1
EXHIBIT 13
Selected Historical Consolidated
FINANCIAL DATA
The following table sets forth certain historical financial data with respect to
Yardville National Bancorp and subsidiaries on a consolidated basis. This table
should be read in conjunction with Yardville National Bancorp's historical
consolidated financial statements and related notes thereto. All share and per
share data has been restated to reflect the 2.5% stock dividend declared in
March 1998 and the two-for-one stock split effected in the form of a stock
dividend declared in December 1997.
December 31,
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME
(in thousands)
Interest income $ 69,719 $ 50,923 $ 40,768 $ 34,251 $ 27,336
Interest expense 39,645 28,392 21,100 17,041 12,841
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 30,074 22,531 19,668 17,210 14,495
Provision for loan losses 3,175 1,975 1,125 1,640 865
Securities (losses) gains, net (301) 151 24 (136) (91)
Gains on sales of mortgages, net 38 62 30 21 19
Other non-interest income 3,028 2,789 2,490 2,228 1,927
Non-interest expense 18,457 15,337 13,341 11,479 10,260
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense $ 11,207 $ 8,221 $ 7,746 $ 6,204 $ 5,225
Income tax expense 3,187 2,639 2,740 2,178 1,822
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 8,020 $ 5,582 $ 5,006 $ 4,026 $ 3,403
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
(in thousands, except per share data)
Assets $ 1,123,598 $ 757,666 $ 614,686 $ 490,545 $ 403,115
Loans, net of unearned income 646,737 491,649 385,751 331,237 245,054
Securities 417,465 221,688 186,636 124,967 133,853
Deposits 743,807 519,643 422,944 364,445 302,972
Borrowed funds 298,689 177,888 134,316 86,339 65,221
Stockholders' equity 58,825 40,756 39,745 35,230 31,717
Allowance for loan losses 8,965 6,768 5,570 4,957 3,677
PER SHARE DATA
Net income -- basic $ 1.33 $ 1.11 $ 0.99 $ 0.82 $ 0.85
Net income -- diluted 1.33 1.10 0.98 0.80 0.82
Cash dividends 0.34 0.29 0.24 0.22 0.19
Stockholders' equity (book value) 8.88 8.20 7.82 7.07 6.58
OTHER DATA
Average shares outstanding -- basic 6,015 5,017 5,052 4,938 4,026
Average shares outstanding -- diluted 6,041 5,059 5,117 5,040 4,151
======================================================================================================================
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Selected Historical Consolidated
FINANCIAL DATA (cont.)
December 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average assets 0.83% 0.82% 0.93% 0.90% 0.99%
Return on average stockholders'
equity 15.34 13.96 13.32 12.25 13.84
Net interest margin (FTE) (1) 3.33 3.55 3.95 4.10 4.49
Efficiency ratio (2) 56.20 60.07 60.06 59.41 62.75
Average stockholders' equity to
average assets 5.39 5.84 7.00 7.33 7.14
Dividend payout ratio 25.40 25.96 24.63 26.90 21.69
Tier 1 leverage ratio (3) 7.90 7.68 9.53 7.80 9.07
Tier 1 capital as a percent of
risk-weighted assets 10.26 9.91 12.24 10.17 11.95
Total capital as a percent of
risk-weighted assets 11.46 11.17 13.49 11.43 13.20
Allowance for loan losses
to total loans (year end) 1.39 1.38 1.44 1.50 1.50
Net loan charge offs to average
total loans 0.17 0.18 0.14 0.13 0.05
Nonperforming loans (5) to total loans 0.48 0.79 1.38 2.46 1.15
Nonperforming assets (4) to
total loans and other real estate
owned (year end) 0.87 1.78 2.18 2.57 1.40
Allowance for loan losses
to nonperforming assets (4) (year end) 158.31 76.65 65.64 58.08 106.77
Allowance for loan losses
to nonperforming loans (5) (year end) 291.26% 174.75% 104.80% 60.90% 130.44%
=====================================================================================================================
(1) Tax equivalent based on a 34% Federal tax rate for all periods presented
(FTE = Federal tax equivalent basis).
(2) Efficiency ratio is equal to non-interest expense divided by the sum of the
net interest income and non-interest income.
(3) Tier 1 leverage ratio is Tier 1 capital to average assets.
(4) Nonperforming assets include nonperforming loans and other real estate
owned. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition."
(5) Nonperforming loans include nonaccrual loans, restructured loans, and loans
90 days past due or greater and still accruing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition."
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3
Management's Discussion and Analysis
of Consolidated Financial Condition and
RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report. Throughout the
following sections, the "Corporation" is defined as Yardville National Bancorp
and its wholly owned subsidiaries Yardville National Bank (the "Bank") and
Yardville Capital Trust, collectively referred to as "YNB." The purpose of this
discussion and analysis is to assist in the understanding and evaluation of
YNB's financial condition, changes in financial condition and results of
operations.
1999 OVERVIEW
1999 was a remarkable year as YNB continued its development into a
supercommunity bank while achieving exceptional results. YNB's reputation as a
business lender in our expanding marketplace resulted in record loan growth in a
consolidating market.
In May 1999, YNB successfully completed a secondary public offering which
resulted in additional new capital, net of offering expenses, of approximately
$17,600,000 to support asset growth.
YNB achieved major milestones in the second half of 1999 by passing the $1
billion mark in assets and opening its new corporate headquarters, consolidating
major divisions in one building.
SUMMARY OF FINANCIAL PERFORMANCE
YNB's philosophy of relationship banking and reputation in the marketplace as a
business lender resulted in record loan and deposit growth as well as record
earnings.
Net income amounted to $8,020,000, a 43.7% increase, compared to the record
results of $5,582,000 reported in 1998. Earnings were primarily enhanced by
commercial loan and securities growth experienced throughout the year. On a
diluted per share basis, net income increased 20.9% to $1.33 in 1999 from $1.10
in 1998.
Driven by commercial loan growth, YNB's loan portfolio increased 31.5% in
1999 compared to 1998. At December 31, 1999, total loan outstandings reached
$646,737,000 compared to $491,649,000 at the end of 1998. Asset quality showed
improvement in 1999 as illustrated by the decrease in the ratio of nonperforming
loans to total loans from 0.79% in 1998 to 0.48% in 1999. The allowance for loan
losses totaled $8,965,000 or 1.39% of total loans, covering 291.3% of total
nonperforming loans. YNB's deposit base increased 43.1% to total $743,807,000 at
December 31, 1999. CDs were competitively priced throughout the year to fund
loan growth. YNB's emphasis on relationship banking is reflected in the 19.6%
increase in demand deposits in 1999.
[BARCHART]
RETURN ON AVERAGE ASSETS
1995 0.99%
1996 0.90%
1997 0.93%
1998 0.82%
1999 0.83%
[BARCHART]
RETURN ON AVERAGE STOCKHOLDERS' EQUITY
1995 13.84%
1996 12.25%
1997 13.32%
1998 13.96%
1999 15.34%
Return on average assets (ROA) increased to 0.83% in 1999 from 0.82% in
1998. For 1999 YNB's return on average stockholders' equity (ROE) was 15.34%
compared to 13.96% in 1998. This measurement indicates how effectively a company
can generate net income on the capital invested by its shareholders. The
efficiency ratio decreased to 56.20% in 1999 from 60.07% in 1998.
RESULTS OF OPERATIONS
YNB earned $8,020,000 or $1.33 per share (diluted) for the year ended December
31, 1999 compared to $5,582,000 or $1.10 per share (diluted) for the year ended
December 31, 1998. Net income and earnings per share grew 43.7% and 20.9%,
respectively, in 1999. YNB posted net income of $5,006,000 or $0.98 per share
(diluted) in 1997. The increase in earnings per share in 1999 is principally
attributed to increased earnings, offset by higher average shares outstanding
due to the secondary public offering.
NET INTEREST INCOME
Net interest income, YNB's largest and most significant component of operating
income, is the difference between interest and fees earned on loans and other
earning assets, and interest paid on deposits and borrowed funds. This component
represented 91.6% of YNB's net revenues in 1999. Net interest income also
depends upon the relative amount of interest earning assets, interest bearing
liabilities, and the interest rate earned or paid on them.
The following tables set forth YNB's consolidated average balances of
assets, liabilities and stockholders' equity as well as interest income and
expense on related items, and YNB's average yield or rate for the years ended
December 31, 1999, 1998, 1997, 1996, and 1995. The yields and costs are derived
by dividing income and expense by the average balance of assets or liabilities.
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Financial Summary
AVERAGE BALANCES, RATES PAID AND YIELDS
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE Average
AVERAGE YIELD/ Average Yield/
(in thousands) BALANCE INTEREST RATE Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Deposits with other banks $ 734 $ 45 6.13% $ 3,365 $ 175 5.20%
Federal funds sold 17,932 904 5.04 6,180 333 5.39
Securities 341,135 21,216 6.22 198,890 12,197 6.13
Loans, net of unearned income (1) 564,552 47,554 8.42 438,050 38,218 8.72
- ---------------------------------------------------------------------------------------------------------------------
Total interest earning assets $ 924,353 $ 69,719 7.54% $ 646,485 $50,923 7.88%
- ---------------------------------------------------------------------------------------------------------------------
NON-INTEREST EARNING ASSETS:
Cash and due from banks $ 16,208 $ 15,398
Allowance for loan losses (7,638) (6,102)
Premises and equipment, net 7,493 5,786
Other assets 29,109 22,599
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest earning assets 45,172 37,681
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 969,525 $ 684,166
- ---------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets,
and interest bearing demand $ 185,504 $ 4,887 2.63% $ 165,534 $ 5,034 3.04%
Certificates of deposit of
$100,000 or more 51,290 2,643 5.15 25,550 1,386 5.42
Other time deposits 320,809 17,528 5.46 211,790 12,152 5.74
- ---------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 557,603 25,058 4.49 402,874 18,572 4.61
Borrowed funds 256,957 13,523 5.26 158,106 8,756 5.54
Trust preferred securities 11,500 1,064 9.25 11,500 1,064 9.25
- ---------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $ 826,060 $ 39,645 4.80% $ 572,480 $28,392 4.96%
- ---------------------------------------------------------------------------------------------------------------------
NON-INTEREST BEARING LIABILITIES:
Demand deposits $ 81,843 $ 66,857
Other liabilities 9,351 4,857
Stockholders' equity 52,271 39,972
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest bearing liabilities
and stockholders' equity $ 143,465 $ 111,686
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 969,525 $ 684,166
- ---------------------------------------------------------------------------------------------------------------------
Interest rate spread (2) 2.74% 2.92%
- ---------------------------------------------------------------------------------------------------------------------
Net interest income and margin (3) $ 30,074 3.25% $22,531 3.49%
- ---------------------------------------------------------------------------------------------------------------------
Net interest income and margin
(tax equivalent basis) (4) $ 30,786 3.33% $22,950 3.55%
=====================================================================================================================
(1) Loan origination fees are considered an adjustment to interest income. For
the purpose of calculating loan yields, average loan balances include nonaccrual
loans with no related interest income.
(2) The interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities.
(3) The net interest margin is equal to net interest income divided by average
interest earning assets.
(4) In order to make pre-tax income and resultant yields on tax exempt
investments and loans comparable to those on taxable investments and loans, a
tax equivalent adjustment is made equally to interest income and income tax
expense with no effect on after tax income. The tax equivalent adjustment has
been computed using a Federal income tax rate of 34% and has increased interest
income by $712,000, $419,000, $325,000, $222,000, and $202,000, for the years
ended December 31, 1999, 1998, 1997, 1996, and 1995, respectively.
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- ------------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
$ 2,533 $ 107 4.22% $ 1,992 $ 98 4.92% $ 685 $ 36 5.26%
7,121 380 5.34 4,265 228 5.35 7,838 464 5.92
140,655 8,770 6.24 132,036 8,194 6.21 97,456 5,756 5.91
355,526 31,511 8.86 287,289 25,731 8.96 221,232 21,080 9.53
- --------------------------------------------------------------------------------------------------------------------------
$ 505,835 $40,768 8.06% $425,582 $34,251 8.05% $ 327,211 $27,336 8.35%
- --------------------------------------------------------------------------------------------------------------------------
$ 15,425 $ 11,905 $ 8,778
(5,254) (4,190) (3,265)
5,288 5,037 4,175
15,337 10,156 7,490
- --------------------------------------------------------------------------------------------------------------------------
30,796 22,908 17,178
- --------------------------------------------------------------------------------------------------------------------------
$ 536,631 $448,490 $ 344,389
- --------------------------------------------------------------------------------------------------------------------------
$ 159,720 $ 5,083 3.18% $133,450 $ 4,014 3.01% $ 123,029 $ 4,107 3.34%
23,357 1,273 5.45 18,188 922 5.07 15,521 883 5.69
168,962 9,759 5.78 125,332 7,138 5.70 103,637 5,792 5.59
- --------------------------------------------------------------------------------------------------------------------------
352,039 16,115 4.58 276,970 12,074 4.36 242,187 10,782 4.45
84,492 4,761 5.63 87,065 4,967 5.70 33,339 2,059 6.18
2,422 224 9.25 -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
$ 438,953 $21,100 4.81% $364,035 $17,041 4.68% $ 275,526 $12,841 4.66%
- --------------------------------------------------------------------------------------------------------------------------
$ 56,700 $ 49,078 $ 42,321
3,404 2,507 1,950
37,574 32,870 24,592
- --------------------------------------------------------------------------------------------------------------------------
$ 97,678 $ 84,455 $ 68,863
- --------------------------------------------------------------------------------------------------------------------------
$ 536,631 $448,490 $ 344,389
- --------------------------------------------------------------------------------------------------------------------------
3.25% 3.37% 3.69%
- --------------------------------------------------------------------------------------------------------------------------
$19,668 3.89% $17,210 4.04% $14,495 4.43%
- --------------------------------------------------------------------------------------------------------------------------
$19,993 3.95% $17,432 4.10% $14,697 4.49%
==========================================================================================================================
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Changes in net interest income and margin result from the interaction between
the volume and composition of earning assets, interest bearing liabilities,
related yields, and associated funding costs. The following table demonstrates
the impact on net interest income of changes in the volume of interest earning
assets and interest bearing liabilities and changes in interest rates earned and
paid.
- ---------------------------------------------------------------------------------------------------------------------
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
RATE/VOLUME ANALYSIS
1999 VS. 1998 1998 vs. 1997
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGES IN: Due to changes in:
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) VOLUME RATE TOTAL Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Deposits with other banks $ (157) $ 27 $ (130) $ 40 $ 28 $ 68
Federal funds sold 594 (23) 571 (51) 4 (47)
Securities 8,844 175 9,019 3,574 (147) 3,427
Loans, net of unearned income (1) 10,696 (1,360) 9,336 7,207 (500) 6,707
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 19,977 (1,181) 18,796 10,770 (615) 10,155
- ---------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets,
and interest bearing demand 569 (716) (147) 181 (230) (49)
Certificates of deposit of
$100,000 or more 1,330 (73) 1,257 (6) 119 113
Other time deposits 5,982 (606) 5,376 2,458 (65) 2,393
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 7,881 (1,395) 6,486 2,633 (176) 2,457
Borrowed funds 5,222 (455) 4,767 4,078 (83) 3,995
Trust preferred securities -- -- -- 840 -- 840
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 13,103 (1,850) 11,253 7,551 (259) 7,292
- ---------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 6,874 $ 669 $ 7,543 $ 3,219 $ (356) $ 2,863
=====================================================================================================================
(1) Loan origination fees are considered adjustments to interest income.
YNB's net interest income totaled $30,074,000 in 1999, an increase of 33.5%
from the $22,531,000 reported in 1998. The prior year's increase was 14.6% from
1997's net interest income of $19,668,000. The principal factor contributing to
the 1999 increase in net interest income was an increase in interest income of
$18,796,000 resulting from increased loan and security volumes. This was
partially offset by a decrease in loan yields and increased volumes of time
deposits and borrowed funds and the related interest expense.
Average interest earning assets increased by $277,868,000 or 43.0% for 1999
with increases of $126,502,000 in loans and $142,245,000 in securities. Led by
commercial loans, YNB's average loan portfolio grew by 28.9%, however, loan
yields averaged 8.42% in 1999 or 30 basis points lower than 1998. The decrease
was, in part, the result of 1999 loan growth at lower yields due to a
competitive market and a lower interest rate environment for the majority of the
year. YNB's commercial, commercial mortgage, and real estate - construction
loans with floating interest rates declined from approximately 48% of the total
at year-end 1998 to approximately 39% at year-end 1999. This decline also
contributed to the lower loan yield as higher yielding floating rate loans were
refinanced into lower yielding fixed rate commercial loan assets. YNB's average
securities portfolio grew 71.5%, and the yield on that portfolio increased 9
basis points when comparing 1999 to 1998. Overall, the yield on earning assets
decreased 34 basis points to 7.54% in 1999 from 7.88% in 1998.
Interest expense was $39,645,000 for 1999, an increase of $11,253,000 or
39.6% from $28,392,000 a year ago. The increase in interest expense for the
comparable period is principally attributable to higher levels of time deposits
and borrowed funds. Time deposits were aggressively priced throughout 1999 to
fund loan growth. The cost on these deposits, however, dropped 28 basis points
in 1999 from 1998. Average interest bearing liabilities rose 44.3% in 1999
compared to 1998. The cost of total interest bearing liabilities, however, fell
16 basis points to 4.80% in 1999 from 4.96% in 1998.
16
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Net interest income was $22,531,000 in 1998, an increase of 14.6% from
$19,668,000 in 1997. The principal factor contributing to the improvement was an
increase in interest income due to increased loan and security volumes. This was
partially offset by decreases in loan and security yields and increased volumes
of other time deposits, borrowed funds and trust preferred securities and the
related interest expense.
The net interest margin (tax equivalent basis), which is net interest
income divided by average interest earning assets, was 3.33% in 1999 compared
with 3.55% in 1998 and 3.95% in 1997. The decrease in the net interest margin
resulted from factors discussed previously. In addition, management has
continued to use an investment leverage strategy (Investment Growth Strategy)
that negatively impacts the margin.
The Investment Growth Strategy is designed to increase net interest income
by purchasing investments using borrowed funds with a targeted spread of 75
basis points after tax. The primary goals of the strategy are to improve ROE and
earnings per share. Incrementally, any increase to net interest income will
improve ROE and earnings per share. The targeted spread on this strategy,
however, will result in a negative impact to the net interest margin and ROA.
For the period ended December 31, 1999, the Investment Growth Strategy averaged
approximately $210,000,000. The positive impact to ROE and earnings per share
was approximately 3.50% and $0.33, respectively. Due to the above performance of
the Investment Growth Strategy, ROA was also enhanced by approximately .03%. The
negative impact to the net interest margin was approximately .59%. This strategy
is proactively managed, analyzing risk and reward relationships in different
interest rate environments based on the composition of investments in the
strategy and YNB's overall interest rate risk position.
Based on a higher interest rate environment, the trend of a narrowing
interest spread and margin is likely to continue throughout 2000. The majority
of YNB's entire CD portfolio will reprice over a twelve month period which will
put pressure on the net interest margin and net income. Other deposit products
are being promoted which are designed to reduce the dependence on higher cost
funding sources.
Nonaccrual loans totaled $2,189,000 in 1999, an increase of $143,000 from
the $2,046,000 reported in 1998. Had such nonaccrual loans been paid in the
manner and at the rate and time contracted at the time the loans were made, YNB
would have recognized additional interest income of approximately $257,000 in
1999, $249,000 in 1998, and $254,000 in 1997. Moreover, YNB's net interest
margin would have been .03% higher in 1999, .04% higher in 1998 and .05% higher
in 1997.
Average non-interest bearing demand deposits increased 22.4% to $81,843,000
in 1999 from $66,857,000 in 1998. Business checking accounts and relationships
have generated most of the increase. Throughout the comparative periods,
increases in average non-interest bearing deposits contributed to the increase
in net interest income.
NON-INTEREST INCOME
Non-interest income amounted to $2,765,000 in 1999 compared to $3,002,000 the
prior year, a decrease of $237,000 or 7.9%. The primary reason for the decrease
was the effect of an investment portfolio restructuring, which resulted in a
pre-tax net loss on sale of securities of approximately $301,000 compared to net
gains in 1998 and 1997. Non-interest income in 1998 increased by $458,000, or
18.0% from 1997's posted total of $2,544,000.
Non-interest income represented 3.8% of total revenues in 1999. Part of
YNB's strategic plan is to improve non-interest income growth. The Product
Development and Management Committee continues to expand YNB's product base to
meet the challenges of a competitive marketplace and changing customer needs. A
recently introduced product is YNB Online - PC Banking designed to serve YNB
customers quickly and conveniently. This committee has also pursued other
strategic initiatives to provide additional sources of fee income that
complement YNB's established banking products and services. Management is in the
process of completing a business plan focused on taking advantage of the newly
allowed business opportunities under the recently passed Financial Modernization
Act. These include insurance and investment advisory services.
The major components of non-interest income are presented in the following
table.
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Service charges on
deposit accounts $ 1,374 $ 1,246 $ 1,174
Other service fees 687 611 593
Gains on sales of
mortgages, net 38 62 30
Securities (losses)
gains, net (301) 151 24
Earnings on bank owned
life insurance 765 708 541
Other non-interest income 202 224 182
- --------------------------------------------------------------------------------
Total $ 2,765 $ 3,002 $ 2,544
================================================================================
Service charges on deposit accounts represent the largest single source of
non-interest income. Service charge revenues in 1999 totaled $1,374,000, an
increase of 10.3%, compared to $1,246,000 in 1998. Service charge income totaled
$1,174,000 in 1997. This component of non-interest income represented 49.7%,
41.5% and 46.1% of the total non-interest income in 1999, 1998 and 1997,
respectively. Service charge income increased in 1999 principally due to an
increase in income from overdraft fees. YNB attributes the increase to better
collection efforts and pricing initiatives instituted in September 1999.
Management continues to utilize a strategy of requiring compensating balances
from its commercial customers. Those who meet balance requirements are not
service charged.
YNB also generates non-interest income from a variety of fee-based
services. These include safe deposit rentals,
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lockbox services and Automated Teller Machine fees for non-customers. Deposit
and fee services are determined annually by the Product Development and
Management Committee to reflect current costs and competitive factors. Other
service fees increased 12.4% to $687,000 in 1999 from $611,000 in 1998. Other
service fees totaled $593,000 in 1997.
Gains on sales of mortgages, net, decreased in 1999 to $38,000 from $62,000
in 1998. Gains on sales of mortgages, net, totaled $30,000 in 1997. YNB has not
been an active participant in the secondary mortgage market.
YNB recorded net securities losses of $301,000 in 1999 and net securities
gains of $151,000 and $24,000 in 1998 and 1997, respectively. The net losses in
1999 are the result of a portfolio restructuring in the last quarter of 1999.
The purpose was to improve YNB's longer-term interest rate risk position and
enhance earnings in 2000 and beyond.
Income from Bank Owned Life Insurance (BOLI) totaled $765,000 in 1999, an
increase of $57,000 or 8.1% compared to 1998. Income from BOLI totaled $541,000
in 1997. BOLI assets offset the costs of executive compensation plans and a
deferred compensation plan for directors.
Other non-interest income is primarily composed of income derived from
mortgage servicing income. Other non-interest income totaled $202,000 in 1999, a
decrease of $22,000, or 9.8%, when compared to $224,000 in 1998. Other
non-interest income totaled $182,000 in 1997.
NON-INTEREST EXPENSE
Non-interest expense totaled $18,457,000 in 1999, an increase of $3,120,000 or
20.3%, compared to $15,337,000 in 1998. Non-interest expense in 1998 increased
15.0% from $13,341,000 in 1997. The largest increase in non-interest expense in
1999 compared to 1998 was in salaries and employee benefits. To a lesser extent,
occupancy, equipment and other non-interest expense also increased for the
comparable periods.
The following table presents the major components of non-interest expense for
the years indicated.
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Salaries and
employee benefits $10,041 $ 8,115 $ 7,446
Occupancy expense, net 1,516 1,070 977
Equipment expense 1,642 1,299 1,107
Audit and
examination fees 346 306 227
Attorneys' fees 296 379 373
O.R.E. expenses 571 573 378
Outside services and
processing 237 328 332
Stationery and supplies 498 403 347
Communication and
postage 487 434 373
FDIC insurance premium 67 53 47
Insurance (other) 97 101 127
Marketing 835 747 575
Amortization of trust
preferred expenses 160 160 27
Other 1,664 1,369 1,005
- --------------------------------------------------------------------------------
Total $18,457 $15,337 $13,341
================================================================================
Salaries and employee benefits, which represent the largest portion of
non-interest expense, increased $1,926,000 in 1999 or 23.7% over 1998. These
expenses increased $669,000 or 9.0% over 1997. Full time equivalent employees
increased to 233 at December 31, 1999 from 187 at December 31, 1998. This
increase in staffing was necessary due to YNB's strong growth and additional
branching. Also contributing to the increase were annual merit salary increases.
Staffing costs, not including benefits, rose 19.6% in 1999 compared to 1998.
Employee benefit costs increased 41.5% in 1999. The primary reasons for the
increase was the formation of an Employee Stock Ownership Plan (ESOP) in 1999
and higher health benefits cost. The compensation expense portion of the ESOP
was $347,000 and accounted for 54.5% of the increase in benefits expense. 1998's
increase from 1997 primarily was the result of additional staffing required with
additional branching and further staffing due to YNB's growth, as well as the
related benefit expense. Salaries and employee benefits as a percent of average
assets were 1.0% in 1999, 1.2% in 1998 and 1.4% in 1997.
During 1999, net occupancy expense increased $446,000 to $1,516,000 from
$1,070,000 reported in 1998. The increase in occupancy expenses in 1999 compared
to 1998 was due primarily to the operating expenses associated with YNB's new
corporate headquarters building and branch facility. In October, YNB occupied
and began lease payments on the 45,000 square foot building. Occupancy related
expenses for the corporate center totaled approximately
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$275,000 in the last quarter of 1999. To a lesser extent, occupancy expenses
also increased due to higher costs associated with the lease payments and other
operating costs of the Pennington office (full year impact) and the Newtown,
Pennsylvania branch, which opened in April 1999. The increase in occupancy
expenses in 1998 compared to 1997 was due primarily to new rental lease payments
on the Pennington branch, additional space for the East Windsor branch, and
routine rent increases. In the last quarter of 1998, YNB began lease payments on
its Newtown, Pennsylvania branch. This component of non-interest expense has
remained constant as a percentage of average assets at 0.2% in 1999, 1998 and
1997, respectively.
Equipment expenses increased $343,000 or 26.4% to $1,642,000 in 1999 from
$1,299,000 in 1998. Equipment expense includes depreciation on furniture and
equipment as well as maintenance on that equipment. Throughout 1998 and 1999,
management upgraded equipment in preparation for Year 2000 and increased
processing capability to enhance productivity. Depreciation on furniture and
equipment and equipment repairs and maintenance costs increased $251,000 and
$40,000 or 35.9% and 11.1%, respectively, in 1999. Of the increase, furniture
and equipment expense associated with the corporate center in 1999 totaled
approximately $70,000. YNB's enhanced technology has allowed management to
further diversify business and consumer product lines. The increase in equipment
expenses in 1998 compared to 1997 was the result of management's efforts to
upgrade YNB's technology capacity to increase productivity, provide quality
customer service, and resolve Year 2000 issues.
The full impact of corporate center-related expenses will be realized in
2000. This estimated expense includes all lease costs, depreciation of leasehold
improvements, furniture and equipment as well as utility costs. The estimated
annual expense impact is $1,320,000.
Other real estate (O.R.E.) expenses decreased $2,000 to $571,000 in 1999
when compared to 1998. O.R.E. expenses increased 51.6% in 1998 to $573,000 from
$378,000 in 1997. The settlement of one real estate - construction loan,
originally placed into nonaccrual in late 1996, took place in late December
1999. Further reducing O.R.E. expenses in 2000 will be dependent on O.R.E.
levels experienced during the year. Legal fees and real estate taxes associated
with the two real estate - construction loans that were placed in nonaccrual in
late 1996 account for the increased O.R.E. expenses in 1998 and 1997.
Marketing expenses increased by $88,000, or 11.8% in 1999 to $835,000,
compared to $747,000 in 1998. Marketing expenses totaled $575,000 in 1997. In
1999, marketing efforts were concentrated on advertising to generate deposits to
support asset growth in addition to YNB's emphasis on participation in community
activities. YNB's entry into Pennsylvania in 1999 resulted in additional
marketing costs to enhance YNB's profile in a new market.
Other expenses, which include various professional fees, loan-related
expenses and other operating expenses, have increased primarily due to the
increasing size of the organization. In 1999, other non-interest expenses were
$1,664,000, an increase of $295,000 or 21.5% from $1,369,000 in 1998. Other
expenses totaled $1,005,000 in 1997. The increase for the comparable periods are
primarily attributable to loan related expenses related to growth, increased
professional fees, which include continued employee training and education due
to technology improvements and other operating expenses associated with a larger
institution.
YNB's ratio of non-interest expense to average assets decreased to 1.9% for
1999 compared to 2.2% for 1998 and 2.5% for 1997.
An important industry productivity measure is the efficiency ratio. The
efficiency ratio is calculated by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio indicates
that more resources are being utilized to generate the same or greater volume of
income while a decrease would indicate a more efficient allocation of resources.
YNB's efficiency ratio decreased in 1999 to 56.20% compared to 60.07% in 1998,
and 60.06% in 1997.
INCOME TAXES
The provision for income taxes, which is comprised of Federal and state
income taxes, was $3,187,000 in 1999 compared to $2,639,000 in 1998 and
$2,740,000 in 1997. The increase in tax expense resulted from higher taxable
income partially offset by a lower effective tax rate. The provisions for income
taxes for 1999, 1998, and 1997 were at effective tax rates of 28.4%, 32.1% and
35.4%, respectively. The decrease in the effective tax rate was primarily due to
a state income tax planning strategy initiated in 1998. Those savings are
anticipated to continue into 2000. Higher levels of tax-free income also reduced
Federal income taxes in 1999 compared to 1998.
19
10
FINANCIAL CONDITION
YEARS ENDED DECEMBER 31, 1999 AND 1998
TOTAL ASSETS
YNB's assets were $1,123,598,000 at year-end 1999 versus $757,666,000 the
previous year, an increase of $365,932,000, or 48.3%. In the third quarter of
1999, YNB achieved a major milestone in its development into a supercommunity
bank as it surpassed the $1 billion mark. The growth in YNB's asset base
throughout 1999 was primarily due to an increase in loans and securities.
Average loans and securities grew 28.9% and 71.5% respectively, in 1999. During
the last several years, YNB has established its niche as the pre-eminent
business community bank in Mercer County specializing in commercial lending. The
increase in commercial loans is the product of YNB's relationship banking
philosophy and the consolidation in the marketplace, which has solidified YNB's
competitive position in its markets.
Average interest earning assets in 1999 were $924,353,000, a 43.0% increase
from $646,485,000 in 1998. The growth in interest earning assets was principally
funded by the increase in interest bearing liabilities, and, to a lesser extent,
demand deposits and stockholders' equity. YNB's ratio of average interest
earning assets to average assets increased to 95.3% at December 31, 1999
compared to 94.5% at December 31, 1998.
SECURITIES
YNB's securities portfolio represented $417,465,000, or 37.2% of assets at
December 31, 1999 versus $221,688,000, or 29.3% of assets at December 31, 1998.
The $195,777,000 or 88.3% increase for the comparable period was primarily due
to the increase in short-term securities purchased to enhance YNB's liquidity
profile as well as securities purchased as part of the Investment Growth
Strategy. On an average basis, the securities portfolio represented 36.9% of
average interest earning assets for the year ended December 31, 1999 compared to
30.8% of average interest earning assets for the year ended December 31, 1998.
Securities included in the Investment Growth Strategy totaled approximately
$228,400,000 at December 31, 1999 compared to approximately $142,200,000 at
December 31, 1998. This represents an increase of $86,200,000 or 60.6% in 1999.
The Investment Growth Strategy is diversified and consists of fixed and floating
rate mortgage-backed securities as well as agency callable securities. U.S.
agency-callable bonds and floating rate U.S. agency collateralized mortgage
obligations (CMOs) increased $65,190,000 and $29,201,000, respectively, in 1999.
Offsetting these increases was a $7,900,000 decrease in U.S. agency adjustable
rate mortgage-backed securities. Management uses asset and liability simulation
models to analyze risk and reward relationships and the degree of interest rate
exposure associated with this strategy. As a result of these models, floating
rate CMOs were purchased in the second half of 1999 as interest rates moved
higher. These securities will perform better in a higher interest rate
environment than fixed rate securities. The purpose of this strategy remains to
improve ROE and earnings per share.
The available for sale securities portfolio increased $123,721,000 to
$309,298,000 at December 31, 1999 from $185,577,000 at December 31, 1998. This
portfolio principally consists of U.S. Treasury, U.S. agency and agency
mortgage-backed securities. Throughout 1999, floating rate CMOs, shorter-term
U.S. Treasury and U.S. agency callable securities, totaling approximately
$73,000,000 were purchased to enhance YNB's liquidity and interest rate risk
profile. Floating rate CMOs totaling $29,201,000 were also purchased as part of
the Investment Growth Strategy in 1999. This activity accounted for the large
increase in available for sale securities. Federal Home Loan Bank stock also
increased $16,600,000 as a result of required stock purchases related to
borrowings. Activity in this portfolio is undertaken primarily to manage
liquidity and interest rate risk and to take advantage of market conditions that
create more attractive returns on these investments. As of December 31, 1999,
available for sale securities represented 74.1% of the entire portfolio. These
securities are reported at fair value, with unrealized gains and losses, net of
tax, included as a separate component of stockholders' equity.
Volatility in the bond market had a negative impact on market values in
YNB's securities portfolios. The yields on the 10 year Treasury and benchmark 30
year Treasury increased 179 basis points and 139 basis points, respectively,
from December 31, 1998 to December 31, 1999. At December 31, 1999 securities
available for sale had net unrealized losses of $9,637,000 compared to net
unrealized losses of $436,000 at December 31, 1998.
In late 1998, YNB established a trading account policy. Trading securities
are purchased specifically for short-term appreciation with the intent of
selling in the near future. Minimal net gains were realized in trading for 1999.
There were no trading securities outstanding at December 31, 1999.
Investment securities classified as held to maturity totaled $108,167,000
at December 31, 1999 compared to $36,111,000 at December 31, 1998. This
portfolio is principally comprised of U.S. agency callable securities and state
and municipal securities. In 1999, $64,200,000 in U.S. agency callable
securities were invested in the held-to-
20
11
maturity portfolio. Of that total, $50,200,000 was related to the Investment
Growth Strategy. The municipal bond portfolio grew to $31,892,000 at December
31, 1999 from $20,773,000 at December 31, 1998. Municipal bonds were purchased
to reduce YNB's effective tax rate. At December 31, 1999, investment securities
had net unrealized losses of $8,046,000 compared to net unrealized gains of
$92,000 at December 31, 1998.
The following tables present the amortized cost and market value of YNB's
securities portfolios as of December 31, 1999, 1998, and 1997.
- ---------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE SECURITIES
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) AMORTIZED COST MARKET VALUE Amortized Cost Market Value Amortized Cost Market Value
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of other
U.S. government agencies $ 117,496 $ 112,731 $ 55,051 $ 55,039 $ 62,465 $ 62,540
Mortgage-backed securities 170,775 166,164 120,410 119,986 91,193 91,316
Corporate obligations 5,783 5,522 2,867 2,867 3,297 3,306
Federal Reserve Bank Stock 1,397 1,397 812 812 587 587
Federal Home Loan Bank Stock 23,484 23,484 6,873 6,873 1,975 1,975
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 318,935 $ 309,298 $ 186,013 $ 185,577 $ 159,517 $159,724
===========================================================================================================================
INVESTMENT SECURITIES
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) AMORTIZED COST MARKET VALUE Amortized Cost Market Value Amortized Cost Market Value
- ---------------------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ 69,184 $ 63,992 $ 4,994 $ 4,935 $ -- $ --
Obligations of state and
political subdivisions 31,892 29,281 20,773 20,982 8,819 8,957
Mortgage-backed securities 7,091 6,848 10,344 10,286 18,093 17,891
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 108,167 $ 100,121 $ 36,111 $ 36,203 $ 26,912 $26,848
===========================================================================================================================
21
12
The expected maturities and average weighted yields for YNB's securities
portfolio as of December 31, 1999 are shown below. Yields for tax-exempt
securities are presented on a fully taxable equivalent basis assuming a 34% tax
rate.
- ------------------------------------------------------------------------------------------------------------------
SECURITY MATURITIES AND AVERAGE WEIGHTED YIELDS
AVAILABLE FOR SALE SECURITIES
December 31, 1999
- ------------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
(in thousands) one year five years ten years ten years Total
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of other U.S. government agencies $ 19,864 $ 39,409 $ 23,596 $ 29,862 $112,731
Mortgage-backed securities -- 2,058 1,823 162,283 166,164
Corporate obligations -- -- -- 5,522 5,522
Federal Reserve Bank Stock -- -- -- 1,397 1,397
Federal Home Loan Bank Stock -- -- -- 23,484 23,484
- ------------------------------------------------------------------------------------------------------------------
Total $ 19,864 $ 41,467 $ 25,419 $222,548 $309,298
- ------------------------------------------------------------------------------------------------------------------
Weighted average yield, computed on a
tax equivalent basis 5.31% 5.90% 6.60% 6.73% 6.51%
==================================================================================================================
INVESTMENT SECURITIES
December 31, 1999
- ---------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
(in thousands) one year five years ten years ten years Total
- ---------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ -- $ -- $ 20,998 $ 48,186 $ 69,184
Obligations of state and political
subdivisions 1,057 3,335 3,453 24,047 31,892
Mortgage-backed securities 2,506 -- 3,266 1,319 7,091
- ---------------------------------------------------------------------------------------------------------------
Total $ 3,563 $ 3,335 $ 27,717 $ 73,552 $108,167
- ---------------------------------------------------------------------------------------------------------------
Weighted average yield, computed on a
tax equivalent basis 5.55% 6.93% 6.59% 6.94% 6.80%
===============================================================================================================
Investments in mortgage-backed securities involve prepayment and interest
rate risk. YNB attempts to minimize these risks by diversifying the coupons of
the mortgage-backed securities, buying seasoned securities with consistent and
predictable prepayment histories and adhering to strict pricing policies when
purchasing mortgage-backed securities. At December 31, 1999 and 1998, YNB had
mortgage-backed securities totaling $177,866,000 and $130,754,000, respectively.
At December 31, 1999 and 1998 there were $94,125,000 and $96,654,000 in fixed
rate mortgage-backed securities outstanding, respectively. The risk to fixed
rate mortgage-backed securities is similar to fixed rate loans. In rising
interest rate environments, the rate of prepayment on fixed rate mortgage-backed
securities tends to decrease because of lower prepayments on the underlying
mortgages, and conversely, as interest rates fall, prepayments on such
securities tend to rise. In 1999 YNB realized $26,901,000 in principal cash
flows from mortgage-backed securities, compared to $46,041,000 in 1998. The
decreased cash flows are the result of a higher interest rate environment.
Collateralized mortgage obligations (CMOs) totaled approximately
$64,100,000 at December 31, 1999 compared to $9,836,000 at December 31, 1998. A
CMO is a mortgage-backed security comprised of classes of bonds created by
prioritizing the cash flows from the underlying mortgage pool in order to meet
different objectives of investors. Floating rate CMOs make up more than 95% of
the total CMO portfolio. In 1999, floating rate CMOs were purchased as part of
YNB's overall asset/liability management strategy to reduce longer-term interest
rate risk. All CMOs at December 31, 1999 were held in the available for sale
category.
22
13
LOAN PORTFOLIO
The loan portfolio represents YNB's largest earning asset class and is a
significant source of interest income. YNB's lending strategy stresses quality
growth, portfolio diversification, and strong underwriting standards.
YNB's strength as a commercial real estate and business lender was again
reflected in 1999 results. Consolidation in YNB's marketplace provided
opportunities to acquire new lending relationships with established businesses,
which is reflected in 1999 results as well. During 1999, total loans increased
$155,088,000 or 31.5% to $646,737,000 at December 31, 1999 from $491,649,000 at
December 31, 1998. There are several factors that may impact loan growth in
2000. They include competition from other financial institutions and nonbanks,
higher interest rates, and borrowers' concerns over the economy. The principal
areas of loan growth in dollar volume for 1999 were commercial mortgage real
estate loans and real estate construction loans, which grew $84,809,000 and
$32,547,000, respectively. The average yield earned on the loan portfolio was
8.42% in 1999, compared to 8.72% in 1998, a decrease of 30 basis points. The
primary reason for this decrease was lower commercial real estate loan yields. A
lower interest rate environment, competitive pricing, and a shift from floating
to fixed rate loans account for the lower commercial yields. YNB's loan
portfolio represented 57.6% of assets at December 31, 1999 compared with 64.9%
the prior year end.
The following table sets forth the components of YNB's loan portfolio at the
dates indicated.
- -----------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands) AMOUNT % Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------
Real estate --
mortgage:
Commercial $ 251,534 38.9% $166,725 33.9% $ 134,499 34.9% $ 112,914 34.1% $ 73,164 29.8%
Residential 110,293 17.1 93,540 19.0 85,754 22.2 83,183 25.1 73,076 29.8
Home equity 23,614 3.6 23,474 4.8 23,805 6.2 23,457 7.1 26,951 11.0
Commercial and
industrial 150,629 23.3 133,263 27.1 88,228 22.9 63,426 19.2 33,218 13.6
Real estate --
construction 70,933 11.0 38,386 7.8 28,182 7.3 25,958 7.8 19,353 7.9
Consumer 27,494 4.2 24,531 5.0 18,519 4.8 15,034 4.5 12,386 5.1
Other loans 12,240 1.9 11,730 2.4 6,764 1.7 7,265 2.2 6,906 2.8
- -----------------------------------------------------------------------------------------------------------------------------
Total loans $ 646,737 100.0% $491,649 100.0% $ 385,751 100.0% $ 331,237 100.0% $245,054 100.0%
=============================================================================================================================
23
14
YNB's primary lending focus continues to be commercial loans,
owner-occupied commercial mortgage loans, and tenanted commercial real estate
loans. In underwriting such loans, YNB first evaluates the cash flow capability
of the borrower to repay the loan. In addition, a substantial majority of
commercial loans are also secured by real estate and business assets, and
supported by personal guarantees. YNB makes commercial loans primarily to small-
to medium-sized businesses and professionals.
Over the last several years, YNB has significantly increased its capital
base through various equity offerings and retained earnings. As a result, YNB
now has a larger legal lending limit and has attracted larger loan
relationships.
Real estate - commercial mortgage loans increased by $84,809,000, or 50.9%
in 1999 to $251,534,000 from $166,725,000 at December 31, 1998. YNB's lending
policies generally require an 80% or lower loan-to-value ratio for commercial
real estate mortgages. Collateral values are established based upon
independently prepared appraisals. Generally, these loans are secured by
owner-occupied or cash flow tenanted properties and normally are part of a
broader commercial lending relationship.
Real estate - residential loans are primarily comprised of residential
mortgage loans, fixed-rate home equity loans, and business loans secured by
residential real estate. This portion of the portfolio totaled $110,293,000 at
December 31, 1999, up $16,753,000, or 17.9% from the prior year. Residential
mortgage loans represented $60,942,000, or 55.3% of the total. YNB's residential
mortgage loans are secured by first liens on the underlying real property. At
December 31, 1999, approximately 59% of the residential mortgage loan portfolio
had fixed interest rates and 41% had adjustable interest rates.
The home equity portfolio totaled $23,614,000 or 3.6% of YNB's loan
portfolio at December 31, 1999. This compares to $23,474,000, or 4.8% of the
total loan portfolio at December 31, 1998. The modest growth illustrated above
for 1999 is indicative of the aggressive competition for home equity loans in
YNB's markets. The home equity portfolio has provided consistent operating
income to YNB with controllable delinquencies and minimal losses.
[BARCHART]
TOTAL LOAN PORTFOLIO
(Dollars in millions)
1995 245
1996 331
1997 386
1998 492
1999 647
Commercial and industrial loans increased $17,366,000, or 13.0% at December
31, 1999 to $150,629,000 from $133,263,000 at December 31, 1998. Commercial and
industrial loans are made to small- to middle-market businesses and are
typically working capital loans, used to finance inventory, receivables,
equipment needs, and other working capital needs. These loans are generally
secured by business assets of the commercial borrower. YNB diversifies risk
within this portfolio by closely monitoring industry concentration.
Diversification is intended to limit the risk of loss from any single unexpected
event or trend.
- --------------------------------------------------------------------------------
YEAR-END COMMERCIAL AND INDUSTRIAL LOANS
(dollars in thousands)
- --------------------------------------------------------------------------------
Percent Number
Industry Classification Balance of balance of loans
- --------------------------------------------------------------------------------
Services $ 36,880 24.5% 275
Retail trade 25,137 16.7 614
Real estate-related 22,145 14.7 73
Manufacturing 17,503 11.6 76
Construction 12,415 8.2 60
Wholesale trade 10,473 7.0 47
Individuals 10,466 6.9 60
Transportation and
public utilities 6,865 4.6 39
Trade contractors 5,916 3.9 29
Other 2,829 1.9 24
- --------------------------------------------------------------------------------
Total $150,629 100.0% 1,297
================================================================================
Real estate - construction loans increased 84.8% or $32,547,000 to
$70,933,000 at December 31, 1999 compared to $38,386,000 at December 31, 1998.
These loans represented 11.0% of the total loan portfolio at December 31, 1999.
In 1999, YNB increased its activity in commercial construction lending. These
loans were made to established developers. Generally these loans are strictly
underwritten and closely monitored with advances made only after work is
completed and independently inspected and verified by qualified professionals.
YNB makes automobile, motorcycle, personal and other loans to consumers.
Consumer loans increased to $27,494,000 at December 31, 1999 compared to
$24,531,000 at December 31, 1998.
Other loans include loans to individuals and businesses for investment
purposes, mortgage warehouse loans, and loans to non-profit organizations. These
loans are generally secured. Other loans increased to $12,240,000 at December
31, 1999 compared to $11,730,000 at December 31, 1998.
The majority of YNB's business is with customers located within Mercer
County, New Jersey and contiguous counties. Accordingly, the ultimate
collectibility of the loan portfolio and the recovery of the carrying amount of
real estate are subject to changes in the region's economic environment and real
estate market.
24
15
The following table provides information concerning the maturity and
interest rate sensitivity of YNB's commercial and industrial and real estate -
construction loan portfolios at December 31, 1999.
- --------------------------------------------------------------------------------------------
After one After
Within but within five
(in thousands) one year five years years Total
- --------------------------------------------------------------------------------------------
Maturities:
Commercial and industrial $63,662 $67,626 $19,341 $150,629
Real estate -- construction 22,975 22,069 25,889 70,933
- --------------------------------------------------------------------------------------------
Total $86,637 $89,695 $45,230 $221,562
- --------------------------------------------------------------------------------------------
Type:
Floating rate loans $82,375 $55,028 $19,410 $156,813
Fixed rate loans 4,262 34,667 25,820 64,749
- --------------------------------------------------------------------------------------------
Total $86,637 $89,695 $45,230 $221,562
============================================================================================
NONPERFORMING ASSETS
Nonperforming assets consist of nonperforming loans and other real estate owned.
Nonperforming loans are composed of (1) loans on a nonaccrual basis, (2) loans
which are contractually past due 90 days or more as to interest and principal
payments but have not been classified as nonaccrual and (3) loans whose terms
have been restructured to provide a reduction or deferral of interest or
principal because of a deterioration in the financial position of the borrower.
YNB's policy with regard to nonaccrual loans varies by the type of loan
involved. Generally, commercial loans are placed on a nonaccrual status when
they are 90 days past due unless these loans are well secured and in the process
of collection or, regardless of the past due status of the loan, when management
determines that the complete recovery of principal or interest is in doubt.
Consumer loans are generally charged off after they become 120 days past due.
Residential mortgage loans are not generally placed on a nonaccrual status
unless the value of the real estate has deteriorated to the point that a
potential loss of principal or interest exists. Subsequent payments are credited
to income only if collection of principal is not in doubt. Nonperforming loans
totaled $3,078,000 at December 31, 1999, a decrease of $795,000 from the
$3,873,000 reported at December 31, 1998. The decrease in nonperforming loans
was primarily the result of a decrease in loans 90 days or more past due of
$844,000 offset by a slight increase in nonaccrual loans.
The following table sets forth nonperforming assets and risk elements in
YNB's loan portfolio by type for the years indicated.
- ----------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
December 31,
- ----------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial and industrial $ 676 $ 232 $ 515 $ 961 $ --
Real estate -- mortgage 1,189 570 384 1,451 1,395
Real estate -- construction -- 684 2,106 4,659 142
Consumer 12 31 38 12 30
Other 312 529 312 -- --
- ----------------------------------------------------------------------------------------------------------------------
Total 2,189 2,046 3,355 7,083 1,567
- ----------------------------------------------------------------------------------------------------------------------
Restructured loans 540 634 969 -- 612
- ----------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due:
Commercial and industrial 46 -- -- -- --
Real estate -- mortgage 277 1,093 886 1,014 588
Consumer 26 100 105 43 52
- ----------------------------------------------------------------------------------------------------------------------
Total 349 1,193 991 1,057 640
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 3,078 3,873 5,315 8,140 2,819
- ----------------------------------------------------------------------------------------------------------------------
Other real estate 2,585 4,957 3,171 395 625
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $5,663 $8,830 $8,486 $8,535 $ 3,444
======================================================================================================================
25
16
Nonperforming assets decreased $3,167,000, to $5,663,000 at December 31,
1999 compared to $8,830,000 at December 31, 1998. YNB continues to aggressively
manage nonperforming assets with the goal of reducing these assets in relation
to the entire portfolio. Nonperforming assets represented 0.50% of total assets
at December 31, 1999 and 1.17% at December 31, 1998. Nonperforming assets as a
percentage of total loans and other real estate were 0.87% at December 31, 1999,
compared to 1.78% at December 31, 1998. The improvement in these ratios is due
to the reduction of nonperforming asset levels in addition to strong asset and
loan growth rates. There is no assurance this positive trend will continue in
the future.
Nonaccrual loans were $2,189,000, or 0.34% of total loans at December 31,
1999, an increase of $143,000 from December 31, 1998.
Restructured loans totaled $540,000 at December 31, 1999 and $634,000 at
December 31, 1998. These restructured loans are in compliance with restructured
terms and conditions.
At December 31, 1999, loans that were 90 days or more past due but still
accruing interest income represented only $349,000, or 0.05% of total loans
compared to $1,193,000, or 0.2% of total loans at December 31, 1998.
Management's decision to accrue income on these loans was based on the level of
collateral and the status of collection efforts.
Other real estate (O.R.E.) totaled $2,585,000 at December 31, 1999 and
$4,957,000 at December 31, 1998. In December 1999, YNB completed the sale of a
real estate-construction property, originally placed on nonaccrual status in
late 1996, for $1,800,000. The reduction in O.R.E. at December 31, 1999 was
principally due to the sale of this property. O.R.E. represented 0.4% of total
loans at December 31, 1999. Management uses an active strategy to liquidate
these assets and re-deploy the proceeds in YNB's loan portfolio. At December 31,
1999, the O.R.E. balance included a real estate construction loan placed in
nonaccrual in 1996. That property is currently on YNB's books at approximately
$1,750,000 and is in the process of being resolved.
[BARCHART]
TOTAL NONPERFORMING ASSETS
AS A PERCENT OF TOTAL ASSETS
1995 0.85%
1996 1.74%
1997 1.38%
1998 1.17%
1999 0.50%
26
17
ALLOWANCE FOR LOAN LOSSES
Management utilizes a systematic and documented allowance adequacy
methodology for loan losses that requires specific allowance assessment for all
loans, including residential real estate mortgages and consumer loans. This
methodology assigns reserves based upon credit risk ratings for all loans. The
reserves are based on various factors, including historical performance and the
current economic environment. Management closely monitors delinquencies and
delinquency trends and, on a quarterly basis, reviews all criticized assets.
Management continually reviews the process used to determine the adequacy of the
allowance for loan losses. Allocations to the allowance for loan losses, both
specific and general, are determined after this review. Loans are classified as
"minimal, modest, better than average, average, acceptable, special mention,
substandard, doubtful and loss." Loan classifications are based on internal
reviews and evaluations performed by the lending staff. These evaluations are,
in turn, examined by YNB's internal loan review staff. A formal loan review
function, independent of loan origination, is used to identify and monitor risk
classifications. The following table presents, for the years indicated, an
analysis of the allowance for loan losses and other related data.
- --------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Allowance balance, beginning of year $ 6,768 $ 5,570 $ 4,957 $ 3,677 $ 2,912
Charge offs:
Commercial and industrial (405) (547) (212) -- --
Real estate -- mortgage (6) -- (161) (72) (26)
Real estate -- construction (182) -- -- (75) (30)
Consumer (309) (296) (201) (252) (153)
Other (183) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total charge offs (1,085) (843) (574) (399) (209)
- --------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial and industrial 22 6 7 -- --
Real estate -- mortgage 9 4 -- -- 64
Consumer 76 56 55 39 45
- --------------------------------------------------------------------------------------------------------------------
Total recoveries 107 66 62 39 109
- --------------------------------------------------------------------------------------------------------------------
Net charge offs (978) (777) (512) (360) (100)
Provision charged to operations 3,175 1,975 1,125 1,640 865
- --------------------------------------------------------------------------------------------------------------------
Allowance balance, end of year $ 8,965 $ 6,768 $ 5,570 $ 4,957 $ 3,677
- --------------------------------------------------------------------------------------------------------------------
Loans, end of year $ 646,737 $491,649 $385,751 $331,237 $ 245,054
Average loans outstanding $ 564,552 $438,050 $355,526 $287,289 $ 221,232
Allowance for loan losses
to total loans, end of year 1.39% 1.38% 1.44% 1.50% 1.50%
Net charge offs to average
loans outstanding 0.17 0.18 0.14 0.13 0.05
Nonperforming loans to total loans 0.48 0.79 1.38 2.46 1.15
Nonperforming assets to total assets 0.50 1.17 1.38 1.74 0.85
Nonperforming assets to total loans
and other real estate owned, end of year 0.87 1.78 2.18 2.57 1.40
Allowance for loan losses
to nonperforming assets, end of year 158.31 76.65 65.64 58.08 106.77
Allowance for loan losses
to nonperforming loans, end of year 291.26% 174.75% 104.80% 60.90% 130.44%
====================================================================================================================
27
18
YNB provides for possible loan losses by a charge to current operations to
maintain the allowance for loan losses at an adequate level determined according
to management's documented allowance adequacy methodology. The provision for
loan losses for 1999 was $3,175,000, reflective of the continued substantial
growth in the commercial loan portfolio. Management believes commercial loan
growth has the potential for higher loss severity which is reflected in the
provision as well. This compares to a provision for loan losses of $1,975,000 in
1998 and $1,125,000 in 1997.
At December 31, 1999, the allowance for loan losses totaled $8,965,000, an
increase of $2,197,000 or 32.5%, from $6,768,000 at December 31, 1998, which
compares to $5,570,000 at December 31, 1997. The ratio of allowance for loan
losses to total loans was 1.39%, 1.38%, and 1.44% at December 31, 1999, 1998,
and 1997, respectively. Another measure of the adequacy of the allowance for
loan losses is the ratio of the allowance to total nonperforming loans. At
December 31, 1999 this ratio was 291.26% versus 174.75% at December 31, 1998.
The quality of the loan portfolio remains strong and it is management's
assessment that the allowance for loan losses is adequate in relation to credit
risk exposure levels.
YNB's gross charge offs in 1999 totaled $1,085,000, compared with $843,000
in 1998 and $574,000 in 1997. Losses on loans and loans which are determined to
be uncollectible are charged against the allowance and subsequent recoveries, if
any, are credited to it. YNB's gross recoveries totaled $107,000 in 1999
compared to $66,000 in 1998 and $62,000 in 1997. The balance of the allowance
for loan losses is determined by an overall analysis of the loan portfolio and
reflects an amount that, in management's judgment, is adequate to provide for
potential loan losses.
Management has also strengthened lending policies and loan and credit
administration to minimize potential credit problems in the loan portfolio.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following tables describe the allocation for loan losses among various
categories of loans and certain other information as of the dates indicated. An
unallocated allowance is distributed proportionately among each loan category.
This unallocated portion of the loan loss allowance is important to maintain the
overall allowance at a level that is adequate to absorb potential credit losses
inherent in the total loan portfolio. The allocation is made for analytical
purposes and is not necessarily indicative of the categories in which future
loan losses may occur. The total allowance is available to absorb losses from
any segment of loans.
December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
PERCENT OF Percent of Percent of
RESERVE PERCENT OF LOANS TO Reserve Percent of Loans to Reserve Percent of Loans to
(in thousands) AMOUNT ALLOWANCE TOTAL LOANS Amount Allowance Total Loans Amount Allowance Total Loans
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial and
industrial $ 2,651 29.6% 23.3% $ 1,741 25.7% 27.1% $1,627 29.2% 22.9%
Real estate -- mortgage 3,981 44.4 59.6 2,993 44.2 57.7 1,740 31.2 63.3
Real estate -- construction 1,412 15.8 11.0 1,292 19.1 7.8 1,775 31.9 7.3
Consumer 443 4.9 4.2 358 5.3 5.0 283 5.1 4.8
Other loans 478 5.3 1.9 384 5.7 2.4 145 2.6 1.7
Total $ 8,965 100.0% 100.0% $ 6,768 100.0% 100.0% $5,570 100.0% 100.0%
==================================================================================================================================
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to
(in thousands) Amount Allowance Total Loans Amount Allowance Total Loans
- ---------------------------------------------------------------------------------------------------------------------------
Commercial and
industrial $1,704 34.4% 19.2% $ 983 26.7% 13.6%
Real estate -- mortgage 2,064 41.7 66.3 1,816 49.4 70.6
Real estate -- construction 938 18.9 7.8 664 18.1 7.9
Consumer 175 3.5 4.5 132 3.6 5.1
Other loans 76 1.5 2.2 82 2.2 2.8
- ---------------------------------------------------------------------------------------------------------------------------
Total $4,957 100.0% 100.0% $3,677 100.0% 100.0%
===========================================================================================================================
28
19
DEPOSITS
YNB's deposit base is the principal source of funds supporting interest
earning assets. YNB offers a wide range of deposit products, including demand
deposits, savings deposits, tiered money market accounts and certificates of
deposit. YNB's overall philosophy of building and maintaining long-term customer
relationships is the key to further expanding the deposit base, which, in turn,
presents opportunities for YNB to cross-sell its expanded services. These
services include telephone banking and the recently introduced YNB OnLine which
allows our customers to do their banking from their personal computers.
The following table provides information concerning average balances and
rates of deposits for the years indicated:
- --------------------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSIT BALANCES AND RATES
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
% OF % of % of
(in thousands) BALANCE RATE TOTAL Balance Rate Total Balance Rate Total
- --------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits $ 81,843 --% 12.8% $ 66,857 --% 14.2% $ 56,700 --% 13.9%
Interest bearing
demand deposits 57,788 2.79 9.0 47,709 3.41 10.2 44,024 3.46 10.8
Savings and money
market deposits 127,716 2.56 20.0 117,825 2.89 25.1 115,696 3.08 28.3
Time deposits 372,099 5.42 58.2 237,340 5.70 50.5 192,319 5.74 47.0
- --------------------------------------------------------------------------------------------------------------------------
Total $ 639,446 3.92% 100.0% $ 469,731 3.95% 100.0% $408,739 3.94% 100.0%
==========================================================================================================================
Total deposits amounted to $743,807,000 at year-end 1999 compared to
$519,643,000 at the end of 1998, an increase of 43.1%. Average total deposits
during 1999 totaled $639,446,000 compared to $469,731,000 during 1998, an
increase of 36.1%. The growth in YNB's deposit base in 1999 was primarily the
result of aggressive pricing of certificates of deposit (CDs) to fund loan
growth. Time deposits were 61.1% of total deposits at the end of 1999. This
trend of increased balances in higher costing time deposits is indicative of the
highly competitive Mercer County, NJ and Bucks County, PA deposit marketplaces
in addition to YNB's competitive pricing of time deposits to fund strong loan
growth.
In March of 1998, YNB purchased a software program that allows YNB to
market its CDs nationwide. This program has become a part of management's
strategy to fund loan growth as well as bolstering YNB's liquidity profile. At
December 31, 1999, YNB has raised approximately $100,600,000 utilizing this
software. This represents an increase of approximately $76,000,000 in 1999. The
average maturity of these CDs is approximately 11 months. This is a highly
competitive market and maintaining these balances in 2000 in a higher interest
rate environment will result in higher interest expense.
The average balance of non-interest bearing demand deposits was $81,843,000
during 1999, an increase of $14,986,000, or 22.4% from $66,857,000 during 1998.
Non-interest bearing demand deposits represent a stable, interest free source of
funds. The increase in demand deposits, primarily from the growth in business
checking accounts, is a contributing factor in the growth of the net interest
income.
Average interest bearing demand, savings and money market, and time
deposits increased 21.1%, 8.4%, and 56.8%, respectively, from 1998 to 1999.
Management has developed several marketing strategies designed to attract lower
cost deposits. Paying bonus rates on CDs to customers who opened lower cost
interest bearing demand accounts yielded positive results, as indicated above.
YNB's Premier Money Market Account has been enhanced with attractive interest
rates on higher balances.
Total average time deposits, which consist of certificates of deposit and
individual retirement accounts, increased $134,759,000 to $372,099,000 from
$237,340,000 in 1998. The average time to maturity on the entire CD portfolio at
December 31, 1999 was 9.8 months. The repricing of these CDs in 2000 will
negatively impact the average rate paid on YNB's deposit base and increase
interest expense.
The average rate paid on YNB's deposit balances in 1999 was 3.92%, a 0.76%
decrease from the 3.95% average rate for 1998.
In the second quarter of 1998, management initiated a program to reduce
reserve levels required to be maintained with the Federal Reserve. The result of
this program was a substantial reduction in required reserve levels. These funds
have been deployed into earning assets.
29
20
The following table details amounts and maturities for certificates of
deposit of $100,000 or more for the years indicated:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Maturity range:
Within three months $20,407 $ 6,702
After three but within
six months 7,420 9,112
After six but within
twelve months 31,861 8,753
After twelve months 12,840 4,958
- --------------------------------------------------------------------------------
Total $72,528 $29,525
================================================================================
Certificates of deposit of $100,000 or more totaled $72,528,000, or 9.8% of
deposits, at December 31, 1999 compared to $29,525,000, or 5.7% of deposits at
December 31, 1998.
Management anticipates that the branching for 2000 in the new market of
Burlington and YNB's first entry into supermarket banking in Ewing Township,
projected for the second quarter, will assist in building YNB's deposit base.
Attracting lower cost deposits in this competitive environment will be
challenging. Depositors will continue to look for higher yielding opportunities
outside the banking system. Management expects that CD rates will be
competitively priced in 2000 to fund asset growth, and believes a brokered CD
facility will be in place sometime in the first quarter as an alternative
funding source.
[BARCHART]
TOTAL DEPOSITS AT YEAR END
(Dollars in millions)
1995 303
1996 364
1997 423
1998 520
1999 744
BORROWED FUNDS
Borrowed funds consist primarily of securities sold under agreements to
repurchase, Federal Home Loan Bank of New York (FHLB) advances, and other forms
of borrowings. Management utilizes, from time to time, unsecured Federal funds
lines of credit with four of its correspondent banks for daily funding needs.
Borrowed funds totaled $298,689,000 at December 31, 1999, an increase of
$120,801,000 or 67.9% when compared to $177,888,000 at December 31, 1998.
Approximately $225,000,000 or 75.3% of borrowed funds at December 31, 1999 are
tied to the Investment Growth Strategy. In 1999, management instituted a
strategy to extend funding duration and reduce YNB's exposure to rising interest
rates. Management utilized callable FHLB advances with longer lockout terms to
address this goal. Callable FHLB advances have terms of ten years and are
callable after periods ranging from one to five years. Repurchase agreements
totaling $45,000,000 at year-end 1999 were used as part of the Investment Growth
Strategy. At year-end 1999, there were $20,000,000 in callable repurchase
agreements that have passed their lockout dates. These can be called every 90
days.
Borrowed funds also include $1,600,000 related to YNB's Employee Stock
Ownership Plan (ESOP). In 1999, the ESOP purchased 155,340 shares of YNB's
common stock with a loan from a nonaffiliated financial institution.
Borrowed funds averaged $256,957,000 in 1999, an increase of $98,851,000
from the average of $158,106,000 reported in 1998. The average cost of borrowed
funds declined 28 basis points during the year to 5.26% compared with 5.54% in
1998. The use of callable FHLB advances and callable repurchase agreements
allowed YNB to reduce its borrowing costs in 1999. With the increase in interest
rates in late 1999, management anticipates that funding costs associated with
borrowed funds will increase as shorter term repurchase agreements mature and
callable funding at below market rates are called. At year-end 1999, there were
$250,293,000 in outstanding borrowings with the FHLB and no outstanding
borrowings with YNB's correspondents. Management will continue to strategically
employ borrowed funds to meet short-term liquidity needs and as an additional
source of funding for the loan and investment portfolios.
30
21
LIQUIDITY
Liquidity measures the ability to satisfy current and future cash flow needs as
they become due. YNB has an Asset/Liability Committee (ALCO) whose function is
to monitor and coordinate all activities relating to maintaining adequate
liquidity and protection of net interest income from fluctuations in market
interest rates.
Liquidity management refers to YNB's ability to support asset growth while
satisfying the borrowing needs and deposit withdrawal requirements of customers.
In addition to maintaining liquid assets, factors such as capital position,
profitability, asset quality and availability of funding affect a bank's ability
to meet its liquidity needs. On the asset side, liquid funds are maintained in
the form of cash and cash equivalents, Federal funds sold, investment securities
held to maturity maturing within one year, securities available for sale and
loans held for sale. Additional asset-based liquidity is derived from scheduled
loan repayments as well as investment repayments of principal and interest from
mortgage-backed securities. On the liability side, the primary source of
liquidity is the ability to generate core deposits, which generally excludes CDs
over $100,000 and CDs generated from the software program previously discussed
that allows YNB to market its CDs nationwide. Short-term borrowings and the
marketing of CDs nationwide are used as supplemental funding sources when growth
in the core deposit base does not keep pace with that of earning assets.
Strong earning asset growth negatively impacted the liquidity profile of
YNB in 1998. In 1999, management instituted a plan to enhance that profile. One
goal of that plan was to strengthen short-term unpledged securities. Securities
with maturities of three years and less were purchased to provide a pool of
securities, with modest market value risk, for liquidity purposes. Total
unpledged securities increased to $153,000,000 at December 31, 1999 compared to
$57,000,000 at December 31, 1998. YNB's contingency funding plan has been
enhanced to address and manage potential liquidity uncertainty due to changes in
interest rates, credit markets, or other external risks.
At December 31, 1999, liquid assets (excluding securities purchased
utilizing borrowed funds) amounted to $143,491,000, as compared to $56,303,000
at December 31, 1998. This represents 16.8% and 9.8% of earning assets, and
15.9% and 9.1% of total adjusted assets at December 31, 1999 and 1998,
respectively.
YNB has the availability to borrow up to $37,845,000 from the FHLB through
its line of credit program, subject to collateral requirements. In addition, YNB
is eligible to borrow up to 30% of assets under the FHLB advance program subject
to FHLB stock level requirements, collateral requirements, and individual
advance proposals based on FHLB credit standards. YNB also has the ability to
borrow at the Federal Reserve discount window along with agreements to borrow
from four of its correspondent banks.
Management believes YNB's liquidity profile was significantly enhanced in
1999. This area will continue to be actively managed in 2000.
INTEREST RATE SENSITIVITY
The objectives of interest rate risk management are to minimize and, to the
degree possible, control the effect of interest rate fluctuations on net
interest income. Interest rate risk is derived from timing differences in the
repricing of assets and liabilities, loan prepayments, deposit withdrawals, and
differences in lending and funding rates. YNB's ALCO actively seeks to monitor
and control the mix of interest rate-sensitive assets and interest
rate-sensitive liabilities.
One measure of interest rate risk is the gap ratio, which is defined as the
difference between the dollar volume of interest earning assets and interest
bearing liabilities maturing or repricing within a specified period of time as a
percentage of total assets. A positive gap results when the volume of interest
rate-sensitive assets exceeds that of interest rate-sensitive liabilities within
comparable time periods. A negative gap results when the volume of interest
rate-sensitive liabilities exceeds that of interest rate-sensitive assets within
comparable time periods.
As indicated in the accompanying table, YNB's one-year gap position at
December 31, 1999 was a negative 13.6%. Generally, a financial institution with
a negative gap position will most likely experience a decrease in net interest
income during periods of rising rates and increases in net interest income
during periods of lower interest rates.
The negative gap was brought about in the last year primarily through
increases in fixed rate loans and investments. Rising interest rates extended
investment portfolio duration in 1999 as well. This effect was offset to some
degree by increases in fixed rate CDs, demand deposit accounts, and
stockholders' equity. While gap analysis represents a useful asset/liability
management tool, it does not necessarily indicate the effect of general interest
rate movements on YNB's net interest income due to discretionary repricing of
some assets and liabilities, balance sheet options, and other competitive
pressures.
YNB reports its callable agency securities ($158,684,000 at December 31,
1999) at their Option Adjusted Spread ("OAS") modified duration date, as opposed
to the call or maturity date. In management's opinion, using modified duration
dates on callable agency securities provides a better estimate of the option
exercise date at December 31, 1999. The OAS methodology is an approach whereby
the likelihood of option exercise takes into account the coupon on the security,
the distance to the call date, the maturity date and the current interest rate
volatility. In addition, prepayment assumptions derived from historical
31
22
data have been applied to mortgage-related securities, which are included in
investments. Similarly, convertible advance borrowings and repurchase agreements
($279,500,000 at December 31, 1999) with options have expected repricing dates
between the option date and the final maturity date, based on the debt
instrument's interest rate and current market rate levels for the same type of
debt.
Included in the analysis of YNB's gap position are certain savings deposit
and interest checking accounts, which are less sensitive to fluctuations in
interest rates than other interest-bearing sources of funds. In determining the
sensitivity of such deposits, management reviews the movement of its deposit
rates for the past five years relative to market rates. Using regression
analysis, management's ALCO committee has estimated that these deposits are
approximately 50% sensitive to interest rate changes (i.e., if short term rates
were to increase 100 basis points, the interest rate on such deposits would
increase 50 basis points). Management considers these assumptions to be
conservative as recent market rate increases have resulted in little or no rate
changes in these products.
In addition to the utilization of gap for interest rate risk management,
the ALCO uses simulation analysis whereby the model estimates the variance in
net interest income with a change of interest rates of plus and minus 200 basis
points over a 12 month period (base case sensitivity). Given recent simulations,
YNB is presently positioned to benefit modestly from a rising rate environment,
with lower income levels calculated with declining rate environments of 200
basis points. Both variances are within policy guidelines of plus or minus 7%.
Management analyzes a number of different simulation scenarios to determine
the impact to net interest income in various interest rate environments,
assigning a higher probability of interest rates changing plus or minus 100
basis points over a 12 month period. YNB would presently benefit in gradually
increasing interest rates over a 12 month period. The impact, positive or
negative, is within a 3% variance in this scenario.
Lastly, YNB measures longer-term risks through the Economic Value of
Portfolio Equity ("EVPE"). The present value of asset and liability cash flows
are subjected to rate shocks of plus and minus 200 basis points. The variance in
the residual, or economic value of equity is measured as a percentage of total
assets. This variance is managed within a negative 3% boundary. At December 31,
1999 this variance was a negative 3.67% with a plus 200 basis point rate shock.
Management is initiating strategies in 2000 to bring this measurement back
within policy guidelines.
32
23
The table sets forth certain information at December 31, 1999 relating to
YNB's assets and liabilities by scheduled repricing for adjustable assets and
liabilities, or by contractual maturity for fixed-rate assets and liabilities.
- ------------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS AND LIABILITIES
December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
More than More than More than More than
Under Six months one year two years five years ten years
six through through through through and not
(in thousands) months one year two years five years ten years repricing Total
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ -- $ -- $ -- $ -- $ -- $ 17,582 $ 17,582
Federal funds sold and interest
bearing deposits 8,990 -- -- -- -- -- 8,990
Available for sale securities 85,245 26,395 41,695 41,153 69,472 45,338 309,298
Investment securities 1,881 3,271 1,113 13,829 68,044 20,029 108,167
Loans, net of unearned income 264,397 39,831 61,351 212,433 44,487 24,238 646,737
Other assets, net -- 14,421 -- -- -- 18,403 32,824
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $360,513 $ 83,918 $ 104,159 $ 267,415 $ 182,003 $ 125,590 $1,123,598
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing demand $ -- $ -- $ -- $ -- $ -- $ 90,219 $ 90,219
Savings and interest bearing demand 74,143 15,176 -- 52,464 -- -- 141,783
Money markets 46,548 -- -- 10,595 -- -- 57,143
Certificates of deposit of $100,000
or more 27,827 31,861 11,153 1,687 -- -- 72,528
Other time deposits 135,302 129,488 81,167 36,177 -- -- 382,134
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 283,820 176,525 92,320 100,923 -- 90,219 743,807
Borrowed funds 67,974 68,684 54,634 94,397 13,000 -- 298,689
Trust preferred securities -- -- -- -- -- 11,500 11,500
Other liabilities -- -- -- -- -- 10,777 10,777
Stockholders' equity -- -- -- -- -- 58,825 58,825
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $351,794 $ 245,209 $ 146,954 $ 195,320 $ 13,000 $ 171,321 $1,123,598
- ------------------------------------------------------------------------------------------------------------------------------------
Gap 8,719 (161,291) (42,795) 72,095 169,003 (45,731)
Cumulative gap 8,719 (152,572) (195,367) (123,272) 45,731 --
Cumulative gap to total assets 0.8% -13.6% -17.4% -11.0% 4.1% --
====================================================================================================================================
33
24
MARKET RISK
For YNB, market risk is defined as the potential loss in the value of financial
instruments due to adverse changes in interest rates. This is different than
accounting losses that may occur over the next one to two years due to maturity
mismatches or spread changes between assets and liabilities, which are measured
through simulation analysis.
As a financial intermediary, YNB assumes market risk by holding both
financial assets (primarily loans, securities, and Fed funds sold) and financial
liabilities (deposits and borrowings) on the balance sheet. Rising rates have a
negative impact on the value of fixed rate assets and a positive impact on the
value of fixed rate and non-maturity deposits, as well as fixed rate borrowings.
Deposits or borrowings acquired at today's market rate levels are more valuable
to YNB as interest rates rise in the future, resulting in an economic gain. This
occurs at the same time fixed rate asset values are declining.
The table below shows the expected repricing of YNB's financial instruments
subject to market risks, the weighted average interest rate, and fair value of
the instruments as of December 31, 1999. The expected repricings take into
account amortization and expected prepayments on mortgage-related securities and
probable call dates on U.S. agency notes and debentures represented by the
option adjusted spread modified duration. The table does not include prepayments
on loans, as they are less predictable than securities with homogenous coupons
and maturity dates. Loan repricings are, therefore, likely to be shorter than
what is indicated in this table, as some prepayments can be expected.
- ------------------------------------------------------------------------------------------------------------------------------------
EXPECTED REPRICING OF FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Beyond Fair
(in thousands) 2000 2001 2002 2003-2004 2005-2009 10 Years Totals Value
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and due from banks $ -- $ -- $ -- $ -- $ -- $17,582 $ 17,582 $ 17,582
Average rate --% --% --% --% --% --% --%
Federal funds sold and interest
bearing deposits 8,990 -- -- -- -- -- 8,990 8,990
Average rate 5.23% -- -- -- -- -- 5.23%
Available for sale securities 111,640 41,695 10,456 30,697 69,472 45,338 309,298 309,298
Average rate 6.70% 5.98% 6.64% 6.47% 6.72% 6.81% 6.60%
Investment securities 5,152 1,113 2,752 11,077 68,044 20,029 108,167 100,121
Average rate 5.33% 5.66% 4.98% 6.86% 6.50% 4.79% 6.12%
Loans, net of unearned income 304,228 61,351 45,369 167,064 44,487 24,238 646,737 642,053
Average rate 8.88% 8.36% 8.31% 8.05% 7.66% 6.74% 8.41%
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Non-interest demand deposits $ -- $ -- $ -- $ -- $ -- $90,219 $ 90,219 $ 90,219
Average rate --% --% --% --% --% --% --%
Savings 50,989 -- 2,680 26,631 -- -- 80,300 80,300
Average rate 2.70% -- 3.30% 2.15% -- -- 2.54%
Interest bearing demand 38,330 -- -- 23,153 -- -- 61,483 61,483
Average rate 3.34% -- -- 2.00% -- -- 2.83%
Money markets 46,548 -- 10,595 -- -- -- 57,143 57,143
Average rate 2.90% -- 2.25% -- -- -- 2.78%
CDs of $100,000 or more 59,688 11,153 1,371 316 -- -- 72,528 72,357
Average rate 5.39% 6.13% 5.76% 5.58% -- -- 5.52%
Other time deposits 264,790 81,167 28,554 7,623 -- -- 382,134 381,320
Average rate 5.29% 5.95% 5.74% 5.56% -- -- 5.47%
Borrowed funds 136,658 54,634 50,544 43,853 13,000 -- 298,689 298,349
Average rate 5.05% 5.54% 5.60% 5.85% 6.25% -- 5.40%
Trust preferred securities -- -- -- -- -- 11,500 11,500 11,069
Average rate -- -- -- -- -- 9.25% 9.25%
====================================================================================================================================
34
25
Deposits, other than time deposits and non-interest demand, are shown with
a "rate sensitive" component due in 2000 and a "non-rate sensitive" component
due in subsequent periods. Although these deposits are "payable on demand," YNB
does not anticipate a situation where all of the deposits mature simultaneously.
Therefore, rate sensitivity of non-contractual interest bearing deposits is
measured through a historical regression analysis, which correlates the changes
in the rates paid on these deposits to an external market rate (Fed funds).
Because the regression is based on a historical relationship, it may not be
indicative of how YNB will price these products in the future, but does provide
some basis to determine the market risk of these liabilities.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The management of capital in a regulated environment requires a balance between
maximizing leverage and return to stockholders while maintaining sufficient
capital levels for proper risk management and to satisfy regulatory
requirements.
On May 18, 1999, YNB completed the sale of 1,610,000 shares of its common
stock in an underwritten secondary public offering. The common stock was sold at
a price of $12.00 per share and generated gross proceeds of $19,320,000. Net
proceeds after underwriting and other offering expenses were approximately
$17,620,000. Approximately $17,500,000 was contributed to the Bank to support
asset growth.
Stockholders' equity at December 31, 1999 totaled $58,825,000 compared to
$40,756,000 at December 31, 1998. This represents an increase of $18,069,000 or
44.3%. This increase resulted from (i) earnings of $8,020,000, (ii) net proceeds
of $17,620,000 from the secondary public offering, (iii) proceeds of $68,000
from exercised options and (iv) proceeds of $400,000 from allocated ESOP shares
offset by (i) cash dividend payments of $2,037,000, (ii) a negative equity
adjustment of $5,980,000 for the unrealized loss on securities available for
sale and (iii) treasury stock purchased, at cost, of $22,000.
On January 1, 1999, YNB adopted an Employee Stock Ownership Plan (ESOP) to
permit eligible employees of YNB to share in the growth of YNB through stock
ownership. On February 3, 1999, Yardville National Bancorp sold 155,340 shares
to the ESOP for $2,000,000. The ESOP financed the stock purchase with a
nonaffiliated financial institution. The financing is for a term of five years
with an interest rate of 7.00%. The full balance of the loan will be repaid in
equal installments over the term of the loan. The shares purchased by the ESOP
were used as collateral for the loan. The estimated minimum annual expenses
associated with the ESOP are $540,000 per year for the next five years.
The Board of Directors, as part of YNB's Capital Management Plan in October
1997, authorized a stock buy back program, providing for the repurchase of up to
172,000 shares of YNB's stock. In 1999, 1,700 shares were repurchased, bringing
the total shares repurchased to 172,000, in effect, completing the program. The
average repurchase price of the 172,000 shares was $17.62.
YNB trades on the NASDAQ National Market System under the symbol "YANB."
The listing on the NASDAQ National Market System has provided increased
liquidity for YNB stockholders.
Dividends paid per share in 1999 totaled $0.34. As a result of YNB's
earnings growth during 1999, the common stock dividend was increased from $0.08
per share to $0.085 per share in the third quarter of 1999. The Board of
Directors, in addition to the regular cash dividend paid in the last quarter of
$0.085, paid a special year-end dividend of $0.01. Dividends increased 17.2% in
1999 compared to 1998.
Yardville National Bancorp and its banking subsidiary are subject to
minimum risk-based and leverage capital guidelines under Federal banking
regulations. These banking regulations measure capital using three ratios which
include Tier I capital, total capital and leverage capital. The measurement of
risk-based capital takes into account the credit risk of both balance sheet
assets and off-balance sheet exposures. These guidelines require minimum
risk-based capital ratios of 4% for Tier I capital and 8% for total capital
(Tier I plus Tier II). In addition, the current minimum regulatory guideline for
the Tier I leverage ratio is 4%.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five capital level designations ranging from "well capitalized" to
"critically undercapitalized." A bank is considered "well capitalized" if it has
a minimum Tier I and total risk-based capital ratios of 6% and 10%,
respectively, and a minimum Tier I leverage ratio of 5%.
At December 31, 1999, the capital ratios for YNB exceeded those required to
be well capitalized. The table below summarizes YNB's capital ratios for the
years indicated:
December 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Tier I leverage ratio 7.9% 7.7% 9.5%
Tier I risk-based 10.3% 9.9% 12.2%
Total risk-based 11.5% 11.2% 13.5%
================================================================================
35
26
YEAR 2000 (Y2K)
YNB's proactive approach to Y2K issues yielded positive results as the calendar
moved to January 1, 2000. YNB's approach included a written compliance plan, a
commitment of financial resources to correct problems and upgrade equipment and
strong support from the Board of Directors.
Over the last two and a half years, senior management directed the
upgrading, renovating, testing and re-testing of all mission critical and
non-mission critical operational areas. This was completed by the middle of
1999. Contingency plans as well as business resumption plans had also been
developed, reviewed and rehearsed. Disaster recovery testing was also performed
at an offsite disaster recovery center with success. Staff members were briefed
for contingencies as well as for operations under normal conditions, and the
staff was assigned specific tasks to accomplish during the early hours of 2000.
YNB's total related Y2K costs for 1999 were approximately $40,000. The
total estimated Y2K costs since mid-1997 when Y2K plans were initially
formulated was $850,000. This amount includes equipment related purchases of
$615,000 that are depreciated over a five year period. The remaining expense
included additional compensation expense and costs related to the testing and
upgrading of systems.
On January 1, 2000 YNB was open for business. YNB's primary and secondary
operations were brought up and running without incident. Our ATM network was
successfully tested just after midnight on the 1st. Every department and branch
was responsible for reporting its status to the command center. YNB's
expenditure of human, technical, and financial resources paid dividends with YNB
open for business, as usual, on January 1, 2000.
FORWARD-LOOKING STATEMENTS
This annual report contains express and implied statements relating to the
future financial condition, results of operations, plans, objectives,
performance and business of YNB, which are considered forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These include statements that relate to, among other things, profitability,
liquidity, loan loss reserve adequacy, plans for growth, interest rate
sensitivity, and market risk. Actual results may differ materially from those
expressed or implied as a result of certain risks and uncertainties, including,
but not limited to, changes in economic conditions, interest rate fluctuations,
continued levels of loan quality and origination volume, competitive product and
pricing pressures within YNB's markets, continued relationships with major
customers including sources for loans and deposits, personal and corporate
customers' bankruptcies, legal and regulatory barriers and structure, inflation,
and technological changes, as well as other risks and uncertainties detailed
from time to time in the filings of YNB with the Securities and Exchange
Commission.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
- ---------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------------------------------------------
1999
Interest income $ 20,178 $18,373 $ 16,570 $ 14,598
Interest expense 11,516 10,478 9,470 8,181
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 8,662 7,895 7,100 6,417
Provision for loan losses 775 1,000 750 650
Non-interest income 501 781 755 728
Non-interest expense 5,190 4,594 4,328 4,345
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense 3,198 3,082 2,777 2,150
Income tax expense 922 882 787 596
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 2,276 $ 2,200 $ 1,990 $ 1,554
=====================================================================================================================
Net income - basic $ 0.34 $ 0.33 $ 0.34 $ 0.31
Net income - diluted 0.34 0.33 0.34 0.31
=====================================================================================================================
1998
Interest income $ 13,602 $13,209 $ 12,421 $ 11,691
Interest expense 7,682 7,455 6,843 6,412
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 5,920 5,754 5,578 5,279
Provision for loan losses 575 500 500 400
Non-interest income 786 796 732 688
Non-interest expense 4,248 3,912 3,673 3,504
- ---------------------------------------------------------------------------------------------------------------------
Income before income tax expense 1,883 2,138 2,137 2,063
Income tax expense 425 730 755 729
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 1,458 $ 1,408 $ 1,382 $ 1,334
=====================================================================================================================
Net income - basic $ 0.29 $ 0.28 $ 0.27 $ 0.26
Net income - diluted 0.29 0.28 0.27 0.26
=====================================================================================================================
36
27
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Condition
December 31,
- ----------------------------------------------------------------------------------------------
(in thousands, except share data) 1999 1998
- ----------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 17,582 $ 16,246
Federal funds sold 8,035 280
- ----------------------------------------------------------------------------------------------
Cash and Cash Equivalents 25,617 16,526
- ----------------------------------------------------------------------------------------------
Interest bearing deposits with banks 955 733
Securities available for sale 309,298 185,577
Investment securities (market value of $100,121 in 1999
and $36,203 in 1998) 108,167 36,111
Loans 646,737 491,649
Less: Allowance for loan losses (8,965) (6,768)
- ----------------------------------------------------------------------------------------------
Loans, net 637,772 484,881
Bank premises and equipment, net 9,400 6,251
Other real estate 2,585 4,957
Other assets 29,804 22,630
Total Assets $ 1,123,598 $ 757,666
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
- ----------------------------------------------------------------------------------------------
Deposits
Non-interest bearing $ 90,219 $ 75,426
Interest bearing 653,588 444,217
Total Deposits 743,807 519,643
- ----------------------------------------------------------------------------------------------
Borrowed funds
Securities sold under agreements to repurchase 45,000 87,120
Federal Home Loan Bank advances 250,293 89,316
Obligation for Employee Stock Ownership Plan (ESOP) 1,600 --
Other 1,796 1,452
- ----------------------------------------------------------------------------------------------
Total Borrowed Funds 298,689 177,888
Company - obligated Mandatorily Redeemable Trust
Preferred Securities of Subsidiary Trust holding solely
junior Subordinated Debentures of the Company 11,500 11,500
Other liabilities 10,777 7,879
- ----------------------------------------------------------------------------------------------
Total Liabilities $ 1,064,773 $ 716,910
- ----------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities
Stockholders' equity
Preferred stock: no par value
Authorized 1,000,000 shares, none issued
Common stock: no par value
Authorized 12,000,000 shares
Issued 6,917,794 shares in 1999
and 5,138,474 shares in 1998 40,052 20,364
Surplus 2,205 2,205
Undivided profits 27,462 21,479
Treasury stock, at cost, 172,000 shares in 1999
and 170,300 in 1998 (3,030) (3,008)
Unallocated ESOP shares (1,600) --
Accumulated other comprehensive loss (6,264) (284)
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity 58,825 40,756
- ----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,123,598 $ 757,666
==============================================================================================
See Accompanying Notes to Consolidated Financial Statements.
37
28
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
Year Ended December 31,
- --------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 47,554 $ 38,218 $ 31,511
Interest on deposits with banks 45 175 107
Interest on securities available for sale 15,674 10,788 7,093
Interest on investment securities:
Taxable 4,236 783 1,277
Exempt from Federal income tax 1,306 626 400
Interest on Federal funds sold 904 333 380
- --------------------------------------------------------------------------------------------------
Total Interest Income 69,719 50,923 40,768
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings account deposits 4,887 5,034 5,083
Interest on certificates of deposit of $100,000 or more 2,643 1,386 1,273
Interest on other time deposits 17,528 12,152 9,759
Interest on borrowed funds 13,523 8,756 4,761
Interest on trust preferred securities 1,064 1,064 224
- --------------------------------------------------------------------------------------------------
Total Interest Expense 39,645 28,392 21,100
- --------------------------------------------------------------------------------------------------
Net Interest Income 30,074 22,531 19,668
Less provision for loan losses 3,175 1,975 1,125
- --------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 26,899 20,556 18,543
- --------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges on deposit accounts 1,374 1,246 1,174
Gains on sales of mortgages, net 38 62 30
Securities (losses) gains, net (301) 151 24
Other non-interest income 1,654 1,543 1,316
- --------------------------------------------------------------------------------------------------
Total Non-Interest Income 2,765 3,002 2,544
- --------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 10,041 8,115 7,446
Occupancy expense, net 1,516 1,070 977
Equipment expense 1,642 1,299 1,107
Other non-interest expense 5,258 4,853 3,811
- --------------------------------------------------------------------------------------------------
Total Non-Interest Expense 18,457 15,337 13,341
- --------------------------------------------------------------------------------------------------
Income before income tax expense 11,207 8,221 7,746
Income tax expense 3,187 2,639 2,740
- --------------------------------------------------------------------------------------------------
Net Income $ 8,020 $ 5,582 $ 5,006
- --------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 1.33 $ 1.11 $ 0.99
Diluted $ 1.33 $ 1.10 $ 0.98
==================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
38
29
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Year Ended December 31, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Unallocated other
Common Common Undivided Treasury ESOP comprehensive
(in thousands, except share amounts) shares stock Surplus profits stock shares (loss) income
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 4,982,348 $17,246 $ 2,205 $ 15,940 $ (161)
Net income 5,006
Unrealized gain - securities available
for sale, net of tax of $83,000 285
Total comprehensive income
Cash dividends (1,233)
Common stock issued:
Exercise of stock options 99,702 457
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 5,082,050 $17,703 $ 2,205 $ 19,713 $ 124
Net income 5,582
Unrealized loss - securities available
for sale, net of tax of $152,000 (408)
Total comprehensive income
Cash dividends (1,449)
Common stock issued:
Exercise of stock options 56,424 294
2.5% stock dividend 2,367 (2,367)
Treasury shares acquired (170,300) (3,008)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1998 4,968,174 $20,364 $ 2,205 $ 21,479 $ (3,008) $ (284)
Net income 8,020
Unrealized loss - securities available
for sale, net of tax of $3,373,000 (5,980)
Total comprehensive income
Cash dividends (2,037)
Common stock issued:
Exercise of stock options 13,980 68
Common shares issued 1,610,000 17,620
ESOP shares issued 155,340 2,000 (2,000)
ESOP shares allocated 400
Treasury shares acquired (1,700) (22)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 6,745,794 $40,052 $ 2,205 $ 27,462 $ (3,030) $ (1,600) $ (6,264)
====================================================================================================================================
Year Ended December 31, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------
(in thousands, except share amounts) Total
- ------------------------------------------------------------------------------------
BALANCE, December 31, 1996 $35,230
Net income 5,006
Unrealized gain - securities available
for sale, net of tax of $83,000 285
-------
Total comprehensive income 5,291
-------
Cash dividends (1,233)
Common stock issued:
Exercise of stock options 457
- ------------------------------------------------------------------------------------
BALANCE, December 31, 1997 $39,745
Net income 5,582
Unrealized loss - securities available
for sale, net of tax of $152,000 (408)
-------
Total comprehensive income 5,174
-------
Cash dividends (1,449)
Common stock issued:
Exercise of stock options 294
2.5% stock dividend
Treasury shares acquired (3,008)
- ------------------------------------------------------------------------------------
BALANCE, December 31, 1998 $40,756
Net income 8,020
Unrealized loss - securities available
for sale, net of tax of $3,373,000 (5,980)
-------
Total comprehensive income 2,040
-------
Cash dividends (2,037)
Common stock issued:
Exercise of stock options 68
Common shares issued 17,620
ESOP shares issued --
ESOP shares allocated 400
Treasury shares acquired (22)
- ------------------------------------------------------------------------------------
BALANCE, December 31, 1999 $58,825
====================================================================================
See Accompanying Notes to Consolidated Financial Statements.
39
30
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,020 $ 5,582 $ 5,006
Adjustments:
Provision for loan losses 3,175 1,975 1,125
Depreciation 1,286 942 832
Amortization and accretion 512 943 467
Loss (gain) on sales of securities available for sale 301 (151) (24)
Writedown of other real estate 587 463 532
Loss on sale of other real estate 1 7 --
Increase in other assets (3,953) (5,532) (2,076)
Increase in other liabilities 2,898 1,698 1,650
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 12,827 5,927 7,512
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest bearing deposits with banks (222) 1,486 (862)
Purchase of securities available for sale (196,574) (168,202) (123,534)
Maturities, calls and paydowns of securities available for sale 31,225 93,346 45,928
Proceeds from sales of securities available for sale 31,694 47,725 11,740
Proceeds from maturities and paydowns of investment securities 8,197 11,081 4,757
Purchase of investment securities (80,333) (20,436) (528)
Net increase in loans (157,047) (109,188) (57,984)
Expenditures for bank premises and equipment (4,435) (2,001) (606)
Proceeds from sale of other real estate 2,765 257 --
Capital improvements to other real estate -- -- (350)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (364,730) (145,932) (121,439)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in non-interest bearing
demand, money market, and savings deposits 39,849 23,232 36,188
Net increase in certificates of deposit 184,315 73,467 22,311
Net increase in borrowed funds 120,801 43,572 47,977
Proceeds from issuance of common stock 19,688 294 457
Increase in unallocated ESOP shares (1,600) -- --
Treasury shares acquired (22) (3,008) --
Proceeds from issuance of trust preferred securities -- -- 11,500
Dividends paid (2,037) (1,449) (1,233)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 360,994 136,108 117,200
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,091 (3,897) 3,273
Cash and cash equivalents as of beginning of year 16,526 20,423 17,150
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of End of Year $ 25,617 $ 16,526 $ 20,423
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 36,403 $ 25,714 $ 19,239
Income taxes 4,348 3,140 3,642
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers from loans to other real estate, net of charge offs $ 981 $ 2,513 $ 2,958
==============================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
40
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Yardville National Bancorp through its
subsidiary Yardville National Bank (the Bank) provides a full range of services
to individuals and corporate customers in Mercer County and contiguous counties.
The Bank is subject to competition from other financial institutions. The Bank
is also subject to the regulations of certain Federal agencies and undergoes
periodic examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheet and revenues and expenses
for the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
A. CONSOLIDATION. The consolidated financial statements include the accounts of
Yardville National Bancorp and its subsidiaries, Yardville Capital Trust and the
Bank and the Bank's wholly owned subsidiaries, the Yardville National Investment
Corporation, Brendan, Nancy Beth, Jim Mary, Yardville Real Estate Corporation,
YNB Realty Inc., YNB Financial Services, Inc., and Capital Development, Inc.
(collectively, the Corporation). All significant inter-company accounts and
transactions have been eliminated.
B. CASH AND CASH EQUIVALENTS. For purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, and Federal funds sold. Generally, Federal funds are purchased or sold
for one day periods.
C. SECURITIES. The Corporation's securities portfolio is classified into three
separate portfolios: held to maturity, available for sale and trading.
Securities classified as available for sale may be used by the Corporation as
funding and liquidity sources and can be used to manage the Corporation's
interest rate sensitivity position. These securities are carried at their
estimated market value with their unrealized gains and losses carried, net of
income tax, as adjustments to stockholders' equity. Amortization of premium or
accretion of discount are recognized as adjustments to interest income, on a
level yield basis. Gains and losses on disposition are included in earnings
using the specific identification method.
Investment securities are composed of securities that the Corporation has
the positive intent and ability to hold to maturity. These securities are stated
at cost, adjusted for amortization of premium or accretion of discount. The
premium or discount adjustments are recognized as adjustments to interest
income, on a level yield basis. Unrealized losses due to fluctuations in market
value are recognized as investment security losses when a decline in value is
assessed as being other than temporary.
Trading securities are purchased specifically for short-term appreciation
with the intent of selling in the near future. Trading securities are carried at
fair value with realized and unrealized gains and losses reported in
non-interest income.
D. LOANS. Interest on loans is recognized based upon the principal amount
outstanding. Loans are stated at face value, less unearned income and net
deferred fees. Generally, commercial loans are placed on a nonaccrual status
when they are 90 days past due unless they are well secured and in the process
of collection or, regardless of the past due status of the loan, when management
determines that the complete recovery of principal and interest is in doubt.
Consumer loans are generally charged off after they become 120 days past due.
Mortgage loans are not generally placed on a nonaccrual status unless the value
of the real estate has deteriorated to the point that a potential loss of
principal or interest exists. Subsequent payments are credited to income only if
collection of principal is not in doubt. Loan origination and commitment fees
less certain costs are deferred and the net amount amortized as an adjustment to
the related loan's yield. Loans held for sale are recorded at the lower of
aggregate cost or market.
E. Allowance for Loan
Losses. The provision for loan losses charged to operating expense is determined
by management and is based upon a periodic review of the loan portfolio, past
experience, the economy, and other factors that may affect a borrower's ability
to repay the loan. This provision is based on management's estimates, and actual
losses may vary from these estimates. These estimates are reviewed and
adjustments, as they become necessary, are reported in the periods in which they
become known. Management believes that the allowance for loan losses is
adequate. While management uses available information to
41
32
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions, particularly in New Jersey. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Corporation's allowance for loan losses and the
valuation of other real estate. Such agencies may require the Corporation to
recognize additions to the allowance or adjustments to the carrying value of
other real estate based on their judgments about information available to them
at the time of their examination.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or fair value of the collateral. Impairment losses are included in
the allowance for loan losses through provisions charged to income.
F. BANK PREMISES AND EQUIPMENT. Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is computed on straight-line and
accelerated methods over the estimated useful lives of the assets (buildings 25
to 50 years, furniture and fixtures 7 to 10 years). Charges for maintenance and
repairs are expensed as they are incurred.
G. OTHER REAL ESTATE (O.R.E.). O.R.E. comprises real properties acquired through
foreclosure or deed in lieu of foreclosure in partial or total satisfaction of
problem loans. The properties are recorded at the lower of cost or fair value
less estimated disposal costs at the date acquired. When a property is acquired,
the excess of the loan balance over the fair value is charged to the allowance
for loan losses. Any subsequent writedowns that may be required to the carrying
value of the property are included in other non-interest expense. Gains realized
from the sale of other real estate are included in other non-interest income,
while losses are included in non-interest expense.
H. FEDERAL INCOME TAXES. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in the tax rates is recognized
in income in the period of the enactment date.
I. STOCK BASED COMPENSATION. The Corporation applies Accounting Principles Board
(APB) Opinion 25 in accounting for its plans and, accordingly, no compensation
cost has been recognized for its stock options in the consolidated financial
statements. Pro forma disclosures, as required by Statement of Financial
Accounting Standards (SFAS) 123, "Accounting for Stock Based Compensation," have
been included for awards granted after January 1, 1995 (see note 10).
J. EARNINGS PER SHARE. On March 25, 1998, the Board of Directors of the
Corporation approved a 2.5% stock dividend payable on April 21, 1998 to
shareholders of record on April 7, 1998. On December 23, 1997, the Board of
Directors of the Corporation approved a two-for-one stock split effected in the
form of a stock dividend payable on January 20, 1998 to shareholders of record
on January 5, 1998. All share data has been adjusted to reflect these two
actions.
Basic net income per common share is calculated by dividing net income,
less the dividends on preferred stock, if any, by the weighted average common
shares outstanding during the period.
Diluted net income per common share is computed similar to that of basic
net income per common share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if all
potentially dilutive common shares, principally stock options, were issued
during the reporting period.
Weighted average shares for the basic net income per share computation for
the years ended December 31, 1999, 1998, and 1997 were 6,015,000, 5,017,000, and
5,052,000, respectively. For the diluted net income per share computation,
common stock equivalents of 26,000, 42,000, and 65,000 are included for the
years ended December 31, 1999, 1998, and 1997, respectively.
K. COMPREHENSIVE INCOME. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholders' equity. The unrealized holding gains (losses) that
arise during a year are equal to the net unrealized gains (losses) on securities
available for sale included in total comprehensive income in the consolidated
statements of changes in stockholders' equity plus a reclassification adjustment
for gains (losses) realized in income. This reclassification adjustment is equal
to the security gains (losses) included in the consolidated statements of income
for all years presented.
2. CASH AND DUE FROM BANKS
The Corporation maintains various deposits with other banks. As of
December 31, 1999 and 1998, the Corporation maintained sufficient cash on hand
to satisfy Federal regulatory requirements.
42
33
3. SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED Gross Gross Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
(in thousands) COST GAINS LOSSES VALUE Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
other U.S. government
agencies $117,496 $ 6 $ (4,771) $112,731 $ 55,051 $ 149 $ (161) $ 55,039
Mortgage-backed securities 170,775 208 (4,819) 166,164 120,410 157 (581) 119,986
Corporate obligations 5,783 -- (261) 5,522 2,867 8 (8) 2,867
Federal Reserve Bank Stock 1,397 -- -- 1,397 812 -- -- 812
Federal Home Loan Bank Stock 23,484 -- -- 23,484 6,873 -- -- 6,873
- ----------------------------------------------------------------------------------------------------------------------------------
Total $318,935 $ 214 $ (9,851) $309,298 $186,013 $ 314 $ (750) $185,577
==================================================================================================================================
The amortized cost and estimated market value of investment securities are as
follows:
December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED Gross Gross Estimated
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market
(in thousands) COST GAINS LOSSES VALUE Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ 69,184 $ -- $ (5,192) $ 63,992 $ 4,994 $ -- $ (59) $ 4,935
Obligations of state and
political subdivisions 31,892 29 (2,640) 29,281 20,773 302 (93) 20,982
Mortgage-backed securities 7,091 -- (243) 6,848 10,344 -- (58) 10,286
- --------------------------------------------------------------------------------------------------------------------------------
Total $108,167 $ 29 $ (8,075) $100,121 $ 36,111 $ 302 $ (210) $ 36,203
================================================================================================================================
The amortized cost and estimated market value of securities available for
sale and investment securities as of December 31, 1999 by contractual maturity
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
- --------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
ESTIMATED
Amortized MARKET
(in thousands) Cost VALUE
- --------------------------------------------------------
Due in 1 year or less $ 19,985 $ 19,864
Due after 1 year
through 5 years 39,913 39,409
Due after 5 years
through 10 years 25,000 23,596
Due after 10 years 63,262 60,265
- --------------------------------------------------------
Subtotal 148,160 143,134
Mortgage-backed securities 170,775 166,164
- --------------------------------------------------------
Total $ 318,935 $ 309,298
========================================================
- --------------------------------------------------------
INVESTMENT SECURITIES
Estimated
AMORTIZED Market
(in thousands) COST Value
- --------------------------------------------------------
Due in one year or less $ 1,057 $ 1,057
Due after 1 year
through 5 years 3,335 3,346
Due after 5 years
through 10 years 24,451 22,981
Due after 10 years 72,233 65,889
- --------------------------------------------------------
Subtotal 101,076 93,273
Mortgage-backed securities 7,091 6,848
- --------------------------------------------------------
Total $ 108,167 $100,121
========================================================
Proceeds from the sale of available for sale securities during 1999, 1998,
and 1997 were $31,694,000, $47,725,000, and $11,740,000, respectively. Gross
gains of $21,000, $242,000 and $24,000 were realized on those sales in 1999,
1998, and 1997, respectively. Gross losses of $322,000, and $91,000 were
realized on those sales in 1999 and 1998, respectively. There were no losses in
1997.
43
34
Securities with a carrying value of approximately $264,188,000 as of
December 31, 1999 were pledged to secure public deposits and for other purposes
as required or permitted by law. As of December 31, 1999, Federal Home Loan Bank
(FHLB) stock with a carrying value of $23,484,000 was held by the Corporation as
required by the FHLB.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table shows comparative year-end detail of the loan portfolio:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Commercial and
industrial loans $150,629 $133,263
Real estate loans -- mortgage 385,441 283,739
Real estate loans -- construction 70,933 38,386
Consumer loans 27,494 24,531
Other loans 12,240 11,730
- --------------------------------------------------------------------------------
Total loans $646,737 $491,649
================================================================================
Residential mortgage loans held for sale amounted to $1,972,000 and
$3,084,000 as of December 31, 1999 and 1998, respectively. These loans are
accounted for at the lower of aggregate cost or market value and are included in
the table above.
The Corporation originates and sells mortgage loans to FHLMC and FNMA.
Generally, servicing on such loans is retained by the Corporation. As of
December 31, 1999 and 1998, loans serviced for FHLMC were $27,171,000 and
$33,476,000, respectively; loans serviced for FNMA were $12,508,000 and
$10,503,000, respectively.
The Corporation has extended credit in the ordinary course of business to
directors, officers, and their associates on substantially the same terms,
including interest rates and collateral, as those prevailing, for comparable
transactions with other customers of the Corporation.
The following table summarizes activity with respect to such loans:
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Balance as of beginning of year $ 5,705 $ 6,387
Additions 6,379 3,347
Repayments 1,261 4,029
- --------------------------------------------------------------------------------
Balance as of end of year $10,823 $ 5,705
================================================================================
The majority of the Corporation's business is with customers located within
Mercer County, New Jersey and contiguous counties. Accordingly, the ultimate
collectibility of the loan portfolio and the recovery of the carrying amount of
real estate are subject to changes in the region's economic environment and real
estate market. A portion of the total portfolio is secured by real estate. The
principal areas of exposure are construction and development loans, which are
primarily commercial and residential projects, and commercial mortgage loans.
Commercial mortgage loans are completed projects and are generally
owner-occupied or tenanted investment projects, creating cash flow.
Changes in the allowance for loan losses are as follows:
Year Ended December 31,
- --------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------
Balance as of beginning
of year $ 6,768 $5,570 $ 4,957
Loans charged off (1,085) (843) (574)
Recoveries of loans
charged off 107 66 62
- --------------------------------------------------------
Net charge offs (978) (777) (512)
Provision charged
to operations 3,175 1,975 1,125
- --------------------------------------------------------
Balance as of
end of year $ 8,965 $6,768 $ 5,570
========================================================
The detail of loans charged off is as follows:
Year Ended December 31,
- --------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------
Commercial and
industrial $ 405 $ 547 $ 212
Real estate loans
-- mortgage 6 -- 161
Real estate loans
-- construction 182 -- --
Consumer loans 309 296 201
Other loans 183 -- --
- --------------------------------------------------------
Total $ 1,085 $ 843 $ 574
========================================================
Nonperforming assets include nonperforming loans and other real estate. The
nonperforming loan category includes loans on which accrual of interest has been
discontinued with subsequent interest payments credited to income as received
and loans 90 days past due or greater on which interest is still accruing.
Nonperforming loans as a percentage of total loans were 0.48% as of December 31,
1999 and 0.79% as of December 31, 1998.
44
35
A summary of nonperforming assets follows:
December 31,
- --------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------
Nonaccrual loans:
Commercial and
industrial loans $ 676 $ 232
Real estate loans
-- mortgage 1,189 570
Real estate loans
-- construction -- 684
Consumer loans 12 31
Other loans 312 529
- --------------------------------------------------------
Total nonaccrual loans $ 2,189 $ 2,046
- --------------------------------------------------------
Restructured loans $ 540 $ 634
- --------------------------------------------------------
Past due 90 days or more:
Commercial and
industrial loans $ 46 $ --
Real estate loans
-- mortgage 277 1,093
Consumer loans 26 100
- --------------------------------------------------------
Total past due 90 days
or more 349 1,193
- --------------------------------------------------------
Total nonperforming loans 3,078 3,873
Other real estate 2,585 4,957
- --------------------------------------------------------
Total nonperforming assets $ 5,663 $ 8,830
========================================================
The Corporation has defined the population of impaired loans to be all
nonaccrual commercial loans. Impaired loans are individually assessed to
determine that the loan's carrying value is not in excess of the fair value of
the collateral or the present value of the loan's expected cash flows. Smaller
balance homogeneous loans that are collectively evaluated for impairment,
including residential mortgage and consumer loans, are specifically excluded
from the impaired loan portfolio.
The recorded investment in loans receivable for which an impairment has
been recognized as of December 31, 1999 and 1998 was $2,230,000 and $2,438,000,
respectively. The related allowance for loan losses on these loans as of
December 31, 1999 and 1998 was $618,000 and $519,000, respectively. The average
recorded investment in impaired loans during 1999 and 1998 was $2,056,000 and
$3,252,000, respectively. There was no interest income recognized on impaired
loans in 1999, 1998, and 1997.
Additional income before income taxes amounting to approximately $257,000
in 1999, $249,000 in 1998 and $254,000 in 1997 would have been recognized if
interest on all loans had been recorded based upon original contract terms.
5. BANK PREMISES AND EQUIPMENT
The following table represents comparative information for premises and
equipment:
December 31,
- --------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------
Land and improvements $ 1,249 $ 773
Buildings and improvements 6,591 4,413
Furniture and equipment 9,154 7,373
- --------------------------------------------------------
Total 16,994 12,559
Less accumulated depreciation 7,594 6,308
- --------------------------------------------------------
Bank premises
and equipment, net $ 9,400 $ 6,251
========================================================
6. DEPOSITS
Total deposits consist of the following:
December 31,
- --------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------
Non-interest bearing
demand deposits $ 90,219 $ 75,426
Interest bearing
demand deposits 61,483 51,672
Money market deposits 57,143 44,661
Savings deposits 80,300 77,537
Certificates of deposit
of $100,000 and over 72,528 29,525
Other time deposits 382,134 240,822
- --------------------------------------------------------
Total $ 743,807 $ 519,643
========================================================
A summary of certificates of deposit by maturity is as follows:
December 31,
- --------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------
Within one year $ 324,478 $ 190,259
One to two years 92,320 55,702
Two to three years 29,925 9,935
Three to four years 5,276 9,340
Four to five years 2,663 5,111
- --------------------------------------------------------
Total $ 454,662 $ 270,347
========================================================
7. BORROWED FUNDS
Borrowed funds include securities sold under agreements to repurchase and
Federal Home Loan Bank (FHLB) advances. Other borrowed funds consist of Federal
funds purchased, Treasury tax and loan deposits, and obligation for ESOP.
45
36
The following table presents comparative data related to borrowed funds of
the Corporation as of and for the years ended December 31, 1999, 1998, and 1997.
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Securities sold
under agreements
to repurchase $ 45,000 $ 87,120 $100,050
FHLB advances 250,293 89,316 29,338
Obligation for ESOP 1,600 -- --
Other 1,796 1,452 4,928
- --------------------------------------------------------------------------------
Total $298,689 $177,888 $134,316
- --------------------------------------------------------------------------------
Maximum amount
outstanding at
any month end $304,473 $182,354 $134,316
Average interest rate
on year end balance 5.49% 5.25% 5.94%
Average amount
outstanding
during the year $256,957 $158,106 $ 84,492
Average interest rate
for the year 5.26% 5.54% 5.63%
================================================================================
There are $45,000,000 in securities sold under agreements to repurchase
with expected maturities over 90 days as of December 31, 1999. The outstanding
amount includes $40,000,000 in callable repurchase agreements with maturities
ranging from five to ten years and call dates of one to two years. Due to the
call provisions, expected maturities could differ from contractual maturities.
The FHLB advances as of December 31, 1999 mature as follows:
- --------------------------------------------------------
(in thousands)
- --------------------------------------------------------
Within one year $ 6,000
Over one to two years 768
Over two to three years 25
Over five years 243,500
- --------------------------------------------------------
Total $ 250,293
========================================================
The outstanding amount includes $239,500,000 in callable advances with ten
year maturities and call dates of one to five years. Due to the call provisions,
expected maturities could differ from contractual maturities.
Interest expense on borrowed funds is comprised of the following:
Year Ended December 31,
- --------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Securities sold under
agreements to
repurchase $ 5,507 $ 5,851 $ 3,627
FHLB advances 7,854 2,816 1,081
Obligation for ESOP 115 -- --
Other 47 89 53
- --------------------------------------------------------------------------------
Total $13,523 $ 8,756 $ 4,761
================================================================================
8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY (TRUST PREFERRED SECURITIES)
On October 16, 1997, Yardville Capital Trust (the Trust), a statutory business
trust, and a wholly owned subsidiary of Yardville National Bancorp, issued
$11,500,000 of 9.25% Trust Preferred Securities and $356,000 of 9.25% Common
Securities to Yardville National Bancorp. Proceeds from the issuance of the
Trust Preferred Securities were immediately used by the Trust to purchase
$11,856,000 of 9.25% Subordinated Debentures maturing November 1, 2027 from
Yardville National Bancorp. The Trust exists for the sole purpose of issuing
Trust Preferred Securities and investing the proceeds into Subordinated
Debentures of Yardville National Bancorp. These Subordinated Debentures
constitute the sole assets of the Trust. These Subordinated Debentures are
redeemable in whole or part prior to maturity after November 1, 2002. The Trust
is obligated to distribute all proceeds of a redemption, whether voluntary or
upon maturity, to holders of the Trust Preferred Securities. Yardville National
Bancorp's obligation with respect to the Trust Preferred Securities and the
Subordinated Debentures, when taken together, provide a full and unconditional
guarantee on a subordinated basis by Yardville National Bancorp of the Trust's
obligations to pay amounts when due on the Trust Preferred Securities.
46
37
9. INCOME TAXES
Income taxes reflected in the consolidated financial statements for 1999, 1998,
and 1997 are as follows:
Year Ended December 31,
- ----------------------------------------------------------------
(in thousands) 1999 1998 1997
- ----------------------------------------------------------------
Statements of Income:
Federal:
Current $ 3,988 $2,625 $ 2,440
Deferred (840) (358) (294)
State:
Current 39 512 675
Deferred -- (140) (81)
- ----------------------------------------------------------------
Total tax expense $ 3,187 $2,639 $ 2,740
- ----------------------------------------------------------------
Statements of Condition:
Deferred tax on
Accumulated other
comprehensive income $ (3,373) $ (236) $ 190
- ----------------------------------------------------------------
Deferred income taxes reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax assets and liabilities for 1999 and 1998 are
as follows:
December 31,
- --------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------
Deferred tax assets:
Deferred loan fees $ -- $ 58
Allowance for
loan losses 3,339 2,462
Writedown of basis
of O.R.E. properties 167 118
Deferred income 2 16
Net state operating
loss carryforwards 48 52
Accumulated other
comprehensive loss 3,526 152
Deferred compensation 567 474
- --------------------------------------------------------
Total deferred tax assets $ 7,649 $ 3,332
- --------------------------------------------------------
Valuation allowance (78) (78)
- --------------------------------------------------------
Deferred tax liabilities:
Deferred income (274) (168)
Unamortized discount
accretion (37) (75)
Depreciation (140) (166)
Other (62) (13)
- --------------------------------------------------------
Net deferred tax assets $ 7,058 $ 2,832
- --------------------------------------------------------
The Corporation has established the valuation allowance against certain
temporary differences. The Corporation is not aware of any factors that would
generate significant differences between taxable income and pre-tax accounting
income in future years except for the effects of the reversal of current or
future net deductible temporary differences. Management believes, based upon
current information, that it is more likely than not that there will be
sufficient taxable income through carryback to prior years to realized the net
deferred tax asset. However, there can be no assurance regarding the level of
earnings in the future.
A reconciliation of the tax expense computed by multiplying pre-tax
accounting income by the statutory Federal income tax rate of 34% is as follows:
Year Ended December 31,
- ----------------------------------------------------------
(in thousands) 1999 1998 1997
- ----------------------------------------------------------
Income tax expense
at statutory rate $ 3,810 $ 2,795 $ 2,634
State income taxes, net
of Federal benefit 26 245 392
Changes in taxes
resulting from:
Tax exempt interest (471) (239) (155)
Tax exempt income (260) (227) (184)
Non-deductible
expenses 82 65 53
- ----------------------------------------------------------
Total $ 3,187 $ 2,639 $ 2,740
- ----------------------------------------------------------
10. BENEFIT PLANS
RETIREMENT SAVINGS PLAN. The Corporation has a 401(K) plan which covers
substantially all employees with one or more years of service. The plan permits
all eligible employees to make basic contributions to the plan up to 12% of base
compensation. Under the plan, the Corporation provided a matching contribution
of 50% in 1999, 1998 and 1997, up to 6% of base compensation. Employer
contributions to the plan amounted to $128,000 in 1999, $107,000 in 1998, and
$93,000 in 1997.
POSTRETIREMENT BENEFITS. The Corporation provides additional postretirement
benefits, namely life and health insurance, to retired employees over the age of
62 who have completed 15 years of service. The plan calls for retirees to
contribute a portion of the cost of providing these benefits in relation to
years of service.
The cost of retiree health and life insurance benefits is recognized
over the employees' period of service. There were no periodic postretirement
benefit costs under SFAS 106 in 1999 and 1998. Those costs were $64,000 in 1997.
The actuarial present value of benefit obligations was $755,000 in 1999 and
$604,000 in 1998.
47
38
STOCK OPTION PLANS. The Corporation maintains stock option plans for both
officers and directors. The purpose of these plans is to assist the Corporation
in attracting and retaining highly qualified officers and directors and to
provide such with incentive to contribute to the growth and development of the
Corporation.
These options are intended to be either incentive or non-qualified
stock options. Options have been granted to purchase common stock at the fair
value of the stock at the date of grant. A committee appointed by the Board of
Directors sets the vesting schedule and terms of stock options.
- ------------------------------------------------------------
Weighted average
Shares exercise price
- ------------------------------------------------------------
Balance,
December 31, 1996 201,401 $ 4.32
- ------------------------------------------------------------
Shares:
Granted 29,930 10.64
Exercised 99,702 4.64
Expired 1,322 4.95
- ------------------------------------------------------------
Balance,
December 31, 1997 130,307 $ 5.52
- ------------------------------------------------------------
Shares:
Granted 419,288 17.20
Exercised 57,575 5.03
Expired 1,529 8.43
- ------------------------------------------------------------
Balance,
December 31, 1998 490,491 $ 15.55
- ------------------------------------------------------------
SHARES:
GRANTED 19,680 12.08
EXERCISED 13,980 4.78
EXPIRED 3,252 12.10
- ------------------------------------------------------------
BALANCE,
DECEMBER 31, 1999 492,939 $ 15.75
- ------------------------------------------------------------
SHARES EXERCISABLE AS OF
DECEMBER 31, 1999 136,410 $ 12.78
- ------------------------------------------------------------
The fair value of options granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1999, 1998, and 1997, respectively: (1) an
expected annual dividend rate of $0.40, $0.32, and $0.28. (2) risk free rate of
6.3%, 5.6%, and 5.5%. (3) expected life of approximately 5 years in 1999 and
1998, and 1 year for 1997.
The Corporation applies APB Opinion No. 25 in accounting for its plans
and, accordingly, no compensation cost has been recognized for stock options in
the consolidated financial statements.
Had the Corporation determined compensation cost based on the fair
value at the grant date for its stock options under SFAS 123, the Corporation's
1999, 1998, and 1997 net income would have been reduced to the pro forma amounts
indicated below:
- --------------------------------------------------------
(in thousands) 1999 1998 1997
- --------------------------------------------------------
Net income:
As reported $ 8,020 $5,582 $ 5,006
Pro forma 7,952 3,567 4,976
- --------------------------------------------------------
Earnings per share:
Basic:
As reported $ 1.33 $ 1.11 $ 0.99
Pro forma 1.32 0.71 0.99
Diluted:
As reported $ 1.33 $ 1.10 $ 0.98
Pro forma 1.32 0.71 0.97
- --------------------------------------------------------
BENEFIT PLANS. The Corporation has a salary continuation plan for key executives
and a director deferred compensation plan for its board members. The plans
provide for yearly retirement benefits to be paid over a specified period. The
present value of the benefits accrued under these plans as of December 31, 1999
and 1998 is approximately $669,000 and $493,000, respectively, and is included
in other liabilities in the accompanying consolidated statements of condition.
Compensation expense of approximately $142,000, $138,000, and $120,000 is
included in the accompanying consolidated statements of income for the years
ended December 31, 1999, 1998, and 1997, respectively.
In connection with the benefit plans, the Corporation has purchased
life insurance policies on the lives of the executives and directors. The
Corporation is the owner and beneficiary of the policies. The cash surrender
values of the policies are approximately $10,041,000 and $9,595,000, as of
December 31, 1999 and 1998, respectively, and are included in other assets in
the accompanying consolidated statements of condition.
The Corporation implemented an officer group term replacement plan for
divisional officers in 1996. This plan replaces group term life insurance for
these officers. This plan is funded through life insurance policies purchased by
the Corporation. This plan is a split dollar plan; therefore, the policy
interests are divided between the bank and the employee. The death benefits over
and above the cash surrender of the life insurance policy, if any, are endorsed
to the beneficiary of the executive. The cash surrender value of the policies is
approximately $4,380,000 and $4,192,000, as of December 31, 1999 and 1998, and
is included in other assets in the accompanying consolidated statements of
condition.
48
39
11. COMMON STOCK
On October 28, 1997, the Corporation's Board of Directors authorized the
repurchase of up to 172,000 shares in aggregate of the Corporation's common
stock. At various times in 1998, the Corporation repurchased shares totaling
170,300 at an average price of $17.67. In 1999, the corporation repurchased
1,700 shares at an average price of $12.94.
The Bank established an Employee Stock Ownership Plan and related trust
("ESOP") for eligible employees. The ESOP is a tax-qualified plan subject to the
requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Employees with twelve months of employment with the Bank and who have worked at
least 1,000 hours are eligible to participate. The ESOP borrowed $2,000,000 from
an unaffiliated financial institution and purchased 155,340 shares of common
shares, no par value, of the Corporation. Shares purchased by the ESOP are held
in a suspense account pending allocation among participants as the loan is
repaid.
Compensation expense is recognized based on the fair value of the stock
when it is committed to be released. Compensation expense amounted to $347,000
for the twelve months ended December 31, 1999. The fair value of unearned shares
at December 31, 1999 is $1,445,000.
Unallocated shares are deducted from common shares outstanding for
earnings per share purposes with shares that are committed to be released during
the year added back into weighted average shares outstanding.
On May 18, 1999, the Corporation completed the sale of 1,610,000 shares
of its common stock in an underwritten public offering. The common stock was
offered at a price of $12.00 per share and generated gross proceeds of
$19,320,000. Net proceeds after the underwriting discount and other offering
costs was approximately $17,620,000. Of the net proceeds, approximately
$17,500,000 was contributed to the Bank to support future asset growth.
12. OTHER NON-INTEREST EXPENSE
Other non-interest expense included the following:
Year Ended December 31,
- -----------------------------------------------------------------
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------
Audit and examination fees $ 346 $ 306 $ 227
Attorneys' fees 296 379 373
O.R.E. expenses 571 573 378
Outside services and processing 237 328 332
Stationery and supplies 498 403 347
Communication and postage 487 434 373
FDIC insurance premium 67 53 47
Insurance (other) 97 101 127
Marketing 835 747 575
Amortization of trust preferred
expenses 160 160 27
Other 1,664 1,369 1,005
- -----------------------------------------------------------------
Total $ 5,258 $4,853 $3,811
- -----------------------------------------------------------------
13. OTHER COMMITMENTS AND
CONTINGENT LIABILITIES
The Corporation enters into a variety of financial instruments with off-balance
sheet risk in the normal course of business. These financial instruments include
commitments to extend credit and letters of credit, both of which involve to
varying degrees, elements of risk in excess of the amount recognized in the
consolidated financial statements.
Credit risk, the risk that a counterparty of a particular financial
instrument will fail to perform, is the contract amount of the commitments to
extend credit and letters of credit. The credit risk associated with these
financial instruments is essentially the same as that involved in extending
loans to customers. Credit risk is managed by limiting the total amount of
arrangements outstanding and by applying normal credit policies to all
activities with credit risk. Collateral is obtained based on management's credit
assessment of the customer.
The contract amounts of off-balance sheet financial instruments as of
December 31, 1999 and 1998 for commitments to extend credit were $161,973,000
and $114,077,000, respectively. For standby letters of credit, the contract
amounts were $9,190,000 and $8,208,000, respectively.
Many such commitments to extend credit may expire without being drawn
upon, and, therefore, the total commitment amounts do not necessarily represent
future cash flow requirements.
The Corporation maintains lines of credit with the FHLB and four of its
correspondent banks. There were approximately $62,845,000 in lines of credit
available as of December 31, 1999. The Corporation maintains repurchase
agreement lines of credit with two brokerage firms. There were approximately
$155,000,000 in lines available at December 31, 1999.
The Corporation leases its banking offices in Ewing Township, East
Windsor Township, Trenton, Hamilton Square, Pennington, Newtown Township,
Pennsylvania and its new corporate headquarters building and branch located in
Hamilton Township. Total lease rental expense was $531,080, $298,234, and
$236,912 for the years ended December 31, 1999, 1998, and 1997, respectively.
Minimum rentals under the terms of the leases are approximately $1,224,000 in
2000, $1,230,000 in 2001, $1,244,000 in 2002, $1,246,000 in 2003 and $1,249,000
in 2004.
The Corporation and the Bank are party, in the ordinary course of
business, to litigation involving collection matters, contract claims and other
miscellaneous causes of action arising from their business. Management does not
consider that any such proceedings depart from usual routine litigation, and in
its judgment, the Corporation's consolidated financial position or results of
operations will not be affected materially by the final outcome of any pending
legal proceedings.
49
40
14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the 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
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments 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 (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Permission from the Comptroller of the Currency is required if the
total of dividends declared in a calendar year exceeds the total of the Bank's
net profits, as defined by the Comptroller, for that year, combined with its
retained net profits of the two preceding years. The retained net profits of the
Bank available for dividends are approximately $10,288,000 as of December 31,
1999.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement act of 1991 (the "FDIC Improvement Act") became law. While the FDIC
Improvement Act primarily addresses additional sources of funding for the Bank
Insurance Fund, which insures the deposits of commercial banks and saving banks,
it also imposes a number of new mandatory supervisory measures on savings
associations and banks.
The FDIC Improvement Act requires financial institutions to take
certain actions relating to their internal operations, including: providing
annual reports on financial condition and management to the appropriate Federal
banking regulators, having an annual independent audit of financial statements
performed by an independent public accountant and establishing an independent
audit committee composed solely of outside directors. The FDIC Improvement Act
also imposes certain operational and managerial standards on financial
institutions relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits.
The following table presents the Corporation's and Bank's actual
capital amounts and ratios:
- ---------------------------------------------------------------------------------------------------------------------
REGULATORY MATTERS
Per Regulatory Guidelines
- ---------------------------------------------------------------------------------------------------------------------
Actual Minimum "Well Capitalized"
- ---------------------------------------------------------------------------------------------------------------------
(amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
As of December 31, 1999:
Corporation
Total capital (to risk-weighted assets) $ 85,544 11.5% $ 59,717 8.0% $ 74,646 10.0%
Tier I capital (to risk-weighted assets) 76,579 10.3 29,858 4.0 44,788 6.0
Tier Icapital (to average assets) 76,579 7.9 38,781 4.0 48,476 5.0
Bank
Total capital (to risk-weighted assets) $ 85,244 11.4% $ 59,672 8.0% $ 74,590 10.0%
Tier I capital (to risk-weighted assets) 76,279 10.2 29,836 4.0 44,754 6.0
Tier Icapital (to average assets) 76,279 7.8 38,910 4.0 48,637 5.0
As of December 31, 1998:
Corporation
Total capital (to risk-weighted assets) $ 59,151 11.2% $ 42,394 8.0% $ 52,993 10.0%
Tier I capital (to risk-weighted assets) 52,531 9.9 21,197 4.0 31,796 6.0
Tier Icapital (to average assets) 52,531 7.7 27,367 4.0 34,208 5.0
Bank
Total capital (to risk-weighted assets) $ 57,590 10.8% $ 42,500 8.0% $ 53,125 10.0%
Tier I capital (to risk-weighted assets) 50,948 9.6 21,250 4.0 31,875 6.0
Tier Icapital (to average assets) 50,948 8.5 27,251 4.0 34,064 5.0
- ---------------------------------------------------------------------------------------------------------------------
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15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value estimates, methods and assumptions were used to measure
the fair value of each class of financial instruments for which it is practical
to estimate that value:
CASH AND CASH EQUIVALENTS. For such short-term investments, the carrying amount
was considered to be a reasonable estimate of fair value.
SECURITIES AND MORTGAGE-BACKED SECURITIES. The fair value of investments and
mortgage-backed securities, except certain state and municipal securities, is
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value of certain state and
municipal securities is not readily available through market sources other than
dealer quotations, so fair value estimates are based on quoted market prices of
similar instruments, adjusted for differences between the quoted instruments and
the instruments being valued.
LOANS. Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage and other consumer. Each loan category is
further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
The fair value of performing loans, except residential mortgage loans, is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the
Corporation's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of current
economic and lending conditions. For performing residential mortgage loans, fair
value is estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources adjusted to
reflect differences in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
DEPOSIT LIABILITIES. The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, interest bearing demand deposits, money
market, and savings deposits, is considered to be equal to the amount payable on
demand. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
BORROWED FUNDS. For securities sold under agreements to repurchase and FHLB
advances, fair value was based on rates currently available to the Corporation
for agreements with similar terms and remaining maturities. For other borrowed
funds, the carrying amount was considered to be a reasonable estimate of fair
values.
The estimated fair values of the Corporation's financial instruments are as
follows:
December 31, 1999
- --------------------------------------------------------
Carrying Fair
(in thousands) Value Value
- --------------------------------------------------------
Financial Assets:
Cash and cash
equivalents $ 25,617 $ 25,617
Interest bearing
deposits with banks 955 955
Securities available for
sale 309,298 309,298
Investment securities 108,167 100,121
Loans, net 637,772 633,088
Financial Liabilities:
Deposits 743,807 742,822
Borrowed funds 298,689 298,349
Trust preferred securities 11,500 11,069
December 31, 1998
- --------------------------------------------------------
Carrying Fair
(in thousands) Value Value
- --------------------------------------------------------
Financial Assets:
Cash and cash
equivalents $ 16,526 $ 16,526
Interest bearing
deposits with banks 733 733
Securities available for
sale 185,577 185,577
Investment securities 36,111 36,203
Loans, net 484,881 485,944
Financial Liabilities:
Deposits 519,643 521,421
Borrowed funds 177,888 181,711
Trust preferred securities 11,500 12,219
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, and as the fair value for
these financial instruments was not material, these disclosures are not included
above.
LIMITATIONS. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to
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estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Significant assets
that are not considered financial assets include the deferred tax assets and
bank premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in many of the estimates.
16. PARENT CORPORATION INFORMATION
The condensed financial statements of the parent company only are presented
below:
YARDVILLE NATIONAL BANCORP (Parent Corporation)
Condensed Statements of Condition
December 31,
------------
(in thousands) 1999 1998
- -------------- ---- ----
Assets:
Cash ........................ $ 219 $ 200
Securities available for sale 105 105
Investment in subsidiaries .. 70,371 51,020
Other assets ................ 1,616 1,296
------- -------
Total Assets ................ $72,311 $52,621
------- -------
Liabilities and
Stockholders' Equity:
Other liabilities ........... $ 30 $ 9
Obligation for ESOP ......... 1,600 --
Subordinated debentures ..... 11,856 11,856
Stockholders' equity ............ 58,825 40,756
------- -------
Total Liabilities and
Stockholders' Equity ........ $72,311 $52,621
------- -------
Condensed Statements of Income
Year Ended December 31,
-----------------------
(in thousands) 1999 1998 1997
- -------------- ---- ---- ----
Operating Income:
Dividends from subsidiary $ 3,099 $ 1,982 $ 1,765
Interest income ......... 12 42 --
Other income ............ 514 63 --
----- ----- -----
Total Operating Income .. 3,625 2,087 1,765
----- ----- -----
Operating Expense:
Interest expense ........ 1,179 1,064 224
Other expense ........... 381 340 144
----- ----- -----
Total Operating Expense . 1,560 1,404 368
----- ----- -----
Income before income
taxes and equity in
undistributed income
of subsidiaries ......... 2,065 683 1,397
Federal income tax benefit .. (470) (441) (114)
----- ----- -----
Income before equity in
undistributed income
of subsidiaries ......... 2,535 1,124 1,511
Equity in undistributed
income of subsidiaries .. 5,485 4,458 3,495
----- ----- -----
Net Income ........... $ 8,020 $ 5,582 $ 5,006
----- ----- -----
Condensed Statements of Cash Flows
Year Ended December 31,
-----------------------
(in thousands) 1999 1998 1997
- -------------- ---- ---- ----
Cash Flows from
Operating Activities:
Net Income ........................... $ 8,020 $ 5,582 $ 5,006
Adjustments:
Increase in
other assets ................... (320) (769) (448)
Equity in undistributed
income of subsidiaries ......... (5,485) (4,458) (3,495)
Increase in
other liabilities .............. 21 -- 9
------ ------ ------
Net Cash Provided by
Operating Activities ............. 2,236 355 1,072
------ ------ ------
Cash Flows from Investing
Activities:
Purchases of securities
available for sale ............. -- -- (3,297)
Proceeds from sales of
securities available for sale .. -- 3,192 --
Investing in subsidiaries ........ (19,846) 1 (8,356)
------ ------ ------
Net Cash (Used) Provided by
Investing Activities ............. (19,846) 3,193 (11,653)
------ ------ ------
Cash Flows from Financing
Activities:
Increase in obligation
for ESOP ....................... 1,600 -- --
Proceeds from issuance
of subordinated debentures ..... -- -- 11,856
Proceeds from shares issued 18,088 294 457
Purchase of treasury shares ...... (22) (3,008) --
Dividends paid ................... (2,037) (1,449) (1,233)
------ ------ ------
Net Cash Provided (Used) by
Financing Activities ............. 17,629 (4,163) 11,080
------ ------ ------
Net increase (decrease) in cash ...... 19 (615) 499
Cash as of beginning of year ......... 200 815 316
------ ------ ------
Cash as of end of year ............... $ 219 $ 200 $ 815
====== ====== ======
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INDEPENDENT AUDITORS'
REPORT
The Board of Directors and Stockholders
Yardville National Bancorp:
We have audited the accompanying consolidated statements of condition of
Yardville National Bancorp and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Yardville
National Bancorp and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Princeton, New Jersey
January 21, 2000