
dissolution 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.










**Years
      Ended December 31,****2004**
    **2003**
    **2002**Return
      on Average Assets
    1.49%
    1.41%
    1.71%Return
      on Average Equity
    26.04%
    25.67%
    30.06%Common
      Dividend Payout Ratio
    47.73%
    47.03%
    40.77%Average
      Stockholders’ Equity to
      Average
      Assets Ratio
    5.72%
    5.51%
    5.68%










16




**Average
Balances, Net Interest Income, Yields, and Rates**


**(Net
interest income is on a tax equivalent basis, see footnotes
below)**




Years Ended December 31,**2004**
    
    
    **2003**
    
    
    **2002****($
      000)Assets**
    
    **Average
      Balance**
    
    **Interest**
    
    **Yield/**
      **Rate**
    
    
    **Average
      Balance**
    
    **Interest**
    
    **Yield/**
      **Rate**
    
    
    **Average
      Balance**
    
    **Interest**
    
    **Yield/**
      **Rate**Interest
      bearing due from banks
    
    $
    47,211
    
    $
    492
    
    
    1.04
    %
    
    $
    56,127
    
    $
    423
    
    
    0.75
    %
    
    $
    —
    
    $
    —
    
    
    —Securities-taxable(1)
    
    
    3,195,744
    
    
    139,009
    
    
    4.35
    %
    
    
    2,926,670
    
    
    120,891
    
    
    4.13
    %
    
    
    2,222,928
    
    
    125,521
    
    
    5.65
    %Securities-tax
      exempt (2)
    
    
    49,367
    
    
    1,644
    
    
    3.33
    %
    
    
    50,836
    
    
    2,343
    
    
    4.61
    %
    
    
    38,030
    
    
    1,762
    
    
    4.63
    %Loans
      (3)
    
    
    4,700,573
    
    
    277,048
    
    
    5.89
    %
    
    
    4,333,435
    
    
    274,569
    
    
    6.34
    %
    
    
    4,287,200
    
    
    306,487
    
    
    7.15
    %Total
      Earning Assets
    
    $
    7,992,895
    
    $
    418,193
    
    
    5.23
    %
    
    $
    7,367,068
    
    $
    398,226
    
    
    5.41
    %
    
    $
    6,548,158
    
    $
    433,770
    
    
    6.62
    %Cash
      and due from banks
    
    
    196,028
    
    
    
    
    
    
    
    
    
    199,931
    
    
    
    
    
    
    
    
    
    274,759Allowance
      for loan losses
    
    
    (66,765
    )
    
    
    
    
    
    
    
    
    (69,566
    )
    
    
    
    
    
    
    
    
    (71,900
    )Premises
      and equipment
    
    
    123,092
    
    
    
    
    
    
    
    
    
    98,394
    
    
    
    
    
    
    
    
    
    107,291Other
      assets
    
    
    349,726
    
    
    
    
    
    
    
    
    
    349,873
    
    
    
    
    
    
    
    
    
    357,813**Total
      Assets**
    
    $
    8,594,976
    
    
    
    
    
    
    
    
    $
    7,945,700
    
    
    
    
    
    
    
    
    $
    7,216,121
 **Liabilities and Stockholders' Equity**NOW
      accounts
    
    $
    834,273
    
    $
    4,714
    
    
    0.57
    %
    
    $
    687,710
    
    $
    2,575
    
    
    0.37
    %
    
    $
    643,872
    
    $
    4,785
    
    
    0.74
    %Savings
      accounts
    
    
    1,182,705
    
    
    2,207
    
    
    0.19
    %
    
    
    1,248,971
    
    
    4,849
    
    
    0.39
    %
    
    
    1,286,822
    
    
    12,910
    
    
    1.00
    %Money
      market accounts
    
    
    1,152,206
    
    
    12,316
    
    
    1.07
    %
    
    
    1,197,033
    
    
    13,121
    
    
    1.10
    %
    
    
    1,096,161
    
    
    20,495
    
    
    1.87
    %Time
      deposits
    
    
    1,741,619
    
    
    31,369
    
    
    1.80
    %
    
    
    1,746,370
    
    
    36,874
    
    
    2.11
    %
    
    
    1,922,040
    
    
    59,617
    
    
    3.10
    %Total
      Interest-Bearing Deposits
    
    $
    4,910,803
    
    $
    50,606
    
    
    1.03
    %
    
    $
    4,880,084
    
    $
    57,419
    
    
    1.18
    %
    
    $
    4,948,895
    
    $
    97,807
    
    
    1.98
    %Borrowings
    
    
    1,391,095
    
    
    23,044
    
    
    1.66
    %
    
    
    900,576
    
    
    13,888
    
    
    1.54
    %
    
    
    212,513
    
    
    6,517
    
    
    3.07
    %Long-term
      debt
    
    
    374,164
    
    
    25,132
    
    
    6.72
    %
    
    
    378,600
    
    
    23,566
    
    
    6.22
    %
    
    
    349,432
    
    
    24,922
    
    
    7.13
    %Total
      Interest-Bearing Liabilities
    
    $
    6,676,062
    
    $
    98,782
    
    
    1.48
    %
    
    $
    6,159,260
    
    $
    94,873
    
    
    1.54
    %
    
    $
    5,510,840
    
    $
    129,246
    
    
    2.35
    %Demand
      deposits
    
    
    1,315,280
    
    
    
    
    
    
    
    
    
    1,274,562
    
    
    
    
    
    
    
    
    
    1,201,289Other
      liabilities
    
    
    111,831
    
    
    
    
    
    
    
    
    
    74,391
    
    
    
    
    
    
    
    
    
    94,154Stockholders'
      equity
    
    
    491,803
    
    
    
    
    
    
    
    
    
    437,487
    
    
    
    
    
    
    
    
    
    409,838**Total
      Liabilities and Stockholders’ Equity**
    
    $
    8,594,976
    
    
    
    
    
    
    
    
    $
    7,945,700
    
    
    
    
    
    
    
    
    $
    7,216,121**Net
      Interest Income**
    
    
    
    
    $
    319,411
    
    
    
    
    
    
    
    
    $
    303,353
    
    
    
    
    
    
    
    
    $
    304,524**Net
      Interest Margin (4)**
    
    
    
    
    
    
    
    
    4.00
    %
    
    
    
    
    
    
    
    
    4.12
    %
    
    
    
    
    
    
    
    
    4.65
    %




(1)
    The
      tax equivalent adjustments for the years ended December 31, 2004, 2003 and
      2002 were $389, $397 and $0, respectively, and are based on a federal tax
      rate of 35% for the Company’s investment in preferred stock of government
      sponsored entities.
 
 (2)
    The
      tax equivalent adjustments for the years ended December 31, 2004, 2003 and
      2002 were $573, $820 and $837, respectively, and are based on a federal
      tax rate of 35%.
 
 (3)
    The
      tax equivalent adjustments for the years ended December 31, 2004, 2003 and
      2002 were $2,797, $2,878 and $2,930, respectively, and are based on a
      federal tax rate of 35%. Average loan balances include nonaccrual loans
 
 (4)
    Represents tax equivalent net interest
      income divided by interest-earning assets.





17





***The(
following table presents the relative contribution of changes in volumes and
changes in rates to changes in net interest income for the periods indicated.
The change in interest income and interest expense attributable to the combined
impact of both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate (in
thousands):***




Changes
      in Taxable Equivalent Net Interest Income-Rate/Volume
Analysis******Increase/(Decrease)**
    
    **Increase/(Decrease)****2004
      over 2003**
    
    **2003
      over 2002**For
      the Years Ending December 31,
    
    **Volume**
    
    **Rate**
    
    **Total**
    
    **Volume**
    
    **Rate**
    
    **Total**Loans
    
    $
    23,262
    
    $
    (20,783
    )
    $
    2,479
    
    $
    3,305
    
    $
    (35,223
    )
    $
    (31,918
    )Securities-taxable
    
    
    11,115
    
    
    7,003
    
    
    18,118
    
    
    39,738
    
    
    (44,368
    )
    
    (4,630
    )Securities-tax
      exempt
    
    
    (68
    )
    
    (631
    )
    
    (699
    )
    
    593
    
    
    (12
    )
    
    581Interest
      bearing due from banks
    
    
    (67
    )
    
    136
    
    
    69
    
    
    423
    
    
    —
    
    
    423Total
      interest income
    
    $
    34,242
    
    $
    (14,275
    )
    $
    19,967
    
    $
    44,059
    
    $
    (79,603
    )
    $
    (35,544
    )NOW
    
    $
    549
    
    $
    1,590
    
    $
    2,139
    
    $
    326
    
    $
    (2,536
    )
    $
    (2,210
    )Savings
    
    
    (257
    )
    
    (2,385
    )
    
    (2,642
    )
    
    (380
    )
    
    (7,681
    )
    
    (8,061
    )Money
      market
    
    
    (491
    )
    
    (314
    )
    
    (805
    )
    
    1,886
    
    
    (9,260
    )
    
    (7,374
    )Time
      deposits
    
    
    (100
    )
    
    (5,405
    )
    
    (5,505
    )
    
    (5,449
    )
    
    (17,294
    )
    
    (22,743
    )Short-term
      borrowings
    
    
    7,564
    
    
    1,592
    
    
    9,156
    
    
    21,100
    
    
    (13,729
    )
    
    7,371Long-term
      debt
    
    
    (276
    )
    
    1,842
    
    
    1,566
    
    
    2,080
    
    
    (3,436
    )
    
    (1,356
    )Total
      interest expense
    
    $
    6,989
    
    $
    (3,080
    )
    $
    3,909
    
    
    19,563
    
    $
    (53,936
    )
    $
    (34,373
    )Net
      Interest Income
    
    $
    27,253
    
    $
    (11,195
    )
    $
    16,058
    
    $
    24,496
    
    $
    (25,667
    )
    $
    (1,171
    )





Net
Interest Income




Net
interest income is the difference between the interest earned on earning assets
and the interest expensed 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 automobile 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 of
non-accrual loans, 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 $319.4 million for 2004 compared to $303.4
million for 2003 and $304.5 million for 2002. The increase in net interest
income in 2004 compared to 2003 was due to a $625.8 million increase in average
interest-earning assets. The decrease in net interest income in 2003 compared to
2002 was attributable to lower yields on variable rate loans and increased
amortization of premiums on investment securities resulting from faster
prepayment speeds, which partially offset an increase in average investments and
average loans. The decrease in interest income was offset in part by lower
interest expense on deposits in 2003 as compared to 2002.




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 4.00% in
2004 compared to 4.12% in 2003 and 4.65% in 2002. The decrease in the net
interest margin in 2004 compared to 2003 resulted primarily from an increase in
the investment securities portfolio funded with FHLB borrowings and repurchase
agreements and a decline in market interest rates for loans and investment
securities. The 53 basis point decrease in net interest margin in 2003 from 2002
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 2003.




18


Provision
for Loan and Lease Losses




The
provision for loan and leases losses was $14.9 million for the full year 2004
compared to $26.0 million for the full year 2003. The decrease was due to lower
levels of nonperforming loans, lower net charge-offs and reduction in net loan
losses for the Company’s consumer loan portfolio. The provision for loan and
lease losses was $26.0 million for the year ended December 31, 2003, compared to
$51.3 million for the year ended December 31, 2002. The decrease was due to
$21.3 million established for the accelerated disposition of certain
non-performing loans in 2002 as well as reduced levels of net loan charge-offs
in the third and fourth quarters of 2003.






Noninterest
Income




Noninterest
income was $156.3 million for 2004, $133.0 million for 2003 and $185.1 million
for 2002. The increase in 2004 compared to 2003 resulted primarily from a full
year of normal income associated with the Company’s landfill gas operations, a
one time cash settlement related to bankruptcy claims related to the Company’s
landfill gas operations in the amount of $4.7 million, a $5.2 million gain from
the sale of the Company’s merchant processing business and $3.8 million in
property sales recorded in 2004. In addition, increases in credit card income
and loan fees were offset in part by decreases in retail service fees and
reduced trading gains. The decrease in 2003 compared to 2002 was due to mainly
to the $77 million Dime merger termination payment received in 2002, offset by
increases in income from the Company’s Shopper’s Charge credit card fee income,
retail service fees, securities gains, investment in landfill gas companies,
trading asset gains and other income in 2003.




Noninterest
Expenses




Noninterest
expense was $283.7 million in 2004, $256.3 million in 2003 and $247.1 million
for 2002. The increase in noninterest expense for 2004 when compared to 2003 was
due primarily to contract modification and settlement charges, severance,
retirement and early vesting of certain benefits together with the Company’s
third quarter modification of its data processing and item processing contracts
and expense from landfill gas investments, which were owned for the full year
2004. The increase in 2003 from 2002 was due primarily to the Company’s
investment in landfill gas companies, increases in salaries and benefit expense,
occupancy expense, amortization of intangibles, outside services-data processing
and litigation resolution, being offset by the $21.5 million of certain expenses
incurred in 2002. These increases in expense were offset in part by declines in
marketing expense, equipment expense and outside services-other in 2003.





Salary
and benefit expense was $115.7 million in 2004, $101.8 million in 2003 and $94.8
million in 2002. The increase in 2004 compared to 2003 resulted mainly from the
above mentioned contract modification and settlement charges of $4.7 million,
severance of $0.9 million, retirement and early vesting of certain benefits of
$6.6 million. The increase in 2003 over 2002 was due primarily to $4.5 million
of charges in the fourth quarter of 2003 relating to executive transition,
replacement of the Company’s medical and dental benefit insurance provider and a
modification of the payroll process.





Equipment
expense was $16.4 million in 2004 as compared to $18.5 million in 2003 and $20.3
million in 2002. The lower expense in 2004 compared to 2003 was due primarily to
lower depreciation expense on technology equipment that resulted from full
depreciation of the fixed asset. The lower expense in 2003 compared to 2002 was
due to the Company’s focused management of capital expenditures and
infrastructure expense.




Outside
services expense was $60.6 million in 2004 as compared to $53.4 million in 2003
and $53.0 million in 2002. The increase in expense for 2004 when compared to
2003 was mainly the result of the third quarter modification of the Company’
data processing and item processing contracts, professional fees related to
Sarbanes-Oxley implementation and expenses resulting from strategic business
reviews. The increase in 2003 compared to 2002 was primarily due to higher legal
expenses in 2003.




Marketing
expense was $6.8 million in 2004, $3.3 million in 2003 and $5.5 million in 2002.
Management continues to focus on cost effective marketing expenditures.
Expenditure levels will vary as conditions and business opportunities change in
the Company’s marketplace.




Amortization
of intangibles was $4.9 million in 2004, $4.3 million in 2003 and $4.0 million
in 2002. The increases in expense was due to the Company’s acquisition of
Flatiron Credit Company, Inc. in 2003.




Other
expenses were $14.3 million for 2004, $14.2 million in 2003 and $23.7 million in
2002. The decrease in 2003 over 2002 was due mainly to the inclusion in 2002 of
$10.4 million of certain expenses related to the Dime termination payment .







19




In 2004,
there were $2.7 million of expenses related to factors related to the resolution
of the Company’s correspondent banking business. These expenses were for legal,
consulting and policy and procedure implementation. In 2003 there were $7.4
million in expenses related to the resolution of the Company’s correspondent
banking business. This total consisted of $5.0 million in settlement fees, $1.9
million in the write-off of the core deposit intangible associated with the
Company’s acquisition of CBC, and $0.5 million in professional fees. In 2002,
there were $8.3 million in expenses related to the Dime termination payment. Of
this amount $4.7 million was an investment banking advisory fee, $1.6 million
was the acceleration of restricted stock expense, $1.1 million was for executive
and other employee bonuses and $0.9 million was for other related expenses.




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
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 $45.3 million in 2004, $37.7 million in
2003 and $64.2 million in 2002. The Company’s effective tax rate was 26.1% in
2004, 24.3% in 2003 and 34.3% in 2002. The increase in the provision for taxes
in 2004 compared to 2003 was due primarily to higher pretax income,
nondeductible compensation expense, partially offset by a full year of section
29 tax credits. The decrease in 2003 over 2002 was due to the Company’s
increased investment in tax advantaged securities; as well as section 29 tax
credits, the tax benefit associated with the closure of certain tax years and
the inclusion in 2002’s income of the Dime merger termination payment offset by
certain expenses. The same factors were the primary reasons for the change in
the effective tax rate for the years discussed. The Company’s effective tax rate
in 2004, 2003 and 2002 was also favorably impacted by the Company’s use of HUB
Mortgage Investments Inc.II 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)




Section
29 Tax Credits




The
section 29 tax credit is reduced and ultimately eliminated as the price of oil
increases. Historically, this has not been a problem, and the section 29 credit
has never been subject to phase out. However, recent dramatic market shifts in
oil prices have raised the possibility of phase out for 2005 and future
years.




Section
29 provides a credit against tax for the production of fuel from a
nonconventional source. IRC § 29(a). The credit is $3.00 multiplied by the
“barrel-of oil equivalent” of qualified fuels sold by the taxpayer to the
unrelated person. IRC § 29(a). The credit amount is indexed for inflation. Each
spring, the IRS publishes the section 29 “inflation adjustment factor” for the
prior year. The inflation adjustment factor for 2003 was 2.1336, which was
published in April 2004. 69 F.R. 18424 (Apr. 7,2004). Thus, the Section 29
credit amount for 2003 was $6.40 per barrel-of-oil equivalent. Thus,
the actual credit amount for the particular qualified fuel produced at any
facility will depend on a number of factors.




As noted
above, the credit phases out if oil prices exceed certain levels. IRC § 29(b).
The amount of the credit is reduced by an amount that bears the same ratio to
the unadjusted amount of the credit as the amount by which the “reference price”
for the calendar year in which the sale occurs exceeds $23.50 bears to $6.00.
IRC § 29(b). The $23.50 and $6 amounts are adjusted for the inflation adjustment
factor as is used to adjust the basic credit amount ( 2.1336 in 2003). As a
result, in 2003, the Section 29 credit would have become subject to phase out at
a reference price in excess of $50.14, and the credit would have been fully
phased out had the reference price been in excess of $62.94.




The range
over which the phase-out occurs is calculated as follows (using 2003 data)
:




Threshold Price = $23.50 x 2.1336
    = $50.14Phase- out Range =$6 x
      2.1336
    = $12.80Total Phase -out
      Price
    =$62.94







The
Actual Credit Amount (“ACA”) for any Reference price (“RP”) between $50.14 and
$64.94 in 2003 would have been calculated from the unadjusted or Base Credit
Amount (“BCA”) as follows:




ACA = BCA *(l=(RP -
      $50.14)/$12.80)


The
reference price is set each year by the IRS based on the IRS’s estimate of the
annual average wellhead price for domestic crude oil. IRC § 29(d)(2)(C). For
2003, the reference price was a modest $27.56. 69 F.R. 18424 (Apr. 7, 2004). The
reference price for 2004 will not be set until Spring 2005. The 2004 reference
price likely will be substantially higher than $27.56, but not high enough to
require any phase out of the Section 29 credit for 2004.




20





Financial
Condition




Total
assets at December 31, 2004 were $9.1 billion, an increase of $1.0 billion from
total assets at December 31, 2003 of $8.1 billion. This increase was mainly due
to a $834.1 million increase in investment securities and a $208.6 million
increase in core loans. Total assets at December 31, 2003 were $8.1 billion
compared to total assets of $7.7 billion at December 31, 2002. This increase was
due to the acquisition of Flatiron Credit Company in October 2003 which
increased loans by $248.9 million, increases in investment securities of $89.7
million, and increases in commercial, commercial mortgage, consumer and credit
card loans of $177.9 million being offset in part by a decrease of $106.6
million in residential mortgage loans. The increase in securities was due
primarily to increased purchases associated with growth in deposits and
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.




Total
liabilities were $8.5 billion at December 31, 2004 and $7.6 billion at December
31, 2003. The increase was due primarily to an $801.2 million increase in
borrowings. Total liabilities at December 31, 2003 were $7.6 billion, an
increase from total liabilities at December 31, 2002 of $7.2 billion. The
increase was primarily due to a $43.7 million increase in deposits; a $451.5
million increase in borrowings; offset in part by decreases of $32.0 million and
$42.5 million in other liabilities and subordinated debt,
respectively.




Total
Stockholders’ Equity was $531.7 at December 31, 2004 and $458.2 at December 31,
2003. The increase was due primarily to net income of $128.1, partially offset
by cash dividends paid of $61.1 million. Total Stockholders’ Equity was $458.2
million at December 31, 2003, an increase of $25.7 million from Stockholders’
Equity of $432.5 million at December 31, 2002. This increase was due primarily
to net income of $112.3 million, partially offset by cash dividends declared and
paid of $52.8 million and purchases of treasury stock of $16.5
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 39% of the total assets of the Company at December 31, 2004
and 33% of the total assets of the Company at December 31,
2003.







The
following tables summarize the composition of the investment securities as of
December 31, 2004 and 2003 (in thousands):


December
      31, 2004EstimatedAmortized
    
    Gross
      Unrealized
    
    MarketCost
    
    Gains
    
    (Losses)
    
    Value**Available
      for Sale**U.S.
      Treasury and Government Agency Obligations
    
    $
    142,644
    
    $
    89
    
    $
    (7
    )
    $
    142,726State
      and Political Subdivisions
    
    
    —
    
    
    —
    
    
    —
    
    
    —Mortgage
      backed securities guaranteed or issued by U.S. Government
      Agencies
    
    
    1,605,564
    
    
    3,490
    
    
    (6,706
    )
    
    1,602,348All
      other mortgage backed securities
    
    
    62,818
    
    
    364
    
    
    (108
    )
    
    63,074Asset
      backed and other debt securities
    
    
    165,478
    
    
    2,704
    
    
    (677
    )
    
    167,505FHLB
      stock
    
    
    45,150
    
    
    —
    
    
    —
    
    
    45,150Other
      securities
    
    
    144,145
    
    
    2,609
    
    
    (930
    )
    
    145,824$
    2,165,799
    
    $
    9,256
    
    $
    (8,428
    )
    $
    2,166,627


21




December
      31, 2003EstimatedAmortized
    
    Gross
      Unrealized
    
    MarketCost
    
    Gains
    
    (Losses)
    
    Value**Available
      for Sale**U.S.
      Treasury and Government Agency Obligations
    
    $
    6,012
    
    $
    31
    
    $
    —
    
    $
    6,043State
      and Political subdivisions
    
    
    39,560
    
    
    514
    
    
    —
    
    
    40,074Mortgage
      backed securities guaranteed or issued by U.S. Government
      Agencies
    
    
    1,478,575
    
    
    6,433
    
    
    (15,157
    )
    
    1,469,851All
      other mortgage backed securities
    
    
    579,136
    
    
    3,488
    
    
    (3,727
    )
    
    578,897Asset
      backed and other debt securities
    
    
    448,546
    
    
    12,060
    
    
    (9,040
    )
    
    451,566FHLB
      stock
    
    
    16,250
    
    
    —
    
    
    —
    
    
    16,250Other
      securities
    
    
    141,429
    
    
    2,175
    
    
    (100
    )
    
    143,504$
    2,709,508
    
    $
    24,701
    
    $
    (28,024
    )
    $
    2,706,185




December
      31, 2004EstimatedAmortized
    
    Gross
      Unrealized
    
    MarketCost
    
    Gains
    
    (Losses)
    
    Value**Held
      to Maturity**U.S.
      Treasury and Government Agency Obligations
    
    $
    73,300
    
    $
    —
    
    $
    (419
    )
    $
    72,881State
      and Political subdivisions
    
    
    65,208
    
    
    —
    
    
    (14
    )
    
    65,194Mortgage
      backed securities guaranteed or issued by U.S. Government
      Agencies
    
    
    1,049,940
    
    
    1,512
    
    
    (7,072
    )
    
    1,044,380All
      other mortgage backed securities
    
    
    178,811
    
    
    458
    
    
    (1,813
    )
    
    177,456Asset
      backed and other debt securities
    
    
    4,969
    
    
    20
    
    
    —
    
    
    4,989$
    1,372,228
    
    $
    1,990
    
    $
    (9,318
    )
    $
    1,364,900




The
following table summarizes trading assets at December 31, 2004 (in
thousands):




**Estimated Market
      Value****Trading Asset
Portfolio**Other
      Equity Securities
    
    $
    1,477Total
    
    $
    1,477






Securities
with a book value of $2,696.1 million and $1,822.9 million at December 31, 2004
and 2003, respectively, were pledged to secure public funds, repurchase
agreements and for other purposes as required by law. The increase was due to
the Company’s increased borrowings and public sector deposits







The
majority of the Company’s mortgage backed securities, and asset backed
securities and other debt securities, are guaranteed by U.S. Agencies or
Government Sponsored Entities (GSEs), or have credit ratings of triple A by one
or more rating agencies. The majority of these assets have fixed interest
rates.







EITF No.
03-1 “The Meaning of Other-Than -Temporary Impairment and Its Application to
Certain Investments” discusses recommendations set forth on the proposed models
for evaluating impairment of equity securities and debt securities. While no
consensus has yet been reached guidelines were given for the quantitative and
qualitative disclosures for debt and marketable equity securities classified as
available for sale or held to maturity. The Company has adopted these guidelines
as of December 31, 2003 and continues to monitor the status of the
recommendations laid forth in EITF No.3-1. The Company monitors the market value
fluctuations of its investment portfolio on a monthly basis as well as
associated credit ratings to determine potential impairment of a security. As of
December 31, 2004, the Company had $81.1 million of securities classified as
“Other-Than-Temporarily Impaired.” These securities are carried at the lower of
cost or fair value. Charges for “Other-Than-Temporarily Impaired” securities
were $13.9 million in 2004. As of December 31, 2003, the Company did not have
any securities classified as “Other-Than-Temporarily-Impaired” and in 2003 the
Company did not have any charges on such securities. As of year-end 2004, 91% of
the Company’s investment portfolio was rated AA or better. The
Company’s investment securities with unrealized losses are considered
temporarily impaired due to interest rate fluctuations that occurred during the
year.







22





The
majority of the Company’s other debt securities are capital trust securities and
other corporate securities of other financial institutions, which are either not
rated by the rating agencies, or have non investment grade credit ratings from
one or more rating agencies. The majority of these assets have fixed interest
rates. Other equity securities also include preferred stocks of GSEs, and common
stocks of other financial institutions.







In the
two tables below, mortgage backed securities backed by government and government
sponsored agencies are included in the U.S. Treasury and other U.S. Government
Agencies and Corporations caption. Other mortgage backed securities are included
in the Asset backed, Other Mortgage Backed and Other Debt Securities caption.
Other securities include both common and preferred stock .







INVESTMENT
SECURITIES PORTFOLIO


Carrying
Value at End of Each Year





As
      of December 31,2004
    
    2003
    
    2002(in
      thousands)U.S.
      Treasury and other U.S. Government Agencies and
    Corporations
    
    $
    2,868,314
    
    $
    1,475,894
    
    $
    1,172,419States
      and Political Subdivisions
    
    
    65,208
    
    
    40,074
    
    
    45,316Asset
      backed, Other Mortgage Backed and Other Debt Securities
    
    
    414,359
    
    
    1,030,463
    
    
    1,248,358Other
      Securities
    
    
    190,974
    
    
    159,754
    
    
    150,359Subtotal
    
    
    3,538,855
    
    
    2,706,185
    
    
    2,616,452Trading
      Assets
    
    
    1,477
    
    
    —
    
    
    —TOTAL
    
    $
    3,540,332
    
    $
    2,706,185
    
    $
    2,616,452








Maturities
and Weighted Average Yield for the Year Ending December 31, 2004 (in
thousands)




MaturingWithin
      One Year
    
    
    After
      One But
      Within
      Five Years
    
    
    After
      Five But
      Within
      Ten Years
    
    
    After
      Ten YearsAmount
    
    Yield
    
    
    Amount
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    YieldU.S.
      Treasury and other U.S. Government Agencies Obligations
    
    $
    —
    
    
    —
    %
    
    $
    142,726
    
    
    4.15
    %
    
    $
    73,300
    
    
    4.51
    %
    
    $
    —
    
    
    —
    %States
      and Political Subdivisions
    
    
    57,281
    
    
    3.12
    
    
    
    6,089
    
    
    5.06
    
    
    
    1,599
    
    
    7.78
    
    
    
    238
    
    
    7.95Mortgage
      Backed securities guaranteed or issued by US Government
      Agencies
    
    
    —
    
    
    —
    
    
    
    61,684
    
    
    3.15
    
    
    
    321,430
    
    
    3.81
    
    
    
    2,269,176
    
    
    4.16All
      Other Mortgage Backed Securities
    
    
    —
    
    
    —
    
    
    
    18
    
    
    9.25
    
    
    
    —
    
    
    —
    
    
    
    241,866
    
    
    5.08Asset
      backed and other debt securities
    
    
    500
    
    
    —
    
    
    
    27,275
    
    
    3.87
    
    
    
    19,947
    
    
    5.39
    
    
    
    125,251
    
    
    6.16Other
      Securities
    
    
    45,184
    
    
    1.56
    
    
    
    51,409
    
    
    3.69
    
    
    
    —
    
    
    —
    
    
    
    93,882
    
    
    5.75TOTAL
    
    $
    102,965
    
    
    2.42
    %
    
    $
    289,201
    
    
    3.85
    %
    
    $
    416,276
    
    
    4.02
    %
    
    $
    2,730,413
    
    
    4.38
    %


Weighted
average yields on tax-exempt obligations have been computed on a fully
tax-equivalent basis assuming a federal tax rate of 35.0 percent. Weighted
average yields on held to maturity and available for sale securities are based
on amortized cost.




Contractual
maturities of the Company’s investment securities may differ from expected
maturities and average lives because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.






23





Loans
and Leases




Loan
Portfolio Distribution of Loans by Category (excludes loans held for
sale)


*( in
thousands)*




(as of December 31,)Loans
      secured byreal
      estate:
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Residential
      mortgage loans
    
    $
    126,775
    
    $
    167,913
    
    $
    274,473
    
    $
    537,055
    
    $
    1,433,697Residential
      home equity loans
    
    
    436,134
    
    
    399,160
    
    
    356,193
    
    
    329,571
    
    
    338,164Commercial
      mortgage loans
    
    
    1,113,604
    
    
    993,937
    
    
    908,910
    
    
    826,151
    
    
    920,397$
    1,676,513
    
    $
    1,561,010
    
    $
    1,539,576
    
    $
    1,692,777
    
    $
    2,692,258Commercial
      and financial loans
    
    
    2,190,339
    
    
    2,137,499
    
    
    1,784,444
    
    
    1,728,793
    
    
    1,891,171Credit
      cards
    
    
    400,700
    
    
    326,713
    
    
    340,173
    
    
    299,295
    
    
    158,922Other
      loans to individuals
    
    
    559,632
    
    
    634,533
    
    
    675,282
    
    
    617,624
    
    
    535,172Total
      Loan Portfolio
    
    $
    4,827,184
    
    $
    4,659,755
    
    $
    4,339,475
    
    $
    4,338,489
    
    $
    5,277,523




Total
loans increased by $167.4 million to $4,827.2 million at December 31, 2004 from
$4,659.8 million at December 31, 2003. The increase was in the commercial,
commercial mortgage and credit card categories. Total loans, excluding
residential mortgages, increased by $208.6 million.





Total
loans increased by $320.3 million to $4,659.8 million at December 31, 2003 from
$4,339.5 million at December 31, 2002. The increase was in the categories of
commercial and financial and commercial mortgages. The acquisition of Flatiron
Credit Company in October 2003 added $248.9 million in commercial and financial
loans to the Company’s loan portfolio.




The
Company continued its emphasis on commercial; commercial mortgage; consumer; and
credit card loans in 2004 and 2003. These loans represented 97.4% of loans at
December 31, 2004; 96.4% of loans at December 31, 2003 and 93.7% of loans at
December 31, 2002.







The
following table shows the maturity of loans outstanding (excluding 1-4 family
residential mortgages and credit cards). Also provided are the amounts
classified according to the sensitivity to changes in interest
rates.


Maturities
and Sensitivity to Changes in Interest Rates as of December 31, 2004 (in
thousands)




(In
      thousands)
    
    MATURINGWithin
      One
      Year
    
    After
      One
      But
      Within
      Five
      Years
    
    After
      Five
      Years
    
    TotalCommercial
      and Financial
    
    $
    1,380,430
    
    $
    417,696
    
    $
    112,371
    
    $
    1,910,497Real
      Estate Construction
    
    
    257,716
    
    
    19,807
    
    
    2,319
    
    
    279,842Commercial
      Mortgage
    
    
    202,990
    
    
    282,592
    
    
    628,022
    
    
    1,113,604Consumer
      Loans
    
    
    463,648
    
    
    262,646
    
    
    269,472
    
    
    995,766TOTAL
    
    $
    2,304,784
    
    $
    982,741
    
    $
    1,012,184
    
    $
    4,299,709








Contractual
maturities of the Company’s loans may differ from expected maturities and
average lives because borrowers and the Company may have the right to call or
prepay loans with or without call or prepayment penalties.








24






SENSITIVITY
      TO CHANGES IN INTEREST RATESAs
      of December 31, 2004Fixed
      Rate
    
    Variable
      RateDue
      Within One Year
    
    $
    406,605
    
    $
    1,898,179Due
      After One But Within Five Years
    
    
    674,558
    
    
    308,183Due
      After Five Years
    
    
    445,576
    
    
    566,608TOTAL
    
    $
    1,526,739
    
    $
    2,772,970







Asset
Quality






One of
the Company's principal earning assets are its loans, which are made primarily
to businesses and individuals located in its four state business area. Inherent
in the lending business is the risk of deterioration in a borrower's ability to
repay loans under existing loan agreements. Other risk elements include the
amount of nonaccrual and past-due loans, the amount of potential problem loans,
industry or geographic loan concentrations, and the level of OREO that must be
managed and disposed of.






Nonaccruing
loans include commercial loans and commercial mortgage loans past due for
payment 90-days or more and are deemed not fully collectable. Consumer loans are
charged off after 120 days and credit card loans are charged off after 180 days.
Residential real estate loans are generally placed on nonaccrual status after
180 days of delinquency. Any loan may be put on nonaccrual status earlier if the
Company has concern about the future collectability of the loan or its ability
to return to current status. The Company believes that the practices it follows
for classifying loans as non-accrual loans are generally consistent with general
practices within the banking industry.




Nonaccrual
real estate mortgage loans are principally loans secured by real estate in the
foreclosure process, including single family residential, multi-family, and
commercial properties.




Nonaccruing
consumer credit loans are loans to individuals. Excluding the credit card
receivables, these loans are principally secured by homes or real
estate.




Renegotiated
loans are loans which were renegotiated as to the term or rate or both to assist
the borrower after the borrower has suffered adverse effects in financial
condition. Terms are designed to fit the ability of the borrower to repay and
the Company's objective of obtaining repayment. The Company has no loans which
are considered renegotiated as of December 31, 2004.




Foreclosed
assets consist of properties on which the Bank has foreclosed or has taken a
deed in lieu of the loan obligation. Included are OREO properties, which are
carried at fair value, net of estimated costs to sell. The cost to maintain the
properties during ownership and any further declines in fair value are charged
to current earnings. The Company has been successful in disposing of OREO
properties, including those acquired in acquisitions.




Foreclosed
assets amounted to $15.6 million at December 31, 2004, $1.0 million at December
31, 2003, and $1.3 million at December 31, 2002. Included in foreclosed assets
at December 31, 2004 was a property with a carrying value of $13.3 million.




Nonperforming
Assets




Nonperforming
assets were $27.9 million at December 31, 2004 compared to $14.2 million at
December 31, 2003 and $16.7 million at December 31, 2002. The increase in
non-performing assets in 2004 compared to 2003 resulted mainly from a default on
a property with a carrying value of $13.3 million which the Company foreclosed
on in November 2004. The amount of interest income on nonperforming loans which
would have been recorded had these loans continued to perform under their
original terms amounted to $1.8 million in 2004, $1.2 million in 2003, and $3.0
million in 2002. The Company recorded no interest income on a cash basis in 2004
and 2003, and $0.9 million in 2002. The Company has no outstanding commitments
to advance additional funds to borrowers whose loans are in a nonperforming
status.




Measures
to control and reduce the level of nonperforming assets are continuing. Efforts
are made to identify slow paying loans and collection procedures are instituted.
After identification, steps are taken to understand the problems of the borrower
and to work with the borrower toward resolving the problem, if practicable.
Continuing collection efforts are a priority for the Company.




25







The
following table summarizes the Company's nonperforming assets at the dates
indicated (in thousands):






**Nonperforming
      Assets (including assets held for sale)**(in
    thousands)
    
    **At
      December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**Nonaccrual
      Loans
    
    $
    12,257
    
    $
    13,217
    
    $
    15,357
    
    $
    44,4691
    
    $
    57,898Total
      Nonperforming Loans
    
    $
    12,257
    
    $
    13,217
    
    $
    15,357
    
    $
    44,469
    
    $
    57,898Foreclosed
      Assets
    
    
    15,618
    
    
    977
    
    
    1,315
    
    
    3,381
    
    
    4,318Total
      Nonperforming Assets
    
    $
    27,875
    
    $
    14,194
    
    $
    16,672
    
    $
    47,850
    
    $
    62,216Ratios:Nonaccrual
      Loans to Total Loans
    
    
    0.25
    %
    
    0.28
    %
    
    0.35
    %
    
    1.02
    %
    
    1.10
    %Nonperforming
      assets to loans and Foreclosed Assets
    
    
    0.58
    
    
    0.30
    
    
    0.38
    
    
    1.10
    
    
    1.18Allowance
      for Loan and Lease Losses to Nonaccrual Loans
    
    
    496
    
    
    513
    
    
    468
    
    
    158
    
    
    164Allowance
      for Loan and Lease Losses to Nonperforming Loans
    
    
    496
    
    
    513
    
    
    468
    
    
    158
    
    
    164





1Includes
$16.2 million of nonperforming loans held for sale at December 31,
2001.
 
 The
following table shows the loans past due 90 days or more and still accruing and
applicable asset quality ratios:
   **As
      of December 31,***( in
      thousands)*
    
    **2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**Commercial
      & financial
    
    $
    1,950
    
    $
    4,107
    
    $
    1,596
    
    $
    2,600
    
    $
    4,293Real
      estate mortgages
    
    
    3,852
    
    
    2,867
    
    
    6,921
    
    
    6,053
    
    
    13,080Consumer
      credits
    
    
    1,492
    
    
    2,228
    
    
    2,269
    
    
    3,287
    
    
    4,034Credit
      cards
    
    
    7,323
    
    
    7,481
    
    
    9,004
    
    
    9,068
    
    
    8,371Total
      Loans Past-Due 90-Days or More and Still Accruing
    
    $
    14,617
    
    $
    16,683
    
    $
    19,790
    
    $
    21,008
    
    $
    29,778As
      a percent of Total Loans
    
    
    0.30
    %
    
    0.36
    %
    
    0.46
    %
    
    0.48
    %
    
    0.56
    %
  The
Company determines the placement of loans into the 90 days past due or more and
still accruing based on management’s determination of the collectability of the
assets and their associated interest, consistent with regulatory
guidelines.
  Allowance
for Loan and Lease Losses
  The
Company considers its allowance for loan and lease losses policy to be a
critical accounting policy. The methodology for assessing the adequacy of the
allowance as well as the components of the allowance includes management’s
subjective judgements on such factors as: economic data, peer comparisons,
trends in criticized loans and the designation of individual loans as requiring
attention. The Company’s policy regarding the allowance for loan and lease
losses is further discussed in Note (1) Summary of Significant Accounting
Policies.
  The
provision for loan and lease losses was $14.9 million for 2004 compared with
$26.0 million in 2003 and $51.3 million in 2002. The decrease in 2004 compared
to 2003 was due to lower levels of delinquent and nonperforming loans over the
course of the year, lower net charge-offs and a reduction in net loan losses for
the Company’s consumer loan portfolio. The decrease in the provision in 2003
compared to 2002 was due to the $21.3 million provision related to accelerated
disposition of loans in 2002 as well as reduced levels of net loan charge-offs
in the third and fourth quarter of 2003.
   Management
formally reviews the loan portfolio, the allowance for loan and lease losses and
the components of the allowance for loan and lease losses on a monthly basis
throughout the year. Such review takes into consideration the Company’s
assessment of the financial condition of the borrowers, and the Company’s
internal risk grading of the borrowers, fair value of the collateral, level of
delinquencies, historical loss experience by loan category, industry trends and
the impact of local and national economic conditions. Management also evaluates
the allowance for loan and lease losses, and the components of the Allowance for
Loan and Lease Losses throughout the year, based on changes in external
conditions and other factors, and makes changes to the Allowance
accordingly







26







The
determination of the adequacy of the Allowance for Loan and Lease Losses (“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. The methodology employed
for assessing the adequacy of the Allowance consists of the following two
criteria:




1.
    The
      establishment of allowance amounts for all specifically identified
      criticized loans, including those arising from business combinations, that
      have been designated as requiring attention by management’s internal loan
      review program.




2.
    The
      establishment of allowances for pools of homogenous types of loans not
      subject to specific review, including 1-4 family residential mortgages,
      consumer loans, and credit card accounts, based upon historical loss
      rates.




An
allocation of the allowance for the non-criticized loans in each portfolio is
determined based upon the historical average loss experience of those
portfolios. Consideration is also given to the changed risk profile brought
about by the aforementioned business combinations, customer knowledge, the
results of ongoing credit quality monitoring processes, the adequacy and
expertise of the Company’s lending work out and collection staffs, underwriting
policies, loss histories, delinquency trends, the cyclical nature of economic
and business conditions and the concentration of real estate related loans
located within the Company’s footprint. Since many of the loans depend upon the
sufficiency of 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:




- regulatory and other examinations




- the
amount and trend of criticized loans




- actual
losses




- peer
comparisons with other financial institutions




- economic
data associated with the real estate market in the Company’s area of
operations




- opportunities to dispose of marginally performing loans for cash
considerations




Based
upon the process employed and giving recognition to all attendant factors
associated with the loan portfolio, management considers the Allowance for Loan
and Lease Losses to be adequate at December 31, 2004. The Company allocated an
immaterial amount of its allowance to off-balance sheet items




27






The
following is a summary of the activity in the allowance for possible loan and
lease losses, by loan category, for the years indicated (in
thousands):





**Allowance for Loan and Lease
      Losses****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**Amount
      of Loans Outstanding at End of Year
    
    $
    4,827,184
    
    $
    4,659,755
    
    $
    4,339,475
    
    $
    4,460,787
    
    $
    5,277,523Daily
      Average Amount of Loans Outstanding
    
    
    4,700,573
    
    
    4,333,434
    
    
    4,287,200
    
    
    4,793,998
    
    
    5,470,763**Allowance
      for Loan and Lease Losses**Balance
      at beginning of year
    
    $
    67,846
    
    $
    71,929
    
    $
    70,046
    
    $
    95,180
    
    $
    98,749Loans
      charged off:Real
      estate mortgages
    
    
    1,184
    
    
    1,427
    
    
    2,420
    
    
    6,851
    
    
    2,847Commercial
      and financial
    
    
    6,051
    
    
    7,825
    
    
    10,505
    
    
    21,323
    
    
    8,778Consumer
      Credit
    
    
    24,385
    
    
    28,214
    
    
    27,155
    
    
    33,517
    
    
    23,781Other
    
    
    5
    
    
    —
    
    
    79
    
    
    67
    
    
    —Accelerated
      disposition
    
    
    —
    
    
    —
    
    
    21,333
    
    
    —
    
    
    —Assets
      held for sale (1)
    
    
    —
    
    
    —
    
    
    —
    
    
    10,147
    
    
    —Total
      loans charged off
    
    $
    31,625
    
    $
    37,466
    
    $
    61,492
    
    $
    71,905
    
    $
    35,406Recoveries:Real
      estate mortgages
    
    
    535
    
    
    928
    
    
    912
    
    
    935
    
    
    772Commercial
      and financial
    
    
    3,592
    
    
    4,412
    
    
    4,636
    
    
    1,625
    
    
    1,822Consumer
      Credit
    
    
    6,135
    
    
    6,905
    
    
    6,412
    
    
    5,255
    
    
    5,243Other
    
    
    161
    
    
    168
    
    
    82
    
    
    98
    
    
    —Total
      recoveries
    
    $
    10,423
    
    $
    12,413
    
    $
    12,042
    
    $
    7,913
    
    
    7,837Net
      loans charged off
    
    
    21,202
    
    
    25,053
    
    
    49,450
    
    
    63,992
    
    
    27,569Provision
      for loan and lease losses - portfolio loans
    
    
    14,850
    
    
    26,000
    
    
    30,000
    
    
    24,000
    
    
    24,000Provision
      for loan and lease losses -
      non-performing
      loans held for accelerated disposition or for sale
    
    
    —
    
    
    —
    
    
    21,333
    
    
    10,147
    
    
    —Loan
      portfolio sales and reclassification of acquired reserves
    
    
    (695
    )
    
    (5,030
    )
    
    —
    
    
    —
    
    
    —Allowance
      acquired through mergers and acquisitions
    
    
    —
    
    
    —
    
    
    —
    
    
    4,711
    
    
    —Balance
      at end of year
    
    $
    60,799
    
    $
    67,846
    
    $
    71,929
    
    $
    70,046
    
    $
    95,180Provision
      for loan and lease losses as a percentage of average loans
      outstanding
    
    
    0.32
    %
    
    0.60
    %
    
    1.20
    %
    
    0.71
    %
    
    0.44
    %Net
      charge offs as a percentage of average loans outstanding
    
    
    0.45
    %
    
    0.58
    %
    
    1.15
    %
    
    1.33
    %
    
    0.50
    %Allowance
      for loan and lease losses as a percentage of loans outstanding at year
      end
    
    
    1.26
    %
    
    1.46
    %
    
    1.66
    %
    
    1.57
    %
    
    1.80
    %


(1)
    The
      writedown of assets held for sale pertains to the planned disposal of
      $16.2 million of nonaccrual loans in 2001.






The
following is the allocation of the allowance for loan and lease losses by loan
category (in thousands):




**Allocation
of the Allowance for Loan and Lease Losses**






**As
      of December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****Allowance**
    
    **Category
      Percent of Loans(%)**
    
    
    **Allowance**
    
    **Category
      Percent of Loans(%)**
    
    
    **Allowance**
    
    **Category Percent of Loans(%**)****
    
    
    **Allowance**
    
    **Category Percent of Loans(%**)****
    
    
    **Allowance**
    
    **Category
      Percent of Loans(%)**Real
      estate mortgages
    
    $
    6,114
    
    
    25.7
    %
    
    $
    6,082
    
    
    24.9
    %
    
    $
    12,350
    
    
    27.3
    %
    
    $
    9,607
    
    
    30.7
    %
    
    $
    23,245
    
    
    44.4
    %Commercial
      and financial
    
    
    26,716
    
    
    45.4
    %
    
    
    26,521
    
    
    45.9
    %
    
    
    19,722
    
    
    41.1
    %
    
    
    32,546
    
    
    41.3
    %
    
    
    42,355
    
    
    36.2
    %Consumer
      Credit
    
    
    25,129
    
    
    28.9
    %
    
    
    35,232
    
    
    29.2
    %
    
    
    35,318
    
    
    31.6
    %
    
    
    27,893
    
    
    28.0
    %
    
    
    28,278
    
    
    19.4
    %Unallocated
    
    
    2,840
    
    
    —
    
    
    
    11
    
    
    —
    
    
    
    4,539
    
    
    —
    
    
    
    0
    
    
    —
    
    
    
    1,302
    
    
    —Total
    
    $
    60,799
    
    
    100
    %
    
    $
    67,846
    
    
    100
    %
    
    $
    71,929
    
    
    100
    %
    
    $
    70,046
    
    
    100.0
    %
    
    $
    95,180
    
    
    100.0
    %





28





Deposits




As of
December 31, 2004, Hudson had 102 branch offices in New Jersey, 34 branch
offices in New York State, 43 branch offices in Connecticut, and 25 branch
offices in Pennsylvania, for a total of 204 branches.




The
following table summarizes deposits at the dates indicated (in
thousands):




**December
      31,****2004**
    
    **2004**
      **%
      of Total**
    
    
    **2003**
    
    **2003**
      **%
      of Total******
    
    
    **2002**
    
    **2002**
      **%
      of Total******Noninterest-bearing
      deposits
    
    $
    1,355,624
    
    
    21.4
    %
    
    $
    1,328,586
    
    
    21.3
    %
    
    $
    1,304,289
    
    
    21.0
    %NOW
      accounts
    
    
    884,139
    
    
    14.0
    %
    
    
    728,708
    
    
    11.7
    %
    
    
    712,004
    
    
    11.5
    %Savings
      deposits
    
    
    1,125,739
    
    
    17.7
    %
    
    
    1,214,998
    
    
    19.4
    %
    
    
    1,231,225
    
    
    19.9
    %MMDA
    
    
    1,119,477
    
    
    17.6
    %
    
    
    1,066,114
    
    
    17.1
    %
    
    
    1,176,004
    
    
    19.0
    %Time
      deposits
    
    
    1,859,219
    
    
    29.3
    %
    
    
    1,904,953
    
    
    30.5
    %
    
    
    1,776,179
    
    
    28.6
    %Total
      Deposits
    
    $
    6,344,198
    
    
    100.0
    %
    
    $
    6,243,359
    
    
    100.0
    %
    
    $
    6,199,701
    
    
    100.0
    %






Total
deposits increased by $100.8 million at December 31, 2004 compared to December
31, 2003. Total deposits increased by $43.7 million at December 31, 2003
compared to December 31, 2002. In December 2003, the Company terminated its
banking business for correspondent customers of CBC. The effect on deposits of
this termination was a decline of approximately $50 million which is reflected
in the Company’s balance sheet as of December 31, 2003. Management has focused
on increasing non-interest bearing and low cost deposits by offering products
designed to bring in balances of this type. Part of the increase in NOW accounts
was from the development of a new deposit account used by the public sector
group to solicit relationships with government units. These accounts include
both an interest-earning component and a non-interest bearing component as
compensation for account services.







The
following table sets forth average deposits and average rates for each of the
years indicated (in thousands).





As
      of December 31,2004
    
    2003
    
    2002Amount
    
    InterestRate
    
    Amount
    
    InterestRate
    
    Amount
    
    InterestRateNoninterest
      bearing demand deposits
    
    $
    1,315,280
    
    
    
    
    $
    1,274,562
    
    
    
    
    $
    1,201,289Interest
      bearing NOW
    
    
    834,273
    
    
    0.57
    %
    
    687,710
    
    
    0.37
    %
    
    643,872
    
    
    0.74
    %Savings
      deposits
    
    
    1,182,705
    
    
    0.19
    %
    
    1,248,971
    
    
    0.39
    %
    
    1,286,822
    
    
    1.00
    %Interest-bearing
      MMDA
    
    
    1,152,206
    
    
    1.07
    %
    
    1,197,033
    
    
    1.10
    %
    
    1,096,161
    
    
    1.87
    %Time
      deposits
    
    
    1,741,619
    
    
    1.80
    %
    
    1,746,370
    
    
    2.11
    %
    
    1,922,040
    
    
    3.10
    %**TOTAL**
    
    $
    6,226,083
    
    
    
    
    $
    6,154,646
    
    
    
    
    $
    6,150,184





Maturities
of certificates of deposit and other time deposits of $100,000 or more issued,
outstanding at December 31, 2004 are summarized as follows:




Time
      Certificates
      of
      Deposit
    
    Other
      Time
      Deposits
      (1)
    
    Total(In
      thousands)3
      months or less
    
    $
    510,517
    
    $
    127,653
    
    $
    638,170Over
      3 through 6 months
    
    
    614,473
    
    
    28,617
    
    
    643,090Over
      6 through 12 months
    
    
    217,503
    
    
    —
    
    
    217,50312
      months and over
    
    
    70,285
    
    
    290,171
    
    
    360,456TOTAL
    
    $
    1,412,778
    
    $
    446,441
    
    $
    1,859,219


(1) Other time deposits consist solely of brokered
certificates of deposit.




29






Borrowings




The
following is a summary of borrowings at December 31, 2004, 2003 and 2002 (in
thousands):




The
following table shows the distribution of the Company's borrowings and the
weighted average interest rates thereon at the end of each of the last three
years. Also provided are the maximum amounts of borrowings and the average
amounts of borrowings as well as weighted average interest rates for the last
three years.








Borrowings
    
    Securities Sold
      Under
      Agreementto
      Repurchase
    
    OtherAt
      December 31:2004
    
    $
    842,893
    
    $
    879,5302003
    
    
    532,485
    
    
    388,7342002
    
    
    134,920
    
    
    334,766Weighted
      average interest
      rate
      at year end:2004
    
    
    1.68
    %
    
    2.33
    %2003
    
    
    0.63
    %
    
    1.84
    %2002
    
    
    1.93
    %
    
    1.38
    %Maximum
      amount outstanding
      at
      any month's end:2004
    
    $
    842,893
    
    $
    1,283,3952003
    
    
    691,679
    
    
    941,2282002
    
    
    142,301
    
    
    334,766Average
      amount outstanding
      during
      the year:2004
    
    $
    564,553
    
    $
    826,5422003
    
    
    365,712
    
    
    534,8652002
    
    
    131,439
    
    
    81,075Weighted
      average interest
      rate
      during the year2004
    
    
    1.07
    %
    
    2.09
    %2003
    
    
    0.87
    %
    
    2.00
    %2002
    
    
    2.18
    %
    
    3.49
    %







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 individuals, businesses and public sector
customers through its branches, ATMs, call center, internet banking capabilities
and marketing efforts of its employees; brokered deposits; cash flow from
interest payments and scheduled principal repayments and prepayments on
investment securities and loans; sales of securities, loans or other assets, 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.









The
Company does not rely on its unsecured credit ratings for borrowing senior debt
to fund its operations in the institutional certificate of deposit market or
debt market. The Company does rely on its unsecured credit ratings for issuing
subordinated debt and capital trust securities to enhance its regulatory capital
ratios, or to replace subordinated debt and capital trust securities from time
to time that the Company has redeemed or repurchased. During 2004, the Company
increased its unsecured line of credit, which expires June 30, 2005, to $40
million with an unaffiliated U.S. bank. This line of credit, which was not
utilized in 2004, is available for general corporate purposes.







30




The Bank
and the Company have obtained credit ratings for certain of its obligations from
Moody’s, Standard and Poor’s and Fitch, which are nationally recognized rating
agencies.




The
Company’s credit ratings are as follows:





Moody’s
    S & P
    FitchBank
    Short-term deposits
    P2
    A2
    F2Long-term
      deposits
    Baa1
    BBB
    BBB+Subordinated
      debt
    Baa3
    BBB-
    BBB-Company
    Subordinated debt
    Not rated
    BB+
    BBB-Capital
      trust securities
    Not rated
    Not rated
    BBB-




Any
downgrading of the Company’s unsecured credit ratings would not cause the
interest rate on any of its subordinated debt or capital trust securities to
increase, or cause the principal amount to be putable by the holders to the
Company.




A
downgrading of the Company’s unsecured credit ratings could make it difficult
for the Company to issue additional subordinated debt or capital trust
securities on attractive terms, if at all.




Capital




Capital
adequacy is a measure of the amount of capital needed to support asset growth,
unanticipated losses, and provide safety for depositors. The regulators
establish minimum capital ratio guidelines for the banking
industry.




The
following table sets forth the regulatory minimum capital ratio guidelines, the
capital ratio guidelines an institution must meet to be considered well
capitalized and the current capital ratios of the Company.









**Regulatory
      Minimum Capital Ratios**
    **Well
      Capitalized Capital Ratios**
    **Company
      Capital Ratios at December 31, 2004**Tier
      1 Leverage Ratio
    4%
    5%
    6.69%Tier
      1 Risk-Based Capital Ratio
    4%
    6%
    9.60%Total
      Risk-Based Capital
    8%
    10%
    13.89%






At
December 31, 2004, 2003, and 2002, the Company exceeded all regulatory capital
guidelines including those for a well-capitalized institution (See Note 24 to
the Consolidated Financial Statements).




The
Company, subject to the approval of the Board of Directors, has paid regular
cash dividends on a quarterly basis. The quarterly cash dividends paid in 2003
and 2004 are detailed in the section “Quarterly Common Stock and Dividend
Information.” The dividend payout ratio, based on cash dividends per share and
diluted earnings per share, was 47.7% for 2004, 47.0% for 2003 and 40.8% for
2002. The increase in the dividend payout ratio in 2003 compared to 2002 was due
to the decline in net income in 2003 as compared to 2002 offset in part by fewer
common shares outstanding .




Subordinated
Debt




In May
2002, the Bank issued $200.0 million aggregate principal amount of subordinated
debentures. The debentures, which mature in 2012, bear interest at a fixed
interest rate of 7.00% per annum payable semi-annually. Proceeds of the above
issuance were used for general corporate purposes including providing Tier 2
capital to Hudson United.







In
September 1996, the Company issued $75.0 million of subordinated debt. The
subordinated debentures bear interest at a fixed rated of 8.20% per annum
payable semi-annually and mature in 2006. The Company repurchased $7.0 million
of this debt during 2002, $37.8 million during 2003 and $5.7 million during
2004. The outstanding balance of this debt is $24.5 million as of December
31,2004.





In
January 1994, the Company issued $25.0 million aggregate principal amount of
subordinated debentures which bore interest at a fixed rate of 7.75% per annum
payable semi-annually. During 2002, the Company repurchased $16.2 million of
this debt. The debentures, matured in January 2004, at which time, the Company
redeemed the debt.





The
Company repurchased $37.8 million of its 8.20% fixed rate subordinated debt due
in September of 2006 in the second quarter of 2003. The debt was repurchased
from an investment banking firm at a price of 115% of par, which resulted in a
premium of $5.7 million and a total transaction value of $44.0 million, which
also included accrued interest. The Company at the same time issued a $45
million, 3.50% fixed rate institutional certificate of deposit due in May of
2008 to the same investment banking firm. The changed terms of the debt
instruments and the present value of the cash flows of the obligations
repurchased and the new obligation issued were not considered to be
substantially different. The effective annual interest cost of the new
obligation issued by the Company is 6.02%. The Company repurchased $5.7 million
of its 8.20% subordinated debt in the third quarter in 2004. The Company
recorded a $0.5 million charge associated with this early retirement.





31


Proceeds
of the above issuances were used for general corporate purposes including
providing Tier I capital to the subsidiary bank. The debt has been structured to
comply with the Federal Reserve Bank rules regarding debt qualifying as Tier 2
capital at the Company.





Junior
Subordinated Debt Associated with Capital Trust Securities





The
Company issued on March 17, 2004, $20 million of capital trust preferred
securities, with a final maturity of March 17, 2034, using Hudson United
Statutory Trust I, a statutory business trust formed under the laws of the State
of Connecticut. The sole asset of the trust, which is the obligor on the Capital
Trust Securities, is $20.6 million principal amount variable rate Junior
Subordinated Debentures due 2034 of the Company. The capital trust preferred
securities have a rate equal to the 3-month LIBOR plus 2.79% adjusting quarterly
at each interest payment date and are callable by the Company on or after March
17, 2009 and any subsequent interest payment date thereafter.








On March
31, 2003, the Company issued $20 million of trust preferred securities, with a
final maturity on April 15, 2033, using Hudson United 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 Capital Trust Securities,
is $20.6 million principal amount at a fixed rate of 6.85% Junior Subordinated
Debentures due 2038 of the Company. The trust preferred securities are callable
at par on April 15, 2008, and have a fixed rate yield of 6.85% until the call
date. Thereafter the yield on this issuance is based on 6-month LIBOR plus
3.30%. The Company issued on March 28, 2003, $15 million of trust preferred
securities, with a final maturity of April 10, 2033, using Hudson United 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 Capital Trust
Securities, is $15.5 million principal amount at a fixed rate of 6.45% Junior
Subordinated Debentures due 2038 of the Company. The trust preferred securities
are callable at par on April 24, 2008, and have a fixed rate yield of 6.45%
until the call date.





In June
1998, the Company placed $50.0 million in aggregate liquidation amount at a
fixed rate 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 assets of the trust, which is the obligor on the Series B Capital
Securities, is $51.5 million principal amount at a fixed rate 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.







On
January 1997, the Company placed $50.0 million in aggregate liquidation amount
at a fixed rate 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 at a fixed rate 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 taxes
is prohibited, treatment as Tier 1 capital is no longer permitted or certain
other contingencies arise. $45.0 million of the 8.98% Capital Securities
remained outstanding as of December 31, 2004.





The five
issues of capital securities have preference over the common securities under
certain circumstances with respect to cash distributions and amounts payable on
liquidation and are guaranteed by the Company. The net proceeds of the offerings
are being used for general corporate purposes and to increase capital levels of
the Company and its subsidiaries. The securities qualify as Tier I capital under
the capital guidelines of the Federal Reserve.




At the
end of the reporting period, there were no known uncertainties that will have or
that are reasonably likely to have a material effect on the Company's liquidity
or capital resources.




The FASB
issued Interpretation No. 46 (“Consolidation of Variable Interest Entities”) in
December 2003. As a consequence of this interpretation the Company now
deconsolidates all of its capital trust issuances and now reports these
issuances in the other liability line on the Company’s balance sheet. On March
1, 2005 the Federal Reserve Bank released its final rule on trust preferred
securities. The final rule retains the bifurcated system of limits on trust
preferred securities: 15% of core capital elements limit for “internationally
active banks” ; 25% of core capital elements for non-internationally active
banks. The final ruling does not have an impact upon the Company







32




The
following is a maturity distribution of outstanding subordinated debt and junior
subordinated debentures associated with capital trust securities, which are
included in the other liability section of the Company’s consolidated balance
sheet at December 31, 2004 (in thousands)




**Year Maturing**
    
    **Year
    Callable**
    
    **Subordinated
      Debt**
    
    **Junior Subordinated
      Debentures**
    
    **Total  ($
      millions)**2006
    
    
    Not
    callable
    
    $
    24,515
    
    $
    —
    
    $
    24,5152012
    
    
    Not
      callable
    
    
    200,669
    
    
    —
    
    
    200,6692027
    
    
    2007
    
    
    
    
    
    46,500
    
    
    46,5002028
    
    
    2008
    
    
    
    
    
    51,500
    
    
    51,5002033
    
    
    2008
    
    
    
    
    
    35,094
    
    
    35,0942034
    
    
    2009
    
    
    
    
    
    20,435
    
    
    20,435$
    225,184
    
    $
    153,529
    
    $
    378,713







The above
schedule includes $1.2 million in deferred issuance costs on the Company’s
junior subordinated debentures.







Interest
and Liquidity rate sensitivity management




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 in order to enhance earnings. Interest rate risk
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.




Liquidity
risk is the risk to earnings or capital that would arise from a bank’s inability
to meet its obligations when they come due, without incurring unacceptable
losses. Liquidity management is a planning process that ensures that the Company
has ample funds from operations; cash flow from interest, payments and principal
repayment of loans and investment securities; proceeds from sales of assets; and
cash flow from increases in deposits from customers to satisfy operational
needs; potential deposit outflows; repayment of borrowings; loan commitments;
and the projected credit needs of its customer base. In addition, the Company
has a number of collateralized borrowing facilities with the Federal Home Loan
Bank and Federal Reserve, primary broker dealers and other sources that are or
can be used as sources of liquidity without having to sell assets to raise cash.




The
Company has an asset/liability management committee, which manages the risks
associated with the volatility of interest rates and the resulting impact on
projected net interest income, net income and capital. The management of
interest rate risk at the Company is performed by: “income simulation analysis”
which analyzes the effects of interest rate changes on net interest income, net
income and capital over specific periods of time and captures the dynamic impact
of interest rate changes on the Company’s mix of assets and
liabilities.




The
Asset/Liability Committee of the Company believes that financial simulation
modeling reasonably estimates the effects and exposure on net interest income to
changes in interest rates. It attempts to measure the degree to which the
interest income and interest expense on certain assets and liabilities which are
directly linked to market indices, such as Fed Funds or the Prime Rate or LIBOR,
may change as market interest rates change. It also attempts to measure the
degree to which interest expense on deposits, which are administered by the
Bank’s management but which need to be generally competitive with the deposit
rates of other banks, may change as market interest rates change, and the degree
to which balances in deposit accounts may change due to changes in administered
rates. It additionally attempts to measure how changes in the composition of the
investment portfolio may change the potential interest income and cash flow of
the Bank, and how hedging instruments such as interest rate derivatives may be
used to change the interest sensitivity of certain assets and liabilities. Net
interest income simulation is designed to address the likely results to net
interest income as a result of interest rate changes and behavioral response of
the components of the balance sheet to those changes. The Market Value of
Portfolio Equity represents the estimated fair values of the net present value
of assets, liabilities, and off-balance sheet items. The estimated fair value of
many loans and other assets, and of deposits and other liabilities, may not be
based on public market prices if markets do not readily exist for trading and
valuing such assets and liabilities.




Financial
modeling is performed under several scenarios including a regulatory interest
rate shock scenario which measures changes in net interest income over the next
twelve months and market value of portfolio equity given instantaneous and
sustained changes in interest rates.




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. 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 does not enter into these
contracts for speculative purposes. The Company’s derivative contracts include
LIBOR indexed interest rate swaps entered into in connection with certain fixed
rate certificates of deposits and with a specified amount of the Company’s fixed
rate borrowings, to effectively convert those fixed rate liabilities into LIBOR
indexed liabilities. The notional amount of the derivative contracts totals $495
million at December 31, 2004.





33


The
derivative contracts hedging the fixed rate certificates of deposit and the
fixed rate borrowings 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.





The
Company’s policies for the use of interest rate derivative contracts, its actual
use of interest rate derivative contracts, and the effectiveness of the interest
rate derivative contracts as hedges are reviewed throughout the year by the
Company’s Asset Liability Committee.






The
following table depicts the Company’s sensitivity to interest rate changes and
the effects on the Market Value of Portfolio Equity as of December 31, 2004
under several scenarios (in thousands).




**Rate
Shock Model**





Basis point rate change
    Net Interest Income
    Effect on Market Value of Portfolio Equity+200 bp
    +1.6%
    -8.9%+100 bp
    +0.8%
    -5.3%-100 bp
    -4.3%
    -2.2%







The
following table illustrates the changes in the Bank’s quarterly net interest
income in 2004. Management believes that the results shown in the following
table indicate that the Company’s use of financial simulation modeling helped it
maintain generally stable net interest income during the year:





Quarter
      Ended
    Net
      Interest Income (millions)March
      31, 2004
    $77.9June
      30, 2004
    78.1September
      30, 2004
    80.0December
      31, 2004
    79.7







Financial
Instruments with Off-Balance Sheet Risk and Concentrations of Credit
Risk




The
Company has no off-balance sheet debt financing or related type
entities.




Unused
commitments include loan origination commitments, which are legally binding
agreements to lend at a specified interest rate for a specified purpose and
lines of credit, which represent loan agreements under which the lender has an
obligation, subject to certain conditions to lend funds up to a particular
amount, whereby the borrower may repay and re-borrow at anytime within the
contractual period. Stand by letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. The Company’s maximum exposure to loss relating to its loan portfolio was
$4.8 billion at December 31, 2004, utilizing the book value of its loan
portfolio less the allowance. The Company’s allowance for loan and lease losses
includes an immaterial amount for off-balance sheet items.




The
Company’s maximum exposure to accounting loss related to the contract amounts of
these financial instruments, assuming they are fully funded at December 31, 2004
and 2003 is as follows:




**2004****(in thousands)**
    
    **Loan
      Origination**
      **Commitments**
    
    **Unused**
      **Lines
      of Credit**
    
    **Stand
      by**
      **Letters
      of Credit**
    
    **Total**Real
      Estate Mortgage
    
    $
    21,226
    
    
    
    
    
    
    
    $
    21,226Home
      Equity Loans
    
    
    
    
    
    426,023
    
    
    
    
    
    426,023Other Consumer Loans
    
    
    39,536
    
    
    1,106,609
    
    
    
    
    
    1,146,145Commercial Loans
    
    
    66,855
    
    
    641,765
    
    $
    78,192
    
    
    786,812Total
    
    $
    127,617
    
    $
    2,174,397
    
    $
    78,192
    
    $
    2,380,206












34





**2003****(in thousands)**
    
    **Loan
      Origination**
      **Commitments**
    
    **Unused**
      **Lines
      of Credit**
    
    **Stand
      by**
      **Letters
      of Credit**
    
    **Total**Real Estate Mortgage
    
    $
    45,572
    
    
    
    
    
    
    
    $
    45,572Home
      Equity Loans
    
    
    
    
    
    411,877
    
    
    
    
    
    411,877Other
      Consumer Loans
    
    
    37,666
    
    
    1,074,774
    
    
    
    
    
    1,112,440Commercial
      Loans
    
    
    48,749
    
    
    641,555
    
    $
    85,441
    
    
    775,745Total
    
    $
    131,987
    
    $
    2,128,206
    
    $
    85,441
    
    $
    2,345,634


The
following table outlines the Company’s contractual obligations as of December
31, 2004 (in thousands):





Contractual
      Obligations
    
    Less than
      one
      year
    
    1 -
      3 years
    
    3 -
      5 years
    
    More
      than 5 years
    
    TotalLong-Term
      Debt
    
    $
    26,505
    
    $
    74,764
    
    $
    48,593
    
    $
    580,733
    
    $
    730,595Operating
      Leases
    
    
    9,566
    
    
    14,592
    
    
    7,828
    
    
    7,936
    
    
    39,922





All of
the Company’s material operating leases are for bank premises.


The
Company’s long-term debt includes the Company’s payments on its junior
subordinated debt (related to its capital trust preferred securities) and
subordinated debt principal, as well as interest payable. As of December 31,
2004, there was $374,515 in principal and $356,080 in interest payments over the
term of the debt.


The
Company makes monthly payments to its data processing service vendors of minimum
amounts based upon levels of transactions and services utilized. These payment
amounts can vary from month to month depending upon certain circumstances.
Actual expense is reflected in the Company’s financial statements and was $33.3
million, $29.7 million and $26.9 million for the years-ended 2004, 2003 and
2002, respectively.





Item 7A.
QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK




See Item
7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations “Interest Rate and Liquidity Sensitivity Management”.




ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The
following are included in this item


Managements
Report on Internal Control Over Financial Reporting


Report of
Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting


Report of
Independent Registered Public Accounting Firm


Consolidated
Balance Sheets at December 31, 2004 and 2003


Consolidated
Statements of Income for each of the years ended December 31, 2004, 2003 and
2002


Consolidated
Statements of Comprehensive Income for each of the years ended December 31,
2004, 2003 and 2002


Consolidated
Statements of Cash Flows for the each of the years ended December 31, 2004, 2003
and 2003


Consolidated
Statements of Changes in Stockholder’s Equity for each of the years ended
December 2004, 2003 and 2002


Notes to
Consolidated Financial Statements


Selected
quarterly financial data of the Company for 2004 and 2003 are reported in “Item
7- Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Selected Quarterly Financial Data”.








35





*Management’s
Report on Internal Control over Financial Reporting*





Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2004. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in *Internal
Control - Integrated Framework* .





Based on
this assessment, management determined that, as of December 31, 2004, the
Company’s internal control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.





Ernst
& Young LLP, the Company’s Independent Registered Public Accounting Firm has
issued an attestation report on management’s assessment of the Company’s
internal controls over financial reporting.





Report on Internal Control over Financial
Reporting




36




**Report
of Independent Registered Public Accounting Firm**
 **The
Board of Directors and Shareholders of Hudson United Bancorp and
Subsidiaries**
 
 We have
audited management's assessment, included in the accompanying Management's
Report on Internal Control over Financial Reporting, that Hudson United Bancorp
and Subsidiaries (the "Company") maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Hudson United
Bancorp and Subsidiaries' management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Because management's assessment
and our audit were conducted to also meet the reporting requirements of Section
112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA),
management's assessment and our audit of Hudson United Bancorp and Subsidiaries'
internal control over financial reporting included controls over the preparation
of financial statements in accordance with the instructions for the preparation
of Consolidated Financial Statements for Bank Holding Companies (Form FRY-9C). A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, management's assessment that Hudson United Bancorp and Subsidiaries
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Hudson United Bancorp and Subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the COSO criteria.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Hudson
United Bancorp and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004 and our report dated March 11, 2005 expressed an unqualified opinion
thereon.
 
 /s/ Ernst
& Young LLP
 
 
 New York,
New York
 
 March 11,
2005


37





**Report
of Independent Registered Public Accounting Firm**








The Board
of Directors and Stockholders of Hudson United Bancorp





We have
audited the accompanying consolidated balance sheets of Hudson United Bancorp
and Subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.








We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.








In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hudson United Bancorp
and Subsidiaries at December 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.








We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Hudson United Bancorp and
Subsidiaries’ internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 11, 2005 expressed an unqualified opinion thereon.








/s/ Ernst
& Young LLP








New York,
New York


March 11,
2005








38


**Hudson
      United Bancorp and Subsidiaries****Consolidated
      Balance Sheets****December
      31,**
    
    **December
      31,***(in
      thousands), except share data*
    
    **2004**
    
    **2003****ASSETS**Cash
      and due from banks non-interest bearing
    
    **$**
    **161,878**
    
    **$**
    **272,636**Interest
      bearing due from banks
    
    
    **99,028**
    
    
    **41,358****TOTAL
      CASH AND CASH EQUIVALENTS**
    
    **$**
    **260,906**
    
    **$**
    **313,994**Investment
      securities available for sale, at market value
    
    **$**
    **2,166,627**
    
    **$**
    **2,706,185**($1,491,084
      and $1,813,247 in market value pledged at December 31, 2004 and December
      31, 2003 Respectively)Investment
      Securities held to maturity, at cost: $1,364,900 market
    value
    
    **$**
    **1,372,228**
    
    **$**
    **—**($1,201,730,
      at cost pledged, at December 31, 2004)Trading
      Assets
    
    **$**
    **1,477**
    
    **$**
    **—******Loans
      and leases: ($345,664 pledged at December 31, 2004)Commercial and financial
    
    **$**
    **2,190,339**
    
    **$**
    **2,137,499**Commercial real estate mortgages
    
    
    **1,113,604**
    
    
    **993,937**Consumer
    
    
    **995,766**
    
    
    **1,033,693**Credit card
    
    
    **400,700**
    
    
    **326,713**Sub-total
    
    **$**
    **4,700,409**
    
    **$**
    **4,491,842**Residential mortgages
    
    
    **126,775**
    
    
    **167,913****TOTAL
      LOANS AND LEASES**
    
    **$**
    **4,827,184**
    
    **$**
    **4,659,755**Less: Allowance for loan and lease losses
    
    
    **(60,799**
    **)**
    
    **(67,846**
    **)****NET
      LOANS AND LEASES**
    
    **$**
    **4,766,385**
    
    **$**
    **4,591,909**Premises
      and equipment, net
    
    
    **121,037**
    
    
    **125,168**Intangibles,
      net of amortization
    
    
    **20,104**
    
    
    **22,664**Goodwill
    
    
    **83,561**
    
    
    **81,068**Investment
      in separate account bank owned life insurance
    
    
    **150,073**
    
    
    **144,126**Other
      assets
    
    
    **136,644**
    
    
    **115,544****TOTAL
      ASSETS**
    
    **$**
    **9,079,042**
    
    **$**
    **8,100,658****LIABILITIES
      ANDSTOCKHOLDERS'
      EQUITY**Deposits:Noninterest bearing
    
    **$**
    **1,355,624**
    
    **$**
    **1,328,586**NOW, money market and savings
    
    
    **3,129,355**
    
    
    **3,009,821**Time deposits
    
    
    **1,859,219**
    
    
    **1,904,952****TOTAL
      DEPOSITS**
    
    **$**
    **6,344,198**
    
    **$**
    **6,243,359**Repurchase
      agreements
    
    
    **842,893**
    
    
    **532,485**Other
      borrowings
    
    
    **879,530**
    
    
    **388,734****TOTAL
      BORROWINGS**
    
    **$**
    **1,722,423**
    
    **$**
    **921,219**Other
      liabilities
    
    
    **255,587**
    
    
    **238,117**Subordinated
      debt
    
    
    **225,184**
    
    
    **239,773****TOTAL
      LIABILITIES**
    
    **$**
    **8,547,392**
    
    **$**
    **7,642,468**Stockholders'
      Equity:Preferred stock, authorized 25,000,000 shares, no shares issued and
      outstanding
    
    **$**
    **—**
    
    **$**
    **—**Common
      stock, no par value;authorized
      103,000,000 shares; 52,186,866 shares issued and 44,982,803 shares
      outstanding December 31, 2004 and 52,186,866shares
      issued and
      44,798,901
      shares outstanding December 31, 2003
    
    
    **92,788**
    
    
    **92,788**Additional paid-in capital
    
    
    **310,102**
    
    
    **311,310**Retained earnings
    
    
    **304,000**
    
    
    **237,046**Treasury
      stock, at cost, 7,204,063 shares December 31, 2004 and 7,387,965 shares
      December 31, 2003
    
    
    **(170,183**
    **)**
    
    **(176,505**
    **)**Effect of Stock Based Compensation
    
    
    **(1,359**
    **)**
    
    **(3,899**
    **)**Accumulated other comprehensive (loss) income
    
    
    **(3,698**
    **)**
    
    **(2,550**
    **)****TOTAL
      STOCKHOLDERS' EQUITY**
    
    **$**
    **531,650**
    
    **$**
    **458,190****TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY**
    
    **$**
    **9,079,042**
    
    **$**
    **8,100,658**




See Notes
to Consolidated Financial Statements.




39





**Hudson
      United Bancorp and Subsidiaries****Consolidated
      Statements of Income****Year
      Ended December 31,***(in
      thousands, except per share data)*
    
    **2004**
    
    **2003**
    
    **2002****INTEREST
      AND FEE INCOME:**Loans
      and leases
    
    **$******
    ******274,251**
    
    **$******
    ******271,691**
    
    **$******
    ******303,558**Investment
      securities
    
    
    **138,802**
    
    
    **120,456**
    
    
    **124,058**Other
    
    
    **1,381**
    
    
    **1,982**
    
    
    **2,387****TOTAL
      INTEREST AND FEE INCOME**
    
    **$******
    ******414,434**
    
    **$******
    ******394,129**
    
    **$******
    ******430,003****INTEREST
      EXPENSE:**Deposits
    
    **$******
    ******50,606**
    
    **$******
    ******57,419**
    
    **$******
    ******97,807**Borrowings
    
    
    **23,045**
    
    
    **12,705**
    
    
    **6,517**Subordinated
      and other debt
    
    
    **25,131**
    
    
    **24,747**
    
    
    **24,922****TOTAL
      INTEREST EXPENSE**
    
    **$******
    ******98,782**
    
    **$******
    ******94,871**
    
    **$******
    ******129,246****NET
      INTEREST INCOME**
    
    **$******
    ******315,652**
    
    **$******
    ******299,258**
    
    **$******
    ******300,757****PROVISION FOR LOAN AND
      LEASE LOSSES,****PORTFOLIO
      LOANS**
    
    
    **14,850**
    
    
    **26,000**
    
    
    **30,000****PROVISION
      FOR LOAN AND LEASE LOSSES,****NON-PERFORMING
      LOANS HELD FOR ACCELERATED DISPOSITION OR SALE**
    
    
    **—**
    
    
    **—**
    
    
    **21,333****TOTAL
      PROVISION FOR LOAN AND LEASE LOSSES**
    
    
    **14,850**
    
    
    **26,000**
    
    
    **51,333****NET
      INTEREST INCOME AFTER PROVISION FOR****LOAN
      AND LEASE LOSSES**
    
    **$******
    ******300,802**
    
    **$******
    ******273,258**
    
    **$******
    ******249,424****NONINTEREST
      INCOME:**Retail
      service fees
    
    **$******
    ******30,628**
    
    **$******
    ******37,812**
    
    **$******
    ******36,895**Credit
      card fee income
    
    
    **31,553**
    
    
    **28,672**
    
    
    **25,214**Loan
      fees
    
    
    **19,075**
    
    
    **13,079**
    
    
    **12,358**ATM
      and debit card fees
    
    
    **6,947**
    
    
    **7,330**
    
    
    **7,552**Separate
      account bank owned life insurance income
    
    
    **5,947**
    
    
    **6,968**
    
    
    **7,783**Trust
      income
    
    
    **3,141**
    
    
    **2,599**
    
    
    **3,079**Income
      From Landfill Investments
    
    
    **26,052**
    
    
    **11,169**
    
    
    **—**Dime
      merger termination payment
    
    
    **—**
    
    
    **—**
    
    
    **77,000**Impairment
      on mortgage related servicing assets
    
    
    **—**
    
    
    (2,004
    )
    
    (2,815
    )Merchant
      processing sale
    
    
    **5,150**
    
    
    **—**
    
    
    **—**Gain
      on sale of premises and equipment
    
    
    **3,654**
    
    
    **417**
    
    
    **318**Trading
      asset gain
    
    
    **1,279**
    
    
    **3,449**
    
    
    **—**Securities
      gains, net
    
    
    **8,887**
    
    
    **5,117**
    
    
    **3,545**Other
      income
    
    
    **14,014**
    
    
    **18,437**
    
    
    **14,193****TOTAL
      NONINTEREST INCOME**
    
    **$******
    ******156,327**
    
    **$******
    ******133,045**
    
    **$******
    ******185,122****NONINTEREST
      EXPENSE:**Salaries
      and benefits
    
    **$******
    ******115,733**
    
    **$******
    ******101,790**
    
    **$******
    ******94,771**Occupancy
      expense
    
    
    **30,968**
    
    
    **30,266**
    
    
    **29,180**Equipment
      expense
    
    
    **16,404**
    
    
    **18,533**
    
    
    **20,327**Deposit
      and other insurance
    
    
    **2,419**
    
    
    **2,233**
    
    
    **2,238**Outside
      services - data processing
    
    
    **33,255**
    
    
    **29,654**
    
    
    **26,939**Outside
      services - other
    
    
    **27,296**
    
    
    **23,725**
    
    
    **26,034**Amortization
      of intangibles
    
    
    **4,911**
    
    
    **4,340**
    
    
    **4,015**Marketing
      expense
    
    
    **6,888**
    
    
    **3,295**
    
    
    **5,513**Telephone
      expense
    
    
    **5,536**
    
    
    **5,850**
    
    
    **6,099**Expenses
      for Landfill Investments
    
    
    **23,308**
    
    
    **14,948**
    
    
    **—**Expenses
      related to Dime termination payment
    
    
    **—**
    
    
    **—**
    
    
    **8,293**CBC
      correspondent bank settlement and related expense
    
    
    **2,662**
    
    
    **7,421**
    
    
    **—**Other
    
    
    **14,326**
    
    
    **14,240**
    
    
    **23,717****TOTAL
      NONINTEREST EXPENSE**
    
    **$******
    ******283,706**
    
    **$******
    ******256,295**
    
    **$******
    ******247,126****INCOME
      BEFORE INCOME TAXES**
    
    **$******
    ******173,423**
    
    **$******
    ******150,008**
    
    **$******
    ******187,420****PROVISION
      FOR INCOME TAXES**
    
    
    **45,340**
    
    
    **37,687**
    
    
    **64,214****NET
      INCOME**
    
    **$******
    ******128,083**
    
    **$******
    ******112,321**
    
    **$******
    ******123,206****NET
      INCOME PER COMMON SHARE:**Basic
    
    **$******
    ******2.86**
    
    **$******
    ******2.51**
    
    **$******
    ******2.73**Diluted
    
    **$******
    ******2.85**
    
    **$******
    ******2.50**
    
    **$******
    ******2.72****WEIGHTED
      AVERAGE SHARES OUTSTANDING:**Basic
    
    
    **44,717**
    
    
    **44,737**
    
    
    **45,159**Diluted
    
    
    **44,944**
    
    
    **44,892**
    
    
    **45,349**


See Notes
to Consolidated Financial Statements.







40







**Hudson
      United Bancorp and Subsidiaries****Consolidated
      Statements of Comprehensive Income***(in
      thousands)*
    
    **2004**
    
    **2003**
    
    **2002****NET
      INCOME**
    
    $
    128,083
    
    $
    112,321
    
    $
    123,206**OTHER
      COMPREHENSIVE INCOME (LOSS), NET OF TAX:**Unrealized
      securities gains (losses) arising during period (tax expense of$1,155
      , tax benefit of $13,683 and tax expenses of $5,712,respectively)
    
    $
    3,484
    
    $
    (25,668
    )
    $
    12,450Unrealized
      (losses) gains on derivative contracts (tax benefits of $0, $2,471,
      $6,740, respectively)
    
    
    —
    
    
    (3,684
    )
    
    (11,221
    )Amortization
      of net unrealized losses arising from the transfer of securities from AFS
      to HTM (tax expense of $487)
    
    
    1,648
    
    
    —
    
    
    —Less:
      reclassification for securities gains (losses) included in net income (tax
      expense of $ 3,382 and tax benefits of $3,652, $2,238,
      respectively)
    
    
    6,280
    
    
    (5,748
    )
    
    (3,241
    )Other
      comprehensive (loss) income
    
    $
    (1,148
    )
    $
    (23,604
    )
    $
    4,470**COMPREHENSIVE
      INCOME**
    
    $
    126,935
    
    $
    88,717
    
    $
    127,676









See Notes
to Consolidated Financial Statements.


41








**Hudson
      United Bancorp and Subsidiaries****Consolidated
      Statements of Stockholders’
Equity**


Shares
    
    Preferred
      Stock
    
    Common
      Stock
    
    Additional
      Paid in Capital
    
    Retained
      Earnings
    
    Treasury
      Stock
    
    Effect
      of Stock Based Compensation Plans
    
    Accumulated
      Other Comprehensive Income (loss)
    
    TotalBalance
      at December 31, 2001
    
    
    45,814,227
    
    
    —
    
    $
    92,796
    
    $
    320,309
    
    $
    104,570
    
    $
    (146,560
    )
    $
    (3,795
    )
    $
    16,584
    
    $
    383,904Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    123,206
    
    
    —
    
    
    —
    
    
    —
    
    
    123,206Cash
      dividends common($1.10 cash paid per share)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (50,232
    )
    
    —
    
    
    —
    
    
    —
    
    
    (50,232
    )Shares
      issued for:
      Stock
      options exercised
    
    
    434,813
    
    
    —
    
    
    —
    
    
    (6,842
    )
    
    —
    
    
    12,250
    
    
    —
    
    
    —
    
    
    5,408Other
      transactions
    
    
    —
    
    
    —
    
    
    (8
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (8
    )Purchase
      of treasury stock
    
    
    (1,303,952
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (37,686
    )
    
    —
    
    
    —
    
    
    (37,686
    )Effect
      of stock based compensation plans
    
    
    78,371
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    2,125
    
    
    1,339
    
    
    —
    
    
    3,464Other
      comprehensive income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    4,470
    
    
    4,470Balance
      at December 31, 2002
    
    
    45,023,459
    
    
    —
    
    $
    92,788
    
    $
    313,467
    
    $
    177,544
    
    $
    (169,871
    )
    $
    (2,456
    )
    $
    21,054
    
    $
    432,526Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    112,321
    
    
    —
    
    
    —
    
    
    —
    
    
    112,321Cash
      dividends common ($1.18 cash paid per share)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (52,819
    )
    
    —
    
    
    —
    
    
    —
    
    
    (52,819
    )Shares
      issued for:
      Stock
      options exercised
    
    
    250,383
    
    
    —
    
    
    —
    
    
    (2,332
    )
    
    —
    
    
    7,778
    
    
    —
    
    
    —
    
    
    5,446Other
      transactions
    
    
    (11,220
    )
    
    —
    
    
    —
    
    
    175
    
    
    —
    
    
    (175
    )
    
    —
    
    
    —
    
    
    —Purchase
      of treasury stock
    
    
    (527,095
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (16,525
    )
    
    —
    
    
    —
    
    
    (16,525
    )Effect
      of stock based compensation plans
    
    
    63,374
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    2,288
    
    
    (1,443
    )
    
    —
    
    
    845Other
      comprehensive (loss)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (23,604
    )
    
    (23,604
    )Balance
      at December 31, 2003
    
    
    44,798,901
    
    
    —
    
    $
    92,788
    
    $
    311,310
    
    $
    237,046
    
    $
    (176,505
    )
    $
    (3,899
    )
    $
    (2,550
    )
    $
    458,190Net
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    128,083
    
    
    —
    
    
    —
    
    
    —
    
    
    128,083Cash
      dividends common ($1.36 cash paid per share)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (61,129
    )
    
    —
    
    
    —
    
    
    —
    
    
    (61,129
    )Shares
      issued for:
      Stock
      options exercised
    
    
    102,932
    
    
    —
    
    
    —
    
    
    (1,208
    )
    
    —
    
    
    3,262
    
    
    —
    
    
    —
    
    
    2,054Purchase
      of treasury stock
    
    
    (14,980
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (561
    )
    
    —
    
    
    —
    
    
    (561
    )Effect
      of stock based compensation plans
    
    
    95,950
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    3,621
    
    
    2,540
    
    
    —
    
    
    6,161Other
      comprehensive (loss)
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (1,148
    )
    
    (1,148
    )Balance
      at December 31, 2004
    
    
    44,982,803
    
    
    —
    
    $
    92,788
    
    $
    310,102
    
    $
    304,000
    
    $
    (170,183
    )
    $
    (1,359
    )
    $
    (3,698
    )
    $
    531,650




See Notes
to Consolidated Financial Statements.










42





**HUDSON
      UNITED BANCORP AND SUBSIDIARES CONSOLIDATED STATEMENT OF CASH 
      FLOWS***For the Years
      Ended December 31, 2004, 2003 and 2002**(in
      thousands)*
    
    2004
    
    2003
    
    2002**CASH
      FLOWS FROM OPERATING ACTIVITIES:**Net
      income
    
    $
    128,083
    
    $
    112,321
    
    $
    123,206Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for possible loan and lease losses
    
    
    14,850
    
    
    26,000
    
    
    51,333Provision
      for depreciation and amortization
    
    
    19,535
    
    
    20,967
    
    
    24,464Amortization
      of security premiums, net
    
    
    5,383
    
    
    27,243
    
    
    4,346Amortization
      of restricted stock
    
    
    6,161
    
    
    845
    
    
    3,464Impairment
      on mortgage servicing assets
    
    
    —
    
    
    2,004
    
    
    2,815Securities
      (gains)
    
    
    (22,829
    )
    
    (5,117
    )
    
    (3,545
    )Trading
      asset (gains)
    
    
    (1,279
    )
    
    (3,449
    )
    
    —Impairment
      on securities
    
    
    13,942(Gain)
      on sale of premises and equipment
    
    
    (3,654
    )
    
    (417
    )
    
    (318
    )Net
      (increase) decrease in assets held for sale
    
    
    (1,477
    )
    
    —
    
    
    —(Increase)
      decrease in other assets
    
    
    (16,227
    )
    
    10,892
    
    
    (64,020
    )Increase
      (decrease) in other liabilities
    
    
    (2,340
    )
    
    (12,135
    )
    
    129,092**NET
      CASH PROVIDED BY OPERATING ACTIVITIES**
    
    $
    140,148
    
    $
    179,154
    
    $
    270,837**CASH
      FLOWS FROM INVESTING ACTIVITIES:**Proceeds
      from sales of investment securities available for sale
    
    $
    1,338,560
    
    $
    1,459,280
    
    $
    768,125Proceeds
      from repayments and maturities of investment securities:Available
      for sale
    
    
    951,260
    
    
    1,555,035
    
    
    701,911Held to maturity
    
    
    345,517
    
    
    —
    
    
    —Purchases
      of investment securitiesAvailable
      for sale
    
    
    (3,378,790
    )
    
    (3,158,831
    )
    
    (1,996,478
    )Held to maturity
    
    
    (87,322
    )
    
    —
    
    
    —Increase
      in loans other than purchases and sales
    
    
    (127,457
    )
    
    (89,185
    )
    
    (109,343
    )Increase
      in loans due to purchases
    
    
    —
    
    
    (5,922
    )
    
    —Payment
      for acquisition of Flatiron Credit Company, net of cash
      acquired
    
    
    —
    
    
    (32,492
    )
    
    —Credit
      card receivables purchased
    
    
    (67,872
    )
    
    (10,148
    )
    
    (62,579
    )Loans
      sold
    
    
    6,003
    
    
    —
    
    
    34,543Proceeds
      from sales of premises and equipment
    
    
    4,386
    
    
    1,395
    
    
    1,287Purchases
      of premises and equipment
    
    
    (11,225
    )
    
    (39,498
    )
    
    (7,135
    )(Increase)
      decrease in foreclosed property
    
    
    (14,641
    )
    
    338
    
    
    2,066**NET
      CASH (USED IN) INVESTING ACTIVITIES**
    
    $
    (
      1,041,581
    )
    $
    (320,028
    )
    $
    (667,603
    )**CASH
      FLOWS FROM FINANCING ACTIVITIES:**Net
      increase (decrease) in demand deposits, NOW and savings
      accounts
    
    $
    146,572
    
    $
    (85,115
    )
    $
    656,218Net
      increase (decrease) in certificates of deposit
    
    
    (45,733
    )
    
    128,773
    
    
    (440,062
    )Net
      increase in borrowings
    
    
    801,204
    
    
    228,586
    
    
    157,720Proceeds
      from issuance of debt securities
    
    
    19,810
    
    
    33,976
    
    
    —Payment
      of debt securities
    
    
    —
    
    
    (25,300
    )
    
    (51,210
    )Proceeds
      from issuance of subordinated debt
    
    
    —
    
    
    —
    
    
    200,000Payment
      of subordinated debt securities
    
    
    (13,872
    )
    
    (37,734
    )
    
    —Cash
      received from exercise or stock options
    
    
    2,054
    
    
    5,446
    
    
    5,400Cash
      dividends paid
    
    
    (61,129
    )
    
    (52,819
    )
    
    (50,232
    )Acquisition
      of treasury stock
    
    
    (561
    )
    
    (16,525
    )
    
    (37,686
    )**NET CASH PROVIDED BY
      FINANCING ACTIVITIES**
    
    $
    848,345
    
    $
    179,288
    
    $
    440,148**INCREASE (DECREASE) IN
      CASH AND CASH EQUIVALENTS**
    
    $
    (53,088
    )
    $
    38,414
    
    $
    43,382**CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR**
    
    
    313,994
    
    
    275,580
    
    
    232,198**CASH
      AND CASH EQUIVALENTS AT END OF YEAR**
    
    $
    260,906
    
    $
    313,994
    
    $
    275,580**SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:**Cash
      paid during the year for-Interest
    
    $
    97,142
    
    $
    97,333
    
    $
    134,177Income
      taxes
    
    
    48,834
    
    
    34,793
    
    
    27,159Fair
      value of assets acquired-Flatiron
    
    
    —
    
    
    259,609
    
    
    —Cash
      Paid (Received) for Flatiron acquisition
    
    
    (1,761
    )
    
    40,000
    
    
    —Liabilities
      assumed-Flatiron
    
    
    —
    
    
    219,609
    
    
    —Additional
      Disclosures:Residential
      mortgage exchange for mortgage-backed securities
    
    
    —
    
    
    —
    
    
    118,012Securities transferred from available for sale to trading
      assets
    
    
    1,477
    
    
    133,457
    
    
    —Securities transferred from available for sale to held to
      maturity
    
    
    1,632,754
    
    
    —
    
    
    —




See Notes
to Consolidated Financial Statements.




43




Notes to
Consolidated Financial Statements
 
 *DECEMBER
31, 2004 (in thousands, except share data* )
 
 **(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  Hudson
United Bancorp (the “Company”) provides a full range of banking services to
individual and corporate customers through its banking subsidiary, Hudson United
Bank (“Hudson United”), with branch locations in New Jersey, Connecticut, New
York and Pennsylvania. The Company is subject to the regulations of certain
Federal and State banking agencies and undergoes periodic examinations by those
agencies.
  **Basis
of Presentation and Consolidation**
  The
consolidated financial statements include the accounts of Hudson United Bancorp
and its subsidiaries.
  During
May 2003, the Company acquired ownership interests in two companies, a wholly
owned company and a 50% owned company, involved in landfill gas projects
(“LGPs”). The Company has included both companies in the consolidated financial
statements from their date of acquisition, the minority interest is included in
other liabilities, income in the “noninterest income” category and expense in
the “noninterest expense” category. All ther subsidiaries are
wholly-owned.
  In
preparing the consolidated financial statements, in accordance with GAAP
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent
liabilities, as of the date of the financial statements and revenues and
expenses for the period. Actual results could differ from those
estimates.
  All
intercompany accounts and transactions are eliminated in
consolidation.
  Certain
amounts from prior years have been reclassified to conform to the current year’s
presentation.
  **Securities**
  The
Company classifies its securities as held to maturity, available for sale and
held for trading purposes. Securities for which the Company has the ability and
positive intent to hold until maturity are classified as held to maturity. These
securities are carried at cost adjusted for amortization of premiums and
accretion of discounts on a method, which is not materially different from the
interest method. Management reviews its intent to hold securities to maturity as
a result of changes in circumstances, including major business
combinations.
  Securities,
which are held for indefinite periods of time, and management intends to use as
part of its asset/liability management strategy, or that may be sold in response
to changes in interest rates, changes in prepayment risk, increases in capital
requirements or other similar factors, are classified as available for sale and
are carried at fair value. Temporary differences between available for sale
securities' amortized cost and fair value are charged/credited directly to other
comprehensive income (loss), net of income taxes. The cost basis of individual
securities is written down to estimated fair value through a charge to earnings
when declines in value below amortized cost are considered to be other than
temporary. This other than temporary impairment is charged to securities gain,
net, on the Company’s financial statements. Securities held for trading purposes
are carried at fair value, with changes in fair value charged/credited directly
to income. Security purchases and sales are recorded on the trade date. The cost
of securities sold is determined on a specific identification
basis.
  **Repurchase
Agreements**
  Securities
purchased and sold under agreements to resell and repurchase are accounted for
as collateralized financing transactions and are carried at contract value plus
accrued interest. It is the policy of the Company to obtain possession or
control of collateral with market value equal to or in excess of principal
amount loaned under resale agreements. Collateral is valued daily, and the
Company may require counter parties to deposit additional collateral when
appropriate.
  **Loans
Held for Sale**
  Mortgages
held for sale are recorded at cost, which approximates market. These mortgages
are typically sold within three months of origination without recourse. Loans
held for sale are carried at lower of cost or market.
  44
  **Loans**
  Loans are
recorded at their principal amounts outstanding except for certain credit card
loans purchased at a discount, which are recorded at a value less than the
principal amount outstanding. Interest income on loans not made on a discounted
basis is credited to income based on principal amounts outstanding at applicable
interest rates. Interest income on consumer credit loans is recorded primarily
using the simple interest method.
  Recognition
of interest on the accrual method is discontinued when a loan, including commercial loans and commercial mortgage loans are past due for
payment 90-days or more and are deemed not fully collectable. Any loan may be
put on nonaccrual status earlier if the Company has concern about the future
collectability of the loan or its ability to return to accrual status. Consumer
loans are charged off after 120 days and credit card loans are charged off after
180 days. Residential real estate loans are generally placed on nonaccrual
status after 180 days of delinquency. A
nonaccrual loan is not returned to an accrual status until all past due payments
are received on a current basis and other factors indicate that collection of
the entire principal and interest is no longer doubtful.
  The net
amount of loan origination fees, direct loan origination costs and loan
commitment fees are deferred and recognized over the estimated life of the
related loans as an adjustment of yield.
  **Allowance
For Loan and Lease Losses**
  The
allowance is maintained at a level believed adequate by management to absorb
probable losses in the loan portfolio. Management's determination of the
adequacy of the allowance is based on an evaluation of the portfolio, past loan
loss experience, current economic conditions, volume, growth and composition of
the loan portfolio and other relevant factors. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. In accordance with
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No.
118," Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure," a loan is deemed impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. These accounting
standards require that the measurement of impairment of a loan be based on one
of the following: the present value of expected future cash flows, net of
estimated costs to sell, discounted at the loan's effective interest rate; a
loan's observable market price; or the fair value of collateral, if the loan is
collateral dependent. If the measure of the impaired loan is less than the
recorded investment in the loan, the Company will establish a valuation
allowance, or adjust existing valuation allowances, with a corresponding charge
or credit to the provision for loan and lease losses. The valuation allowance,
if any, is maintained as part of the allowance for loan and lease losses. The
Company’s process of identifying impaired loans is conducted as part of its
review for the adequacy of the allowance for loan and lease losses.
  While
management uses available information to recognize probable losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions, particularly in the Company’s market areas. Various regulatory
agencies, as an integral part of their examination processes, periodically
review the allowance for loan and lease losses of the Bank. Such agencies may
require additions to the allowance based on their judgments of information
available to them at the time of their examinations.
  **Premises
and Equipment**
  Land,
buildings and furniture, fixtures and equipment are carried at amortized cost.
Depreciation on substantially all buildings and furniture, fixtures and
equipment is provided using the straight-line method. Leasehold improvements and
banking premises are amortized and depreciated over the shorter of the lease
term including renewals or 39 years; furniture and fixtures over 7 years;
machinery, equipment and software are depreciated generally over 5 years and up
to 20 years for landfill gas equipment; and bank owned automobiles are
depreciated over 3 years. Maintenance and repairs are expensed as incurred and
additions and improvements are capitalized.
  **Foreclosed
Assets**
  Foreclosed
assets includes loan collateral that has been formally repossessed. These assets
are transferred to foreclosed assets and recorded at the lower of cost or the
fair value of the properties, less estimated costs to sell. Subsequent
provisions that result from ongoing periodic evaluations of these foreclosed
assets are charged to expense in the period in which they are identified.
Carrying costs, such as maintenance and property taxes, are charged to expense
as incurred.
  **Bank
Owned Life Insurance**
  Separate
account bank owned life insurance, which is recorded separately on the balance
sheet, and general account bank owned life insurance, which is recorded in other
assets, reflect the cash surrender value of the underlying policies. Increases
in the cash surrender value resulting from investment returns net of expenses is
recorded in noninterest income as
 
 
 45
 a
separate line item. Any premium payments or related expenses pertaining to these
policies are reflected in noninterest expenses. At December 31, 2004, the
Company had recorded $179.5 million in bank owned life insurance of which $150.1
million was separate account bank owned life insurance. The assets in the
separate account consist of investment grade rated securities, the majority of
which are Treasuries or Triple A rated mortgage backed securities. The assets in
the separate account are independently managed by Goldman Sachs Asset Management
LP. The Company’s investment equaled its cash surrender value at the end of
2004. The Company made its investment in separate account bank owned life
insurance as part of a plan to manage the long-term cost of employee benefits,
and to do so in a tax efficient manner, and consequently the Company has no
current intention of surrendering its policy. The cash surrender value of the
policy is guaranteed by Sun Life Insurance Company of Canada (“Sun Life”) in the
ordinary course of business. Sun Life does not guarantee the cash surrender
value if the Company were to exchange its policy for a similar policy of a
different insurance carrier rather than surrender it for cash, or if the Company
has undergone a change of control within two years prior to the date of
surrender. The Company would also be subject to increased federal income tax
liability if it were to surrender the policy.
  At
year-end 2003, the Company had recorded $172.0 million in bank owned life
insurance, of which $144.1 million was in separate account bank owned life
insurance.
  **Goodwill**
  Goodwill
resulting from acquisitions under the purchase method of accounting was
amortized on a straight-line basis over periods ranging from five to ten years.
The Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill
and Other Intangible Assets”. Under this standard, separately identifiable
deposit intangibles must continue to be amortized, but goodwill is no longer
amortized.. Goodwill that is determined to be impaired must be written-off when
that determination is made. The Company has not recognized any impairment
charges as a result of the implementation of this standard.
  **Intangibles**
  Intangible
assets resulting from acquisitions under the purchase method of accounting
consist of core deposit intangibles, naming rights and customer intangibles.
Naming rights relate to the Quinnipiac University basketball and hockey arenas,
which are in the process of construction, and have a term of 10 years commencing
upon project completion, which is estimated to occur in 2007. Customer
intangibles resulted from the Company’s acquisition of Flatiron Credit Company
and certain Shoppers Charge merchant relationships. Core deposit intangibles are
being amortized, on a straight-line basis, over the estimated average remaining
lives of such intangible assets. Customer intangibles are being amortized, on a
straight-line basis, over the estimated life of the customer
relationship.
  **Income
Taxes**
  The
Company uses the liability method of accounting for income taxes. Certain income
and expense items are recorded differently for financial reporting purposes than
for Federal income tax purposes, and provisions for deferred taxes are made in
recognition of these temporary differences. A deferred tax valuation allowance
is established if it is more likely than not that all or a portion of the
Company's deferred tax asset will not be realized. Changes in the deferred tax
valuation allowance are reported through charges or credits to the income tax
provision.
  The
Company and its subsidiaries file a consolidated Federal income tax return. Each
subsidiary provides for and settles income taxes with the Company as if they
would have filed on a separate return basis.
  **Treasury
Stock**
  The
Company determines the cost of treasury shares under the weighted-average cost
method.
  **Stock-Based
Compensation**
  The FASB
issued a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” in
December 2004 (SFAS No. 123R),effective July 1, 2005. SFAS No. 123R establishes
standards for the accounting of transactions in which an entity exchanges its
equity instruments for goods and services. SFAS No. 123R also requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based upon the grant-date fair value of the
award. **** The
adoption of this statement will not have a material effect on the Company’s
operations.
  SFAS No.
123 established financial accounting and reporting standards for stock-based
employee compensation plans and allows companies to choose either: 1) a fair
value method of valuing stock-based compensation plans which will affect
reported net income; or 2) to continue following the existing accounting rules
for stock option accounting but disclose what the impact would have been had the
new standard been adopted. Prior to January 1, 2003, the Company elected the
disclosure option of this standard. The Company applied APB
 
 
 46
 Opinion
25 and related Interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized. Had compensation cost been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, the Company’s net income and income
per share would have been reduced to the proforma amounts indicated in Note 15,
Stockholders’ Equity.
  SFAS No.
148 has provided alternative transition methods to SFAS No. 123’s fair value
method of accounting for stock -based employee compensation. The Company has
adopted SFAS No. 148 as of January 1, 2003 and has chosen the prospective method
of transition. The adoption of this standard did not have a material effect on
the Company’s operations.
  **Cash
Equivalents**
  Cash
equivalents include amounts due from banks.
  **Per
Share Amounts**
  Basic
earnings per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per share is computed by dividing net income by the weighted average number of
common shares plus the number of shares issuable upon conversion of any
preferred stock and the incremental number of shares issuable from the exercise
of stock options calculated using the treasury stock method. All per share
amounts have been retroactively adjusted for all stock dividends in applicable
years.
  **Reporting
Comprehensive Income (Loss)**
  SFAS No.
130 established standards for the reporting of comprehensive income (loss)and
its components in a full set of general-purpose financial statements. The
Company has elected to display Consolidated Statements of Income and
Consolidated Statements of Comprehensive Income Loss separately for the
disclosed periods.
  **Disclosures
about Segments of an Enterprise and Related Information**
  SFAS No.
131 requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Hudson United Bancorp, does
not have any reportable segments since the activities of the Company and its
subsidiaries are primarily banking related and none of the quantitative
thresholds are met.
  **Employers’
Disclosures about Pensions and Other Postretirement
Benefits**
  SFAS No.
132 standardized the disclosure requirements for pension and other
postretirement benefits to the extent practicable and requires additional
information on changes in the benefit obligations and fair values of plan
assets. The Company does not currently offer post retirement benefits and has
only a small number of grandfathered retirees of immaterial
amounts.
  **Derivative
Financial Instruments**
  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. 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 does not enter into these
contracts for speculative purposes. These agreements are designated against
specific assets and liabilities. The effectiveness of each hedge is analyzed by
the Company on both an initial and ongoing basis. Under SFAS No.133, the Company
has adopted hedge accounting for these contracts. The current derivative
contracts are utilized to hedge fixed rate certificates of deposit and fixed
rate borrowings and are accounted for as “fair value” hedges using the
“short-cut method” under SFAS No. 133. 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 Company’s adoption of SFAS No. 149, which amends and
clarifies certain provisions of SFAS No. 133, had no material impact on the
Company’s operations.
  47
 
  **Recent
Accounting Standards**
  The FASB
issued a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” in
December 2004 (SFAS No. 123R). SFAS No. 123R establishes standards for the
accounting of transactions in which an entity exchanges its equity instruments
for goods and services. SFAS No. 123R also requires a public entity to measure
the cost of employee services received in exchange for an award of equity
instruments based upon the grant-date fair value of the award. **** The
adoption of this statement did not have a material effect on the Company’s
operations
  The FASB
issued SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and
Disclosure” on December 31, 2002. This pronouncement provides alternative
methods of transition to FAS 123. The Company has adopted FASB No. 148 effective
January 1, 2003. The Company has elected to utilize the prospective method,
which requires that companies apply the recognition provisions of Statement 123
to all employee awards granted, modified, or settled after the beginning of the
fiscal year in which the recognition provisions are first applied. The adoption
of this statement did not have a material effect on the Company’s
operations.
  The FASB
issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and
Hedging Activities” in April 2003. This statement amends and clarifies financial
accounting and reporting for derivative instruments and hedging activities under
FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities”. The adoption of this statement did not have a material effect on
the Company’s operations.
  The FASB
issued SFAS No. 150 “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” in May 2003. This pronouncement
requires that an issuer classify a financial instrument that is within its scope
as a liability. As a result of adoption of this statement the Company
reclassified its capital trust security issuances into the other liability
category on the Company’s consolidated balance sheets. There was no material
impact on the Company’s operations from adoption of this statement.
  The FASB
issued FIN 46,”Consolidation of Variable Interest Entities” as amended in
December 2003. This interpretation provides guidance on how to identify a
variable interest entity and determine when the assets, liabilities,
noncontrolling interests and results of operations are to be included in an
entity’s consolidated financial statements. The Company applied the provisions
of FIN 46 to wholly-owned subsidiary trusts in 2003 and 2002 that issued capital
trust securities to third-party investors. For purposes of financial statement
presentation, the Company has deconsolidated the trusts issuing the capital
trust securities and now includes the junior subordinated debentures under other
liabilities on its consolidated balance sheet. . This does not have a material
impact on the Company’s operations. On March
1, 2005 the Federal Reserve Bank released its final rule on trust preferred
securities. The final rule retains the bifurcated system of limits on trust
preferred securities: 15% of core capital elements limit for “internationally
active banks” ; 25% of core capital elements for non-internationally active
banks.
 
 In
December 2003, the FASB issued a revised FIN46 (“FIN46R”), which attempted to
clarify the guidance in the original interpretation regarding variable interest
entities created after January 31, 2003 and to all variable interest entities
created prior to February 1, 2003 that were considered special-purpose entities,
by further defining special-purpose entities. The adoption of FIN 46R did not
have a material impact upon the Company’s operations.
  EITF No.
03-1 “The Meaning of Other-Than -Temporary Impairment and Its Application to
Certain Investments” was issued in November 2003 and discusses recommendations
set forth on the proposed models for evaluating impairment of equity securities
and debt securities. While no consensus has yet been reached guidelines were
given for the quantitative and qualitative disclosures for debt and marketable
equity securities classified as available for sale or held to maturity. The
Company has adopted these guidelines as of December 31, 2003 and continues to
monitor the status of the recommendations laid forth in EITF
No.3-1.
  The FASB
issued FIN 45, ”Initial Recognition and Measurement of the Liability for a
Guarantor’s Obligations” in September 2004. This interpretation provides
guidance on the obligations of a guarantor under many different circumstances
surrounding the initial recognition and measurement. The Company has applied the
provisions of FIN 45 with no material impact on the Company’s
operations.
  **(2)
BUSINESS COMBINATIONS**
  The
following business combinations were accounted for using the purchase method of
accounting:
  The
Company, through its subsidiary Hudson United Bank, acquired Flatiron Credit
Company (“Flatiron”) on October 31, 2003. The purchase price of the acquisition
was approximately $40 million in cash based on the estimated book value of
Flatiron on the closing date of the acquisition. The Bank may also be obligated
to make additional earn-out
 
 
 48
 payments,
based on the increase in net income of Flatiron in the next two years after the
closing of the acquisition. The purchase price (excluding any potential earn-out
payments) represents a $3.4 million premium to Flatiron’s estimated book value
(before acquisition costs). At December 31, 2004, $4.5 million of additional
goodwill was recorded representing the first earn-out payment which is payable
when finalized during 2005. The final earn-out payment, if any, will be based on
2005 financial results compared to 2004.
  In 2003,
Hudson United acquired ownership interests in two companies involved in landfill
gas projects (“LGPs”). The Company as the owner of the LGPs is eligible to
receive tax credits under Section 29 of the Internal Revenue Code (“Section 29
tax credits”), which are available to producers of fuel from non-conventional
sources. These Section 29 tax credits were $9.4 million for 2004 and $6.3
million for 2003. The Section 29 tax credits, which may be limited or eliminated
based upon a formula tied to the average price of crude oil during each calendar
year, are scheduled to expire on December 31, 2007. The difference between the
acquisition value of $20 million and the net asset value was recorded as a
reduction of the carrying value of long-lived equipment.
  The
Company entered into agreements at several times in 2004 and 2003 to purchase
third party credit card assets from unaffiliated third parties. In 2004, the
Company had paid total consideration of $67.9 million for $77.3 million of these
assets, with an associated discount of $10.4 million and an associated premium
of $1.0 million. In 2003, the Company had paid total consideration of $19.0
million for $23.0 million of these assets, with an associated discount of $4.0
million
  The
Company had $21.5 million in merger related and other expenses 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.
 
 **(3)
CASH AND DUE FROM BANKS**
  The
Company’s subsidiary bank is required to maintain an average reserve balance as
established by the Federal Reserve Board. The amount of the reserve balance
requirement for the reserve computation period, which included December 31,
2004, was approximately $60.5 million.
  **(4)
INVESTMENT SECURITIES**
  The
amortized cost and estimated market value of Investment Securities as of
December 31, are summarized as follows (in thousands):
  December
      31, 2004Amortized
    
    Gross Unrealized
    
    EstimatedCost
    
    Gains
    
    (Losses)
    
    Market Value**Available
      for Sale**U.S.
      Treasury and Government Agency Obligations
    
    $
    142,644
    
    $
    89
    
    $
    (7
    )
    $
    142,726State
      and Political Subdivisions
    
    
    —
    
    
    —
    
    
    —
    
    
    —Mortgage
      backed securities guaranteed or issued by U.S. Government
      Agencies
    
    
    1,605,564
    
    
    3,490
    
    
    (6,706
    )
    
    1,602,348All
      other mortgage backed securities
    
    
    62,818
    
    
    364
    
    
    (108
    )
    
    63,074Asset
      backed and other debt securities
    
    
    165,478
    
    
    2,704
    
    
    (677
    )
    
    167,505FHLB
      stock
    
    
    45,150
    
    
    —
    
    
    —
    
    
    45,150Other
      securities
    
    
    144,145
    
    
    2,609
    
    
    (930
    )
    
    145,824$
    2,165,799
    
    $
    9,256
    
    $
    (8,428
    )
    $
    2,166,627
 
 
 49
  December
      31, 2003Amortized
    
    Gross
      Unrealized
    
    Estimated MarketCost
    
    Gains
    
    (Losses)
    
    Value**Available
      for Sale**U.S.
      Treasury and Government Agency Obligations
    
    $
    6,012
    
    $
    31
    
    $
    —
    
    $
    6,043State
      and Political subdivisions
    
    
    39,560
    
    
    514
    
    
    —
    
    
    40,074Mortgage
      backed securities guaranteed or issued by U.S. Government
      Agencies
    
    
    1,478,575
    
    
    6,433
    
    
    (15,157
    )
    
    1,469,851All
      other mortgage backed securities
    
    
    579,136
    
    
    3,488
    
    
    (3,727
    )
    
    578,897Asset
      backed and other debt securities
    
    
    448,546
    
    
    12,060
    
    
    (9,040
    )
    
    451,566FHLB
      stock
    
    
    16,250
    
    
    —
    
    
    —
    
    
    16,250Other
      securities
    
    
    141,429
    
    
    2,175
    
    
    (100
    )
    
    143,504$
    2,709,508
    
    $
    24,701
    
    $
    (28,024
    )
    $
    2,706,185
  December
      31, 2004Amortized
    
    Gross
      Unrealized
    
    EstimatedCost
    
    Gains
    
    (Losses)
    
    MarketValue**Held
      to Maturity**U.S.
      Treasury and Government Agency Obligations
    
    $
    73,300
    
    $
    —
    
    $
    (419
    )
    $
    72,881State
      and Political subdivisions
    
    
    65,208
    
    
    —
    
    
    (14
    )
    
    65,194Mortgage
      backed securities guaranteed or issued by U.S. Government
      Agencies
    
    
    1,049,940
    
    
    1,512
    
    
    (7,072
    )
    
    1,044,380All
      other mortgage backed securities
    
    
    178,811
    
    
    458
    
    
    (1,813
    )
    
    177,456Asset
      backed and other debt securities
    
    
    4,969
    
    
    20
    
    
    —
    
    
    4,989$
    1,372,228
    
    $
    1,990
    
    $
    (9,318
    )
    $
    1,364,900
  The
amortized cost and estimated market value of investment securities at December
31, 2004, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment
penalties.
 (in
      thousands)
    
    **Amortized
      Cost**
    
    **Estimated
      Market Value****Available
      For Sale Securities**Due
      in one year or less
    
    $
    45,678
    
    $
    45,684Due
      after one year through five years
    
    
    282,130
    
    
    283,112Due
      after five years through ten years
    
    
    342,678
    
    
    341,376Due
      after ten years
    
    
    1,495,313
    
    
    1,496,455Total
    
    $
    2,165,799
    
    $
    2,166,627
  (in
      thousands)
    
    
    **Amortized
      Cost**
    
    
    **Estimated
      Market Value****Held
      to Maturity Securities**Due
      in one year or less
    
    $
    57,281
    
    $
    57,268Due
      after one year through five years
    
    
    6,089
    
    
    6,089Due
      after five years through ten years
    
    
    74,900
    
    
    74,480Due
      after ten years
    
    
    1,233,958
    
    
    1,227,063Total
    
    $
    1,372,228
    
    $
    1,364,900
  
 50
  Sales of
securities for the years ended December 31, are summarized as follows (in
thousands):
  **2004**
    
    **2003**
    
    **2002**Proceeds
      from sales
    
    $
    1,338,560
    
    $
    1,459,280
    
    $
    768,125Gross
      gains from sales
    
    
    23,946
    
    
    12,583
    
    
    8,029Gross
      losses from sales
    
    
    (1,117
    )
    
    (7,466
    )
    
    (4,484
    )
  Realized
gains and losses on the sales of investment securities are determined using the
specific identification method. The Company incurred $13.9 million of impairment
charges for securities with losses classified as other than temporarily
impaired. These charges are included on the Company’s financial statements for
the year ended December 31, 2004 under security gains, net.
  The
following table represents the Company’s 122 investment securities that are
temporarily impaired as of December 31, 2004:
  Less
      than one year
      Fair
      Value
    
    Less
      than one year
      Unrealized
      loss
    
    One
      year or greater
      Fair
      Value
    
    One
      year or greater
      Unrealized
      lossU.S.
      Treasury and Government Agency Obligations
    
    $
    77,834
    
    $
    (426
    )
    $
    —
    
    $
    —State
      and Political Subdivisions
    
    
    5,303
    
    
    (14
    )
    
    —
    
    
    —Mortgage
      backed securities guaranteed or issued by U.S. Government
      Agencies
    
    
    1,520,568
    
    
    (5,385
    )
    
    584,386
    
    
    (8,393
    )All
      other mortgage backed securities
    
    
    52,848
    
    
    (455
    )
    
    123,278
    
    
    (1,466
    )Asset
      backed and other debt securities
    
    
    16,119
    
    
    (274
    )
    
    14,174
    
    
    (403
    )Other
      Securities
    
    
    19,754
    
    
    (770
    )
    
    10,494
    
    
    (160
    )Total
    
    $
    1,692,426
    
    $
    (7,324
    )
    $
    732,332
    
    $
    (10,422
    )
  In
determining impairment the Company analyzed the investment portfolio by issuer
and credit rating and reviewed period to period price changes relative to
changes in open market interest rates. The Company’s investment securities with
unrealized losses as of December 31, 2004 are temporarily impaired primarily due
to interest rate fluctuations. Of the $81.1 million of securities classified as
“Other -Than- Temporarily impaired as of December 31, 2004, are categorized as
collateralized mortgage obligations. The Company sold $65.5 million of these
securities in January 2005. The Company undergoes expected cash flow analysis on
this sector of its portfolio to further monitor changes in market
values.
  The
Company had impairment charges of $13.9 million in 2004 that were included in
security gains, net on the Company’s financial statements. The Company did not
have any securities classified as other than temporarily impaired as of December
31, 2003.
  At
December 31, 2004, the Company transferred from available for sale to trading
account assets $1.5 million of one investment security and recorded trading
asset gains of $1.3 million in 2004. These types of transfers are transacted on
an infrequent basis by the Company.
  Securities
with a book value of $2,696.1 million and $1,822.8 million at December 31, 2004
and 2003, respectively, were pledged to secure public sector deposits,
repurchase agreements, derivative contracts and for other purposes as required
by law.
   51
  **(5)
LOANS AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES**
  The
Company's loan portfolio is diversified with no industry comprising greater than
10% of the total loans outstanding. Real estate loans are primarily made in the
four state lending area of the Bank.
  The
Company had $279.8 million and $391.0 million outstanding construction loans at
December 31, 2004 and 2003, respectively.
  At
December 31, 2004, $345.7 million of loans secured by real estate were pledged
as collateral to secure borrowings from the Federal Home Loan Bank.
  The
allowance for loan and lease losses is based on estimates, and ultimate losses
may vary from the current estimates. These estimates are reviewed periodically
and, as adjustments become necessary, they are reflected in operations in the
periods in which they become known. The Company allocates an immaterial amount
of its allowance to off-balance sheet items.
  A summary
of the activity in the allowance for loan and lease losses is as follows (in
thousands):
  **2004**
    
    **2003**
    
    **2002**Balance
      at January 1
    
    $
    67,846
    
    $
    71,929
    
    
    70,046Additions
      (deductions):
      Provision
      for loan and lease losses - portfolio loans
    
    
    14,850
    
    
    26,000
    
    
    30,000Provision
      for loan and lease losses - Non-performing loans held for accelerated
      disposition or for sale
    
    
    —
    
    
    —
    
    
    21,333Loan
      portfolio sales and reclassification of acquired reserves
    
    
    (695
    )
    
    (5,030
    )
    
    —Recoveries
      on loans previously charged off
    
    
    10,423
    
    
    12,413
    
    
    12,042Loans
      charged off portfolio loans
    
    
    (31,625
    )
    
    (37,466
    )
    
    (61,492
    )Balance
      at December 31
    
    $
    60,799
    
    $
    67,846
    
    $
    71,929
 
 52
   **(6)
NONPERFORMING LOANS**
  The
following table presents information related to loans which are on nonaccrual
(non-performing loans), or contractually past due ninety days or more as to
interest or principal payments (in thousands)
  **December
      31,**2004
    
    2003Nonperforming
      loans
    
    $
    12,257
    
    $
    13,21790
      days or more past due and still accruing
    
    $
    14,617
    
    $
    16,683Gross
      interest income which would have been recorded under original
      terms
    
    $
    1,831
    
    $
    1,250Gross
      interest income recorded during the year
    
    $
    88
    
    $
    519
  At
December 31, 2004, 2003, 2002, 2001 and 2000 impaired loans, comprised
principally of nonaccruing loans, totaled $12.7 million, $13.8 million, $15.9,
$45.1 and $58.5 million respectively. The allowance for possible loan and lease
losses related to such impaired loans was $2.4 million, $1.9 million, $2.1, $3.9
and $9.9 million at December 31, 2004, 2003, 2002, 2001 and 2000 respectively.
The average balance of impaired loans for 2004, 2003, 2002, 2001 and 2000 was
$14.5 million, $14.8 million $30.5 million,$51.8 million and $52.1 million
respectively. The interest recognized on impaired loans in 2004, 2003, 2002,
2001 and 2000 was $0.1 million, $0.5 million ,$0.9 million, $0.9 million and
$0.6 million respectively.
  **(7)
RELATED PARTY TRANSACTIONS**
  In the
ordinary course of business, the subsidiary bank has extended credit to various
directors, senior officers and their affiliates. The aggregate loans outstanding
to related parties are summarized below for the years ended December 31, 2004,
2003 and 2002 (in thousands):
  Balance
      at January 1, 2004
    
    $
    4,411New
      loans issued
    
    
    500Repayment
      of loans
    
    
    (900
    )Balance
      at December 31, 2004
    
    $
    4,011Balance
      at January 1, 2003
    
    $
    6,343New
      loans issued
    
    
    1,000Repayment
      of loans
    
    
    (2,930
    )Loans
      to former directors
    
    
    (2
    )Balance
      at December 31, 2003
    
    $
    4,411Balance
      at January 1, 2002
    
    $
    7,319New
      loans issued
    
    
    527Repayment
      of loans
    
    
    (923
    )Loans
      to former directors
    
    
    (580
    )Balance
      at December 31, 2002
    
    $
    6,343
  Charles
F.X. Poggi, who is a director, was formerly President of Poggi Press, a general
printing company. Mr. Poggi is no longer a director, shareholder or executive
officer of Poggi Press. During 2004, 2003 and 2002, Poggi Press was paid $134
thousand, $205 thousand and $267 thousand, respectively, for printing work for
the Company. Management believes the terms and conditions of the transactions
with Poggi Press to be equivalent to terms available from an independent third
party.
  The
son-in-law of Donald Calcagnini, a director of the Company, is a partner in a
law firm which was paid approximately $127 thousand in legal fees by Hudson
United Bank for services to Hudson United Bank in 2004 in connection with the
closing of loans. Of this amount approximately $67 thousand was paid directly by
customers of Hudson United Bank In 2003, the firm was paid approximately $230
thousand in legal fees by Hudson United Bank in connection with the closing of
loans. Of this amount approximately $59 thousand was paid directly by customers
of Hudson United Bank. In 2002, the firm was paid approximately $176 thousand in
legal fees by HUB in connection with the closing of loans. Of this amount
approximately $52.5 thousand was paid directly by customers of Hudson
UnitedBank. Management believes the terms and conditions of the transactions
with this law firm were equivalent to terms and conditions available from an
independent third party. Mr. Calcagnini received no benefit from these
payments.
  53
  During
2004 Hudson United Bank agreed to a $5 million sponsorship of Quinnipiac
University’s new athletic center, which will be known as the Hudson United Bank
Center. Mr. Calcagnini, a director of the Company, is also a member of
Quinnipiac University’s Board of Trustees and chairman of the finance committee.
Mr. Calcagnini himself received no benefits from Hudson United Bank’s
sponsorship of Quinnipiac University’s new athletic center.
  Mr.
McBride a director of the Company, owns 2% of the outstanding shares of McBride
Corporate Real Estate. McBride Corporate Real Estate was retained to assist in
the sale and/or leasing of various Company and/or Hudson United Bank properties
and earned commissions of approximately $28 thousand during 2004 and $88
thousand during 2002. Management believes that the terms and conditions of the
transactions with McBride Corporate Real Estate were equivalent to terms and
conditions available from an independent third party.
  Mr.
Malcolm, a director of the Company was paid approximately $14 thousand by the
Company in 2004 for engineering services performed in conjunction with loan
closings. Of this amount approximately $8 thousand was paid directly by
customers of Hudson United Bank. Management believes the terms and conditions of
the transactions with Mr. Malcolm were equivalent to terms and conditions
available from an independent third party.
  **(8)
PREMISES AND EQUIPMENT**
  The
following is a summary of premises and equipment at December 31 (in
thousands):
  **2004**
    
    **2003**Land
    
    $
    16,668
    
    $
    16,936Premises
    
    
    69,131
    
    
    67,693Leasehold
      improvements
    
    
    36,055
    
    
    35,880Furniture,
      fixtures and equipment
    
    
    159,627
    
    
    160,477$
    281,481
    
    $
    280,986Less-
      Accumulated depreciation
    
    
    (135,790
    )
    
    (132,948
    )Less-
      Accumulated amortization
    
    
    (24,654
    )
    
    (22,870
    )$
    121,037
    
    $
    125,168
  Depreciation
expense for premises and equipment for 2004, 2003 and 2002 amounted to $12.6
million, $15.7 million and $16.3 million, respectively. Amortization expense for
2004, 2003 and 2002 amounted to $2.0 million, $1.9 million and $1.9 million,
respectively.
  **(9)
INCOME TAXES**
  The
components of the provision for income taxes for the year ended December 31 are
as follows (in thousands):
  **2004**
    
    **2003**
    
    **2002**Federal-Current
    
    $
    45,390
    
    $
    35,032
    
    $
    17,869Deferred
    
    
    1,397
    
    
    2,557
    
    
    41,149State-Current
    
    
    (2,082
    )
    
    505
    
    
    691Deferred
    
    
    635
    
    
    (407
    )
    
    4,505Total
      provision for income taxes
    
    $
    45,340
    
    $
    37,687
    
    $
    64,214
   54
 A
reconciliation of the provision for income taxes, as reported, with the Federal
income tax at the statutory rate for the year ended December 31 is as follows
(in thousands):
  **2004**
    
    **2003**
    
    **2002**Tax
      at statutory rate
    
    $
    60,698
    
    $
    52,503
    
    $
    65,597Increase (decrease) in taxes resulting from:Section
      29 tax credits
    
    
    (9,419
    )
    
    (6,316
    )
    
    —Tax-exempt income
    
    
    (6,812
    )
    
    (7,839
    )
    
    (6,718
    )Release of reserve
    
    
    (660
    )
    
    (1,500
    )
    
    —Release of valuation allowance
    
    
    —
    
    
    (1,215
    )Non-deductible
      compensation
    
    
    2,096
    
    
    —
    
    
    —Non-deductible
      settlement payment
    
    
    —
    
    
    1,750State
      income taxes, net of Federal income tax benefit-merger termination
      related
    
    
    —
    
    
    —
    
    
    4,505State
      income taxes, net of Federal income tax benefit
    
    
    (1,233
    )
    
    328
    
    
    691Other,
      net
    
    
    670
    
    
    (24
    )
    
    139Provision for income taxes
    
    $
    45,340
    
    $
    37,687
    
    $
    64,214
  The
Company included Section 29 tax credits in its income tax calculation for 2004
and 2003, as indicated in the table above. These credits are related to the
Company’s landfill gas operations. The level of credits generated depends on the
quantity and quality of the alternative fuel that is produced. The tax credits
may be limited or eliminated based upon a formula tied to the average price of
crude oil during each calendar year. Sophisticated equipment is used to measure
the fuel produced and these production volumes are then used in a formula to
calculate the tax credits. Based on current law, these Section 29 tax credits
are due to expire at year-end 2007. The Company had no valuation allowance at
December 31, 2004.
  Deferred
income taxes are provided for the differences between the tax bases of assets
and liabilities and their reported amounts in the consolidated financial
statements. These temporary differences will result in future income or
deductions for income tax purposes and are measured using the enacted tax rates
that will be in effect when such items are expected to reverse. The net deferred
tax assets are reported in Other Assets in the Consolidated Balance Sheet.
  Significant
components of deferred tax assets and liabilities are as follows (in
thousands):
  **December
      31,****2004**
    
    **2003**Deferred
      Tax Assets:
      Allowance
      for loan and lease losses
    
    $
    25,343
    
    $
    28,563Federal
      and state tax operating loss carry forwards
    
    
    724
    
    
    3,625Capital
      losses
    
    
    —
    
    
    4,247Director/Officer
      compensation Plans
    
    
    555
    
    
    2,075Allowance
      for impaired investment securities
    
    
    4,408
    
    
    —Accumulative
      other comprehensive loss
    
    
    1,579
    
    
    161Other
    
    
    2,286
    
    
    4,153Subtotal
      Deferred Tax Asset
    
    $
    34,895
    
    $
    42,824Deferred
      Tax Liabilities:Acquisition
      related expenses
    
    
    22,545
    
    
    23,587Pension
      plan
    
    
    7,579
    
    
    4,882Depreciation
    
    
    1,846
    
    
    10,485Other
    
    
    916
    
    
    1,247Subtotal
      Deferred Tax Liability
    
    $
    32,886
    
    $
    40,201Net
      Deferred Tax Asset
    
    $
    2,009
    
    $
    2,623
  Management
periodically evaluates the realizability of its deferred tax asset and will
adjust the level of the valuation allowance if it is deemed more likely than not
that all or a portion of the net deferred tax asset is realizable. As part of
the evaluation process in 2003, it was determined that the New Jersey
alternative minimum assessment (“AMA”) should be treated as a temporary item
because New Jersey allows for AMA credit to offset regular income tax in future
years, the AMA credit has an indefinite life and the Company is expected to pay
the
 
 
 55
 New
Jersey regular income tax in the foreseeable future. If the Company’s New Jersey
tax profile changes, it will reconsider whether a valuation allowance should be
established to offset the AMA credit. In addition, the Company released a
valuation allowance against its state and local deferred items. The release of
the valuation allowance occurred in the tax year ended December 31, 2003,
because, as stated above, the Company’s state tax profile has
changed.
  The
Company has a net operating loss (“NOL”) of approximately $2.1 million. These
NOLs relate to various subsidiaries that the Company acquired. As such, these
NOLs generally have Internal Revenue Code Section 382 limitations. The NOLs
should start to expire in 2006. However, the Company believes that the NOLs are
realizable prior to expiration taking into consideration the Section 382
limitations, the expiration schedule, and the history of the taxable income of
the Company. Accordingly, no valuation allowance has been established related to
the NOLs.
  **(10)**  **BENEFIT
PLANS AND POSTRETIREMENT BENEFITS**
  The
Company provides pension plan benefits to eligible employees. Payments are based
on salary and years of service. The Company's funding policy is to make the
maximum annual contributions allowed by the applicable regulations.
  Investment
Policies and Strategies
  Retirement
Plan assets are invested in accordance with the Company’s Wealth Management
Department overall investment guidelines consistent with its stated investment
objective. In terms of our asset allocation guidelines, the Retirement Plan has
an investment objective of growth with income. This objective allows for cash to
range 0 - 10% of the total market value of the account, fixed income 30 - 50%
and stocks 50-70%.
  The
selection of individual bonds and stocks is consistent with the Company’s Wealth
Management Department fixed income and equity investment policies. Bonds are all
investment grade with laddered maturities to minimize reinvestment risk. In
accordance with the Company’s Wealth Management Department equity investment
philosophy, it blends growth stocks and value stocks consistent with its stated
guidelines. While the Company concentrates its equity selections on large
capitalization domestic equities, mutual funds may be appropriate vehicles for
international or small cap stocks. The investment goal is to achieve results
that will contribute to the proper funding of the pension plan by exceeding the
rate of inflation over the long-term. In addition, investment managers are
expected to provide above average performance when compared to their peer
managers. Performance volatility is also monitored.
  Current
Asset Allocation
  The
Company’s pension plan weighted average asset allocations at January 1, 2004 and
2005, by asset category are as follows:
  Asset Category
    Plan assets at January 1, 2004
    Plan assets at January 1, 2005Equity securities
    61%
    
    61%Debt securities (Bond Mutual Funds)
    30%
    
    30%Cash (Money Market)
    9%
    
    9%Total
    100%
    
    100%
 
 Equity
securities include 854,000 and 743,000 common shares of various companies held
in the plan at December 31, 2004 and 2003, respectively. Fair value of these
shares was $36.1 million and $33.2 million at year end December 2004 and 2003,
respectively. Dividends paid to the plan were $0.8 million and $0.6 million at
December 31, 2004 and December 31, 2003, respectively.
  Included
in the above equity securities are 111,621 and 112,029 shares of Hudson United
Bancorp common stock at January 1, 2004 and January 1, 2005, respectively. The
fair value of these securities was $4.1 million at January 1, 2004 and $4.4
million at January 1, 2005.
  Determination
of Long-Term Rate of Return
  The
long-term rate of return on assets assumption was set based on historical
returns earned by equities and fixed income securities, adjusted to reflect
expectations of future returns as applied to the plan’s target allocation of
asset classes. Equities and fixed income securities were assumed to earn real
rates of return in the ranges of 5-9% and 2-6% respectively.
 
 
 56
 The
long-term inflation rate was estimated to be 3%. When these overall return
expectations are applied to the plan’s target allocation, the expected rate of
return is determined to be 9.0% which is approximately the midpoint of the range
of expected return.
  Cash
Flows
  Contributions
  For the
fiscal year ending December 31, 2005, based on an actuarial calculation, the
Company will not have a required contribution
  to the
plan. However, in 2004 and 2003 the Company made the maximum tax-deductible
contribution.
  Estimated
Future Benefit Payments
  The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid.
  Fiscal
year ending December 31 (in thousands)
  2005
    
    $
    2,4622006
    
    
    2,5712007
    
    
    2,7742008
    
    
    3,0782009
    
    
    3,2852010
      - 2014
    
    
    21,690
 
  Information
regarding the benefit obligation resulting from the actuarial valuations
prepared as of January 1, 2004 and 2003 is as follows (in
thousands):
  **2004**
    
    **2003****Change
      in benefit obligation:**Benefit
      obligation at beginning of year
    
    $
    54,295
    
    $
    47,832Service
      cost
    
    
    2,537
    
    
    2,342Interest
      cost
    
    
    3,562
    
    
    3,215Actuarial
      (gain) loss
    
    
    3,440
    
    
    1,478Settlements
    
    
    (1,019
    )
    
    (673
    )Benefits
      paid
    
    
    (2,017
    )
    
    (1,929
    )Termination
      benefits
    
    
    (83
    )
    
    0Plan
      amendments
    
    
    0
    
    
    2,030Curtailments
    
    
    333
    
    
    0Contractual
      deferred compensation
    
    
    1,562
    
    
    0Benefit
      obligation at end of year
    
    $
    62,610
    
    $
    54,295
  **2004**
    
    
    **2003****Change
      in plan assets:**Fair
      value of plan assets at beginning of year
    
    $
    55,741
    
    $
    44,054Actual
      gain (loss) on plan assets
    
    
    2,108
    
    
    7,116Employer
      contribution
    
    
    7,502
    
    
    7,173Settlements
    
    
    (1,019
    )
    
    (673
    )Benefits
      paid
    
    
    (2,017
    )
    
    (1,929
    )Fair
      value of plan assets at end of year
    
    $
    62,315
    
    $
    55,741
  **Prepaid/accrued
      pension cost consists of the following as of Dec
    31:**
    
    
    **2004**
    
    
    **2003**Funded
      status
    
    $
    (295
    )
    $
    1,447Unrecognized
      net transition obligation
    
    
    —
    
    
    —Unrecognized
      net actuarial gain
    
    
    15,188
    
    
    9,376Unrecognized
      prior service cost
    
    
    4,623
    
    
    5,262Prepaid
      pension cost
    
    
    23,462
    
    
    16,932Accrued
      pension( benefit)
    
    $
    (3,946
    )
    $
    (847
    )
   57
 Assumptions
used by the Company in the accounting for its plans in 2004 and 2003
were:
  **Weighted
      average assumptions as of Dec. 31:**
    
    **2004**
    
    **2003**Discount
      rate
    
    6.375
    %
    
    6.75
    %Expected
      return on plan assets
    
    9.0
    %
    
    9.0
    %Rate
      of compensation increase
    
    3.0
    %
    
    3.0
    %
  **Components
      of net periodic benefit cost as of December 31, (in
      thousands):**
    
    
    **2004**
    
    
    **2003**
    
    
    **2002**Service
      cost
    
    $
    2,538
    
    $
    2,342
    
    $
    1,745Interest
      cost
    
    
    3,562
    
    
    3,215
    
    
    2,982Expected
      return on plan assets
    
    
    (4,937
    )
    
    (3,900
    )
    
    (3,603
    )Settlements
    
    
    76
    
    
    55
    
    
    377Net
      amortization and deferral
    
    
    1,022
    
    
    1,225
    
    
    115Contractual
      deferred compensation
    
    
    1,562
    
    
    0
    
    
    0Termination
      benefits charge
    
    
    249
    
    
    0
    
    
    0Net
      periodic benefit cost
    
    $
    4,072
    
    $
    2,937
    
    $
    1,616
  The above
tables include costs associated with the Company’s SERP agreements with key
employees.
 
 The
Company has 401(k) savings plans covering substantially all of its employees.
Under the plans, the Company matches varying percentages of the employee’s
contribution. The Company’s contributions under the plans were approximately
$1.1 million, $0.8 million, and $1.5 million in 2004, 2003, and 2002,
respectively.
  **(11)**  **DEPOSITS**
  The
scheduled maturities of certificates of deposit are as follows at December 31,
2004(in thousands):
  
  3
      months or less
    
    $
    638,170Greater
      than 3 months to 1 year
    
    
    643,090Greater
      than 1 year to 3 years
    
    
    217,503Greater
      than 3 years
    
    
    360,456$
    1,859,219
 
  The
Company had $1,003.5 million and $926.1 million in time deposits greater than
$100,000 at December 31, 2004 and December 31, 2003 respectively. The Company
has hedged $295 million of its time deposits with interest rate swaps accounted
for as fair value hedges under FAS 133 at December 31,2004 and $305 million was
hedged at December 31, 2003. The amount of the fair value adjustment that is
included in time deposit balances was $1.5 million at December 31, 2004 and $1.7
million at December 31, 2003.
   58
 
  **12)
BORROWINGS**
  The
following is a summary of borrowings at December 31, 2004, 2003 and
2002:
  The
following table shows the distribution of the Company's borrowings and the
weighted average interest rates thereon at the end of each of the last three
years. Also provided are the maximum amounts of borrowings and the average
amounts of borrowings as well as weighted average interest rates for the last
three years.
 
 
 Securities Sold($In Thousands)
    
    
    Under Agreement
    
    
    Otherto RepurchaseBorrowingsAt
      December 31:2004
    
    $
    842,893
    
    $
    879,5302003
    
    
    532,485
    
    
    388,7342002
    
    
    134,920
    
    
    334,766Weighted
      average interestrate
      at year-end:2004
    
    
    1.68
    %
    
    2.33
    %2003
    
    
    0.63
    %
    
    1.84
    %2002
    
    
    1.93
    %
    
    1.38
    %Maximum
      amount outstandingat
      any month's end:2004
    
    $
    842,893
    
    $
    1,283,3952003
    
    
    691,679
    
    
    941,2282002
    
    
    142,301
    
    
    334,766Average
      amount outstandingduring
      the year:2004
    
    $
    564,553
    
    $
    826,5422003
    
    
    365,712
    
    
    534,8652002
    
    
    131,439
    
    
    81,075Weighted
      average interest rate
      during the year:2004
    
    
    1.07
    %
    
    2.09
    %2003
    
    
    0.87
    %
    
    2.00
    %2002
    
    
    2.18
    %
    
    3.49
    %
 The
following is a summary of borrowings at December 31 (in thousands)
  **2004**
    
    **2003**Federal
      Home Loan Bank advances
    
    $
    874,924
    
    $
    298,825Bank
      repurchase agreements
    
    
    699,020
    
    
    430,857Customer
      repurchase agreements
    
    
    143,873
    
    
    101,628Treasury,
      Tax and Loan note
    
    
    1,718
    
    
    1,650Other
      borrowings
    
    
    2,888
    
    
    88,259Total
      borrowings
    
    $
    1,722,423
    
    $
    921,219
  59
 Maturity
distribution of borrowings at December 31, 2004 (in thousands):
  2005
    
    
    (1
    )
    $
    1,497,4232006
    
    
    
    
    
    200,0002007
    
    
    
    
    
    —2008
    
    
    
    
    
    25,000Total
    
    
    
    
    $
    1,722,423
  (1)
    Includes
      $528 million of structured repurchase agreements extendable at the option
      of the counterparty in 2005.
 
 
 Information
      concerning securities sold under agreements to repurchase and FHLB
      advances is summarized as follows (in thousands):
    
    **2004**
    
    **2003**Average
      daily balance during the year
    
    $
    1,381,575
    
    $
    731,423Average
      interest rate during the year
    
    
    0.68
    %
    
    0.73
    %Maximum
      month-end balance during the year
    
    $
    1,577,020
    
    $
    1,073,428
 
 Investment
securities underlying the repurchase agreements and FHLB advances at December 31
are as follows (in thousands):
  **2004**
    
    **2003**Amortized
      cost
    
    $
    1,561,719
    
    $
    1,258,876Estimated
      fair value
    
    $
    1,557,011
    
    $
    1,253,543
  At
December 31, 2004, the Company had a $40 million line of credit with an
unaffiliated Bank, which matures June 30, 2005. The line of credit was not
utilized in 2004.
  **(13)
SUBORDINATED DEBT**
  On May 6,
2002, the Bank issued $200 million of 7.00% subordinated notes due May 2012. The
debentures bear interest at a fixed interest rate of 7.00% per annum payable
semi-annually. The proceeds of the above issuance were used for general
corporate purposes including providing Tier 2 Capital to Hudson
United.
 
 In
September 1996, the Company issued $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. The Company
repurchased $7.0 million of this debt during 2002, $37.8 million during 2003 and
$5.7 million during 2004. The outstanding balance of this debt is $24.5 million
as of December 31, 2004.
  In
January, 1994, the Company sold $25.0 million aggregate principal amount of
subordinated debentures which bore interest at a fixed rate of 7.75% per annum
payable semi-annually. The debentures, matured in January 2004, at which time,
the Company redeemed the debt.
  The
Company repurchased $37.8 million of its 8.20% fixed rate subordinated debt due
in September of 2006 in the second quarter of 2003. The debt was repurchased
from an investment banking firm at a price of 115% of par, which resulted in a
premium of $5.7 million and a total transaction value of $44.0 million, which
also included accrued interest. The Company at the same time issued a $45
million, 3.50% fixed rate institutional certificate of deposit due in May of
2008 to the same investment banking firm. The changed terms of the debt
instruments and the present value of the cash flows of the obligations
repurchased and the new obligation issued were not considered to be
substantially different. The effective annual interest cost of the new
obligation issued by the Company is 6.02%. The Company repurchased $5.7 million
of its 8.20% subordinated debt in the third quarter of 2004. The Company
recorded a $0.5 million charge associated with this early
retirement.
  **(14)** **JUNIOR
SUBORDINATED DEBT ASSOCIATED WITH** **CAPITAL TRUST SECURITIES**
  The
Company issued on March 17, 2004, $20 million of capital trust preferred
securities, with a final maturity of March 17, 2034, using Hudson United
Statutory Trust I, a statutory business trust formed under the laws of the State
of Connecticut. The sole asset of the trust, which is the obligor on the Capital
Trust Securities, is $20.6 million principal amount variable rate Junior
Subordinated Debentures due 2034 of the Company. The capital trust preferred
securities have a rate equal to the 3-month LIBOR plus 2.79% adjusting quarterly
at each interest payment date and are callable by the Company on or after March
17, 2009 and any subsequent interest payment date thereafter.
 
 60
  On March
31, 2003, the Company issued $20 million of capital trust preferred securities,
with a final maturity on April 15, 2033, using Hudson United 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 Capital Trust Securities,
is $20.6 million principal amount at a fixed rate of 6.85% Junior Subordinated
Debentures due 2038 of the Company. The capital trust preferred securities are
callable at par on April 15, 2008, and have a fixed rate yield of 6.85% until
the call date. Thereafter the yield on this issuance is based on 6-month LIBOR
plus 3.30%. The Company issued on March 28, 2003, $15 million of capital trust
preferred securities, with a final maturity of April 10, 2033, using Hudson
United 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
Capital Trust Securities, is $15.5 million principal amount at a fixed rate of
6.45% Junior Subordinated Debentures due 2038 of the Company. The capital trust
preferred securities are callable at par on April 24, 2008, and have a fixed
rate yield of 6.45% until the call date.
 
 On June
19, 1998, the Company issued $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.
  On
January 31, 1997, the Company issued $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 December 31, 2004, $45.0 million of the 8.98% Capital Securities and $46.5
Junior Subordinated Debentures respectively, remained outstanding.
  The FASB
issued SFAS No. 150 “Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity” in May 2003. This pronouncement
requires that an issuer classify a financial instrument that is within its scope
as a liability. As a result of adoption of this statement the Company
reclassified its capital trust security issuances into the other liability
category on the Company’s consolidated balance sheets. There was no material
impact on the Company’s operations from adoption of this statement.
  The FASB
issued FIN 46,”Consolidation of Variable Interest Entities” as amended in
December 2003. This interpretation provides guidance on how to identify a
variable interest entity and determine when the assets, liabilities,
noncontrolling interests and results of operations are to be included in an
entity’s consolidated financial statements. The Company applied the provisions
of FIN 46 to the wholly-owned subsidiary trusts described above in 2003 and 2002
that issued capital trust preferred securities to third-party investors. For
purposes of financial statement presentation, the Company has deconsolidated the
trusts issuing the capital trust securities and now includes these junior
subordinated debentures under other liabilities on its consolidated balance
sheet. This does not have a material impact on the Company’s
operations
  The
outstanding issues of capital trust preferred securities have preference over
the common securities under certain circumstances with respect to cash
distributions and amounts payable on liquidation and are guaranteed by the
Company. The net proceeds of the offerings are being used for general corporate
purposes and to increase capital levels of the Company and its
subsidiaries On March
1, 2005 the Federal Reserve Bank released its final rule on trust preferred
securities. The final rule retains the bifurcated system of limits on trust
preferred securities: 15% of core capital elements limit for “internationally
active banks” ; 25% of core capital elements for non-internationally active
banks. The final ruling does not have an impact upon the Company.
 
 61
 
 
 
 The
following is a maturity distribution of outstanding subordinated debt and junior
subordinated debentures associated with capital trust preferred securities as of
December 31, 2004: (in millions)
  **Year
      Maturing**
    
    **Year
      Callable**
    
    **Subordinated
      Debt**
    
    **Junior
      Subordinated Debentures**
    
    **Total**
      **($
      millions)**2006
    
    
    Not
      callable
    
    $
    24,515
    
    $
    —
    
    $
    24,5152012
    
    
    Not
      callable
    
    
    200,669
    
    
    —
    
    
    200,6692027
    
    
    2007
    
    
    —
    
    
    46,500
    
    
    46,5002028
    
    
    2008
    
    
    —
    
    
    51,500
    
    
    51,5002033
    
    
    2008
    
    
    —
    
    
    35,094
    
    
    35,0942034
    
    
    2009
    
    
    
    
    
    20,435
    
    
    20,435$
    225,184
    
    $
    153,529
    
    $
    378,713
 
 **(15)
STOCKHOLDERS' EQUITY**
  The Board
of Directors adopted the 1995 Stock Option Plan, which provides for the issuance
of up to 1,030,000 stock options to employees of the Company in addition to
those previously granted. There are other options outstanding that were granted
under the plans of acquired companies. The option or grant price cannot be less
than the fair market value of the common stock at the date of the
grant.
  On April
17, 2002, the Board of Directors adopted the 2002 Stock Option Plan, which
provides for the issuance of up to 1,250,000 stock options to employees of the
Company. As of the adoption date there are no further issuances from any of the
previous plans. As of December 31, 2004, there remained 875,200 shares available
for grant from the 2002 Stock Option Plan.
  In
connection with the acquisitions completed by the Company in prior years,
certain outstanding options were converted into options to purchase common stock
of the Company.
  Transactions
under the Company’s plans are summarized as follows:
  **Number
      of**
      **Shares**
    
    **Weighted
      Average Exercise Price**
    
    **Weighted
      Average Remaining Contractual Life**
    
    **Option
      Price Per Share**Outstanding,
      December 31, 2002
    
    
    1,397,694
    
    $
    24.39
    
    
    11.3
      yrs
    
    $
    7.14
      - $30.79Granted
    
    
    88,700
    
    
    34.43
    
    
    9.4
      yrs
    
    $
    31.10
      - $34.74Exercised
    
    
    (88,273
    )
    
    12.66
    
    
    0.9
      yrs
    
    
    7.14
      - 13.56Exercised
    
    
    (18,022
    )
    
    21.93
    
    
    3.9
      yrs
    
    
    18.36
      - 23.73Exercised
    
    
    (104,302
    )
    
    26.68
    
    
    4.5
      yrs
    
    
    25.07
      - 26.76Exercised
    
    
    (39,786
    )
    
    28.83
    
    
    6.0
      yrs
    
    
    28.50
      - 30.16Forfeited
    
    
    (232,217
    )
    
    23.29
    
    
    5.7
      yrs
    
    
    12.42
      - 34.74Outstanding,
      December 31, 2003
    
    
    1,003,794
    
    $
    26.20
    
    
    14.4
      yrs
    
    $
    10.36
      - $34.74Granted
    
    
    87,700
    
    
    37.35
    
    
    9.60
      yrs
    
    $
    36.54
      - $38.10Exercised
    
    
    (51,536
    )
    
    10.55
    
    
    0.0
      yrs
    
    
    10.36
      - 13.17Exercised
    
    
    (8,078
    )
    
    16.39
    
    
    1.78
      yrs
    
    
    14.64
      - 17.89Exercised
    
    
    (11,930
    )
    
    22.99
    
    
    3.14
      yrs
    
    
    20.92
      - 23.73Exercised
    
    
    (31,388
    )
    
    27.80
    
    
    6.64
      yrs
    
    
    27.39
      - 30.16Forfeited
    
    
    (73,488
    )
    
    29,28
    
    
    7.03
      yrs
    
    
    17.67
      - 36.60Outstanding,
      December 31, 2004
    
    
    915,074
    
    $
    27.97
    
    
    6.44
      yrs
    
    $
    14.14
      - $38.10Exercisable,
      December 31, 2004
    
    
    269,792
    
    $
    26.33
    
    
    3.81
      yrs
    
    $
    14.14
      - $30.79
 
  62
  If
compensation cost had been determined based on the fair value at the grant dates
for stock options awarded under the Company’s plans consistent with the method
of SFAS No. 123, the Company’s net income and income per share would have been
reduced to the proforma amounts indicated below for the years ended December 31,
2004 and December 31, 2003. The Company has adopted the prospective method of
recording stock compensation expense effective January 1, 2003 (in thousands
except per share data):
  
 **Twelve
      months ended**December
      31, 2004
    
    December
      31, 2003
      (A)
      RestatedNet
      income
    
    
    As
      reported
    
    $
    128,083
    
    $
    112,321Plus:
      Stock-based employee compensation cost, net of related tax effects,
      included in the determination of net income as reported
(1)
    
    
    
    
    
    4,005
    
    
    549Less:
      Stock-based employee compensation cost, net of related tax effects, that
      would have been included in the determination of net income, if the fair
      value method had been applied to all awards
    
    
    
    
    
    4,515
    
    
    1,042Pro
      forma
    
    $
    127,573
    
    $
    111,829Basic
      earnings per share
    
    
    As
      reported
    
    $
    2.86
    
    $
    2.51Pro
      forma
    
    $
    2.85
    
    $
    2.50Diluted
      earnings per share
    
    
    As
      reported
    
    $
    2.85
    
    $
    2.50Pro
      forma
    
    $
    2.84
    
    $
    2.49
  (1)
    Includes
      expenses for both stock options and restricted
stock
  (A) In
July 2004, the Company identified an error in the computation of pro forma stock
based compensation cost, pro forma net income and pro forma basic and fully
diluted earnings per share included in the financial statements as of and for
the period ending March 31, 2004 and all prior periods. The computation error
related to amortization of such awards and the calculation of forfeitures. The
table above has been revised for the twelve months ended December 31, 2003.
These revisions had no effect upon the Company’s Consolidated Balance Sheets,
Consolidated Statements of Income and reported basic and fully diluted earnings
per share.
  The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for 2004,
2003 and 2002: dividend yield of 3.38% - 3.61% for 2004, 3.40% - 3.75% for 2003,
and 3.66% for 2002; risk-free interest rates of 2.471% - 3.96% for 2004, 2.322%
- 2.961% in 2003, and 3.05% to 3.25% in 2002; volatility factors of the expected
market price of the Company’s common stock of approximately 21. 29% in 2004,
22.40% in 2003, and 34% in 2002 and an expected life of 5 years in 2004, 2003
and 2002. The Company used an expected life of five years for employee options
and ten years for executive options based on actual exercise history.
  The
Company adopted as of January 1, 2003 SFAS No. 148 and will utilize the
prospective method of transition, which requires that companies apply the
recognition provisions of Statement 123 to all employee awards granted,
modified, or settled after the beginning of the fiscal year in which the
recognition provisions are first applied. Adoption of this statement had no
material effect on the Company’s operations.
  The Board
of Directors adopted and the shareholders approved on April 21, 2004 an amended
restricted stock plan, which authorized an additional one million shares
available for future issuances. As of December 31, 2004, 941,647 shares remain
available to be granted to officers and key employees. During 2004, 2003 and
2002, respectively, the Company awarded 116,600, 80,000 and 52,850 shares of
common stock which have vesting periods of up to ten years from the date of
grant. The weighted average price of the grants awarded during 2004, 2003 and
2002 were $36.30, $34.80 and $27.66, respectively. The value of shares issued
that have not been vested are $1.5 million, $3.9 million and $2.4 million for
2004, 2003 and 2002, respectively, and have been recorded as a reduction of
stockholders' equity. Amortization of restricted stock awards charged to expense
amounted to $6.0 million, $0.8 million and $1.9 million, in 2004, 2003 and 2002,
respectively.
  63
  Prior to
termination of the merger agreement between Hudson United Bancorp and Dime
Bancorp, Inc., the compensation committee adopted the Hudson United Bancorp and
Subsidiaries Key Employee Retention Program. The program was designed to
encourage designated key employees of Hudson United Bancorp and its subsidiaries
(collectively, the “Company”) to remain with the Company in connection with the
then pending merger and subsequent transition in light of the uncertainty then
surrounding the consummation of the merger. Eligible employees received awards
under the program that totaled, in the aggregate, 186,000 shares of restricted
stock and $90,000 in cash awards. Restricted stock and cash awards under the
program could become vested ten years from the date of the award of the
Compensation Committee, if extended after the initial two-year period.
Restricted stock and cash awards were to become fully and immediately vested if,
within two years after the Hudson-Dime merger agreement, (1) the Company
received payment of $25 million or more in satisfaction of its rights under the
terms of the September 16, 1999 Stock Option Agreement between Hudson and Dime;
or (2) there occurred a change in control, as defined in the Restricted Stock
Plan. On January 7, 2002, the Company received a $77 million final merger
termination payment from Dime, which resulted in the vesting of the
aforementioned restricted stock and cash awards. The compensation expense
resulting from the vesting of the restricted stock and cash awards were part of
the approximately $8.3 million in expenses related to the closing of the
Washington Mutual/Dime merger recorded by the Company in the first quarter of
2002.
  In
November 1993, the Company's Board of Directors authorized management to
repurchase up to 10 percent of its outstanding common stock each year. The
program may be discontinued or suspended at any time, and there is no assurance
that the Company will purchase the full amount authorized. The acquired shares
are to be held in treasury and to be used for stock option and other employee
benefit plans, stock dividends, or in connection with the issuance of common
stock in pending or future acquisitions. In June 2000, the Company’s Board of
Directors authorized the repurchase of up to 20% of the Company’s outstanding
shares. In June 2001, the Company’s Board of Directors extended the Company’s
stock repurchase program until December 2002 and authorized additional
repurchases of up to 10% of the Company’s outstanding shares. The Board further
authorized on January 30, 2003 the repurchase of up to $4.5 million outstanding
shares of the Company. During 2004, the Company purchased 14,980 shares at a
cost of $0.6 million. During 2003, the Company purchased 0.5 million treasury
shares at a cost of $16.5 million, of which 65,783 were reissued for stock.
During 2002, the Company purchased 1.3 million treasury shares at an aggregate
cost of $37.7 million, of which 434,813 shares were reissued for stock
options.
  **(16)
EARNINGS PER SHARE**
  A
reconciliation of income to net income available to common stockholders and of
weighted average common shares outstanding to weighted average common shares
outstanding assuming dilution follows (in thousands, except share data):
 
 **Year
      Ended****December
      31,****2004**
    
    **2003**
    
    **2002**Basic
      Earnings Per ShareNet
      income
    
    $
    128,083
    
    $
    112,321
    
    $
    123,206Weighted
      average common shares outstanding
    
    
    44,717
    
    
    44,737
    
    
    45,159Basic
      Earnings Per Share
    
    $
    2.86
    
    $
    2.51
    
    $
    2.73
  Diluted
      Earnings Per ShareNet
      income
    
    $
    128,083
    
    $
    112,321
    
    $
    123,206Weighted
      average common shares outstanding
    
    
    44,717
    
    
    44,737
    
    
    45,159Plus:
      Incremental shares from assumed conversion of stock
optionsStock
      Options
    
    
    227
    
    
    160
    
    
    19044,944
    
    
    44,897
    
    
    45,349Diluted
      Earnings Per Share
    
    $
    2.85
    
    $
    2.50
    
    $
    2.72
    64
  As of
December 31, 2004 the Company had 143,800 shares that were not included in the
diluted computation because they would have been antidilutive. There were 74,800
and 11,670 shares as of December 31, 2003, and 2002 respectively that were
antidilutive.
  **(17)
RESTRICTIONS ON BANK DIVIDENDS, LOANS OR ADVANCES**
  Certain
restrictions exist regarding the ability of Hudson United to transfer funds to
the Company in the form of cash dividends, loans or advances. New Jersey state
banking regulations allow for the payment of dividends in any amount provided
that capital stock will be unimpaired and there remains an additional amount of
paid-in capital of not less than 50 percent of the capital stock amount. As of
December 31, 2004, $207.4 million, subject to regulatory capital limitations,
was available for distribution to the Company from Hudson United.
  Under
Federal Reserve regulations, Hudson United is limited as to the amounts it may
loan to its affiliates, including the Company. All such loans are required to be
collateralized by specific assets.
  **(18)
LEASES**
  Total
rental expense for all leases amounted to approximately $13.4 million, $12.4
million and $11.8 million in 2004, 2003 and 2002, respectively.
  At
December 31, 2004, the minimum total rental commitments under all noncancellable
leases on bank premises with initial or remaining terms of more than one year
were as follows (in thousands):
  2005
    
    $
    9,5662006
    
    
    8,1332007
    
    
    6,4592008
    
    
    4,6102009
    
    
    3,2182010
      and thereafter
    
    
    7,936Total
    
    $
    39,922
  It is
expected that in the normal course of business, leases that expire will be
renewed or replaced by leases of other properties.
  **(19)
COMMITMENTS AND CONTINGENT LIABILITIES**
  The
Company and its subsidiaries, from time to time, may be defendants in legal
proceedings. In the opinion of management, based upon consultation with legal
counsel, the ultimate resolution of these legal proceedings will not have a
material effect on the financial condition of the Company.
  In the
normal course of business, the Company and its subsidiaries have various
commitments and contingent liabilities such as commitments to extend credit,
letters of credit and liability for assets held in trust which are not reflected
in the accompanying financial statements. Loan commitments, commitments to
extend lines of credit and stand-by letters of credit are made to customers in
the ordinary course of business. Both arrangements have credit risk essentially
the same as that involved in extending loans to customers and are subject to the
Company’s normal credit policies.
  In 2004,
the Company made a $5 million commitment for the development of Quinnipiac
University’s new sports complex. In return, the Company received from the
University numerous business commitments and full naming rights for a 10 year
term commencing upon the project’s completion, which is estimated to occur in
2007. At December 31, 2004, the Company had paid $2 million of the $5 million
and has classified the asset in Intangibles. The Company will begin amortizing
the intangible upon completion of the project.
  65
 
  **(20)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT
RISK**
  The
Company has no off-balance sheet debt financing or related type
entities.
  Unused
commitments include loan origination commitments, which are legally binding
agreements to lend at a specified interest rate for a specified purpose and
lines of credit, which represent loan agreements under which the lender has an
obligation, subject to certain conditions to lend funds up to a particular
amount, whereby the borrower may repay and re-borrow at anytime within the
contractual period. Stand by letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. The Company’s maximum exposure to loss relating to its loan portfolio was
$4.8 billion at December 31, 2004, utilizing the book value of its loan
portfolio less the allowance.
  The
Company’s maximum exposure to accounting loss related to the contract amounts of
these financial instruments, assuming they are fully funded at December 31, 2004
and 2003 is as follows:
 
 2004   **(in
      thousands)**
    
    **Loan
      Origination**
      **Commitments**
    
    **Unused**
      **Lines
      of Credit**
    
    **Stand
      by**
      **Letters
      of Credit**
    
    **Total**Real
      Estate Mortgage
    
    $
    21,226
    
    
    
    
    
    
    
    $
    21,226Home
      Equity Loans
    
    
    
    
    $
    426,023
    
    
    
    
    
    426,023Other
      Consumer Loans
    
    
    39,536
    
    
    1,106,609
    
    
    
    
    
    1,146,145Commercial
      Loans
    
    
    66,855
    
    
    641,765
    
    $
    78,192
    
    
    786,812Total
    
    $
    127,617
    
    $
    2,174,397
    
    $
    78,192
    
    $
    2,380,206
   **2003**
    **(in
      thousands)**
    
    **Loan
      Origination**
      **Commitments**
    
    **Unused**
      **Lines
      of Credit**
    
    **Stand
      by**
      **Letters
      of Credit**
    
    **Total**Real
      Estate Mortgage
    
    $
    45,572
    
    
    
    
    
    
    
    $
    45,572Home
      Equity Loans
    
    
    
    
    $
    411,877
    
    
    
    
    
    411,877Other
      Consumer Loans
    
    
    37,666
    
    
    1,074,774
    
    
    
    
    
    1,112,440Commercial
      Loans
    
    
    48,749
    
    
    641,555
    
    $
    85,441
    
    
    775,745Total
    
    $
    131,987
    
    $
    2,128,206
    
    $
    85,441
    
    $
    2,345,634
  
 66
  **(21)
HUDSON UNITED BANCORP (PARENT COMPANY ONLY) FINANCIAL
INFORMATION**
 (in
      thousands)
    
    **December
      31,****BALANCE
      SHEETS**
    
    **2004**
    
    **2003****ASSETS:**Cash
      and due from banks
    
    $
    15,765
    
    $
    23,892Investment
      securities available for sale
    
    
    11,498
    
    
    12,074Trading
      Assets
    
    
    1,477
    
    
    —Investment
      in subsidiaries
    
    
    652,687
    
    
    572,440Premises
      and equipment, net
    
    
    6,361
    
    
    6,471Other
      assets
    
    
    25,272
    
    
    28,045**TOTAL
      ASSETS**
    
    $
    713,060
    
    $
    642,922**LIABILITIES
      AND STOCKHOLDERS' EQUITY:**Notes
      payable-subsidiaries
    
    $
    —
    
    $
    1,164Other
      liabilities
    
    
    156,895
    
    
    144,563Subordinated
      Debt
    
    
    24,515
    
    
    39,005**TOTAL
      LIABILITIES**
    
    $
    181,410
    
    $
    184,732Stockholders'
      equity
    
    
    531,650
    
    
    458,190**TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY**
    
    $
    713,060
    
    $
    642,922
 
 
 (in
      thousands)
    
    **Years
      Ended December 31,****STATEMENTS
      OF INCOME**
    
    **2004**
    
    **2003**
    
    **2002****Income:**Cash
      dividends from bank subsidiaries
    
    $
    60,339
    
    $
    113,376
    
    $
    126,723Interest
      income
    
    
    185
    
    
    111
    
    
    172Securities
      (losses) gains
    
    
    1,999
    
    
    6,745
    
    
    (1,309
    )Other
      income
    
    
    509
    
    
    648
    
    
    2,006$
    63,032
    
    $
    120,880
    
    $
    127,592**Expenses:**General
      and administrative
    
    
    8,791
    
    
    2,958
    
    
    5,053Interest
      expense
    
    
    13,203
    
    
    14,519
    
    
    16,851$
    21,994
    
    $
    17,477
    
    $
    21,904Income
      before income taxes and equity inUndistributed
      net income of subsidiaries
    
    
    41,038
    
    
    103,403
    
    
    105,688Income
      tax benefit
    
    
    (6,176
    )
    
    (2,992
    )
    
    (6,311
    )$
    47,214
    
    $
    106,395
    
    $
    111,999Equity
      in undistributed net income of subsidiaries
    
    
    80,869
    
    
    5,926
    
    
    11,207**NET
      INCOME**
    
    $
    128,083
    
    $
    112,321
    
    $
    123,206
 
   67
  **HUDSON
UNITED BANCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
(CONTINUED)**
 (in
      thousands)
    
    **Years
      Ended December 31,****STATEMENTS
      OF CASH FLOWS**
    
    **2004**
    
    **2003**
    
    **2002**Operating
      activities:Net
      income
    
    $
    128,083
    
    $
    112,321
    
    $
    123,206Adjustments
      to reconcile net income to net cash provided by operating
      activities-Amortization and depreciation
    
    
    429
    
    
    592
    
    
    708Amortization
      of restricted stock
    
    
    6,161
    
    
    845
    
    
    3,464Securities
      losses (income)
    
    
    (720
    )
    
    (6,745
    )
    
    (1,205
    )(Increase)
      in investment in subsidiaries
    
    
    (80,247
    )
    
    (9,676
    )
    
    (11,207
    )(Increase)
      in trading assets
    
    
    (1,477
    )
    
    —
    
    
    —Decrease
      (increase) in other assets
    
    
    (184
    )
    
    (1,513
    )
    
    31,332(Decrease)
      in other liabilities
    
    
    (1,332
    )
    
    15,132
    
    
    (24,777
    )**NET
      CASH PROVIDED BY OPERATING ACTIVITIES**
    
    $
    50,713
    
    $
    110,956
    
    $
    121,521Investing
      activities:Proceeds
      from sale of securities
    
    
    1,026
    
    
    15,441
    
    
    8,215Proceeds
      from maturities of securities
    
    
    2,079
    
    
    6,707
    
    
    2,603Purchase
      of securities
    
    
    —
    
    
    (10,960
    )
    
    (2,000
    )Capital
      expenditures
    
    
    —
    
    
    —
    
    
    (155
    )Other
    
    
    (319
    )
    
    (129
    )
    
    —**NET
      CASH PROVIDED BY INVESTING ACTIVITIES**
    
    $
    2,786
    
    $
    11,059
    
    $
    8,663Financing
      activities:Proceeds
      from issuance of common stock
    
    $
    2,054
    
    $
    5,446
    
    $
    5,408Dividends
      paid
    
    
    (61,129
    )
    
    (52,819
    )
    
    (50,232
    )Purchase
      of treasury stock
    
    
    (561
    )
    
    (16,525
    )
    
    (37,686
    )Other
    
    
    (1,990
    )
    
    (39,021
    )
    
    (50,223
    )**NET
      CASH USED IN FINANCING ACTIVITIES**
    
    $
    (61,626
    )
    $
    (102,919
    )
    $
    (132,733
    )**INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS**
    
    $
    (8,127
    )
    $
    19,096
    
    $
    (2,549
    )**CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR**
    
    
    23,892
    
    
    4,796
    
    
    7,345**CASH
      AND CASH EQUIVALENTS AT END OF YEAR**
    
    $
    15,765
    
    $
    23,892
    
    $
    4,796
 
 68
   **(22)
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**
  The
following quarterly financial information for the two years ended December 31,
2004 and 2003 is unaudited. However, in the opinion of management, all
adjustments, which include only normal recurring adjustments necessary to
present fairly the results of operations for the periods, are reflected. Results
of operations for the periods are not necessarily indicative of the results of
the entire year or any other interim period.
  **Three
      Months Ended**(
      in thousands, except per share data)
    
    March
      31
    
    June
      30
    
    September
      30
    
    December
      312004Interest
      and fee income
    
    $
    98,145
    
    $
    100,229
    
    $
    106,332
    
    $
    109,728Interest
      expense
    
    
    20,254
    
    
    22,132
    
    
    26,311
    
    
    30,085Net
      interest income
    
    
    77,891
    
    
    78,097
    
    
    80,021
    
    
    79,643Provision
      for loan and lease losses
    
    
    5,600
    
    
    4,750
    
    
    4,500
    
    
    0Net
      securities (losses) gains
    
    
    3,470
    
    
    857
    
    
    12,050
    
    
    (7,490
    )Other
      non-interest income
    
    
    32,093
    
    
    38,235
    
    
    32,301
    
    
    44,811Non-interest
      expense
    
    
    66,569
    
    
    69,790
    
    
    75,884
    
    
    71,463Income
      before income taxes
    
    
    41,285
    
    
    42,649
    
    
    43,988
    
    
    45,501Net
      income
    
    $
    30,982
    
    $
    31,659
    
    $
    32,538
    
    $
    32,904Earnings
      per share-basic
    
    
    0.69
    
    
    0.71
    
    
    0.73
    
    
    0.73Earnings
      per share-diluted
    
    
    0.69
    
    
    0.70
    
    
    0.72
    
    
    0.732003Interest
      and fee income
    
    $
    102,410
    
    $
    101,365
    
    $
    94,314
    
    $
    96,040Interest
      expense
    
    
    27,206
    
    
    25,167
    
    
    21,562
    
    
    20,936Net
      interest income
    
    
    75,204
    
    
    76,198
    
    
    72,752
    
    
    75,104Provision
      for possible loan and lease losses
    
    
    7,000
    
    
    7,000
    
    
    6,500
    
    
    5,500Net
      securities (losses) gains
    
    
    (3,259
    )
    
    2,364
    
    
    1,228
    
    
    4,784Other
      non-interest income
    
    
    30,142
    
    
    27,242
    
    
    34,259
    
    
    36,285Non-interest
      expense
    
    
    54,657
    
    
    58,999
    
    
    63,044
    
    
    79,595Income
      before income taxes
    
    
    40,430
    
    
    39,805
    
    
    38,695
    
    
    31,078Net
      income
    
    $
    28,301
    
    $
    29,135
    
    $
    30,403
    
    $
    24,482Earnings
      per share-basic
    
    
    0.63
    
    
    0.65
    
    
    0.68
    
    
    0.55Earnings
      per share-diluted
    
    
    0.63
    
    
    0.65
    
    
    0.68
    
    
    0.54
 
  **(23)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS**
 Financial
instruments include cash, loan agreements, debt securities, deposit liabilities,
loan commitments, standby letters of credit and financial guarantees, among
others. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale.
  Estimated
fair values have been determined by the Company using the best available data
and estimation methodology suitable for each category of financial instruments.
For those loans and deposits with floating rates, it is presumed that estimated
fair values generally approximate their recorded book balances. The estimation
methodologies used, the estimated fair values and recorded book balances of the
Company's financial instruments at December 31, 2004 and 2003 were as
follows:
  Cash and
cash equivalents include cash and due from bank balances. For these instruments,
the recorded book balance approximates their fair value.
  For
available for sale securities in the Company's portfolio, fair value was
determined by reference to quoted market prices. In the few instances where
quoted market prices were not available, prices for similar securities were
used. Additional detail is contained in Note 4 to these consolidated financial
statements.
  (in
      thousands)
    
    **2004**
    
    **2003****Estimated
      Fair Value**
    
    **Recorded
      Book Value**
    
    **Estimated
      Fair Value**
    
    **Recorded
      Book Value**Cash
      and cash equivalents
    
    $
    260,906
    
    $
    260,906
    
    $
    313,994
    
    $
    313,994Investment
      securities available for sale
    
    $
    2,166,627
    
    $
    2,166,627
    
    $
    2,706,185
    
    $
    2,706,185Investment
      securities held to maturity,recorded at book value
    
    
    1,364,900
    
    
    1,372,228
    
    
    —
    
    
    —Trading
      assets
    
    
    1,477
    
    
    1,477
    
    
    —
    
    
    —
  
 69
 The fair
value of the Company’s derivative instruments, which includes interest rate
swaps, floors and caps, was based on quoted broker price quotes.
  **2004**
    
    **2003****Estimated
      Fair Value**
    
    **Carrying**
      **Value**
    
    **Estimated
      Fair Value**
    
    **Carrying**
      **Value**Derivative
      instruments
    
    $
    4,580
    
    $
    4,580
    
    $
    (2,121
    )
    $
    (2,121
    )
  The
Company aggregated loans into pools having similar characteristics when
comparing their terms, contractual rates, type of collateral, risk profile and
other pertinent loan characteristics. Since no active market exists for these
pools, fair values were estimated using the present value of future cash flows
expected to be received. Loan rates currently offered by the Bank were used in
determining the appropriate discount rate.
  For
certain homogeneous categories of loans, such as some residential mortgages,
fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the estimated current rates at which similar loans on average would be made to
borrowers and for the same average remaining maturities.
 
 **2004**
    
    **2003****Estimated
      Fair Value**
    
    **Recorded
      Book Value**
    
    **Estimated
      Fair Value**
    
    **Recorded
      Book Value**Loans,
      net of allowance, and assets held for sale
    
    $
    4,805,896
    
    $
    4,766,385
    
    $
    4,650,955
    
    $
    4,591,909
  The fair
value of demand deposits, savings deposits and certain money market accounts are
assumed to approximate their recorded book balances. The fair value of fixed
maturity certificates of deposit was estimated using the present value of
discounted cash flows based on rates currently offered for deposits of similar
remaining maturities.
  **2004**
    
    **2003****Estimated
      Fair Value**
    
    **Recorded
      Book Value**
    
    **Estimated
      Fair Value**
    
    **Recorded
      Book Value**Deposits
    
    $
    6,358,357
    
    $
    6,344,198
    
    $
    6,307,345
    
    $
    6,243,359
  The fair
value for accrued interest receivable and the cash surrender value of life
insurance policies approximates their respective recorded book balance. The fair
value of borrowed funds is estimated using the present value of discounted cash
flows based on the rates currently offered for debt instruments of similar
remaining maturities.
 
 **2004**
    
    **2003****Estimated
      Fair Value**
    **Recorded
      Book Value**
    
    **Estimated
      Fair Value**
    **Recorded
      Book Value**Accrued
      interest receivable
    $
      42,687
    $
      42,687
    
    $
      40,427
    $
      40,427Cash
      surrender value of separate life insurance
    150,073
    150,073
    
    144,126
    144,126Borrowings
    1,722,737
    1,722,423
    
    928,202
    921,219
  The fair
value of the subordinated debt and capital trust securities was determined by
reference to estimated market prices.
  **2004**
    
    **2003****Estimated
      Fair Value**
    
    **Recorded
      Book Value**
    
    **Estimated
      Fair Value**
    
    **Recorded
      Book Value**Subordinated
      Debt
    
    $
    238,491
    
    $
    225,184
    
    $
    259,119
    
    $
    239,773Capital
      Trust Securities
    
    
    145,445
    
    
    148,827
    
    
    129,115
    
    
    129,000
  The
Company's remaining assets and liabilities, which are not considered financial
instruments, have not been valued differently than has been customary with
historical cost accounting. The fair value of off-balance sheet items, which are
primarily unused lines of credit, is not material because they are generally
priced at market at time of offering.
   70
 **(24)
REGULATORY MATTERS/CAPITAL ADEQUACY**
  The
Company 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 the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and its subsidiary bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classification are also subject to qualitative judgements by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
Tier I capital (as defined) to average assets (as defined). Management believes,
as of December 31, 2004, that the Company and its subsidiary bank meet all
capital adequacy requirements to which they are subject. . On March
1, 2005 the Federal Reserve Bank released its final rule on trust preferred
securities. The final rule retains the bifurcated system of limits on trust
preferred securities: 15% of core capital elements limit for “internationally
active banks” ; 25% of core capital elements for non-internationally active
banks. The final ruling did not have an impact upon the Company.
 
 The
Company’s and the Bank's actual capital amounts and ratios at December 31, 2004
and 2003 are presented in the following table
 (dollars
in thousands):
 Actual
    For
      Capital
      Adequacy
      Purposes
    To
      Be Well Capitalized Under Prompt Corrective Action
    ProvisionsAmount
    Ratio
    Amount
    Ratio
    Amount
    Ratio**As
      of December 31, 2004:**Total
      Capital to Risk Weighted Assets:Hudson
      United Bancorp
    
    $
    862,640
    
    
    13.89
    %
    $
    496,935
    
    
    >8.0
    %
    $
    621,169
    
    
    >10.0
    %Hudson
      United Bank
    
    
    824,299
    
    
    13.32
    %
    
    494,914
    
    
    >8.0
    %
    
    618,643
    
    
    >10.0
    %Tier
      I Capital to Risk Weighted Assets:Hudson
      United Bancorp
    
    $
    596,182
    
    
    9.60
    %
    $
    248,468
    
    
    >4.0
    %
    $
    372,701
    
    
    >6.0
    %Hudson
      United Bank
    
    
    562,831
    
    
    9.10
    %
    
    247,457
    
    
    >4.0
    %
    
    371,186
    
    
    >6.0
    %Tier
      I Capital to Average Assets:Hudson
      United Bancorp
    
    $
    596,182
    
    
    6.69
    %
    $
    356,405
    
    
    >4.0
    %
    $
    445,506
    
    
    >5.0
    %Hudson
      United Bank
    
    
    562,831
    
    
    6.33
    %
    
    355,403
    
    
    >4.0
    %
    
    444,254
    
    
    >5.0
    %
   Actual
    
    For
      Capital
      Adequacy
      Purposes
    
    To
      Be Well Capitalized Under Prompt Corrective Action
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio**As
      of December 31, 2003:**Total
      Capital to Risk Weighted Assets:Hudson
      United Bancorp
    
    $
    792,036
    
    
    13.67
    %
    $
    464,863
    
    
    >8.0
    %
    $
    581,078
    
    
    >10.0
    %Hudson
      United Bank
    
    
    754,300
    
    
    13.05
    %
    
    464,012
    
    
    >8.0
    %
    
    580,014
    
    
    >10.0
    %Tier
      I Capital to Risk Weighted Assets:Hudson
      United Bancorp
    
    $
    505,128
    
    
    8.72
    %
    $
    232,431
    
    
    >4.0
    %
    $
    348,647
    
    
    >6.0
    %Hudson
      United Bank
    
    
    485,520
    
    
    8.40
    %
    
    232,006
    
    
    >4.0
    %
    
    348,009
    
    
    >6.0
    %Tier
      I Capital to Average Assets:Hudson
      United Bancorp
    
    $
    505,128
    
    
    6.36
    %
    $
    317,691
    
    
    >4.0
    %
    $
    397,114
    
    
    >5.0
    %Hudson
      United Bank
    
    
    485,520
    
    
    6.14
    %
    
    316,046
    
    
    >4.0
    %
    
    395,057
    
    
    >5.0
    %
  71
  
 On May
28, 2004, the Bank consented to the issuance of an order to cease and desist
(Order) by the FDIC. The Bank committed to take affirmative action to complete:
an internal assessment of compliance with policies and procedures, an
independent comprehensive written review of the BSA/AML program, establish a
committee of the board of directors that is charged with the responsibility of
ensuring compliance with the provisions of the Order and the BSA plan, designate
a qualified BSA officer to monitor day-to-day compliance, provide appropriate
BSA training, enhance the level of internal and external audits of BSA
compliance, implement an enhanced system of internal processes and controls to
ensure compliance with BSA and implement an enhanced system of internal
processes and controls to ensure compliance with BSA and implement enhanced due
diligence procedures for all high risk accounts that are newly-established,
renewed or modified. The Department of Banking and Insurance of the State of New
Jersey did not participate in the Order.
 
 •  In the
opinion of management, the Bank has taken appropriate actions to comply with the
requirements of the Order.
 
 **(25)
DERIVATIVES FINANCIAL INSTRUMENTS**
 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. 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, within the context of the management of the
Company’s overall asset liability risk. Management does not enter into these
contracts for speculative purposes. The notional amount of the derivative
contracts totals $495 million at December 31, 2004. The Company’s derivatives
contracts include LIBOR indexed interest rate swaps entered into in connection
with certain fixed rate certificates of deposits and with a specified amount of
the Company’s fixed rate borrowings, to effectively convert those fixed rate
liabilities into LIBOR indexed liabilities. The Company evaluates the
effectiveness of its hedges on a quarterly basis.
  Under
SFAS No.133, the Company has adopted hedge accounting for these contracts. 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 change in
the value of the hedged item is assumed to be exactly as much as the change in
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. 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 FASB
issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and
Hedging Activities” in April 2003. This statement amends and clarifies financial
accounting and reporting for derivative instruments and hedging activities under
FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging
Activities”. The Company had no material impact on its operations from adoption
of this statement.
  The
Company’s policies for the use of interest rate derivative contracts, its actual
use of interest rate derivative contracts, and the effectiveness of the interest
rate derivative contracts as hedges are reviewed throughout the year by the
Company’s Asset Liability Committee.
 
 Interest
rate derivatives outstanding at December 31, 2004 are as follows: (in
thousands)
 
 Maturity
    
    Notional
      Amount
    
    Fixed
      Interest Rate
    
    Variable
      Rate
      Index
    
    Type
      of
      InstrumentLess
      than one year
    
    $
    100,000
    
    
    2.03
    
    
    LIBOR
    
    
    Swap1
      year through three years
    
    
    100,000
    
    
    2.60
    
    
    LIBOR
    
    
    Swap3
      year through 5 years
    
    
    75,000
    
    
    3.50
      - 4.25
    
    
    LIBOR
    
    
    SwapGreater
      than 5 years
    
    
    220,000
    
    
    5.00
      -5.50
    
    
    LIBOR
    
    
    SwapTotal
    
    $
    495,000
 
 72
 
 **(26)
      INTANGIBLES**Intangibles
      are as follows for the periods indicated ($ in
  thousands)
  At
      December 31, 2004
    
    
    Gross
      CarryingAmount
    
    
    AccumulatedAmortization
    
    
    Net
      CarryingAmountCore
      deposit intangibles
    
    $
    42,029
    
    $
    25,997
    
    $
    16,032Other
      Intangibles (see Note 19)
    
    
    4,880
    
    
    808
    
    
    4,072
  At
      December 31, 2003
    
    
    Gross
      CarryingAmount
    
    
    AccumulatedAmortization
    
    
    Net
      CarryingAmountCore
      deposit intangibles
    
    $
    42,029
    
    $
    21,776
    
    $
    20,253Other
      Intangibles
    
    
    2,529
    
    
    118
    
    
    2,411
  At
      December 31, 2002
    
    
    Gross
      CarryingAmount
    
    
    AccumulatedAmortization
    
    
    Net
      CarryingAmountCore
      deposit intangible
    
    $
    42,029
    
    $
    15,606
    
    $
    26,423
   The
      following is the estimated amortization expense on intangibles for the
      years indicated ($ in thousands):2005
    
    $
    4,8922006
    
    
    4,8462007
    
    
    5,1032008
    
    
    3,6152009
    
    
    1,027
 The
Company annually tests its intangibles for impairment. As of December 31, 2004
and December 31, 2003 the Company did not consider its intangibles
impaired.
 
 **(27)
CONTRACTUAL OBLIGATIONS**
 
 The
following table outlines the Company’s contractual obligations as of December
31, 2004:
 
 Contractual
      Obligations
    
    Less
      than one year
    
    1 -
      3 years
    
    3 -
      5 years
    
    More
      than 5 years
    
    TotalLong-Term
      Debt
    
    $
    26,232
    
    $
    74,219
    
    $
    48,047
    
    $
    579,278
    
    $
    727,776Operating
      Leases
    
    
    9,566
    
    
    14,592
    
    
    7,828
    
    
    7,936
    
    
    39,922
  All of
the Company’s material operating leases are for bank premises.
 
 The
Company’s long-term debt includes the Company’s payments on its junior
subordinated debt (related to its capital trust preferred securities) and
subordinated debt principal as well as interest payable. As of December 31, 2004
there was $374,515 in principal and $353,261 in interest payments over the life
of the long-term debt.
 The
Company makes monthly payments to its data processing service vendors of minimum
amounts based upon levels of transactions and services utilized These payment
amounts can vary considerably from month to month depending upon certain
circumstances. Actual expense is reflected in the Company’s financial statements
and was $33.3 million, $29.7 million and $26.9 million for the years-ended 2004,
2003 and 2002, respectively.
  Market
and Dividend Information
  Hudson
United Bancorp is traded on the New York Stock Exchange under the symbol of
“HU”. At year-end, there were approximately 7,867 common stockholders of record.
The quarterly common stock and dividend information is as follows:
 
 73
  Quarterly
Common Stock and Dividend Information
 
 2004
    
    2003High
    
    Low
    
    Cash
      Dividends
    
    High
    
    Low
    
    Cash
      DividendsQuarter
      EndingMarch
      31
    
    $
    39.82
    
    $
    34.12
    
    $
    0.33
    
    $
    32.32
    
    $
    29.80
    
    $
    0.28June
      30
    
    
    38.30
    
    
    34.95
    
    
    0.33
    
    
    35.36
    
    
    30.83
    
    
    0.30September
      30
    
    
    37.79
    
    
    33.09
    
    
    0.35
    
    
    40.39
    
    
    34.08
    
    
    0.30December
      31
    
    
    41.64
    
    
    37.75
    
    
    0.35
    
    
    37.56
    
    
    34.26
    
    
    0.30
  The
Company’s restrictions on the payment of dividends is covered under Note 17
(“Restrictions on Bank Dividends, Loans or Advances”). In
addition to these restrictions, under the terms of the Company’s junior
subordinated debentures , the Company could not pay dividends on its common
stock if it deferred payments on the junior subordinated debentures which
provide the cash flow for the payments on the trust preferred
securities.
 
 Hudson
United Bancorp will provide, free of charge, to any stockholders, upon written
request, a copy of the Corporation’s Annual Report on Form 10-K, including the
financial statements and schedules, which have been filed with the Securities
& Exchange Commission. Requests should be addressed to Miranda Grimm, Acting
Corporate Secretary, Hudson United Bancorp, 1000 MacArthur Blvd., Mahwah, New
Jersey, 07430.
  Duplicate
accounts and mailings are costly and often unnecessary. We can consolidate such
accounts upon written request if you will notify either the Corporate Secretary
at the above address or , American Stock Transfer and Trust Company, 40 Wall
Street, New York, 10269.
  
 ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ONACCOUNTING AND FINANCIAL
      DISCLOSURE
 
 NONE
 Item9A
    CONTROLS AND PROCEDURES
 
 
 The
Company’s Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the Company’s disclosure controls and procedures as of the end
of the period covered by this report. Based on such evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer have concluded that the
Company’s disclosure controls and procedures are effective.
 
 The
Company’s Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Company’s internal control
over financial reporting during the Company’s fourth quarter that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
controls over financial reporting.
 
 The
Company’s management, including the CEO and CFO, does not expect that our
disclosure controls and procedures or our internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, provides reasonable, not absolute, assurance that the objectives of
the control system are met. The design of a control system reflects resource
constraints; the benefits of controls must be considered relative to their
costs. Because there are inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance with respect to financial
statement preparation and presentation that all control issues and instances of
fraud, if any, within the Company have been or will be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns occur because of simple error or mistake. Controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the controls. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all future conditions; over time,
control may become inadequate because of changes in conditions or deterioration
in the degree of compliance with the policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
 
 Management’s
Report on Internal Control over Financial Reporting is contained in Part IV of
this Annual Report on Form 10-K and is incorporated herein by reference.
  74
   ITEM 9B
    OTHER INFORMATIONNONE
 
 PART
III
 
 ITEM 10.
    DIRECTORS AND EXECUTIVE OFFICERS OF THE
      REGISTRANT
 
 
 HUB’s
Proxy Statement for its 2005 Annual Meeting under the captions Item 1- “Election
of Directors” and "Corporate Governance” --Section 16(a) Beneficial Ownership
Reporting Compliance" contains the information required by Item 10 with respect
to directors of HUB, certain information with respect to executive officers,
audit committee financial experts, code of ethics and material changes in
shareholder nominating procedures and that information is incorporated herein by
reference. Certain additional information regarding executive officers of HUB,
who are not also directors, appears under subsection (e) of Item 1 of this Form
10-K.
  ITEM 11.
    EXECUTIVE
      COMPENSATION
  HUB’s
Proxy Statement for its 2005 Annual Meeting, under the captions “Executive
Compensation”, "Corporate Governance --Compensation of Directors" and
“Compensation Committee Interlocks and Insider Participation”, contains the
information required by Item 11 and that information is incorporated herein by
reference.
 
 ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
      OWNERS ANDMANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
 
 Plan
      category
    
    Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
      (a)
    
    Weighted
      average exercise price of outstanding options, warrants and
      rights
      (b)
    
    Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a)
      ( c
      )Equity
      compensation plans approved by security holders
    
    
    970,138
    
    $
    28.02
    
    
    1,816,847Equity
      compensation plans not approved by security holders
    
    
    NONE
    
    
    NONE
    
    
    NONETotal
    
    
    970,138
    
    
    
    
    
    1,816,847
  The
Company has 7,166 outstanding options that have been granted under the different
plans of acquired institutions. These plans cannot have any further issuances
from them.
 HUB’s
Proxy Statement for its 2004 Annual Meeting under the caption “Stock Ownership
of Management and Principal Shareholders” contains the information required by
Item 12 and that information is incorporated herein by reference.
 
 ITEM 13.
    CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS
  HUB’s
Proxy Statement for its 2005 Annual Meeting under the captions “Corporate
Governance, —“Compensation Committee Interlocks and Insider Participation” and
“Certain Transactions with Management”, contains the information required by
Item 13 and that information is incorporated herein by reference.
  ITEM 14
    PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
 
 The
Company’s Proxy Statement for its 2005 Annual Meeting under the captions
Independent Public Accountants contains the information required by Item 14 and
that information is incorporated herein by reference.
 
 75
 PART
IV
 
 ITEM 15.
    EXHIBITS AND FINANCIAL STATEMENT
      SCHEDULES
  (a) (1)
&
(2)  List
of Financial Statements and Financial
 Statement
Schedules
 
 The
following financial statements and supplementary data are filed as part of the
annual report.
 
 Hudson
United Bancorp and Subsidiaries:
 Consolidated
Balance Sheets
 Consolidated
Statements of Income
 Consolidated
Statements of Comprehensive Income
 Consolidated
Statements of Changes in Shareholders’ Equity
 Consolidated
Statements of Cash Flows
 Notes to
Consolidated Financial Statements
 Management's
Report on Internal Control over Financial Reporting
 Report of Independent Registered Public Accounting
Firm on Internal Control over Financial Reporting
 Report of Independent Registered Public Accounting
Firm
 
 Schedules
to the Consolidated Financial Statements required by Article 9 of Regulation S-X
are not required under the related instructions or are inapplicable, and
therefore have been omitted.
 
 (a)  (3) Exhibits
 
 List
of Exhibits
 
 (2.1)
    Flatiron
      Stock Purchase Agreement. Dated July 25, 2003 (Incorporated by reference
      to the Company’s filing on Form 8-K filed on July 28, 2003 Exhibit
      2.1).
 
 (3)(A)
    The
      Certificate of Incorporation of the Company as in effect on the date of
      this filing. (Incorporated by reference from the Company's Amended
      Quarterly Report on Form 10- Q/A for the quarter ended June 30, 1999 filed
      September 10, 1999, Exhibit (3a)).
 
 (3)(B)
    Revised
      By-Laws of the Company dated April 15, 2003 as in effect on the date of
      this filing. (Incorporated by reference from the Company’s Annual Report
      on Form 10-K for the fiscal year ended 2003,Exhibit 3(b))
 (4a)
    Indenture
      dated as of January 14, 1994, between HUBCO, Inc. and Summit Bank as
      Trustee for $25,000,000 7.75% Subordinated Debentures due 2004.
      (Incorporated by reference to the Company’s Annual Report on Form 10-K for
      the fiscal year ended 2003,Exhibit
4(a)).
 
 (4b)
    Indenture
      dated as of September 13, 1996, between HUBCO, Inc. and Summit Bank as
      Trustee for $75,000,000 8.20% Subordinated Debentures due 2006.
      (Incorporated by reference from the Company’s Annual Report on Form 10-K
      for the fiscal year ended 2002,Exhibit
4(b)).
 
 (4c)
    Indenture dated as of January 31, 1997, between HUBCO,
      Inc. and The Bank of New York as Trustee for $50,000,000 8.98% Junior
      Subordinated Debentures due 2027. (Incorporated by reference from the
      Company’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2002,Exhibit 4( c)).
 
 (4d)
    Indenture dated as of June 19, 1998, between HUBCO, Inc.
      and The Bank of New York as Trustee for $50,000,000 7.65% Junior
      Debentures due 2028. (Incorporated by reference from the Company’s Current
      Report on Form 8-K dated June 26, 1998, Exhibit
4(a)).
 
 4 (e)
    Indenture
      dated March 28, 2003 between Hudson United Bancorp, Inc. and Wilmington
      Trust Company as Trustee for $20,000,000 6.85% Junior Subordinated
      Debentures due 2033 (Incorporated by reference from the Company’s
      Quarterly Report on Form 10-Q for the quarter ended March 31, 2003,Exhibit
      10(a)).
 
 4 (f)
    Guarantee
      Agreement dated March 28, 2003 between Hudson United Bancorp Inc. and
      Wilmington Trust Company (Incorporated by reference from the Company’s
      Quarterly Report on Form 10-Q for the quarter ended March 31,2003,Exhibit
      10(b)).
 
 76
 
 List of Exh ibits
 
 
 
 4 (g)
    Amended
      and Restated Declaration of Trust for Hudson United Capital Trust II dated
      March 28, 2003 (Incorporated by reference from the Company’s Quarterly
      Report on Form 10-Q for the quarter ended March 31,2003,Exhibit 10(
      c)).
 
 4 (h)
    Purchase Agreement dated March 28, 2003 between Hudson
      United Capital Trust II, Hudson United Bancorp Inc. and Sandler O’Neill
      & Partners, LP(Incorporated by reference from the Company’s Quarterly
      Report on Form 10-Q for the quarter ended March 31, 2003,Exhibit 10(d) ).
 
 4 (i)
    Indenture dated March 31, 2003 between Hudson United
      Bancorp, Inc. and Bank of New York as Trustee for $15,000,000 6.448%
      Junior Subordinated Debentures due 2033 (Incorporated by reference from
      the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2003,Exhibit 10(e))
 
 4 (j)
    Guarantee Agreement dated March 31, 2003 between Hudson
      United Bancorp Inc. and Bank of New York (Incorporated by reference from
      the Company’s Quarterly Report on Form 10-Q for the quarter ended March
      31, 2003,Exhibit 10(f))
 
 4 (k)
    Amended and Restated Declaration of Trust for Hudson
      United Capital Trust I dated March 31, 2003 (Incorporated by reference
      from the Company’s Quarterly Report on Form 10-Q for the quarter ended
      March 31, 2003,Exhibit 10(g))
 
 4 (l)
    Purchase Agreement dated March 31, 2003 between
      Hudson United Capital Trust I, Hudson United Bancorp Inc. and Trapeza CDO
      II, LLC(Incorporated by reference from the Company’s Quarterly Report on
      Form 10-Q for the quarter ended March 31, 2003,Exhibit 10(h))
 
 4(m)
    Indenture dated March 17, 2004, between Hudson United
      Bancorp, and U.S. National Bank Association as Trustee for $20,000,000
      Floating Rate Junior Subordinated Deferred Interest Debentures due 2034
      (Incorporated by reference to the Company’s Quarterly Report on Form 10Q
      for the quarter ended March 31, 2004, Exhibit
4(a))
 
 4(n)
    Guarantee agreement dated March 17, 2004 between Hudson
      United Bancorp, and U.S. Bank National Association (Incorporated by
      reference to the Company’s Quarterly Report on Form 10Q for the quarter
      ended March 31, 2004,Exhibit 4(b))
 
 4(o)
    Amended
      and Restated Declaration of Trust dated March 17, 2004, by and among
      Hudson United Bancorp, U.S. Bank National Association, Kenneth T. Neilson,
      James W. Nall and George Amentas as Administrators (Incorporated by
      reference to the Company’s Quarterly Report on Form 10Q for the quarter
      ended March 31, 2004,Exhibit 4(c ))
 
 4(p)
    Placement agreement dated March 8, 2004 between Hudson
      United Bancorp, and Hudson United Statutory Trust I, a Connecticut
      statutory trust (Incorporated by reference to the Company’s Quarterly
      Report on Form 10Q for the quarter ended March 31, 2004, Exhibit
      4(d))
 
 (10a)
    Kenneth T. Neilson Agreement Terminating Change in
      Control, Severance and Employment Agreement (Incorporated by reference to
      the Company’s Form 8-K dated December 1, 2004,Exhibit
10(2))
 
 (10b)
    James Mayo Agreement Terminating Change in Control,
      Severance and Employment Agreement (Incorporated by reference to the
      Company’s Form 8-K dated December 1, 2004,Exhibit
10(3))
 
 (10c)
    Thomas
      R. Nelson Agreement Terminating Change in Control, Severance and
      Employment Agreement (Incorporated by reference to the Company’s Form 8-K
      dated December 1, 2004,Exhibit 10(4))
 
 (10d)
    Thomas
      Shara Agreement Terminating Change in Control, Severance and Employment
      Agreement (Incorporated by reference to the Company’s Form 8-K dated
      December 1, 2004,Exhibit 10(5))
 
 (10e)
    Hudson
      United Bancorp Severance Plan(Incorporated
      by reference to the Company’s Form 8-K dated December 1, 2004,Exhibit
      10(1))
 
 (10f)
    Form
      of Agreement Terminating Severance Agreements(Incorporated by reference to
      the Company’s Form 8-K dated December 1, 2004,Exhibit
    10(6))
 
 (10g)
    Gross-up
      Agreement with Kenneth T. Neilson(Incorporated by reference to the
      Company’s Form 8-K dated December 1, 2004,Exhibit
10(7))
 77
 List of Exh ibits
 (10h)
    Form
      of Hudson United Bancorp 2002 Stock Option Plan Nonqualified Stock Option
      Grant Agreement (Incorporated by reference to the Company’s Form 8-K Filed
      December 30, 2004,Exhibit 10(1))
 (10i)
    Form
      of Hudson United Bancorp 2002 Stock Option Plan Incentive Stock Option
      Grant Agreement (Incorporated by reference to the Company’s Form 8-K Filed
      December 30, 2004,Exhibit 10(2)
 
 (10j)
    Form
      of Hudson United Bancorp Restricted Stock Plan Agreement (Incorporated by
      reference to the Company’s Form 8-K Filed December 30, 2004,Exhibit
      10(3)
 
 (10k)
    Separation Agreement and Release between D. Lynn Van
      Borkulo-Nuzzo and Hudson United Bancorp and Hudson United Bank dated
      September 23, 2004. (Incorporated by reference to the Company’s Form 8-K
      filed September 29, 2004,Exhibit 10(1))
  (10l)
    Supplemental
      Employee Retirement Participation Agreement, as restated with Kenneth T.
      Neilson dated March 1, 2004(Incorporated by reference to the Company’s
      Annual Report on Form 10-K for the fiscal year ended 2003,Exhibit
      10(o))
 
 (10m)
    Supplemental
      Employee Retirement Participation Agreement, as restated with Thomas Shara
      dated March 1, 2004 (Incorporated by reference to the Company’s Annual
      Report on Form 10-K for the fiscal year ended 2003,Exhibit
  10(p))
 
 (10n)
    Supplemental Employee Retirement Participation Agreement
      with James Mayo dated March 1, 2004 (Incorporated by reference to the
      Company’s Annual Report on Form 10-K for the fiscal year ended
      2003,Exhibit 10(r ))
 
 (10o)
    Supplemental
      Employee Retirement Participation Agreement with Thomas R..Nelson dated
      March 1, 2004 (Incorporated by reference to the Company’s Annual Report on
      Form 10-K for the fiscal year ended 2003,Exhibit
10(s))
 
 (10p)
    Supplemental
      Employee Retirement Participation Agreement with James Nall, dated March
      5, 2004 (Incorporated by reference to the Company’s Annual Report on Form
      10-K for the fiscal year ended 2003,Exhibit
10(z))
 
 (10q)
    Hudson
      United Bancorp Inc. Supplemental Employee’s Retirement Plan (as amended
      and restated effective September 14, 2004). (Incorporated by reference to
      the Company’s filing on Form 8-K dated September 14, 2004,Exhibit
      10(1))
 
 (10r)
    HUBCO,
      Inc. Directors Deferred Compensation Plan. (incorporated by reference from
      the Company’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2000,Exhibit 10(o))
 
 (10s)
    Hudson
      United Bancorp 2002 Stock Option Plandated
      April 17,2002. (Incorporated by reference to the Company’s Annual Report
      on Form 10-K for the fiscal year ended 2002,Exhibit
10(p))
 
 (10t)
    Hudson
      United Bancorp Restricted Stock Plan of 1989, as amended. (Incorporated by
      reference to the Company’s Annual Report on Form 10-K for the fiscal year
      ended 2003,Exhibit 10(x))
 
 (10u)
    Letter
      of Agreement with John Oliver dated September 3, 2003. (Incorporated by
      reference to the Company’s filing on Form 8-K dated February 10,
      2005,Exhibit 10(1))
 
 (10v)
    Letter
      of Agreement with Irwin Nack dated February 2, 2004. (Incorporated by
      reference to the Company’s filing Form 8-K dated February 10, 2005,Exhibit
      10(2))
 
 (10w)
    Hudson United Bancorp 1999 Stock Option Plandated
      February 27, 1999. (filed herewith)
 
 (10x)
    Hudson United Bancorp 1995 Stock Option Plandated
      December 13, 1994. (filed herewith)
 
 21
    List
      of Subsidiaries (Filed herewith).
 
 23
    Consent
      of Ernst & Young LLP, (filed herewith)
 
 31.1
    Certification
      of Chief Executive Officer (filed herewith)
 
 31.2
    Certification
      of Chief Financial Officer (filed herewith)
 
 32.1
    Certification pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed
      by Kenneth T. Neilson, Chief Executive Officer of the Company (filed
      herewith)
 
 32.2
    Certification pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed
      by James W. Nall, Chief Financial Officer of the Company(filed
      herewith)
 
 
 78
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15 (d) 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 BancorpMarch 15, 2005
    
    By:
    /s/ Kenneth T. NeilsonDate
    
    Kenneth T. NeilsonChairman, President
      and Chief Executive Officer
  
 Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report
      has been signed below by the following persons on behalf of the registrant
      and in the capacities and on the dates indicated./s/
      Kenneth T. Neilson
    
    Chairman,
      President and Chief Executive Officer and Director
    
    March
      15, 2005Kenneth
      T. Neilson/s/
      James W. Nall
    
    EVP,
      CFO (Principal Financial Officer)
    
    March
      15, 2005James
      W. Nall/s/
      Richard Alban
    
    SVP,
      Controller (Principal Accounting Officer)
    
    March
      15, 2005Richard
      Alban/s/
      Robert J. Burke
    
    Director
    
    March
      15, 2005Robert
      J. Burke/s/
      Donald P. Calcagnini
    
    Director
    
    March
      15, 2005Donald
      P. Calcagnini/s/
      Joan David
    
    Director
    
    March
      15, 2005Joan
      David/s/
      Bryant D. Malcolm
    
    Director
    
    March
      15, 2005Bryant
      D. Malcom/s/
      W. Peter McBride
    
    Director
    
    March
      15, 2005W.
      Peter McBride/s/
      Charles F.X. Poggi
    
    Director
    
    March
      15, 2005Charles
      F.X. Poggi/s/
      David A. Rosow
    
    Director
    
    March
      15, 2005David
      A. Rosow/s/
      Brian Flynn
    
    Director
    
    March
      15, 2005Brian
      Flynn/s/
      John H. Tatigian Jr.
    
    Director
    
    March
      15, 2005John
      H. Tatigan, Jr.
 
  79