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 consolidated
financial statements and related notes thereto. All share and per share data
have 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.
At or for the year ended December 31,
2000 1999 1998 1997 1996
Statement of Income
(in thousands)
Interest income $100,389 $69,719 $50,923 $40,768 $34,251
Interest expense 62,654 39,645 28,392 21,100 17,041
Net interest income 37,735 30,074 22,531 19,668 17,210
Provision for loan losses 3,700 3,175 1,975 1,125 1,640
Securities gains (losses), net 46 (301) 151 24 (136)
Other non-interest income 3,380 3,066 2,851 2,520 2,249
Non-interest expense 22,861 18,457 15,337 13,341 11,479
Income before income tax expense $14,600 $11,207 $8,221 $7,746 $6,204
Income tax expense 4,259 3,187 2,639 2,740 2,178
Net income $10,341 $8,020 $5,582 $5,006 $4,026
Balance Sheet
(in thousands, except per share data)
Assets $1,619,312 $1,123,598 $757,666 $614,686 $490,545
Loans 818,289 646,737 491,649 385,751 331,237
Securities 675,638 417,465 221,688 186,636 124,967
Deposits 950,318 743,807 519,643 422,944 364,445
Borrowed funds 545,223 298,689 177,888 134,316 86,339
Stockholders' equity 78,237 58,825 40,756 39,745 35,230
Allowance for loan losses 10,934 8,965 6,768 5,570 4,957
Per Share Data
Net income - basic $1.47 $1.33 $1.11 $0.99 $0.82
Net income - diluted 1.47 1.33 1.10 0.98 0.80
Cash dividends 0.40 0.34 0.29 0.24 0.22
Stockholders' equity (book value) 10.64 8.88 8.20 7.82 7.07
Other Data
Average shares outstanding - basic 7,022 6,015 5,017 5,052 4,938
Average shares outstanding - diluted 7,039 6,041 5,059 5,117 5,040
Selected HISTORICAL CONSOLIDATED
FINANCIAL DATA (cont'd)
At or for the year ended December 31,
2000 1999 1998 1997 1996
Financial Ratios
Return on average assets 0.79% 0.83% 0.82% 0.93% 0.90%
Return on average stockholders' equity 15.64 15.34 13.96 13.32 12.25
Net interest margin 3.07 3.33 3.55 3.95 4.10
Efficiency ratio 55.54 56.20 60.07 60.06 59.41
Average stockholders' equity
to average assets 5.05 5.39 5.84 7.00 7.33
Dividend payout ratio 27.46 25.40 25.96 24.63 26.90
Tier I leverage ratio 8.13 7.90 7.68 9.53 7.80
Tier I capital as a percent of
risk-weighted assets 10.56 10.26 9.91 12.24 10.17
Total capital as a percent of
risk-weighted assets 11.65 11.46 11.17 13.49 11.43
Allowance for loan losses to total loans 1.34 1.39 1.38 1.44 1.50
Net loan charge offs to average total loans 0.24 0.17 0.18 0.14 0.13
Nonperforming loans to total loans 0.86 0.48 0.79 1.38 2.46
Nonperforming assets to
total loans and other real estate
owned 1.11 0.87 1.78 2.18 2.57
Allowance for loan losses to nonperforming
assets 120.50 158.31 76.65 65.64 58.08
Allowance for loan losses to nonperforming
loans 155.47% 291.26% 174.75% 104.80% 60.90%
Return on Average Assets
Return on Average Stockholders' Equity
1.00%
0.80
0.60
0.40
0.20
0
20%
15
10
5
0
0.93%
0.90%
0.83%
0.82%
0.79%
15.64%
15.34%
13.96%
13.32%
12.25%
1996
1997
1998
1999
2000
1996
1997
1998
1999
2000
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"),
Yardville Capital Trust and Yardville Capital Trust II, collectively referred to
as "YNB." The purpose of this discussion and analysis is to assist in the
understanding and the evaluation of the financial condition, changes in
financial condition and results of operations of YNB.
2000 OVERVIEW
YNB achieved a significant milestone in 2000: celebrating its 75th
anniversary. YNB's expansion continued in 2000 with the opening of its first
branch in Hunterdon County. Executive management and the Board of Directors have
targeted the rapidly growing Hunterdon County market as a prime focus for
strategic expansion. YNB also strengthened its core Mercer County market when it
received approval for a branch in Lawrence Township. That branch opened in
January 2001.
To support this continued growth, YNB successfully completed two separate
private placement offerings in June 2000. Approximately $21.3 million of the
total proceeds raised by these offerings was contributed to the Bank to support
future asset growth.
YNB also achieved another consecutive year of record financial performance in
2000. YNB posted increases in net income, loans, and deposits of 28.9%, 26.5%,
and 27.8%, respectively. At December 31, 2000, YNB had $1.6 billion in total
assets.
Summary of Financial Performance
YNB's growth into the area's premier supercommunity bank was reflected in 2000's
record results. YNB's strength as a business lender and its relationship banking
philosophy resulted in outstanding loan, deposit, and net income growth.
Net income amounted to $10.3 million, a 28.9% increase, compared to $8.0 million
earned in 1999, while earnings per share, on a diluted basis, increased 10.5% to
$1.47 in 2000 from $1.33 in 1999. Earnings were primarily enhanced by loan and
securities growth experienced throughout the year. Driven by commercial loan
growth, YNB's loan portfolio increased 26.5% in 2000 compared to 1999. At
December 31, 2000, total loan outstandings reached $818.3 million compared to
$646.7 million at year-end 1999. With a larger loan portfolio and signs of a
softening economy toward the end of the year, YNB has exercised continued
vigilance in monitoring loan quality. YNB's deposit base increased 27.8% to
total $950.3 million at December 31, 2000. CDs were competitively priced
throughout the year to fund loan growth. YNB's emphasis on relationship banking
is reflected in the 13.9% increase in demand deposits in 2000.
Return on average assets (ROA) decreased to 0.79% in 2000 from 0.83% in 1999.
For 2000, YNB's return on average stockholders' equity (ROE) was 15.64% compared
to 15.34% in 1999. This measurement indicates how effectively a company can
generate net income on the capital invested by its stockholders. The efficiency
ratio decreased to 55.54% in 2000 from 56.20% in 1999.
RESULTS OF OPERATIONS
YNB earned $10.3 million or $1.47 per diluted share for the year ended December
31, 2000 compared to $8.0 million or $1.33 for the year ended December 31, 1999.
Net income and earnings per share grew 28.9% and 10.5%, respectively, in 2000.
YNB posted net income of $5.6 million or $1.10 per diluted share in 1998. The
increase in earnings per share in 2000 is principally attributed to increased
earnings offset by higher average shares outstanding due to the private common
stock offering completed in June 2000 and the public offering completed in May
1999.
NET INTEREST INCOME
Net interest income is YNB's largest and most significant component of operating
income. Net interest income is the difference between interest and fees on loans
and other earning assets, and interest paid on interest bearing liabilities.
This component represented 91.7% of YNB's net revenues in 2000. Net interest
income also depends upon the relative amount and mix of interest earning assets,
interest bearing liabilities, and the interest rate earned or paid on them. It
is YNB's goal to strive to optimize net interest income performance in varying
interest rate environments.
The following tables set forth YNB's consolidated average balances of assets,
liabilities and stockholders' equity as well as the amount of interest income
and expense on related items, and YNB's average yield or rate for each of the
five years ended December 31, 2000. The yields and costs are derived by dividing
income and expense by the average balance of assets or liabilities.
Financial SUMMARY
AVERAGE BALANCES, RATES PAID AND YIELDS
December 31, 2000 December 31, 1999
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(in thousands)
Interest Earning Assets:
Deposits with other banks $1,322 $82 6.20% $734 $45 6.13%
Federal funds sold 37,961 2,454 6.46 17,932 904 5.04
Securities 494,439 33,435 6.76 341,135 21,216 6.22
Loans (1) 723,570 64,418 8.90 564,552 47,554 8.42
Total interest earning assets $1,257,292 $100,389 7.98% $924,353 $69,719 7.54%
Non-Interest Earning Assets:
Cash and due from banks $18,307 $16,208
Allowance for loan losses (9,798) (7,638)
Premises and equipment, net 9,303 7,493
Other assets 32,944 29,109
Total non-interest earning assets 50,756 45,172
Total assets $1,308,048 $969,525
Interest Bearing Liabilities:
Deposits:
Savings, money markets,
and interest bearing demand $233,012 $7,937 3.41% $185,504 $4,887 2.63%
Certificates of deposit of
$100,000 or more 106,851 6,918 6.47 51,290 2,643 5.15
Other time deposits 408,414 24,772 6.07 320,809 17,528 5.46
Total interest bearing deposits 748,277 39,627 5.30 557,603 25,058 4.49
Borrowed funds 367,021 21,219 5.78 256,957 13,523 5.26
Trust preferred securities 19,333 1,808 9.35 11,500 1,064 9.25
Total interest bearing liabilities $1,134,631 $62,654 5.52% $826,060 $39,645 4.80%
Non-Interest Bearing Liabilities:
Demand deposits $96,024 $81,843
Other liabilities 11,284 9,351
Stockholders' equity 66,109 52,271
Total non-interest bearing
liabilities and stockholders' equity $173,417 $143,465
Total liabilities and stockholders' equity $1,308,048 $969,525
Interest rate spread (2) 2.46% 2.74%
Net interest income and margin (3) $37,735 3.00% $30,074 3.25%
Net interest income and margin
(tax equivalent basis) (4) $38,656 3.07% $30,786 3.33%
[RESTUB TABLE]
December 31, 1998 December 31, 1997
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(in thousands)
Interest Earning Assets:
Deposits with other banks $3,365 $175 5.20% $2,533 $107 4.22%
Federal funds sold 6,180 333 5.39 7,121 380 5.34
Securities 198,890 12,197 6.13 140,655 8,770 6.24
Loans (1) 438,050 38,218 8.72 355,526 31,511 8.86
Total interest earning assets $646,485 $50,923 7.88% $505,835 $40,768 8.06%
Non-Interest Earning Assets:
Cash and due from banks $15,398 $15,425
Allowance for loan losses (6,102) (5,254)
Premises and equipment, net 5,786 5,288
Other assets 22,599 15,337
Total non-interest earning assets 37,681 30,796
Total assets $684,166 $536,631
Interest Bearing Liabilities:
Deposits:
Savings, money markets,
and interest bearing demand $165,534 $5,034 3.04% $159,720 $5,083 3.18%
Certificates of deposit of
$100,000 or more 25,550 1,386 5.42 23,357 1,273 5.45
Other time deposits 211,790 12,152 5.74 168,962 9,759 5.78
Total interest bearing deposits 402,874 18,572 4.61 352,039 16,115 4.58
Borrowed funds 158,106 8,756 5.54 84,492 4,761 5.63
Trust preferred securities 11,500 1,064 9.25 2,422 224 9.25
Total interest bearing liabilities $572,480 $28,392 4.96% $438,953 $21,100 4.81%
Non-Interest Bearing Liabilities:
Demand deposits $66,857 $56,700
Other liabilities 4,857 3,404
Stockholders' equity 39,972 37,574
Total non-interest bearing
liabilities and stockholders' equity $111,686 $97,678
Total liabilities and stockholders' equity $684,166 $536,631
Interest rate spread (2) 2.92% 3.25%
Net interest income and margin (3) $22,531 3.49% $19,668 3.89%
Net interest income and margin
(tax equivalent basis) (4) $22,950 3.55% $19,993 3.95%
[RESTUB TABLE]
December 31, 1996
Average
Average Yield/
Balance Interest Rate
(in thousands)
Interest Earning Assets:
Deposits with other banks $1,992 $98 4.92%
Federal funds sold 4,265 228 5.35
Securities 132,036 8,194 6.21
Loans (1) 287,289 25,731 8.96
Total interest earning assets $425,582 $34,251 8.05%
Non-Interest Earning Assets:
Cash and due from banks $11,905
Allowance for loan losses (4,190)
Premises and equipment, net 5,037
Other assets 10,156
Total non-interest earning assets 22,908
Total assets $448,490
Interest Bearing Liabilities:
Deposits:
Savings, money markets,
and interest bearing demand $133,450 $4,014 3.01%
Certificates of deposit of
$100,000 or more 18,188 922 5.07
Other time deposits 125,332 7,138 5.70
Total interest bearing deposits 276,970 12,074 4.36
Borrowed funds 87,065 4,967 5.70
Trust preferred securities -- -- --
Total interest bearing liabilities $364,035 $17,041 4.68%
Non-Interest Bearing Liabilities:
Demand deposits $49,078
Other liabilities 2,507
Stockholders' equity 32,870
Total non-interest bearing
liabilities and stockholders' equity $84,455
Total liabilities and stockholders' equity $448,490
Interest rate spread (2) 3.37%
Net interest income and margin (3) $17,210 4.04%
Net interest income and margin
(tax equivalent basis) (4) $17,432 4.10%
- ------------------
(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 $921,000, $712,000, $419,000, $325,000, and
$222,000, for the years ended December 31, 2000, 1999, 1998, 1997, and 1996,
respectively.
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.
YNB's net interest income totaled $37.7 million in 2000, an increase of 25.5%
from the $30.1 million reported in 1999. The prior year's increase was 33.5%
from 1998's net interest income of $22.5 million. The principal factor
contributing to the increase in net interest income in 2000 was an increase in
interest income of $30.7 million resulting from increased loan and security
volumes. This was partially offset by increased volumes of time deposits and
borrowed funds and the related interest expense.
Average interest earning assets increased by $332.9 million or 36.0% for 2000,
with increases of $159.0 million in loans and $153.3 million in securities.
Interest rates started to rise in late 1999 and that trend continued throughout
2000. The result was an increase on the yield of earning assets to 7.98% from
7.54% in 1999. Led by commercial loans, YNB's average loan portfolio grew by
28.2%, to $723.6 million, with loan yields averaging 8.90% in 2000 or 48 basis
points higher than 1999. The increase was the result of loan growth experienced
in 2000 at higher yields due to a higher prime rate of interest. YNB's
commercial, commercial mortgage, and real estate -- construction loans with
floating interest rates tied to the prime rate totaled approximately 41% at
year-end 2000. The average prime rate increased from 8.00% in 1999 to 9.23% in
2000. YNB's average securities portfolio grew by 44.9% to $494.4 million, and
the yield on that portfolio increased 54 basis points when comparing 2000 to
1999. The growth in interest earning assets was primarily funded by increases in
time deposits and borrowed funds. Interest expense was $62.7 million for 2000,
an increase of $23.1 million, or 58.0% from $39.6 million a year ago. The
increase in interest expense for the comparable time period is principally
attributable to higher levels of time deposits and borrowed funds. The rates
paid on both deposits and borrowed funds increased due to the higher interest
rate environment experienced in 2000. In addition, certificates of deposit were
attractively priced to support loan growth funding. Average interest bearing
liabilities rose 37.4% in 2000 compared to 1999. The cost of total interest
bearing liabilities increased 72 basis points to 5.52% in 2000 from 4.80% in
1999.
Net interest income was $30.1 million in 1999, an increase of 33.5% from $22.5
million reported in 1998. 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 both a decrease in loan yields and increased
volumes of time deposits, borrowed funds and the related interest expense.
Rate/Volume Analysis
2000 vs. 1999 1999 vs. 1998
Increase (Decrease) Increase (Decrease)
Due to changes in: Due to changes in:
Volume Rate Total Volume Rate Total
(in thousands)
Interest Earning Assets:
Deposits with other banks $36 $1 $37 $(157) $27 $(130)
Federal funds sold 313 1,237 1,550 594 (23) 571
Securities 10,231 1,988 12,219 8,844 175 9,019
Loans (1) 14,029 2,835 16,864 10,696 (1,360) 9,336
Total interest income 24,609 6,061 30,670 19,977 (1,181) 18,796
Interest Bearing Liabilities:
Deposits:
Savings, money markets, and interest
bearing demand 1,423 1,627 3,050 569 (716) (147)
Certificates of deposit of
$100,000 or more 3,457 818 4,275 1,330 (73) 1,257
Other time deposits 5,162 2,082 7,244 5,982 (606) 5,376
Total deposits 10,042 4,527 14,569 7,881 (1,395) 6,486
Borrowed funds 6,256 1,440 7,696 5,222 (455) 4,767
Trust preferred securities 732 12 744 -- -- --
Total interest expense 17,030 5,979 23,009 13,103 (1,850) 11,253
Change in net interest income $7,579 $82 $7,661 $6,874 $669 $7,543
- ------------
(1) Loan origination fees are considered adjustments to interest income.
The net interest margin, which is calculated by dividing fully taxable
equivalent net interest income by average interest earning assets, declined to
3.07% in 2000 versus 3.33% in 1999 and 3.55% in 1998. The decrease in the net
interest margin resulted from the cost of interest bearing liabilities
increasing 28 basis points more than the yield on interest earning assets.
Management has continued to use an investment leverage strategy (Investment
Growth Strategy) which negatively impacts the margin. For the comparative
periods, the net interest margin was negatively impacted by the Investment
Growth Strategy by approximately 52 basis points in 2000, 59 basis points in
1999, and 69 basis points in 1998.
Management is anticipating continued net interest margin pressure in 2001. The
decline of interest rates will have a negative impact on the levels of net
interest income. At December 31, 2000, YNB had more rate sensitive assets
repricing than liabilities. Management does, however, project that the net
interest margin should stabilize and improve by the end of 2001 as higher cost
CDs reprice at lower current market rates. The average maturity of YNB's CD
portfolio is less than twelve months.
The Investment Growth Strategy is designed to increase net interest income by
purchasing investments utilizing borrowed funds with a targeted spread of 75
basis points after tax. The primary goals of the strategy are to enhance ROE and
earnings per share. Incrementally, any increase to net interest income by this
strategy 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, 2000, the Investment Growth Strategy
averaged approximately $240 million. The positive impact to ROE and earnings per
share was approximately 2.80% and $0.29, respectively. The negative impact to
ROA and the net interest margin was approximately 0.01% and 0.52%, respectively.
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.
Nonaccrual loans totaled $5.8 million in 2000, an increase of $3.6 million from
the $2.2 million reported in 1999. 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 $640,000 in
2000, $257,000 in 1999, and $249,000 in 1998. Moreover, YNB's net interest
margin would have been 0.06% higher in 2000, 0.03% higher in 1999, and 0.04%
higher in 1998.
Average non-interest bearing demand deposits increased 17.3% to $96.0 million in
2000 from $81.8 million in 1999. Growth in 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 $3.4 million in 2000 compared to $2.8 million
the prior year, an increase of $661,000 or 23.9%. The primary reasons for the
improvement were an increase in service charges on deposit accounts and net
securities gains of $46,000 compared to $301,000 in net securities losses in
1999. Non-interest income in 1999 decreased by $237,000, or 7.9% from 1998's
posted total of $3.0 million.
Non-interest income represented 3.3% of total revenues in 2000. As discussed in
last year's annual report, part of YNB's strategic plan is to improve
non-interest income growth. In 2000, YNB formed a subsidiary, YNB Financial
Services, Inc., designed to generate fee-based income. In December 2000, YNB
announced a unique relationship with the retail brokerage firm of Salomon Smith
Barney. Under this partnership, Salomon Smith Barney will initially open two
Investment Centers in YNB branch locations that will provide alternative
investment services to YNB's customers. The goal of YNB Financial Services, Inc.
is to build strategic alliances and partnerships to provide alternative
financial services, including insurance, to YNB's customer base.
The Product Development and Management Committee continued to expand YNB's
product base in 2000 to meet the challenges of a competitive marketplace and
changing customer needs. YNB OnLine - PC Banking, designed to serve YNB
customers quickly and conveniently, was enhanced in 2000. This committee has
continued to pursue other strategic initiatives to provide additional sources of
fee income that complement YNB's established banking products and services. The
major components of non-interest income are presented in the following table.
Year Ended December 31,
2000 1999 1998
(in thousands)
Service charges on deposit accounts $1,551 $1,374 $1,246
Other service fees 822 687 611
Gains on sales of mortgages, net 10 38 62
Securities gains (losses), net 46 (301) 151
Earnings on bank owned life insurance 822 765 708
Other non-interest
income 175 202 224
Total $3,426 $2,765 $3,002
Service charges on deposit accounts represented the largest single source of
non-interest income. Service charge income in 2000 totaled $1.6 million, an
increase of 12.9%, compared to $1.4 million in 1999. Service charge income
totaled $1.2 million in 1998. This component of non-interest income represented
45.3%, 49.7%, and 41.5% of the total non-interest income in 2000, 1999, and
1998, respectively. Service charge income increased in 2000 due principally to
an increase in income from overdraft fees. 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 Second Check(R) fees, lockbox services and Automated Teller
Machine fees on non-customers. Deposit and fee schedules are reviewed annually
by the Product Development and Management Committee to reflect current costs and
competitive factors. Other service fees increased 19.7% to $822,000 in 2000 from
$687,000 in 1999. Other service fees totaled $611,000 in 1998. YNB recorded net
securities gains of $46,000 in 2000, net losses of $301,000 in 1999 and net
securities gains of $151,000 in 1998. The improvement in 2000 compared to 1999
is the result of gains on the sales of securities available for sale due to
favorable shifts in the treasury yield curve. Securities are repositioned or
portions of the portfolio are restructured, as was the case in 2000 and 1999,
with the goal of enhancing future periods' earnings and the management of
longer-term interest rate risk.
Income from Bank Owned Life Insurance (BOLI) totaled $822,000 in 2000, an
increase of $57,000 or 7.5% compared to 1999. Income from BOLI totaled $708,000
in 1998. On December 29, 2000, an additional $15 million in tax-free BOLI assets
was purchased to offset the costs of deferred compensation plans. These assets
also have the secondary benefit of reducing YNB's overall effective tax rate.
Other non-interest income is composed of income derived from mortgage servicing
and safe deposit box rentals. Other non-interest income totaled $175,000 in
2000, a decrease of $27,000, or 13.4%, when compared to $202,000 in 1999. Other
non-interest income totaled $224,000 in 1998.
NON-INTEREST EXPENSE
Non-interest expense totaled $22.9 million in 2000, an increase of $4.4 million
or 23.9%, compared to $18.5 million in 1999. Non-interest expense in 1999
increased 20.3% from $15.3 million in 1998. The largest increases in
non-interest expense in 2000 compared to 1999 were in salaries and employee
benefits and other non-interest expense. To a lesser extent, occupancy and
equipment expense also increased for the comparable periods.
Salaries and employee benefits, which represent the largest portion of
non-interest expense, increased $1.6 million in 2000 or 15.8% over 1999. These
expenses increased $1.9 million or 23.7% over 1998. Full time equivalent
employees increased to 260 at December 31, 2000 from 233 at December 31, 1999.
Contributing to this increase was the addition of staff due to branching, as
well as added administrative staff and lending professionals. In addition to
annual merit increases, salaries rose approximately $1.4 million or 17.6%.
Employee benefit expense totaled $2.1 million, an increase of $279,000, or 15.3%
from 1999. Increases in benefits costs are primarily related to higher staffing
levels, which translate to higher health benefits costs and various payroll
taxes. 1999's increase from 1998 was primarily the result of staffing required
with additional branching, further staffing due to YNB's growth and the related
benefit expense. Contributing to the employee benefit costs increase of 41.5% in
1999 was the formation of an Employee Stock Ownership Plan. Salaries and
employee benefits, as a percent of average assets was 0.9% in 2000, 1.0% in
1999, and 1.2% in 1998, respectively.
The following table presents the major components of non-interest expense for
the years indicated.
Year ended December 31,
2000 1999 1998
(in thousands)
Salaries and
employee benefits $11,632 $10,041 $8,115
Occupancy expense, net 2,404 1,516 1,070
Equipment expense 1,892 1,642 1,299
Audit and examination fees 396 346 306
Attorneys' fees 257 296 379
O.R.E. expenses 893 571 573
Outside services
and processing 269 237 328
Stationery and supplies 628 498 403
Communication and postage 601 487 434
FDIC insurance premium 161 67 53
Insurance (other) 156 97 101
Marketing 1,144 835 747
Amortization of trust preferred expenses 176 160 160
Other 2,252 1,664 1,369
Total $22,861 $18,457 $15,337
Net occupancy expense increased $888,000 to $2.4 million in 2000 from $1.5
million reported in 1999. The increase in occupancy expense in 2000 compared to
1999 was due primarily to the operating expenses associated with YNB's new
corporate headquarters building for the entire year. Occupancy related expense
for the corporate center totaled approximately $1.1 million in 2000 compared to
$275,000 in 1999. The corporate center opened in the last quarter of 1999. In
addition, YNB began lease payments for its new branches in Flemington and
Lawrence in the last quarter of 2000. The increase in occupancy expense in 1999
compared to 1998 was due primarily to the operating expense associated with
YNB's new corporate headquarters building and branch facility. To a lesser
extent, the full year's impact of lease payments and operating expenses
associated with the Pennington office and the Newtown, Pennsylvania branch
contributed to higher occupancy expenses. This component of non-interest expense
has remained constant as a percentage of average assets at 0.2% in 2000, 1999,
and 1998, respectively.
Equipment expense increased $250,000, or 15.2% to $1.9 million in 2000 from $1.6
million in 1999. The increase in equipment costs reflects the continuing efforts
of YNB to maintain and upgrade technology to enhance productivity and efficiency
while providing the highest quality products and services. Accounting primarily
for the higher equipment costs were depreciation on furniture and equipment and
equipment repairs and maintenance costs, which increased $164,000 and $58,000 or
17.2% and 14.4%, respectively, in 2000. YNB's enhanced technology has allowed
management to further diversify business and consumer product lines. The
increase in equipment expenses in 1999 compared to 1998 was due to increased
depreciation costs on furniture and equipment as well as maintenance on that
equipment. During 1999, management upgraded equipment in preparation for Year
2000 and increased processing capability to enhance productivity. Furniture and
equipment depreciation and repairs and maintenance costs increased 35.9% and
11.1%, respectively, in 1999 compared to 1998. Other real estate (O.R.E.)
expenses increased $322,000 to $893,000 in 2000 when compared to 1999.
Management aggressively wrote down the carrying value of O.R.E. properties which
resulted in increased expenses in 2000. O.R.E. expenses decreased $2,000 in 1999
to $571,000 from $573,000 in 1998.
Marketing expenses increased by $309,000, or 37.0% in 2000 to $1.1 million,
compared to $835,000 in 1999. Marketing expenses totaled $747,000 in 1998. In
2000, marketing efforts were expanded to YNB's growing marketplace. During the
year, YNB actively advertised CD rates to generate deposits to support business
loan growth. In addition, targeted lower cost deposit products such as free
checking were marketed to increase core deposits. YNB has continued its emphasis
in community activities, which is also reflected in 2000 expenses.
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 2000, other non-interest expenses were $2.3
million, an increase of $588,000 or 35.3% from $1.7 million in 1999. Other
expenses totaled $1.4 million in 1998. The increase for the comparable periods
are primarily attributable to commercial loan related expenses, and other
operating expenses associated with a growing institution.
YNB's ratio of non-interest expense to average assets decreased to 1.7% for 2000
compared to 1.9% for 1999 and 2.2% for 1998.
YNB continuously assesses the efficiency of its operations seeking ways which
will best serve its customers while reducing operating costs. 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 2000 to 55.54% compared to 56.20% in 1999, and 60.07% in 1998.
INCOME TAXES
The provision for income taxes, which is comprised of Federal and state income
taxes, was $4.3 million in 2000 compared to $3.2 million in 1999 and $2.6
million in 1998. The increase in tax expense resulted from higher taxable income
partially offset by a lower effective tax rate. The provisions for income taxes
for 2000, 1999, and 1998 were at effective tax rates of 29.2%, 28.4%, and 32.1%,
respectively. Over the last several years, YNB has implemented tax planning
strategies which have reduced the effective tax rate. Those savings are
anticipated to continue into 2001.
Financial condition
Years ended December 31, 2000 and 1999
TOTAL ASSETS
YNB's assets were $1.6 billion at year-end 2000 versus $1.1 billion the previous
year, an increase of $496 million, or 44.1%. The growth in YNB's asset base
throughout 2000 was primarily due to an increase in loans and securities.
Average loans and securities grew 28.2% and 44.9% respectively, in 2000. YNB has
established its niche as the pre-eminent supercommunity bank in Mercer County
specializing in commercial lending. The increase in commercial loans is the
product of YNB's relationship banking philosophy, strong business loan demand in
YNB's market area, and a healthy local economy.
Average interest earning assets in 2000 were $1.3 billion, a 36.0% increase from
$924.4 million in 1999. Average earning asset yields increased 44 basis points
in 2000, primarily as a result of a higher interest rate environment. 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 96.1% at December 31, 2000 compared to 95.3% at December 31, 1999.
SECURITIES
YNB's securities portfolio represented $675.6 million, or 41.7% of assets at
December 31, 2000 versus $417.5 million, or 37.2% of assets at December 31,
1999. The $258.1 million or 61.8% increase for the comparable period was
primarily due to two factors. First, management utilized a balanced approach
throughout 2000 in purchasing securities. Maintaining adequate liquidity,
managing interest rate risk and reducing YNB's overall effective tax rate while
at the same time generating net interest income is one strategic focus in
securities portfolio management. The other strategic focus is the Investment
Growth Strategy. On an average basis, the securities portfolio represented 39.3%
of average interest earning assets for the year ended December 31, 2000 compared
to 36.9% of average interest earning assets for the year ended December 31,
1999.
Securities included in the Investment Growth Strategy totaled approximately
$340.1 million at December 31, 2000 compared to approximately $228.4 million at
December 31, 1999. This represents an increase of $111.7 million or 48.9% in
2000. The Investment Growth Strategy is diversified and consists of fixed and
floating rate U.S. agency mortgage-backed securities, as well as U.S. agency
callable securities. Floating rate securities constitute approximately 34% of
this strategy. The increase in the Investment Growth Strategy is primarily the
result of increases in fixed rate mortgage-backed securities of $47.2 million
and floating rate Collateralized Mortgage Obligations (CMOs) of $46.1 million.
Management utilizes asset and liability simulation models to analyze risk and
reward relationships and the degree of interest rate exposure associated with
this strategy. Purchases, and the corresponding funding, were determined during
2000 based on these models and opportunities available in the marketplace. The
purpose of this strategy since its inception in 1995 is to improve ROE and
earnings per share. The income generated from this strategy has offset the costs
associated with the growth of YNB's infrastructure and enhanced total net
interest income.
The available for sale securities portfolio increased $255.6 million to $564.9
million at December 31, 2000 from $309.3 million at December 31, 1999. The
available for sale portfolio principally consists of U.S. Treasury bonds, U.S.
agency obligations and U.S. agency mortgage-backed securities. The primary areas
of growth were in mortgage-backed securities, fixed and floating, of $170.6
million and U.S. agency obligations of $75.1 million. In addition, corporate
obligations increased $21.6 million, primarily as a result of purchasing bank
trust preferred securities to offset the interest expense associated with YNB's
private trust preferred offering completed in June 2000. The yield on the
available for sale portfolio increased 56 basis points to 7.07% in 2000.
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, 2000, available for
sale securities represented 83.6% 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 continued in 2000 with the yield curve inverting
in the second half of the year with yields on the shorter end of the curve
exceeding those on the longer end, specifically the 10 and 30 year notes. The
yield on the 10 and 30 year Treasury bonds decreased 168 and 128 basis points,
respectively, from December 31, 1999 to December 31, 2000. The result was an
improvement in the market value of the securities portfolios, primarily the
available for sale portfolio. At December 31, 2000, securities available for
sale had net unrealized losses of $2.4 million compared to net unrealized losses
of $9.6 million at December 31, 1999. The net unrealized loss, net of tax
effect, was $1.6 million at December 31, 2000 compared to $6.3 million at
December 31, 1999 reported in "Accumulated other comprehensive loss" in
Stockholders' Equity.
Trading securities are purchased specifically for short-term appreciation with
the intent of selling in the near future. Minimal net gains were realized on
sales of trading securities for 2000. There were no trading securities
outstanding at December 31, 2000 or 1999.
Investment securities classified as held to maturity totaled $110.7 million at
December 31, 2000 compared to $108.2 million at December 31, 1999. Securities in
this category are carried at amortized historical cost and for which there is
the intent and the ability to hold to maturity. This portfolio is primarily
comprised of U.S. agency callable securities and state and municipal securities.
The municipal bond portfolio grew to $38.7 million at December 31, 2000 from
$31.9 million at December 31, 1999. Municipal bonds were purchased to reduce
YNB's effective tax rate. Growth in investment securities was primarily the
result of the growth in the municipal portfolio offset by principal paydowns on
mortgage-backed securities. At December 31, 2000, investment securities had net
unrealized losses of $2.1 million compared to net unrealized losses of $8.0
million at December 31, 1999. The yield on this portfolio increased 9 basis
points to 6.89% in 2000.
The following tables present the amortized cost and market values of YNB's
securities portfolios as of December 31, 2000, 1999, and 1998.
SECURITIES AVAILABLE FOR SALE
December 31, 2000 1999 1998
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(in thousands)
U.S. Treasury securities
and obligations of other
U.S. government agencies $173,608 $172,374 $117,496 $112,731 $55,051 $55,039
Mortgage-backed securities 338,377 336,798 170,775 166,164 120,410 119,986
Corporate obligations 26,713 27,091 5,783 5,522 2,867 2,867
Federal Reserve Bank Stock 2,036 2,036 1,397 1,397 812 812
Federal Home Loan Bank Stock 26,639 26,639 23,484 23,484 6,873 6,873
Total $567,373 $564,938 $318,935 $309,298 $186,013 $185,577
INVESTMENT SECURITIES
December 31, 2000 1999 1998
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(in thousands)
Obligations of other
U.S. government agencies $68,185 $66,439 $69,184 $63,992 $4,994 $4,935
Obligations of state and
political subdivisions 38,660 38,336 31,892 29,281 20,773 20,982
Mortgage-backed securities 3,855 3,785 7,091 6,848 10,344 10,286
Total $110,700 $108,560 $108,167 $100,121 $36,111 $36,203
The expected maturities and average weighted yields for YNB's securities
portfolio as of December 31, 2000 are shown below. Yields for tax-exempt
securities are presented on a fully taxable equivalent basis assuming a 34% tax
rate.
Expected maturities will differ from contractual maturities because issuers may
have the right to call their obligations with or without call or prepayment
penalties. Mortgage-backed securities experience principal cash flows based on
the activity on the underlying mortgages.
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, average lives and yields. At December 31, 2000
and 1999, YNB had mortgage-backed securities totaling $342.2 million and $177.9
million, respectively. At December 31, 2000 and 1999, there were $153.2 million
and $94.1 million in fixed-rate mortgage-backed securities outstanding,
respectively. Certain of these securities can be purchased at premiums or
discounts. 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. The yield and average lives of
these securities will change based on prepayment speeds and how the premium or
discount must be amortized or accreted. In 2000, YNB realized $25.1 million in
principal cash flows from mortgage-backed securities, compared to $26.9 million
in 1999. Even though outstandings increased during 2000 there were decreased
cash flows as the result of a higher interest rate environment.
Included in mortgage-backed securities are U.S. agency named Collateralized
Mortgage Obligations (CMOs) which totaled approximately $152.4 million at
December 31, 2000 compared to $64.1 million at December 31, 1999. A CMO is a
mortgage-backed security that is 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 over 90% of the
total. In 2000, U.S. agency named floating rate CMOs were purchased as part of
YNB's overall asset/liability management strategy. All CMOs at December 31, 2000
were held in the available for sale category.
SECURITY MATURITIES AND AVERAGE WEIGHTED YIELDS
Securities Available for Sale
December 31, 2000
After one After five
After Within but within but within
one year five years ten years ten years Total
(in thousands)
U.S. Treasury securities and obligations
of other U.S. government agencies $62,042 $46,085 $32,638 $31,609 $172,374
Mortgage-backed securities -- 1,511 8,867 326,420 336,798
Corporate obligations -- 1,299 -- 25,792 27,091
Federal Reserve Bank Stock -- -- -- 2,036 2,036
Federal Home Loan Bank Stock -- -- -- 26,639 26,639
Total $62,042 $48,895 $41,505 $412,496 $564,938
Weighted average yield, computed
on a tax equivalent basis 6.24% 6.86% 6.76% 7.25% 7.07%
Investment Securities
December 31, 2000
After one After five
After Within but within but within
one year five years ten years ten years Total
(in thousands)
Obligations of other U.S.
government agencies $-- $-- $19,998 $48,187 $68,185
Obligations of state and
political subdivisions 2,000 5,064 5,213 26,383 38,660
Mortgage-backed securities -- -- 2,643 1,212 3,855
Total $2,000 $5,064 $27,854 $75,782 $110,700
Weighted average yield, computed
on a tax equivalent basis 6.54% 7.22% 6.60% 6.98% 6.89%
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 2000 results. The continuing effect of consolidation in YNB's
marketplace provided opportunities to acquire new lending relationships with
established businesses, which is reflected in 2000 results as well. During 2000,
total loans increased $171.6 million or 26.5% to $818.3 million at December 31,
2000 from $646.7 million at December 31, 1999.
There are several factors that may impact loan growth in 2001. They include
competition from other banks and non-banks, borrowers' concerns over the
economy, and future consolidation in YNB's markets. The principal areas of loan
growth in dollar volume for 2000 were commercial mortgage real estate loans and
commercial and industrial loans, which grew $51.3 million and $46.7 million,
respectively. The average yield earned on the loan portfolio was 8.90% in 2000,
compared to 8.42% in 1999, an increase of 48 basis points. YNB's loan portfolio
represented 50.5% of assets at December 31, 2000 versus 57.6% 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,
2000 1999 1998
Amount % Amount % Amount %
(in thousands)
Real estate - mortgage:
Commercial $342,926 41.9% $291,675 45.1% $200,555 40.8%
Residential 161,238 19.7 123,281 19.1 107,640 21.9
Home equity 23,713 2.9 23,614 3.6 23,474 4.8
Commercial
and industrial 161,062 19.7 114,405 17.7 93,510 19.0
Real estate -
construction 96,522 11.8 59,387 9.2 34,064 6.9
Consumer 26,629 3.2 22,915 3.5 19,536 4.0
Other 6,199 0.8 11,460 1.8 12,870 2.6
Total $818,289 100.0% $646,737 100.0% $491,649 100.0%
[RESTUB TABLE]
December 31,
1997 1996
Amount % Amount %
(in thousands)
Real estate - mortgage:
Commercial $141,622 36.7% $115,023 34.7%
Residential 90,061 23.3 86,637 26.2
Home equity 23,799 6.2 23,457 7.1
Commercial
and industrial 77,841 20.2 58,464 17.6
Real estate -
construction 28,173 7.3 25,959 7.8
Consumer 17,683 4.6 14,488 4.4
Other 6,572 1.7 7,209 2.2
Total $385,751 100.0% $331,237 100.0%
The loan portfolio composition table categorizes loans based on the collateral
supporting them as defined by bank regulatory authorities and is used in
preparing various regulatory reports. Loans were classified for 2000 to reflect
the collateral supporting each loan category. Prior years were reclassified to
conform to this presentation.
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 as well as the borrower's business experience. 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. All major areas of commercial lending reflected strong growth in
2000.
Over the last several years, YNB has significantly increased its capital base
through various equity offerings and retained earnings. As a result, in 2000 YNB
had a larger legal lending limit and attracted larger loan relationships and
increased business from existing customers.
Real estate -- commercial mortgage loans increased by $51.3 million, or 17.6% in
2000 to $342.9 million from $291.7 million at December 31, 1999. 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 $161.2 million at December
31, 2000, up $38.0 million, or 30.8% from the prior year. Residential mortgage
loans represented $71.2 million, or 44.2% of the total. YNB's residential
mortgage loans are secured by first liens on the underlying real property. YNB
is a participating seller/servicer with FNMA and FHLMC and generally underwrites
its single family residential mortgage loans to conform with standards required
by these agencies. At December 31, 2000, approximately 52% of the residential
mortgage loan portfolio had fixed interest rates and 48% had adjustable interest
rates. The home equity portfolio totaled $23.7 million or 2.9% of YNB's loan
portfolio at December 31, 2000. This compares to $23.6 million, or 3.6% of the
total loan portfolio at December 31, 1999. YNB's home equity lines of credit
have interest rates that adjust or float based on the prime rate. The minimal
growth illustrated above for 2000 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.
Commercial and industrial loans increased $46.7 million, or 40.8%, at December
31, 2000 to $161.1 million from $114.4 million at December 31, 1999. Commercial
and industrial loans are made to small- to middle-market businesses and are
typically working capital loans, which are used to finance inventory,
receivables, equipment needs, and other working capital needs of commercial
borrowers as shown below. These loans are generally secured by business assets
of the 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.
Real estate -- construction loans increased 62.5%, or $37.1 million to $96.5
million at December 31, 2000, compared to $59.4 million at December 31, 1999.
These loans represented 11.8% of the total loan portfolio at December 31, 2000.
In 2000, YNB continued its participation in commercial and residential
construction lending. These loans were typically made to experienced developers.
Residential construction loans include single family, multi-family, and
condominium projects. Commercial construction loans include office and
professional development, retail development and other commercial related
projects. 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. YNB
also participates in indirect automobile lending. Consumer loans increased to
$26.6 million at December 31, 2000 compared to $22.9 million at December 31,
1999.
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 decreased to $6.2 million at December 31, 2000
compared to $11.5 million at December 31, 1999.
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.
Total Loan Portfolio
(Dollars in millions)
1,000
800
600
400
200
0
818
647
492
386
331
1996
1997
1998
1999
2000
COMMERCIAL and industrial LOANS
(dollars in thousands)
December 31, 2000
Percent Number
Industry Classification Balance of balance of loans
Services $61,579 38.2% 258
Retail trade 19,854 12.3 538
Real estate-related 31,854 19.8 121
Manufacturing 8,913 5.5 50
Construction 10,667 6.6 88
Wholesale trade 13,823 8.6 72
Individuals 8,375 5.2 60
Transportation and
public utilities 3,932 2.5 42
Other 2,065 1.3 34
Total $161,062 100.0% 1,263
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, 2000.
After five
After Within but within
one year five years ten years Total
(in thousands)
Maturities:
Commercial and industrial $86,998 $58,751 $15,313 $161,062
Real estate-- construction 50,884 45,638 -- 96,522
Total $137,882 $104,389 $15,313 $257,584
Type:
Floating rate loans $128,271 $65,079 $5,450 $198,800
Fixed rate loans 9,611 39,310 9,863 58,784
Total $137,882 $104,389 $15,313 $257,584
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.
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,
2000 1999 1998 1997 1996
(in thousands)
Nonaccrual loans:
Commercial and industrial $456 $1,148 $232 $515 $961
Real estate-- mortgage 5,051 717 570 384 1,451
Real estate-- construction -- -- 684 2,106 4,659
Consumer 295 12 31 38 12
Other -- 312 529 312 --
Total 5,802 2,189 2,046 3,355 7,083
Restructured loans 532 540 634 969 --
Loans 90 days or more past due:
Commercial and industrial 6 46 -- -- --
Real estate-- mortgage 662 277 1,093 886 1,014
Consumer 31 26 100 105 43
Total 699 349 1,193 991 1,057
Total nonperforming loans 7,033 3,078 3,873 5,315 8,140
Other real estate 2,041 2,585 4,957 3,171 395
Total nonperforming assets $9,074 $5,663 $8,830 $8,486 $8,535
Management believes that, based on its underwriting standards and credit
policies, the overall quality of the loan portfolio remains strong.
Nonperforming loans totaled $7.0 million at December 31, 2000, an increase of
$3.9 million from the $3.1 million amount reported at December 31, 1999. This
increase mainly represents five commercial loans to one borrower totaling
approximately $2.1 million placed into nonaccrual in 2000.
Nonperforming assets increased $3.4 million, to $9.1 million at December 31,
2000 compared to $5.7 million at December 31, 1999. Over the last several years,
nonperforming assets have averaged approximately $8 million. Due to the positive
conclusion of a nonperforming real estate -- construction loan in December 1999,
nonperforming asset levels fell below $6.0 million temporarily. At December 31,
2000, nonperforming assets returned to those levels historically experienced by
YNB over the last several years. YNB continues to aggressively manage
nonperforming assets with the goal of reducing these assets in relation to the
entire portfolio. Nonperforming assets represented 0.56% of total assets at
December 31, 2000 and 0.50% at December 31, 1999. Nonperforming assets as a
percentage of total loans and other real estate were 1.11% at December 31, 2000,
compared to 0.87% at December 31, 1999.
Nonaccrual loans were $5.8 million, or 0.71% of total loans, at December 31,
2000, an increase of $3.6 million from December 31, 1999.
Restructured loans totaled $532,000 at December 31, 2000 and $540,000 at
December 31, 1999. Income on these loans is being recognized on a cash basis. At
December 31, 2000, loans that were 90 days or more past due but still accruing
interest income represented $699,000, or 0.09% of total loans compared to
$349,000, or 0.05% of total loans at December 31, 1999. 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 $2.0 million at December 31, 2000 and $2.6
million at December 31, 1999. The reduction in O.R.E. for 2000 was principally
due to the writedown and sales of these assets. Management uses an active
strategy to liquidate these assets and re-deploy the proceeds in YNB's loan
portfolio.
Total Nonperforming Assets
As a Percent of Total Assets
2.0
1.5
1.0
0.5
0
1.74%
1.38%
1.17%
0.56%
0.50%
1996
1997
1998
1999
2000
ALLOWANCE FOR LOAN LOSSES
Management utilizes a systematic and documented allowance adequacy methodology
for loan losses that requires a specific allowance assessment for all loans,
including residential real estate mortgages and consumer loans. This methodology
assigns reserves based upon credit risk ratings for specific loans and general
reserves for all other loans. The general 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 utilized to determine the adequacy of the allowance for loan losses.
The following table presents, for the years indicated, an analysis of the
allowance for loan losses and other related data.
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 2000 was $3.7 million, reflective of the continued substantial
growth in the commercial loan portfolio, and, to a lesser extent, higher net
charge offs. This compares to a provision for loan losses of $3.2 million in
1999 and $2.0million in 1998. Management believes commercial and construction
loan growth has the potential for higher loss severity, which is reflected in
the provision as well.
At December 31, 2000, the allowance for loan losses totaled $10.9 million, an
increase of $1.9 million or 22.0%, from $9.0 million at December 31, 1999, which
compares to $6.8 million at December 31, 1998. The ratio of allowance for loan
losses to total loans was 1.34%, 1.39%, and 1.38%, at December 31, 2000, 1999,
and 1998, 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, 2000 this ratio was 155.47% versus 291.26% at December 31, 1999.
YNB's gross charge offs in 2000 totaled $1.9 million, compared with $1.1 million
in 1999 and $843,000 in 1998. 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 $136,000 in 2000
compared to $107,000 in 1999 and $66,000 in 1998. The balance of the allowance
for loan losses is determined by an overall analysis of the loan portfolio and
reflects an amount which, in management's judgment, is adequate to provide for
potential loan losses.
ALLOWANCE FOR LOAN LOSSES
At or for the year ended December 31,
2000 1999 1998 1997 1996
(in thousands)
Allowance balance, beginning of year $8,965 $6,768 $5,570 $4,957 $3,677
Charge offs:
Commercial and industrial (715) (356) (278) (212) --
Real estate-- mortgage (717) (56) (269) (161) (72)
Real estate-- construction (37) (182) -- -- (75)
Consumer (138) (308) (296) (201) (252)
Other (260) (183) -- -- --
Total charge offs (1,867) (1,085) (843) (574) (399)
Recoveries:
Commercial and industrial 43 23 7 7 --
Real estate-- mortgage 6 9 4 -- --
Consumer 87 75 55 55 39
Total recoveries 136 107 66 62 39
Net charge offs (1,731) (978) (777) (512) (360)
Provision charged to operations 3,700 3,175 1,975 1,125 1,640
Allowance balance, end of year $10,934 $8,965 $6,768 $5,570 $4,957
Loans, end of year $818,289 $646,737 $491,649 $385,751 $331,237
Average loans outstanding $723,570 $564,552 $438,050 $355,526 $287,289
Allowance for loan losses to total loans 1.34% 1.39% 1.38% 1.44% 1.50%
Net charge offs to average loans outstanding 0.24 0.17 0.18 0.14 0.13
Nonperforming loans to total loans 0.86 0.48 0.79 1.38 2.46
Nonperforming assets to total assets 0.56 0.50 1.17 1.38 1.74
Nonperforming assets to total loans and other
real estate owned 1.11 0.87 1.78 2.18 2.57
Allowance for loan losses to nonperforming
assets 120.50 158.31 76.65 65.64 58.08
Allowance for loan losses to nonperforming
loans 155.47% 291.26% 174.75% 104.80% 60.90%
Management has taken the necessary steps to identify potential credit problems
in its loan portfolio by strengthening lending policies and quality loan and
credit administration. 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.
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,
2000 1999
Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to
Amount Allowance Total Loans Amount Allowance Total Loans
(in thousands)
Commercial and industrial $1,856 17.0% 19.7% $1,603 17.9% 17.7%
Real estate-- mortgage 5,886 53.8 64.5 5,202 58.0 67.8
Real estate-- construction 2,453 22.4 11.8 1,339 14.9 9.2
Consumer 612 5.6 3.2 385 4.3 3.5
Other 127 1.2 0.8 436 4.9 1.8
Total $10,934 100.0% 100.0% $8,965 100.0% 100.0%
[RESTUB TABLE]
December 31,
1998
Percent of
Reserve Percent of Loans to
Amount Allowance Total Loans
(in thousands)
Commercial and industrial $1,260 18.6% 19.0%
Real estate-- mortgage 3,657 54.0 67.5
Real estate-- construction 1,192 17.6 6.9
Consumer 304 4.5 4.0
Other 355 5.3 2.6
Total $6,768 100.0% 100.0%
December 31,
1997 1996
Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to
Amount Allowance Total Loans Amount Allowance Total Loans
(in thousands)
Commercial and industrial $1,410 25.3% 20.2% $1,670 33.7% 17.6%
Real estate-- mortgage 1,958 35.2 66.2 2,100 42.4 68.0
Real estate-- construction 1,774 31.8 7.3 938 18.9 7.8
Consumer 283 5.1 4.6 175 3.5 4.4
Other 145 2.6 1.7 74 1.5 2.2
Total $5,570 100.0% 100.0% $4,957 100.0% 100.0%
DEPOSITS
YNB's principal funding source is deposits. Deposits, which include non-interest
and interest bearing demand deposits and interest bearing savings and time
deposits, support the growth of interest earning assets. YNB's overall
philosophy of building long-term customer relationships is the key to further
expanding lower cost core deposits as it enters new markets. Like larger
institutions, YNB offers expanded services which include telephone banking and
YNB OnLine, allowing customers to do their banking at their convenience from
their personal computers.
Total deposits amounted to $950.3 million at year-end 2000 compared to $743.8
million at the end of 1999, an increase of 27.8%. Average total deposits during
2000 totaled $844.3 million compared to $639.4 million during 1999, an increase
of 32.0%. The average rate paid on YNB's deposit balances in 2000 was 4.69%, a
19.6% increase from the 3.92% average rate for 1999. The growth in YNB's deposit
base in 2000 was primarily the result of competitive pricing of certificates of
deposit (CDs) to fund loan growth and improve liquidity. Time deposits were
59.8% of total deposits at the end of 2000 compared to 61.1% at the end of 1999.
The competition for deposits in YNB's primary markets between commercial and
savings banks as well as non-bank financial institutions continues. YNB's cost
of deposits reflects a reliance on time deposits to fund loan growth. Growth in
time deposits accounted for 55.1% of the total increase in deposits for 2000
compared to 82.2% at the end of 1999.
The following table provides information concerning average balances and rates
of deposits for the years indicated:
AVERAGE DEPOSIT BALANCES AND RATES
2000 1999 1998
% of % of % of
(in thousands) Balance Rate Total Balance Rate Total Balance Rate Total
Non-interest bearing
demand deposit $96,024 --% 11.4% $81,843 --% 12.8% $66,857 --% 14.2%
Interest bearing
demand deposits 67,443 2.60 8.0 57,788 2.79 9.0 47,709 3.41 10.2
Money market deposits 89,232 4.85 10.6 47,986 2.89 7.5 42,585 3.20 9.1
Savings deposits 76,337 2.43 9.0 79,730 2.36 12.5 75,240 2.72 16.0
Time deposits of
$100,000 or more 106,851 6.47 12.7 51,290 5.15 8.0 25,550 5.42 5.4
Other time deposits 408,414 6.07 48.3 320,809 5.46 50.2 211,790 5.74 45.1
Total $844,301 4.69% 100.0% $639,446 3.92% 100.0% $469,731 3.95% 100.0%
YNB utilizes a software program that allows it to market CDs nationwide and
provide YNB access to a wider market to raise needed funding. Management
anticipates that this market will continue to play an important role in funding
future asset growth. During the course of 2000, these CDs peaked at
approximately $155.0 million and declined to approximately $128.6 million at
December 31, 2000. The growth in these CDs for 2000, however, was approximately
$28.0 million. The average maturity of these CDs is approximately five months.
Management has implemented strategies to reduce YNB's reliance on this higher
cost funding source. Lower cost borrowed funds were utilized in the second half
of 2000 to reduce outstandings. With YNB's continued branch expansion and entry
into new markets, like Hunterdon County, management will continue its efforts to
further expand lower cost core deposits and reduce the need for higher cost
funding sources.
The average balance of non-interest bearing demand deposits was $96.0 million
during 2000, an increase of $14.2 million, or 17.3% from $81.8 million during
1999.Non-interest bearing demand deposits represent a stable, interest free
source of funds. The increase in demand deposits is primarily from the growth in
business checking accounts. In 2000, YNB introduced and aggressively marketed a
free personal checking account. This account has been well received by our
depositors and provides YNB with increased opportunities to cross sell other
products. The increase in business and personal checking accounts has
contributed to the growth in net interest income.
Average interest bearing demand, money market, and time deposits increased
16.7%, 86.0%, and 38.5%, respectively, from 1999 to 2000. Average savings
deposits decreased 4.3%. In early 2000, YNB increased the rates on its tiered
Premier Money Market accounts for both business and personal depositors and
launched a strong advertising and calling campaign to promote this enhanced
product. This campaign resulted in strong growth in money market deposits with
average money market deposits increasing $41.2 million or 86.0% in 2000. The
average cost of these deposits increased from 2.89% to 4.85% in 2000.
Total average time deposits, which consist of certificates of deposit and
individual retirement accounts, increased $143.2 million to $515.3 million from
$372.1 million in 1999. The average months to maturity on the entire CD
portfolio at December 31, 2000 was approximately nine months. The average cost
of time deposits increased 73 basis points in 2000 as the result of a higher
interest rate environment and the competitive pricing of this funding vehicle
for loan growth. Certificates of deposit of $100,000 or more totaled $131.0
million, or 13.8% of deposits, at December 31, 2000 compared to $72.5 million,
or 9.8% of deposits, at December 31, 1999.
YNB's strategy of expanding into the new markets of Hunterdon and Burlington
counties in 2000 and 2001 will help build YNB's deposit base. YNB has targeted
the rapidly growing Hunterdon County market as a prime focus for strategic
expansion. YNB has already announced the formation of a Business Development
Board for Hunterdon County, and expects to open additional offices, including a
regional center. Management expects this strategy to increase lower cost
deposits although the reliance will continue on higher costing CDs to fund loan
growth in 2001.
BORROWED FUNDS YNB utilizes borrowed funds as a source of funds for its earning
asset growth not supported by deposit generation and for asset/liability
management. 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 has available unsecured Federal funds lines of
credit with four of its correspondent banks for daily funding needs. Borrowed
funds totaled $545.2 million at December 31, 2000, an increase of $246.5 million
or 82.5% when compared to $298.7 million at December 31, 1999. The increase is
due to a $114.5 million increase in funding for the Investment Growth Strategy
and $132.0 million in borrowings to fund other earning asset growth and manage
interest rate risk. At December 31, 2000, borrowed funds represented 33.7% of
YNB's assets compared to 26.6% at year end 1999. Approximately $369.5 million,
or 67.8% of borrowed funds at December 31, 2000 are tied to the Investment
Growth Strategy. Management evaluates several factors when determining funding
for the Investment Growth Strategy. These factors include the future outlook for
interest rates, the impact to interest rate risk and other relevant factors.
Callable FHLB advances have terms of two to ten years and are callable after
periods ranging from three months to five years. Callable borrowings totaled
$525 million at year-end 2000 and were used as part of the Investment Growth
Strategy funding, liquidity and interest rate risk management. At year-end 2000,
there was $353.5 million in callable funding with call dates in 2001. Generally,
when rates rise, some or all of these advances will be called and will then be
replaced with higher costing borrowings. Conversely, when rates fall, advances
will not be called and duration will be extended. Borrowed funds also include
$1.2 million related to YNB's Employee Stock Ownership Plan (ESOP). Initiated in
1999, the ESOP purchased 155,340 shares of YNB's common stock with a loan from a
nonaffiliated financial institution.
Borrowed funds averaged $367.0 million in 2000, an increase of $110.0 million
from the average reported in 1999 of $257.0 million. The average cost of
borrowed funds increased 52 basis points during the year to 5.78% compared with
5.26% in 1999. The use of callable FHLB advances allowed YNB to reduce its
funding costs in relation to other funding alternatives in 2000. The increase in
borrowing costs was the result of a higher interest rate environment, and to a
lesser extent, the extension of lockout dates on new borrowings. At year-end
2000 there was $532.8 million in outstanding borrowings with the FHLB and no
outstanding borrowings with YNB's correspondents.
The following table details amounts and maturities for certificates of deposit
of $100,000 or more for the yearsindicated:
December 31,
2000 1999
(in thousands)
Maturity range:
Within three months $34,472 $20,407
After three but within six months 31,512 7,420
After six but within twelve months 54,770 31,861
After twelve months 10,257 12,840
Total $131,011 $72,528
Total Deposits at Year End
(Dollars in millions)
1,000
800
600
400
200
0
950
744
520
423
364
1996
1997
1998
1999
2000
LIQUIDITY
Liquidity measures the ability to satisfy current and future cash flow needs as
they become due. 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
include in-market CDs less than $100,000 and which generally exclude CDs over
$100,000 and CDs generated from the software program previously discussed.
Borrowed funds 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. Brokered CD facilities are also available as another
source of liquidity. YNB's contingency funding plan is structured to manage
potential liquidity concerns due to changes in interest rates, credit markets or
other external risks.
YNB's liquidity profile was significantly enhanced in 1999. Liquidity was again
actively managed in 2000 as strong earning asset growth continued. The unpledged
or free securities position is designed to provide a pool of securities, with
modest market value risk, for liquidity purposes. Total unpledged securities
were approximately $153.0 million at December 31, 2000 and 1999.
At December 31, 2000, liquid assets (excluding securities purchased utilizing
borrowed funds) amounted to $326.1 million, as compared to $143.5 million at
December 31, 1999. This represents 26.9% and 16.8% of earning assets, and 25.4%
and 15.9% of total adjusted assets at December 31, 2000 and 1999, respectively.
Liquidity can be further analyzed by utilizing the Consolidated Statements of
Cash Flows. During 2000, net cash provided by financing activities was $472.5
million. This was primarily due to net increases in borrowed funds of $246.5
million and certificates of deposit of $113.8 million. Net cash used by
investing activities was $440.6 million, consisting primarily of a $363.4
million increase in securities available for sale and $174.0 million net
increase in loans partially offset by maturities, calls, paydowns, and sales of
securities available for sale. Net cash provided by operating activities was
$15.6 million. Overall, cash and cash equivalents increased $47.5 million at
year-end 2000 compared to year-end 1999.
YNB is eligible to borrow funds from the FHLB 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. YNB also maintains unsecured Federal funds lines with four
correspondent banks totaling $25 million for daily funding needs.
Management believes YNB's liquidity profile was sound in 2000. This area will
continue to be actively managed in 2001.
MARKET RISK
YNB's market risk is principally limited to interest rate risk, which is the
impact that changes in interest rates would have on future earnings. The
objective of interest rate risk management is 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 Asset/Liability Committee (ALCO)
is responsible for monitoring policies established by the Board of Directors to
limit exposure to interest rate risk and to ensure procedures are in place to
monitor compliance with those policies. The guidelines are reviewed by ALCO and
reported to the Board of Directors quarterly. Market risk is further 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 Federal 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, resulting in an economic gain. This occurs at the
same time fixed rate asset values are declining.
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.
The table sets forth certain information at December 31, 2000 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.
As indicated in the table above, YNB's one-year gap position at December 31,
2000 was a positive 10.0%. Generally, a financial institution with a positive
gap position will most likely experience an increase in net interest income
during periods of rising rates and decreases in net interest income during
periods of lower interest rates.
Included in the analysis of YNB's gap position are certain savings deposits,
money markets 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 less sensitive to interest rate changes compared to time deposits.
The positive gap was brought about in late 2000, primarily as a function of
lower interest rates and a downward shift in the yield curve of close to 100
basis points, which impacted numerous balance sheet options. On the asset side,
callable agency duration dates shortened and prepayment speeds increased on
mortgage-backed securities. On the liability side, convertible FHLB advances
lengthened. The one year cumulative gap position policy guideline is measured as
a percentage of assets within a +10/-25% range. At December 31, 2000, the gap
position was within the policy guideline. 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.
RATE SENSITIVE ASSETS AND LIABILITIES
December 31, 2000
More than More than More than More than More than
Six months one year two years five years ten years
Under through through through through through
six months one year two years five years ten years repricing Total
(in thousands)
Assets
Cash and due from banks $-- $-- $-- $-- $-- $19,099 $19,099
Federal funds sold and interest
bearing deposits 54,606 -- -- -- -- -- 54,606
Securities available for sale 268,682 41,638 50,424 97,077 36,420 70,697 564,938
Investment securities 3,356 334 7,198 53,070 19,968 26,774 110,700
Loans 349,169 41,360 51,000 304,280 39,713 32,767 818,289
Other assets, net -- 15,000 -- -- -- 36,680 51,680
Total Assets $675,813 $98,332 $108,622 $454,427 $96,101 $186,017 $1,619,312
Liabilities and Stockholders' Equity
Non-interest bearing demand $-- $-- $-- $-- $-- $102,718 $102,718
Savings and interest
bearing demand 56,556 -- 16,000 78,142 -- -- 150,698
Money markets 107,909 -- -- 20,580 -- -- 128,489
Certificates of deposit
of $100,000 or more 65,984 54,770 9,546 711 -- -- 131,011
Other time deposits 113,311 198,162 114,787 11,142 -- -- 437,402
Total deposits 343,760 252,932 140,333 110,575 -- 102,718 950,318
Borrowed funds 14,676 330 19,017 448,200 63,000 -- 545,223
Trust preferred securities -- -- -- -- -- 26,500 26,500
Other liabilities -- -- -- -- -- 19,034 19,034
Stockholders' equity -- -- -- -- -- 78,237 78,237
Total Liabilities and
Stockholders' Equity $358,436 $253,262 $159,350 $558,775 $63,000 $226,489 $1,619,312
Gap 317,377 (154,930) (50,728) (104,348) 33,101 (40,472)
Cumulative gap 317,377 162,447 111,719 7,371 40,472 --
Cumulative gap to total assets 19.6% 10.0% 6.9% 0.5% 2.5% --
For interest rate risk modeling purposes, YNB reports its callable agency
securities ($186 million at December 31, 2000) 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 more accurate estimate of the option exercise date at
December 31, 2000. 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 data have been applied
to mortgage-related securities, which are included in investments. Similarly,
convertible advance borrowings and repurchase agreements ($525 million at
December 31, 2000) 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.
In addition to the utilization of gap for interest rate risk management, the
ALCO utilizes 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). The shorter asset
structure and longer liability structure now presents a larger risk over the
next two years for lower interest rates. The risk to higher rates has for the
most part been muted over the next two years. The current yield curve level
suggests that assets will rollover at lower yields while liability costs are
locked in for an extended period of time. Approximately 75% of CDs less than
$100,000 have repricing dates beyond six months. Much of the risk to lower rates
is due to core deposit funding as rates can be reduced only marginally lower
relative to a rapidly declining interest rate environment. If interest rates
increase 2%, net interest income increases 5% or $2.1 million. If interest rates
decrease 2%, net interest income decreases -8.3% or $3.5 million. The +/- 200
base case scenario is measured within a policy guideline of +/- 7%. Strategies
have been initiated to bring the declining rate measurement within policy
guidelines. Management is also analyzing the use of derivatives to manage
interest rate risk, which it has not used to date.
In addition to the base case sensitivity measurement, management analyzes a
number of different simulation scenarios to determine the impact to net interest
income in various interest rate environments over 12 and 24 months. The impact
to net interest income is also measured in a +/- 200 basis point instantaneous
rate shock environment. YNB would presently benefit in gradually increasing
interest rates over a 12-month period.
Lastly, YNB measures longer-term risks through the Economic Value of Equity
("EVE") model. The variance in the residual, or economic value of equity is
measured as a percentage of total assets. The EVE model reflects certain
estimates and assumptions regarding the impact on the market value of YNB's
assets and liabilities given an immediate 200 basis point change in interest
rates. This variance is managed within a negative 3% boundary. At December 31,
2000, the EVE changes by -2.20% for rate shifts of +200 and -5.35% for rate
shifts of -200 basis points. The total change in the -200 basis point scenario
is outside of policy guidelines. The convertible advance portfolio contributes
to most of this decline. Lower rates also reduced the value of deposits. Asset
values did not increase by a commensurate amount because durations shortened at
the same times rates were falling. Management is assessing options to hedge the
risk to lower interest rates and bring this measurement within policy
guidelines.
YNB also assesses the impact of the Investment Growth Strategy on EVE results.
Management measures the returns on this strategy in relationship to the impact
on longer-term interest rate risk. Excluding the assets and liabilities of this
strategy would bring EVE risk ratios within policy guidelines. The analysis of
EVE and simulation results are based on YNB's current profile of assets,
liabilities, and equity, and does not reflect any actions YNB might undertake in
response to changes in market interest rates. YNB's actions would likely reduce
the impact to net interest income and changes in the economic value of equity in
various rate environments.
STOCKHOLDERS' EQUITY AND CAPITAL RESOURCES
The management of capital in a regulated environment requires a balance between
earning the highest return to stockholders while maintaining sufficient capital
levels for proper risk management, satisfying regulatory requirements, and for
future expansion.
On June 23, 2000, YNB completed the private placement of 68,500 units, each unit
consisting of 10 shares of common stock and 1 common stock purchase warrant. The
units were sold to a limited number of accredited investors at a price of $10.00
per unit, which generated net proceeds after offering costs of $6.8 million.
Stockholders' equity at December 31, 2000 totaled $78.2 million compared to
$58.8 million at December 31, 1999. This represents an increase of $19.4 million
or 33.0%. This increase resulted from (i) earnings of $10.3 million, (ii) net
proceeds of $6.8 million from the private equity offering, (iii) proceeds of
$69,000 from exercised stock options, (iv) a positive adjustment to equity of
$4.7 million related to the improvement in market value on securities available
for sale, and (v) proceeds of $400,000 from allocated ESOP shares offset by (i)
cash dividend payments of $2.8 million, and (ii) a decrease of $75,000
associated with the fair market value adjustment related to the allocation of
shares from the ESOP.
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. In 1999, Yardville National Bancorp sold 155,340 shares to the ESOP
for $2 million. 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 annual expenses associated with the ESOP
were $376,000 in 2000 and $463,000 in 1999. These expenses include compensation
expense, debt service on the loan and any adjustment required due to changes in
the fair value of the shares at time of allocation. The primary factor for the
decline in cost was primarily a $75,000 adjustment related to the change in the
fair value of the stock at the time of allocation.
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.
In the first quarter of 2000, the Board of Directors increased the regular
quarterly dividend on common stock from $0.085 to $0.10. YNB also paid a special
year-end dividend in the fourth quarter of 1999 of $0.01. Dividends declared on
common stock totaled $0.40 per share for 2000 compared to $0.34 for 1999, an
increase of 17.6%. The dividend payout ratio was 27.5% at December 31, 2000,
compared to 25.4% at year-end 1999.
YNB trades on the NASDAQ National Market System under the symbol YANB. The
quarterly market price ranges and dividends declared per common share for the
last two years are shown below.
Yardville National Bancorp and its banking subsidiary are subject to minimum
risk-based and leverage capital guidelines under Federal banking regulations.
These banking regulations relate a company's capital to the risk profile of its
assets, balance sheet and off-balance sheet items, and provide the basis for
evaluating capital adequacy. Capital is measured using three ratios: Tier I
leverage, Tier I risk-based, and total risk-based capital. These guidelines
require minimum risk-based capital ratios of 4% and 8% of risk-weighted assets
for Tier I and total risk-based capital measurements. Total capital is comprised
of all of the components of Tier 1 capital plus qualifying subordinated debt
instruments and the reserve for loan losses, subject to certain limits. In
addition, the current minimum regulatory guideline for the Tier 1 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 1 and total risk-based capital ratios of 6% and 10%,
respectively, and a minimum Tier 1 leverage ratio of 5%. At December 31, 2000,
the capital ratios for YNB exceeded the above ratios required by regulatory
definition to be considered well capitalized. The table below summarizes YNB's
capital ratios for the years indicated:
Cash
Dividend
2000 Quarter High Low Declared
First $11.13 $8.81 $0.100
Second 10.75 8.56 0.100
Third 12.19 10.31 0.100
Fourth 12.25 10.88 0.100
Total $0.400
1999 Quarter
First $13.88 $12.31 $0.080
Second 13.75 11.63 0.080
Third 13.75 10.63 0.085
Fourth 12.63 10.31 0.095
Total $0.340
On June 23, 2000, Yardville Capital Trust II (the Trust II), a statutory
business trust and a wholly owned subsidiary of Yardville National Bancorp,
issued $15 million of 9.50% Trust Preferred Securities in a private placement
transaction to one investor and $464,000 of 9.50% Common Securities to Yardville
National Bancorp. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by the Trust II to purchase $15.0 million of 9.50%
Subordinated Debentures maturing June 22, 2030 from Yardville National Bancorp.
The Trust II 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
II. These Subordinated Debentures are redeemable in whole or part prior to
maturity after June 23, 2010. The Trust II 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, provides a full and unconditional guarantee on a subordinated basis by
Yardville National Bancorp of the obligations of Trust II to pay amounts when
due on the Trust Preferred Securities.
Of the total proceeds raised by the private trust preferred securities and
equity offerings in 2000, approximately $21.3 million was contributed to the
Bank to support future asset growth.
YEAR 2000 (Y2K) AND BEYOND
YNB's proactive approach to Y2K issues resulted in no significant disruptions as
the calendar moved to January 1, 2000. YNB is not aware of any notable year 2000
related problems, and all internal systems have functioned properly throughout
2000. Key vendors have not reported any problems as well. YNB's technology
committee, which includes board and executive management members, meets monthly
to develop strategic initiatives regarding YNB's technology. As a result of
YNB's investment and focus on improving technology, systems are more productive
and efficient. In addition, YNB is able to provide a full line of
state-of-the-art products and services, for both business and retail banking
customers.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 140 (SFAS 140), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
an Amendment of FASB Statement No 125," provides guidance on the following
topics: sales of financial assets such as receivables, loans and securities,
servicing assets and extinguishments of liabilities. This statement becomes
effective for transactions entered into after March 31, 2001. The adoption of
SFAS No. 140 is not expected to have a material impact on the financial position
or results of operations on YNB.
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
recognition of all derivative instruments as either assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. SFAS No. 133 was amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." SFAS No. 138 amends the
accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and certain hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000, on a prospective
basis. The adoption of SFAS No. 133, as amended by SFAS No. 138, is not expected
to have a material impact on the financial position or results of YNB.
December 31,
2000 1999 1998
Tier I leverage 8.1% 7.9% 7.7%
Tier I risk-based 10.6% 10.3% 9.9%
Total risk-based 11.6% 11.5% 11.2%
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.
Unaudited quarterly results are summarized as follows:
Quarterly Financial Data (unaudited)
Three Months Ended
December 31 September 30 June 30 March 31
(in thousands, except per share data)
2000
Interest income $28,502 $26,507 $23,778 $21,602
Interest expense 18,939 16,526 14,332 12,857
Net interest income 9,563 9,981 9,446 8,745
Provision for loan losses 800 1,200 900 800
Non-interest income 935 866 892 733
Non-interest expense 5,985 5,845 5,709 5,322
Income before income tax expense 3,713 3,802 3,729 3,356
Income tax expense 1,089 1,110 1,100 960
Net income $2,624 $2,692 $2,629 $2,396
Earnings per share-- basic $0.36 $0.37 $0.39 $0.36
Earnings per share-- diluted 0.36 0.37 0.39 0.36
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
Earnings per share-- basic $0.34 $0.33 $0.34 $0.31
Earnings per share-- diluted 0.34 0.33 0.34 0.31
Yardville national bancorp and subsidiaries
Consolidated Statements of Condition
December 31,
2000 1999
(in thousands,
except share data)
Assets:
Cash and due from banks $19,099 $17,582
Federal funds sold 54,015 8,035
Cash and Cash Equivalents 73,114 25,617
Interest bearing deposits with banks 591 955
Securities available for sale 564,938 309,298
Investment securities (market value of
$108,560 in 2000 and $100,121 in 1999) 110,700 108,167
Loans 818,289 646,737
Less: Allowance for loan losses (10,934) (8,965)
Loans, net 807,355 637,772
Bank premises and equipment, net 9,428 9,400
Other real estate 2,041 2,585
Other assets 51,145 29,804
Total Assets $1,619,312 $1,123,598
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $102,718 $90,219
Interest bearing 847,600 653,588
Total Deposits 950,318 743,807
Borrowed funds
Securities sold under agreements to repurchase 10,000 45,000
Federal Home Loan Bank advances 532,768 250,293
Obligation for Employee Stock Ownership Plan (ESOP) 1,200 1,600
Other 1,255 1,796
Total Borrowed Funds 545,223 298,689
Company - obligated Mandatorily Redeemable Trust
Preferred Securities of Subsidiary Trust holding
solely junior Subordinated Debentures of the Company 26,500 11,500
Other liabilities 19,034 10,777
Total Liabilities $1,541,075 $1,064,773
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 7,617,214 shares in 2000
and 6,917,794 shares in 1999 46,881 40,052
Surplus 2,205 2,205
Undivided profits 34,963 27,462
Treasury stock, at cost: 172,000 shares (3,030) (3,030)
Unallocated ESOP shares (1,200) (1,600)
Accumulated other comprehensive loss (1,582) (6,264)
Total Stockholders' Equity 78,237 58,825
Total Liabilities and Stockholders' Equity $1,619,312 $1,123,598
See Accompanying Notes to Consolidated Financial Statements.
Yardville national bancorp and subsidiaries
Consolidated Statements of Income
Year Ended December 31,
2000 1999 1998
(in thousands, except per share amounts)
Interest Income:
Interest and fees on loans $64,418 $47,554 $38,218
Interest on deposits with banks 82 45 175
Interest on securities available for sale 27,146 15,674 10,788
Interest on investment securities:
Taxable 4,647 4,236 783
Exempt from Federal income tax 1,642 1,306 626
Interest on Federal funds sold 2,454 904 333
Total Interest Income 100,389 69,719 50,923
Interest Expense:
Interest on savings account deposits 7,937 4,887 5,034
Interest on certificates of deposit of $100,000 or more 6,918 2,643 1,386
Interest on other time deposits 24,772 17,528 12,152
Interest on borrowed funds 21,219 13,523 8,756
Interest on trust preferred securities 1,808 1,064 1,064
Total Interest Expense 62,654 39,645 28,392
Net Interest Income 37,735 30,074 22,531
Less provision for loan losses 3,700 3,175 1,975
Net Interest Income After Provision For Loan Losses 34,035 26,899 20,556
Non-Interest Income:
Service charges on deposit accounts 1,551 1,374 1,246
Securities gains (losses), net 46 (301) 151
Other non-interest income 1,829 1,692 1,605
Total Non-Interest Income 3,426 2,765 3,002
Non-Interest Expense:
Salaries and employee benefits 11,632 10,041 8,115
Occupancy expense, net 2,404 1,516 1,070
Equipment expense 1,892 1,642 1,299
Other non-interest expense 6,933 5,258 4,853
Total Non-Interest Expense 22,861 18,457 15,337
Income before income tax expense 14,600 11,207 8,221
Income tax expense 4,259 3,187 2,639
Net Income $10,341 $8,020 $5,582
Earnings Per Share:
Basic $1.47 $1.33 $1.11
Diluted $1.47 $1.33 $1.10
See Accompanying Notes to Consolidated Financial Statements.
Yardville national bancorp and subsidiaries
Consolidated Statements of CHANGES
IN STOCKHOLDERS' EQUITY
Year Ended December 31, 2000, 1999 and 1998
Common Common Undivided
(in thousands, except per share amounts) shares stock Surplus profits
BALANCE, December 31, 1997 5,082,050 $17,703 $2,205 $19,713
Net income 5,582
Unrealized loss - securities available
for sale, net of tax of $235
Total comprehensive income
Cash dividends (1,449)
Common stock issued:
Exercise of stock options 56,424 294 (2,367)
2.5% stock dividend 2,367
Treasury shares acquired (170,300)
--------- ------- ------ -------
BALANCE, December 31, 1998 4,968,174 $20,364 $2,205 $21,479
Net income 8,020
Unrealized loss - securities available
for sale, net of tax of $3,221
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
ESOP shares allocated
Treasury shares acquired (1,700)
--------- ------- ------ -------
BALANCE, December 31, 1999 6,745,794 $40,052 $2,205 $27,462
--------- ------- ------ -------
Net income 10,341
Unrealized loss - securities available
for sale, net of tax of $2,520
Total comprehensive income
Cash dividends (2,840)
ESOP fair value adjustment (75)
Common stock issued:
Exercise of stock options 14,420 69
Common shares issued 685,000 6,835
ESOP shares allocated
--------- ------- ------ -------
BALANCE, December 31, 2000 7,445,214 $46,881 $2,205 $34,963
========= ======= ====== =======
Yardville national bancorp and subsidiaries
Consolidated Statements of CHANGES
IN STOCKHOLDERS' EQUITY
Year Ended December 31, 2000, 1999 and 1998
Accumulated
Unallocated other
Treasury ESOP comprehensive
(in thousands, except per share amounts) stock shares Income (loss) Total
BALANCE, December 31, 1997 $124 $39,745
Net income 5,582
Unrealized loss - securities available
for sale, net of tax of $235 (408) (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) (3,008)
------- ------- ------- -------
BALANCE, December 31, 1998 $(3,008) $(284) $40,756
Net income 8,020
Unrealized loss - securities available
for sale, net of tax of $3,221 (5,980) (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 (2,000)
ESOP shares allocated 400 400
Treasury shares acquired (22) (22)
------- ------- ------- -------
BALANCE, December 31, 1999 $(3,030) $(1,600) $(6,264) $58,825
------- ------- ------- -------
Net income 10,341
Unrealized loss - securities available
for sale, net of tax of $2,520 4,682 4,682
-------
Total comprehensive income 15,023
-------
Cash dividends (2,840)
ESOP fair value adjustment (75)
Common stock issued:
Exercise of stock options 69
Common shares issued 6,835
ESOP shares allocated 400 400
------- ------- ------- -------
BALANCE, December 31, 2000 $(3,030) $(1,200) $(1,582) $78,237
======= ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements.
Yardville national bancorp and subsidiaries
Consolidated Statements of cash flows
Year Ended December 31,
2000 1999 1998
(in thousands)
Cash Flows from Operating Activities:
Net Income $10,341 $8,020 $5,582
Adjustments:
Provision for loan losses 3,700 3,175 1,975
Depreciation 1,521 1,286 942
ESOP fair value adjustment (75) -- --
Amortization and accretion 146 512 943
(Gain) loss on sales of securities available for sale (46) 301 (151)
Writedown of other real estate 599 587 463
Loss on sale of other real estate 25 1 7
Increase in other assets (8,862) (3,953) (1,748)
Increase in other liabilities 8,257 2,898 1,698
Net Cash Provided by Operating Activities 15,606 12,827 9,711
Cash Flows from Investing Activities:
Net decrease (increase) in interest bearing deposits with banks 364 (222) 1,486
Purchase of securities available for sale (363,424) (196,574) (168,202)
Maturities, calls and paydowns of securities available for sale 65,692 31,225 93,346
Proceeds from sales of securities available for sale 49,240 31,694 47,725
Proceeds from maturities and paydowns of investment securities 5,263 8,197 11,081
Purchase of investment securities (7,841) (80,333) (20,436)
Purchase of Bank Owned Life Insurance (15,000) -- (3,784)
Net increase in loans (173,989) (157,047) (109,188)
Expenditures for bank premises and equipment (1,549) (4,435) (2,001)
Proceeds from sale of other real estate 626 2,765 257
Net Cash Used by Investing Activities (440,618) (364,730) (149,716)
Cash Flows from Financing Activities:
Net increase in non-interest bearing demand, money market,
and savings deposits 92,760 39,849 23,232
Net increase in certificates of deposit 113,751 184,315 73,467
Net increase in borrowed funds 246,534 120,801 43,572
Proceeds from issuance of trust preferred securities 15,000 -- --
Proceeds from issuance of common stock 6,904 19,688 294
Decrease (increase) in unallocated ESOP shares 400 (1,600) --
Treasury shares acquired -- (22) (3,008)
Dividends paid (2,840) (2,037) (1,449)
Net Cash Provided by Financing Activities 472,509 360,994 136,108
Net increase (decrease) in cash and cash equivalents 47,497 9,091 (3,897)
Cash and cash equivalents as of beginning of year 25,617 16,526 20,423
Cash and Cash Equivalents as of End of Year $73,114 $25,617 $16,526
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $56,700 $36,403 $25,714
Income taxes 6,922 4,348 3,140
Supplemental Schedule of Non-cash Investing and Financing Activities:
Transfers from loans to other real estate,
net of charge offs $706 $981 $2,513
See Accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
Yardville Capital Trust II, and the Bank and the Bank's wholly owned
subsidiaries (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 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, equipment 5 to 8 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 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. All share data has been adjusted to
reflect this action.
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, 2000, 1999, and 1998 were 7,022,000, 6,015,000, and
5,017,000, respectively. For the diluted net income per share computation,
common stock equivalents of 17,000, 26,000, and 42,000 are included for the
years ended December 31, 2000, 1999, and 1998, 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.
L. Reclassification. Certain reclassifications have been made in the
consolidated financial statements for 1999 and 1998 to conform to the
classification presented in 2000.
2. CASH AND DUE FROM BANKS
The Corporation maintains various deposits with other banks. As of December 31,
2000 and 1999, the Corporation maintained sufficient cash on hand to satisfy
Federal regulatory requirements.
3. SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
December 31,
2000 1999
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 $173,608 $241 $(1,475) $172,374 $117,496 $6 $(4,771) $112,731
Mortgage-backed securities 338,377 1,587 (3,166) 336,798 170,775 208 (4,819) 166,164
Corporate obligations 26,713 713 (335) 27,091 5,783 -- (261) 5,522
Federal Reserve Bank Stock 2,036 -- -- 2,036 1,397 -- -- 1,397
Federal Home Loan Bank Stock 26,639 -- -- 26,639 23,484 -- -- 23,484
Total $567,373 $2,541 $(4,976) $564,938 $318,935 $214 $(9,851) $309,298
The amortized cost and estimated market value of investment securities are as
follows:
December 31,
2000 1999
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 $68,185 $2 $(1,748) $66,439 $69,184 $-- $(5,192) $63,992
Obligations of state and
political subdivisions 38,660 364 (688) 38,336 31,892 29 (2,640) 29,281
Mortgage-backed securities 3,855 -- (70) 3,785 7,091 -- (243) 6,848
Total $110,700 $366 $(2,506) $108,560 $108,167 $29 $(8,075) $100,121
Investment securities
Estimated
Amortized Market
Cost Value
(in thousands)
Due in 1 year or less $2,000 $1,999
Due after 1 year through 5 years 5,064 5,129
Due after 5 years through 10 years 25,211 24,814
Due after 10 years 74,570 72,833
Subtotal 106,845 104,775
Mortgage-backed securities 3,855 3,785
Total $110,700 $108,560
Proceeds from sale of securities available for sale during 2000, 1999, and 1998
were $49.2 million, $31.7 million, and $47.7 million, respectively. Gross gains
of $162,000, $21,000, and $242,000 were realized on those sales in 2000, 1999,
and 1998, respectively. Gross losses of $116,000, $322,000, and $91,000 were
realized on those sales in 2000, 1999 and 1998, respectively.
The amortized cost and estimated market value of securities available for sale
and investment securities as of December 31, 2000 by contractual maturity are
shown below. Expected maturities will differ from contractual maturities because
issuers may have the right to call their obligations with or without call or
prepayment penalties.
Securities available for sale
Estimated
Amortized Market
Cost Value
(in thousands)
Due in 1 year or less $62,047 $62,042
Due after 1 year through 5 years 47,244 47,384
Due after 5 years through 10 years 33,000 32,638
Due after 10 years 86,705 86,076
Subtotal 228,996 228,140
Mortgage-backed securities 338,377 336,798
Total $567,373 $564,938
Securities with a carrying value of approximately $522.8 million as of December
31, 2000 were pledged to secure public deposits and for other purposes as
required or permitted by law. As of December 31, 2000, Federal Home Loan Bank
(FHLB) stock with a carrying value of $26.6 million 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,
2000 1999
(in thousands)
Commercial and industrial loans $161,062 $114,405
Real estate loans - mortgage 527,877 438,570
Real estate loans - construction 96,522 59,387
Consumer loans 26,629 22,915
Other loans 6,199 11,460
Total loans $818,289 $646,737
During 2000, YNB classified loans to reflect the under-lying collateral. The
1999 and 1998 amounts have been reclassified to reflect the 2000 presentation.
Residential mortgage loans held for sale amounted to $1.6 million and $2.0
million as of December 31, 2000 and 1999, 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, 2000 and 1999, loans serviced for FHLMC were $22.8 million and
$27.2 million, respectively; loans serviced for FNMA were $12.2 million and
$12.5 million, 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,
2000 1999
(in thousands)
Balance as of beginning of year $10,823 $5,705
Additions 6,234 6,379
Repayments 2,386 1,261
Balance as of end of year $14,671 $10,823
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,
2000 1999 1998
(in thousands)
Balance as of beginning
of year $8,965 $6,768 $5,570
Loans charged off (1,867) (1,085) (843)
Recoveries of loans
charged off 136 107 66
Net charge offs (1,731) (978) (777)
Provision charged
to operations 3,700 3,175 1,975
Balance as of
end of year $10,934 $8,965 $6,768
The detail of loans charged off is as follows:
Year Ended December 31,
2000 1999 1998
(in thousands)
Commercial and
industrial loans $715 $356 $278
Real estate loans
-- mortgage 717 56 269
Real estate loans
-- construction 37 182 --
Consumer loans 138 308 296
Other loans 260 183 --
Total $1,867 $1,085 $843
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,
only if collection of principal is not in doubt; loans 90 days past due or
greater on which interest is still accruing; and restructured loans.
Nonperforming loans as a percentage of total loans were 0.86% as of December 31,
2000 and 0.48% as of December 31, 1999.
A summary of nonperforming assets follows:
December 31,
2000 1999
(in thousands)
Nonaccrual loans:
Commercial and industrial loans $456 $1,148
Real estate loans -- mortgage 5,051 717
Consumer loans 295 12
Other loans -- 312
Total nonaccrual loans $5,802 $2,189
Restructured loans $532 $540
Past due 90 days or more:
Commercial and industrial loans $6 $46
Real estate loans -- mortgage 662 277
Consumer loans 31 26
Total past due 90 days or more 699 349
Total nonperforming loans 7,033 3,078
Other real estate 2,041 2,585
Total nonperforming assets $9,074 $5,663
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, 2000 and 1999 was
$5.1 million and $2.2 million, respectively. The related allowance for loan
losses on these loans as of December 31, 2000 and 1999 was $786,000 and
$618,000, respectively. The average recorded investment in impaired loans during
2000 and 1999 was $4.7 million and $2.1 million, respectively. There was no
interest income recognized on impaired loans in 2000, 1999, and 1998.
Additional income before income taxes amounting to approximately $640,000 in
2000, $257,000 in 1999 and $249,000 in 1998 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,
2000 1999
(in thousands)
Land and improvements $1,249 $1,249
Buildings and improvements 6,910 6,591
Furniture and equipment 10,378 9,154
Total 18,537 16,994
Less accumulated depreciation 9,109 7,594
Bank premises and equipment, net $9,428 $9,400
6. DEPOSITS
Total deposits consist of the following:
December 31,
2000 1999
(in thousands)
Non-interest bearing
demand deposits $102,718 $90,219
Interest bearing
demand deposits 77,110 61,483
Money market deposits 128,489 57,143
Savings deposits 73,588 80,300
Certificates of deposit
of $100,000 and over 131,011 72,528
Other time deposits 437,402 382,134
Total $950,318 $743,807
A summary of certificates of deposit by maturity is as follows:
December 31,
2000 1999
(in thousands)
Within one year $432,227 $324,478
One to two years 124,333 92,320
Two to three years 5,035 29,925
Three to four years 3,791 5,276
Four to five years 3,027 2,663
Total $568,413 $454,662
7. BORROWED FUNDS
Borrowed funds include securities sold under agreements to repurchase, Federal
Home Loan Bank (FHLB) advances, and obligation for ESOP. Other borrowed funds
consist of Federal funds purchased and Treasury tax and loan deposits.
The following table presents comparative data related to borrowed funds of the
Corporation as of and for the years ended December 31, 2000, 1999, and 1998.
December 31,
2000 1999 1998
(in thousands)
Securities sold
under agreements
to repurchase $10,000 $45,000 $87,120
FHLB advances 532,768 250,293 89,316
Obligation for ESOP 1,200 1,600 --
Other 1,255 1,796 1,452
Total $545,223 $298,689 $177,888
Maximum amount
outstanding at
any month end $545,223 $304,473 $182,354
Average interest rate
on year end balance 5.79% 5.49% 5.25%
Average amount
outstanding
during the year $367,021 $256,957 $158,106
Average interest rate
for the year 5.78% 5.26% 5.54%
There are $10.0 million in securities sold under agreements to repurchase with
an expected maturity over 90 days as of December 31, 2000. The outstanding
amount is a callable repurchase agreement with a maturity of ten years and a
call date of one year. Due to the call provision, the expected maturity could
differ from the contractual maturity.
The FHLB advances as of December 31, 2000 mature as follows:
(in thousands)
Within one year $751
Over one to two years 22,017
Over five years 510,000
Total $532,768
The outstanding amount includes $515.0 million in callable advances with two to
ten year maturities and call dates of three months 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,
2000 1999 1998
(in thousands)
Securities sold under
agreements to
repurchase $1,281 $5,507 $5,851
FHLB advances 19,785 7,854 2,816
Obligation for ESOP 100 115 --
Other 53 47 89
Total $21,219 $13,523 $8,756
8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUSTHOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY (Trust Preferred Securities)
On June 23, 2000, Yardville Capital Trust II (the Trust II), a statutory
business trust, and a wholly owned subsidiary of Yardville National Bancorp,
issued $15.0 million of 9.50% Trust Preferred Securities in a private placement
transaction to one investor and $464,000 of 9.50% Common Securities to Yardville
National Bancorp. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by the Trust II to purchase $15.0 million of 9.50%
Subordinated Debentures maturing June 22, 2030 from Yardville National Bancorp.
The Trust II 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
II. These Subordinated Debentures are redeemable in whole or part prior to
maturity after June 23, 2010. The Trust II 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, provides a full and unconditional guarantee on a subordinated basis by
Yardville National Bancorp of the obligations of Trust II to pay amounts when
due on the Trust Preferred Securities.
In 1997, Yardville Capital Trust (the Trust) issued $11.5 million of 9.25% Trust
Preferred Securities and $356,000 of 9.25% Common Securities to Yardville
National Bancorp. Proceeds were used by the Trust to purchase $11.9 million of
9.25% Subordinated Debentures maturing November 1, 2027. Those debentures are
redeemable in whole or in part prior to maturity after November 1, 2002.
9. INCOME TAXES
Income taxes reflected in the consolidated financial statements for 2000, 1999,
and 1998 are as follows:
Year Ended December 31,
2000 1999 1998
(in thousands)
Statements of Income:
Federal:
Current $5,162 $4,153 $2,625
Deferred (1,011) (1,005) (358)
State:
Current 108 39 512
Deferred -- -- (140)
Total tax expense $4,259 $3,187 $2,639
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 2000 and 1999 are
as follows:
December 31,
2000 1999
(in thousands)
Deferred tax assets:
Allowance for loan losses $4,465 $3,339
Writedown of basis of O.R.E. properties 106 167
Deferred income 5 2
Net state operating loss carryforwards 22 48
Accumulated other comprehensive loss 853 3,373
Deferred compensation 660 567
Total deferred tax assets $6,111 $7,496
Valuation allowance (78) (78)
Deferred tax liabilities:
Deferred income (274) (274)
Unamortized discount accretion (160) (37)
Depreciation (26) (140)
Other 28 91
Net deferred tax assets $5,601 $7,058
The Corporation has established the valuation allowance against certain
temporary differences. The Corporation is not aware of any factors which 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 realize 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,
2000 1999 1998
(in thousands)
Income tax expense
at statutory rate $4,964 $3,810 $2,795
State income taxes, net of Federal benefit 71 26 245
Changes in taxes resulting from:
Tax exempt interest (591) (471) (239)
Tax exempt income (279) (260) (227)
Non-deductible expenses 94 82 65
Total $4,259 $3,187 $2,639
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 2000, 1999 and 1998 up to 6% of base compensation. Employer
contributions to the plan amounted to $151,000 in 2000, $128,000 in 1999, and
$107,000 in 1998.
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 2000, 1999 and 1998. The
actuarial present value of benefit obligations was $755,000 in 2000 and 1999.
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, 1997 130,307 $5.52
Shares:
Granted 419,288 17.20
Exercised 57,575 5.03
Expired 1,597 8.43
Balance,
December 31, 1998 490,423 $15.55
Shares:
Granted 19,680 12.08
Exercised 13,980 4.78
Expired 3,732 12.10
Balance,
December 31, 1999 492,391 $15.76
Shares:
Granted 509,500 10.94
Exercised 14,420 4.91
Expired 5,472 11.64
Balance,
December 31, 2000 981,999 $15.75
Shares exercisable as of
December 31, 2000 209,175 $15.10
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 2000, 1999, and 1998, respectively: (1) an
expected annual dividend rate of $0.44, $0.40, and $0.32 (2) risk free rate of
5.0%, 6.3%, and 5.6% (3) expected life of approximately 5 years in 2000, 1999
and 1998.
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 2000, 1999,
and 1998 net income would have been reduced to the pro forma amounts indicated
below:
2000 1999 1998
(in thousands)
Net income:
As reported $10,341 $8,020 $5,582
Pro forma 8,482 7,952 3,567
Earnings per share:
Basic:
As reported $1.47 $1.33 $1.11
Pro forma 1.21 1.32 0.71
Diluted:
As reported $1.47 $1.33 $1.10
Pro forma 1.21 1.32 0.71
Benefit Plans. The Corporation has a salary continuation plan for key
executives, a director deferred compensation plan for its board members, and an
officer group term replacement plan for divisional officers. 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, 2000 and 1999
is approximately $845,000 and $669,000, respectively, and is included in other
liabilities in the accompanying consolidated statements of condition.
Compensation expense of approximately $140,000, $142,000, and $138,000 is
included in the accompanying consolidated statements of income for the years
ended December 31, 2000, 1999, and 1998, respectively.
In connection with the benefit plans, the Corporation has purchased life
insurance policies on the lives of the executives, directors, and divisional
officers. The Corporation is the owner and beneficiary of the policies. The cash
surrender values of the policies are approximately $30.1 million and $14.4
million as of December 31, 2000 and 1999, respectively, and are included in
other assets in the accompanying consolidated statements of condition.
11. COMMON STOCK
In 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 completing the stock repurchase program.
In 1999, 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 million 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 $275,000 and
$347,000 for the years ended December 31, 2000 and 1999, respectively. The fair
value of unearned shares at December 31, 2000 is $1.1 million.
Unallocated shares are deducted from common shares outstanding for earnings per
share purposes with shares which 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 $19.3 million. Net
proceeds after the underwriting discount and other offering costs were
approximately $17.6 million. Of the net proceeds, $17.5 million were contributed
to the Bank to support future asset growth.
On June 23, 2000, the Corporation completed the private placement of 68,500
units, each unit consisting of 10 shares of common stock and 1 common stock
purchase warrant. The warrants have an expiration date of June 23, 2010 and a
purchase price of $12.00 per share. The units were sold to a limited number of
accredited investors and generated gross proceeds of $6.9 million. Net proceeds
after offering costs were $6.8 million. Nearly all the net proceeds were
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,
2000 1999 1998
(in thousands)
Audit and examination fees $396 $346 $306
Attorneys' fees 257 296 379
O.R.E. expenses 893 571 573
Outside services and processing 269 237 328
Stationery and supplies 628 498 403
Communication and postage 601 487 434
FDIC insurance premium 161 67 53
Insurance (other) 156 97 101
Marketing 1,144 835 747
Amortization of trust preferred expenses 176 160 160
Other 2,252 1,664 1,369
Total $6,933 $5,258 $4,853
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, 2000 and 1999 for commitments to extend credit were $153.9 million and
$162.0 million, respectively. For letters of credit, the contract amounts were
$14.1 million and $9.2 million, 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 theFHLB and four of its
correspondent banks. There were
approximately $35 million in lines of credit available as of December 31, 2000.
The Corporation maintains repurchase agreement lines of credit with three
brokerage firms. There were approximately $200 million in lines available at
December 31, 2000.
The Corporation leases various banking offices and its corporate headquarters.
Total lease rental expense was $1.0 million, $531,080, and $298,234 for the
years ended December 31, 2000, 1999, and 1998, respectively. Minimum rentals
under the terms of the leases are approximately $1.1 million in 2001, and
approximately $1.2 million per year in 2002, 2003, 2004 and 2005.
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.
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 1 capital to risk-weighted assets, and of Tier 1
capital to average assets (as defined in the regulations). Management believes,
as of December 31, 2000, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 2000, 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 $12.9 million as of December 31,
2000.
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 following table presents the Corporation's and Bank's actual capital amounts
and ratios:
Regulatory Matters
Per Regulatory Guidelines
Actual Minimum "Well Capitalized"
Amount Ratio Amount Ratio Amount Ratio
(amounts in thousands)
As of December 31, 2000:
Corporation
Total capital (to risk-weighted assets) $117,244 11.6% $80,536 8.0% $100,671 10.0%
Tier I capital (to risk-weighted assets) 106,310 10.6 40,268 4.0 60,402 6.0
Tier I capital (to average assets) 106,310 8.1 52,322 4.0 65,402 5.0
Bank
Total capital (to risk-weighted assets) $115,567 11.5% $80,325 8.0% $100,406 10.0%
Tier I capital (to risk-weighted assets) 104,633 10.4 40,162 4.0 60,244 6.0
Tier I capital (to average assets) 104,633 8.0 52,596 4.0 65,745 5.0
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 I capital (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 I capital (to average assets) 76,279 7.8 38,910 4.0 48,637 5.0
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.
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 is based on bid prices published in financial
newspapers or bid quotations received from securities dealers.
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, 2000
Carrying Fair
Value Value
(in thousands)
Financial Assets:
Cash and cash equivalents $73,114 $73,114
Interest bearing
deposits with banks 591 591
Securities available
for sale 564,938 564,938
Investment securities 110,700 108,560
Loans, net 807,355 807,619
Financial Liabilities:
Deposits 950,318 953,640
Borrowed funds 545,223 561,719
Trust preferred securities 26,500 26,213
December 31, 1999
Carrying Fair
Value Value
(in thousands)
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
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 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:
Condensed Statements of Income
Year Ended December 31,
2000 1999 1998
(in thousands)
Operating Income:
Dividends from subsidiary $4,648 $3,099 $1,982
Interest income 14 12 42
Other income 501 514 63
Total Operating Income 5,163 3,625 2,087
Operating Expense:
Interest expense 1,909 1,179 1,064
Other expense 668 728 340
Total Operating Expense 2,577 1,907 1,404
Income before income
taxes and equity in
undistributed income
of subsidiaries 2,586 1,718 683
Federal income tax benefit (701) (470) (441)
Income before equity in
undistributed income
of subsidiaries 3,287 2,188 1,124
Equity in undistributed
income of subsidiaries 7,054 5,832 4,458
Net Income $10,341 $8,020 $5,582
Condensed Statements of Cash Flows
Year Ended December 31,
2000 1999 1998
(in thousands)
Cash Flows from
Operating Activities:
Net Income $10,341 $8,020 $5,582
Adjustments:
Increase in other assets (196) (320) (769)
Equity in undistributed
income of subsidiaries (7,054) (5,832) (4,458)
Increase in other liabilities 98 21 --
Net Cash Provided by
Operating Activities 3,189 1,889 355
Cash Flows from
Investing Activities:
Proceeds from sales of
securities available
for sale -- -- 3,192
Investing in subsidiaries (22,626) (19,499) 1
Net Cash (Used) Provided by
Investing Activities (22,626) (19,499) 3,193
Cash Flows from
Financing Activities:
(Decrease) increase in
obligation for ESOP (400) 1,600 --
Proceeds from issuance of
subordinated debentures 15,464 -- --
Proceeds from shares issued 7,304 18,088 294
Purchase of treasury shares -- (22) (3,008)
Dividends paid (2,840) (2,037) (1,449)
Net Cash Provided (Used) by
Financing Activities 19,528 17,629 (4,163)
Net increase (decrease) in cash 91 19 (615)
Cash as of beginning of year 219 200 815
Cash as of end of year $310 $219 $200
Yardville National Bancorp (Parent Corporation)
Condensed Statements of Condition
December 31,
2000 1999
(in thousands)
Assets:
Cash $310 $219
Securities available for sale 105 105
Investment in subsidiaries 104,658 70,371
Other assets 1,812 1,616
Total Assets $106,885 $72,311
Liabilities and
Stockholders' Equity:
Other liabilities $128 $30
Obligation for ESOP 1,200 1,600
Subordinated debentures 27,320 11,856
Stockholders' equity 78,237 58,825
Total Liabilities and
Stockholders' Equity $106,885 $72,311
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, 2000 and 1999,
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, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with generally accepted accounting
principles.
Princeton, New Jersey
January 25, 2001