UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT
OF 1934
For transition period from
Commission File Number: 0-26086
YARDVILLE NATIONAL BANCORP
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(Exact name of registrant as specified in its charter)
New Jersey 22-2670267
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2465 Kuser Road, Hamilton, New Jersey 08690
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(Address of principal executive offices)
(609) 585-5100
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of May 10, 2001, the
following class and number of shares were outstanding:
Common Stock, no par value 7,445,814
- -------------------------- ----------------------------
Class Number of shares outstanding
1
INDEX
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Consolidated Statements of Condition
March 31, 2001 and December 31, 2000
Consolidated Statements of Income
Three months ended March 31, 2001 and 2000
Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART 2 OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
Item 1. Financial Statements
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
March 31, December 31,
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(in thousands, except share data) 2001 2000
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Assets:
Cash and due from banks $ 20,535 $ 19,099
Federal funds sold 106,100 54,015
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Cash and Cash Equivalents 126,635 73,114
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Interest bearing deposits with banks 1,782 591
Securities available for sale 592,932 564,938
Investment securities (market value of $100,612 in 2001 and
$108,560 in 2000) 101,020 110,700
Loans 845,123 818,289
Less: Allowance for loan losses (11,299) (10,934)
- ----------------------------------------------------------------------------------------------------------
Loans, net 833,824 807,355
Bank premises and equipment, net 9,751 9,428
Other real estate 2,091 2,041
Other assets 46,992 51,145
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Total Assets $1,715,027 $1,619,312
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Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 93,605 $ 102,718
Interest bearing 872,653 847,600
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Total Deposits 966,258 950,318
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Borrowed funds
Securities sold under agreements to repurchase 10,000 10,000
Federal Home Loan Bank advances 602,761 532,768
Obligation for Employee Stock Ownership Plan (ESOP) 1,100 1,200
Other 339 1,255
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Total Borrowed Funds 614,200 545,223
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Company - obligated Mandatorily Redeemable Trust Preferred
Securities of Subsidiary Trust holding solely junior
Subordinated Debentures of the Company 32,500 26,500
Other liabilities 19,913 19,034
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Total Liabilities $1,632,871 $1,541,075
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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 7,617,814 in 2001 and 7,617,214 shares in 2000 46,892 46,881
Surplus 2,205 2,205
Undivided profits 36,871 34,963
Treasury stock, at cost: 172,000 shares (3,030) (3,030)
Unallocated ESOP shares (1,100) (1,200)
Accumulated other comprehensive income (loss) 318 (1,582)
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Total Stockholders' Equity 82,156 78,237
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Total Liabilities and Stockholders' Equity $1,715,027 $1,619,312
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
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(in thousands, except per share amounts) 2001 2000
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INTEREST INCOME:
Interest and fees on loans $ 17,763 $ 14,354
Interest on deposits with banks 19 15
Interest on securities available for sale 9,723 5,446
Interest on investment securities:
Taxable 1,150 1,190
Exempt from Federal income tax 462 384
Interest on Federal funds sold 747 213
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Total Interest Income 29,864 21,602
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INTEREST EXPENSE:
Interest on savings account deposits 2,562 1,588
Interest on certificates of deposit of $100,000 or more 2,129 1,211
Interest on other time deposits 6,963 5,462
Interest on borrowed funds 8,101 4,330
Interest on trust preferred securities 627 266
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Total Interest Expense 20,382 12,857
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Net Interest Income 9,482 8,745
Less provision for loan losses 925 800
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Net Interest Income After Provision for Loan Losses 8,557 7,945
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NON-INTEREST INCOME:
Service charges on deposit accounts 400 377
Securities gains (losses), net 445 (45)
Other non-interest income 721 401
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Total Non-Interest Income 1,566 733
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NON-INTEREST EXPENSE:
Salaries and employee benefits 3,587 2,808
Occupancy expense, net 671 622
Equipment expense 510 468
Other non-interest expense 1,636 1,424
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Total Non-Interest Expense 6,404 5,322
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Income before income tax expense 3,719 3,356
Income tax expense 992 960
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Net Income $ 2,727 $ 2,396
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EARNINGS PER SHARE:
Basic $ 0.37 $ 0.36
Diluted $ 0.37 $ 0.36
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Weighted average shares outstanding:
Basic 7,384 6,659
Diluted 7,442 6,675
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
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(in thousands) 2001 2000
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Cash Flows from Operating Activities:
Net Income $ 2,727 $ 2,396
Adjustments:
Provision for loan losses 925 800
Depreciation 399 376
ESOP fair value adjustment 5 --
Amortization and accretion (453) 55
(Gains) losses on sales of securities available for sale (445) 45
Loss on sales of other real estate -- 16
Write down of other real estate 12 75
Increase (decrease) in other assets 3,130 (384)
Increase in other liabilities 879 1,792
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Net Cash Provided by Operating Activities 7,179 5,171
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Cash Flows From Investing Activities:
Net increase in interest bearing deposits with banks (1,191) (870)
Purchase of securities available for sale (229,533) (59,434)
Maturities, calls, and paydowns of securities available for sale 146,114 6,156
Proceeds from sales of securities available for sale 59,243 30,462
Proceeds from maturities and paydowns of investment
securities 11,683 767
Purchase of investment securities (2,000) (487)
Net increase in loans (27,456) (50,080)
Expenditures for bank premises and equipment (722) (230)
Proceeds from sale of other real estate -- 98
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Net Cash Used by Investing Activities (43,862) (73,618)
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Cash Flows from Financing Activities:
Net increase in non-interest bearing demand,
money market, and savings deposits 9,016 25,045
Net increase in certificates of deposit 6,924 27,460
Net increase in borrowed funds 68,977 43,138
Proceeds from issuance of trust preferred securities 6,000 --
Proceeds from issuance of common stock 6 39
Decrease in unallocated ESOP shares 100 100
Dividends paid (819) (675)
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Net Cash Provided by Financing Activities 90,204 95,107
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Net increase in cash and cash equivalents 53,521 26,660
Cash and cash equivalents as of beginning of period 73,114 25,617
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Cash and Cash Equivalents as of End of Period $ 126,635 $ 52,277
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Supplemental Disclosure of Cash Flow Information:
Cash paid during period for:
Interest expense 17,075 11,788
Income taxes 1,500 100
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Supplemental Schedule of Non-cash Investing and Financing
Activities:
Transfers to other real estate from loans, net of charge offs 62 55
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
Yardville National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2001
(Unaudited)
1. Summary of Significant Accounting Policies
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 as of the date of the balance sheet
and revenue 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. In connection with the
determination of the allowance for loan losses and other real estate, management
obtains independent appraisals for significant properties.
The consolidated financial data as of and for the three months ended March 31,
2001 includes, in the opinion of management, all adjustments, consisting of only
normal recurring accruals necessary for a fair presentation of such periods. The
consolidated financial data for the interim periods presented is not necessarily
indicative of the results of operations that might be expected for the entire
year ending December 31, 2001.
Consolidation
The consolidated financial statements include the accounts of Yardville National
Bancorp (the "Holding Company") and its subsidiaries, Yardville Capital Trust
("Trust I"), Yardville Capital Trust II ("Trust II"), Yardville Capital
Trust III ("Trust III") and The Yardville National Bank (the "Bank"), and the
Bank's wholly owned subsidiaries (collectively, "YNB").
Allowance for Loan Losses
The provision for loan losses charged to operating expense is determined by
management and 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 Bank's allowance for loan losses and the valuation of other real estate.
Such agencies may require the Bank to recognize additions to the allowance or
adjustments to the carrying value of other real estate based on their judgement
about information available at the time of their examination.
6
Company - Obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On March 28, 2001, Trust III, a statutory business trust and a wholly owned
subsidiary of the Holding Company, issued $6,000,000 of 10.18% Trust Preferred
Securities in a private placement and $190,000 of Common Securities to the
Holding Company. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by Trust III to purchase $6,190,000 of 10.18% Subordinated
Debentures due June 8, 2031 from the Holding Company. The Trust exists for the
sole purpose of issuing Trust Preferred Securities and investing the proceeds in
Subordinated Debentures of the Holding Company. These Subordinated Debentures
constitute the sole assets of the Trust.
On June 23, 2000, Trust II, a statutory business trust and a wholly owned
subsidiary of the Holding Company, issued $15,000,000 of 9.50% Trust Preferred
Securities to one nonaffiliated financial institution and $464,000 of Common
Securities to the Holding Company. Proceeds from the issuance of the Trust
Preferred Securities were immediately used by Trust II to purchase $15,464,000
of 9.50% Subordinated Debentures due June 22, 2030 from the Holding Company. The
Trust exists for the sole purpose of issuing Trust Preferred Securities and
investing the proceeds in Subordinated Debentures of the Holding Company. These
Subordinated Debentures constitute the sole assets of the Trust.
On October 16, 1997, Trust I, a statutory business trust and a wholly owned
subsidiary of the Holding Company, issued $11,500,000 of 9.25% Trust Preferred
Securities to the public and $356,000 of 9.25% Common Securities to the Holding
Company. Proceeds from the issuance of the Trust Preferred Securities were
immediately used by Trust I to purchase $11,856,000 of 9.25% Subordinated
Debentures maturing November 1, 2027 from the Holding Company. The Trust exists
for the sole purpose of issuing Trust Preferred Securities and investing the
proceeds in Subordinated Debentures of the Holding Company. These Subordinated
Debentures constitute the sole assets of the Trust.
2. Earnings Per Share
Weighted average shares for the basic net income per share calculation for the
three months ended March 31, 2001 and 2000 were 7,384,000 and 6,659,000
respectively. For the diluted net income per share computation, potential common
stock of 58,000 and 16,000 are included for the three months ended March 31,
2001 and 2000, respectively.
7
3. Comprehensive Income
Below is a summary of comprehensive income for the three months ended March 31,
2001 and 2000.
Comprehensive Income Three Months Ended March 31,
- ---------------------------------------------------------------------------------------------
(in thousands) 2001 2000
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Net Income $ 2,727 $ 2,396
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Other comprehensive income (loss)
Net change in unrealized gain (loss) for the period,
net of tax 1,900 (1,968)
Reclassification of realized net gain (loss) on sale of
Securities available for sale, net of tax 326 (32)
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Holding gain (loss) arising during the period,
net of tax and reclassification 2,226 (2,000)
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Reclassification adjustment for realized net
gain (loss), net of tax (326) 32
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Other comprehensive income (loss)
for the period, net of tax 1,900 (1,968)
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Total comprehensive income $ 4,627 $ 428
=============================================================================================
4. Employee Stock Ownership Plan
The Bank established an Employee Stock Ownership Plan and related trust ("ESOP")
for eligible employees. The ESOP is a tax-qualified plan subject to the
requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Employees with twelve months of employment with the Bank and who have worked at
least 1,000 hours are eligible to participate. The ESOP borrowed $2,000,000 from
an unaffiliated financial institution and purchased 155,340 shares of common
stock, no par value, of the Holding Company. 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 approximately
$94,000 and $54,000 for the three months ended March 31, 2001 and 2000
respectively. The fair value of unearned shares at March 31, 2001 is $1,299,000.
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.
5. Recent Accounting Pronouncements
On January 1, 2001, YNB adopted Statement of Financial Accounting Standard No.
133 (SFAS 133) "Accounting for Derivative Investments and Hedging Activities."
The adoption of this statement had no material impact on the financial position
or results of YNB.
8
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES (YNB)
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This financial review presents management's discussion and analysis of the
financial condition and results of operations. It should be read in conjunction
with the 2000 Annual Report to stockholders and Form 10-K for the fiscal year
ended December 31, 2000 as well as with the unaudited consolidated financial
statements and the accompanying notes in this Form 10-Q.
This Form 10-Q 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, market risk, and financial and other goals. Actual results may
differ materially from those expected 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 U.S. Securities and Exchange Commission.
Financial Condition
Assets
Total consolidated assets at March 31, 2001 were $1,715,027,000 an increase of
$95,715,000 or 5.9% compared to $1,619,312,000 at December 31, 2000. The growth
in YNB's asset base during the first three months of 2001 was primarily due to
increases in loans, Federal funds sold, and securities available for sale. The
increase in the loan portfolio was the product of an ongoing consistent strategy
to improve the profitability of the organization through relationship banking.
With consolidation in its markets, YNB has established its niche as the
preeminent business community bank in Mercer County specializing in commercial
lending. YNB's asset base includes US agency securities of approximately
$354,400,000 purchased utilizing primarily Federal Home Loan Bank advances
(Investment Growth Strategy). The Investment Growth Strategy securities at March
31, 2001 increased approximately $14,300,000 or 4.2% from the reported total of
$340,100,000 at December 31, 2000. The primary goals of the Investment Growth
Strategy, improving return on average equity and earnings per share, continue to
be achieved.
9
Federal funds sold
At March 31, 2001 Federal funds sold totaled $106,100,000 compared to
$54,015,000 at December 31, 2000. The higher amount of Federal funds sold at
March 31, 2001 was primarily due to increased interest bearing deposit balances
and borrowed funds raised to fund loan growth and effectively manage liquidity.
The average Federal funds sold balance for the three months of 2001 was
$54,152,000 compared to $14,794,100 for the same period in 2000. Management
remains focused on maintaining adequate liquidity to fund loan growth and to
enhance the liquidity profile of YNB.
Securities
The following tables present the amortized cost and market value of YNB's
securities portfolios as of March 31, 2001 and December 31, 2000.
Securities Available For Sale March 31, 2001 December 31, 2000
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Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of other U.S.
government agencies $ 102,561 $ 102,958 $ 173,608 $ 172,374
Mortgage-backed securities 430,982 431,623 338,377 336,798
Corporate obligations 26,575 26,027 26,713 27,091
All other securities 32,324 32,324 28,675 28,675
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Total $ 592,442 $ 592,932 $ 567,373 $ 564,938
=============================================================================================================
Investment Securities March 31, 2001 December 31, 2000
- -------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ 61,185 $ 60,725 $ 68,185 $ 66,439
Obligations of state and
political subdivisions 36,159 36,223 38,660 38,336
Mortgage-backed securities 3,676 3,664 3,855 3,785
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Total $ 101,020 $ 100,612 $ 110,700 $ 108,560
=============================================================================================================
Securities represented 40.5% of total assets at March 31, 2001 and 41.7% at
December 31, 2000. Total securities increased $18,314,000 or 2.7% at March 31,
2001 to $693,952,000 compared to $675,638,000 at year-end 2000. The available
for sale portfolio represented 85.4% of the total security holdings of YNB at
March 31, 2001, compared to 83.6% at year-end 2000.
The net unrealized gain on securities available for sale was $490,000 as of
March 31, 2001 compared to a net unrealized loss of $2,435,000 at December 31,
2000. The net unrealized gain, net of tax effect, was $318,000 as reported in
accumulated other comprehensive income (loss) in Stockholders' Equity at March
31, 2001, and the net unrealized loss, net of tax effect of $1,582,000 reported
at December 31, 2000. The change from net unrealized loss to net unrealized gain
on securities available for sale is primarily due to the changes in interest
rates from December 31, 2000 to March 31, 2001.
10
Securities available for sale increased $27,994,000 or 5.0% at March 31, 2001
when compared to the December 31, 2000 balance of $564,938,000. U.S. Treasury
and obligations of other U.S. government agencies decreased $69,416,000 in the
first quarter of 2001. This decrease was due to the maturity of shorter-term
discount notes and increased call activity from the agency callable portfolio.
These cash flows were primarily reinvested into fixed rate mortgage-backed
securities. Fixed rate mortgage-backed securities, including CMOs, increased
$139,700,000. Offsetting this increase was the sale of most of YNB's adjustable
rate mortgage backed securities, which resulted in a $44,700,000 decrease in
this product. These securities were sold due to increased paydowns and YNB's
reduced need for adjustable rate assets.
Investment securities decreased $9,680,000 to $101,020,000 at March 31, 2001
from $110,700,000 at December 31, 2000. The decrease was due to a $7,000,000
decline in callable U.S. agency bonds, smaller declines in obligations of state
and political subdivisions and principal paydowns on mortgage backed securities.
The Investment Growth Strategy securities increased $14,300,000 over the
year-end 2000 level. The largest increase was in fixed rate mortgage-backed
securities, including fixed rate CMOs, which increased $65,600,000, offset by a
$13,000,000 decrease in callable bonds. Adjustable rate mortgage backed
securities decreased $30,400,000 and floating rate CMOs decreased $7,900,000 due
to the sale of adjustable rate products and principal paydowns on floating rate
CMOs. At March 31, 2001, the Investment Growth Strategy portfolio was comprised
of 78.3% of fixed rate securities and 21.7% of adjustable or floating rate
securities compared to 66.2% fixed rate securities and 36.1% adjustable rate
securities at year end 2000. Management continues to actively manage the assets
and liabilities in the Investment Growth Strategy.
11
Loans
Total loans increased $26,834,000 or 3.3% at March 31, 2001 to $845,123,000 from
$818,289,000 at December 31, 2000. YNB's loan portfolio represented 49.3% of
total assets at March 31, 2001 compared to 50.5% at December 31, 2000. YNB's
lending focus continues to be on commercial and industrial loans, and commercial
real estate loans. The ability of YNB to enter into larger loan relationships
and management's philosophy of relationship banking are key factors in continued
strong loan growth. Strong competition from both bank and nonbank competitors
could result in comparatively lower yields on new and established lending
relationships. In addition, borrowers' concerns over the economy, real estate
prices and interest rates could all be factors in slowing future loan growth.
The majority of YNB's business is with customers located within Mercer County,
New Jersey and contiguous counties. Accordingly, the ultimate collectability 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.
The table below lists loan growth by type for the period of March 31, 2001 to
December 31, 2000.
Loan Portfolio Composition
- --------------------------------------------------------------------------------------------------------
(in thousands) 3/31/01 12/31/00 Change % change
- --------------------------------------------------------------------------------------------------------
Commercial real estate
Owner occupied $ 138,619 $ 135,234 $ 3,385 2.5%
Investor occupied 211,766 198,184 13,582 6.9
Construction and development 98,007 93,432 4,575 4.9
- --------------------------------------------------------------------------------------------------------
448,392 426,850 21,542 5.0
Residential
Multi-family 23,591 27,800 (4,209) 15.1
1- 4 family 92,456 92,876 (420) 0.5
- --------------------------------------------------------------------------------------------------------
116,047 120,676 (4,629) 3.8
Commercial and industrial
Term 126,192 116,995 9,197 7.9
Line of credit 73,681 72,217 1,464 2.0
Demand 1,282 1,389 (107) 7.7
- --------------------------------------------------------------------------------------------------------
201,155 190,601 10,554 5.5
Consumer
Home equity 50,737 50,809 (72) 0.1
Installment 21,555 22,428 (873) 3.9
Other 7,237 6,925 312 4.5
- --------------------------------------------------------------------------------------------------------
79,529 80,162 (633) 0.8
========================================================================================================
Total loans $ 845,123 $ 818,289 $ 26,834 3.3%
========================================================================================================
12
Commercial real estate loans include owner and investor occupied properties and
construction and development loans. Commercial real estate loans accounted for
53.1% of YNB's total loan portfolio at March 31, 2001. YNB's lending policies
generally require an 80% loan-to-value ratio for commercial real estate
mortgages. Collateral values are established based upon independently prepared
appraisals. Commercial real estate loans also includes construction and
development loans. Construction and development loans include residential and
commercial projects as well as land loans. YNB continues to be an active
participate in both commercial and residential construction lending. These loans
are typically made to experienced developers. Residential construction loans
include single family, multi-family, and condoumium projects. Commercial
construction loans include office and professional development, retail
development and other commercial related projects. Generally these loans are
closely monitored with advances made only after work is completed and
independently inspected and verified by qualified professionals. Commercial real
estate loans increased $21,542,000 or 5.0% in the first three months of 2001.
The majority of the growth was in investor-occupied commercial real estate
loans. Growth in commercial real estate loans accounted for 80.3% of the total
loan growth for the quarter.
Residential loans include multi-family and 1-4 family loans. The residential 1-4
family loans include residential mortgages of $77,200,000 or 66.5% 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 to
the standards required by these agencies. The remaining residential mortgage
loans are multi-family or other 1-4 family loans that are not first lien or do
not meet the underwriting standards of FNMA or FHLMC. Residential loans declined
$4,629,000 or 3.8% primarily due to a decline in multi-family residential loans.
The falling interest rates have increased the refinance activity particularly in
the 1-4 family loan category.
Commercial and industrial loans are typically loans made to small and middle
market businesses for a wide variety of needs including working capital, which
are used to finance inventory, receivable, equipment needs and other working
capital needs of borrowers. Commercial and industrial loans include term loans,
lines of credit and demand loans. Commercial and industrial loans increased
$10,554,000 or 5.5% to $201,155,000 at March 31, 2001 from $190,601,000 at
December 31, 2000. The primary reason for the increase was higher balances of
term commercial loans.
Consumer loans include fixed rate home equity loans, floating rate home equity
lines, indirect auto loans and other types of installment loans. Consumer loans
decreased $633,000 or 0.8% to $79,529,000 at March 31, 2001 from $80,162,000 at
December 31, 2000. The decline was caused by decreases in both installment loans
and home equity loans partially offset by increases in other consumer loans.
Management believes that there continues to be opportunities to increase the
consumer loan portfolio. However, competition for quality loan relationships
remains strong.
13
Deposit liabilities
The following table provides information concerning YNB's deposit base at March
31, 2001 and December 31, 2000.
Deposits
- ------------------------------------------------------------------------------------------------------
(in thousands) 3/31/01 12/31/00 Change % Change
- ------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits $ 93,605 $ 102,718 $ (9,113) 8.9%
Interest bearing demand deposits 78,065 77,110 955 1.2
Money market deposits 145,330 128,489 16,841 13.1
Savings deposits 73,919 73,588 331 0.4
Certificates of deposit of $100,000
or over 125,719 131,011 (5,292) 4.0
Other time deposits 449,620 437,402 12,218 2.8
- -----------------------------------------------------------------------------------------------------
Total $966,258 $ 950,318 $ 15,940 1.7%
=====================================================================================================
YNB's deposit base is the principal source of funds supporting interest-earning
assets. Total deposits increased $15,940,000 or 1.7% to $966,258,000 at March
31, 2001 compared to $950,318,000 at December 31, 2000. Certificates of deposit
were competitively priced in the first three months of 2001 as part of
promotions associated with the opening of YNB's Flemington and Lawrence offices.
These deposits helped fund earning asset growth and enhanced liquidity.
Certificates of deposits continue to be an important source of funding for YNB
in 2001. Certificates of deposit of $100,000 or over decreased $5,292,000 or
4.0% to $125,719,000 from $131,011,000 at December 31, 2000. Other time deposits
increased $12,218,000 or 2.8% to $449,620,000 from $437,402,000 at December 31,
2000. Growth in time deposits accounted for 43.4% of the total increase in
deposits for the first three months of 2001. Certificates of deposit accounted
for 59.5% of total deposits at March 31, 2001 compared to 59.8% at year-end
2000.
YNB also markets its certificates of deposit through a nationwide computer based
service. This service allows YNB to have access to a wider market to raise
needed funding. At March 31, 2001, YNB had approximately $92,547,000 in
outstanding certificates of deposit raised through this service. This reflects a
net decrease of $36,095,000 in 2001. Since this type of time deposit is one of
the more costly sources of funds, management will continue to reduce the balance
outstanding provided it does not negatively impact the overall liquidity
position of YNB. Management remains focused on reducing the overall cost of
deposits by attracting lower-cost or interest free deposits to replace higher
costing certificates of deposit. To accomplish this strategy management
continues to evaluate new branch sites in our market place to attract lower-cost
deposits and has initiated efforts to improve the sales culture at the existing
branches.
Non-interest bearing demand deposits decreased $9,113,000 or 8.9% to $93,605,000
at March 31, 2001 when compared to $102,718,000 at December 31, 2000. On an
average basis, first quarter 2001 average non-interest bearing demand deposits
totaled $94,375,000 compared to $91,809,000 for the same period in 2000.
Management remains focused on attracting non-interest-bearing demand deposits
from both commercial and retail customers.
14
Interest bearing demand deposits increased $955,000 or 1.2% to $78,065,000 at
March 31, 2001 from $77,110,000 at year-end 2000. In addition, money market
balances increased $16,841,000 or 13.1% to $145,330,000 at March 31, 2001 from
$128,489,000 at December 31, 2000. This increase resulted from the continued
focus on promoting the money market account to both business and retail
customers. Savings deposits increased $331,000 or 0.4% to $73,919,000 at March
31, 2001 from $73,558,000 at December 31, 2000.
While it is management's intention to fund earning asset growth with the lowest
cost deposits, core deposit growth levels, excluding certificates of deposit,
are not adequate to meet current or projected loan demand. YNB's ability to
generate lower cost deposits could affect YNB's ability to meet its earnings
targets. The continuing reliance on higher cost certificates of deposit to fund
asset growth is a major factor in the continued pressure on YNB's net interest
margin.
YNB continues to seek lower cost funding sources. In January 2000, YNB
introduced YNB Online, a PC based home and business banking service. This
service allows customers to have greater access to their accounts and should
help to make YNB's deposit products more competitive in the market place.
Another source of low cost funds is the opening of new branches to serve a wider
market area. The two newest branches for YNB are its Flemington branch in
Hunterdon County and its Lawrence branch in Mercer County. Both of these
branches are attracting lower cost deposits for YNB. Management believes that
Hunterdon County will become a strong secondary market for both loans and
deposits. To better serve this market, construction has begun on a regional
headquarters building in Flemington. This site will include a full service
branch and be staffed with lenders familiar with the local market. Management
anticipates that the regional center will be open before the end of the first
quarter of 2002.
Borrowed Funds
Borrowed funds totaled $614,200,000 at March 31, 2001, an increase of
$68,977,000 or 12.7% when compared to $545,223,000 at December 31, 2000. The
increase in borrowed funds resulted primarily from increased Federal Home Loan
Bank advances used to fund both Investment Growth Strategy purchases as well as
other earning assets. The recent decline in interest rates has
extended the duration of the borrowed fund portfolio, as nearly all borrowings
with call dates are now not likely to be called. Management anticipates limited
call activity if rates remain at or near the levels at March 31, 2001. This
means that if rates continue to decline the cost of borrowed funds will not
decline
YNB had FHLB advances outstanding of $602,761,000 at March 31, 2001, an increase
of $69,993,000 or 13.1% when compared to $532,768,000 at December 31, 2000. YNB
continues to utilize callable FHLB advances to fund both Investment Growth
Strategy purchases as well as other earning assets. At March 31, 2001 callable
advances totaled $595,000,000 or 97.1% of advances outstanding compared to
$525,000,000 or 98.5% at December 31, 2000. Callable FHLB advances have terms of
two to ten years and are callable after periods ranging from three months to
five years. There are $348,500,000 in callable advances with call dates in 2001
outstanding as of March 31, 2001. Management anticipates at the current interest
rate level there will be limited FHLB advances called.
15
As of March 31, 2001 borrowed funds included $1,100,000 related to the ESOP. The
ESOP purchased 155,340 shares of the common stock, no par value, of the Holding
Company with a loan from a nonaffiliated financial institution. The financing is
for a term of five years with an interest rate of 7.00% and a maturity date in
2004. The interest rate is fixed for the period of the loan, and the loan will
be repaid in equal monthly installments over the term of the loan. The shares
purchased by the ESOP were used as collateral for the loan. The Holding Company
guarantees the repayment of the loan.
YNB has the ability to borrow from the FHLB through its line of credit program,
subject to collateral requirements. In addition, YNB is eligible to borrow up to
30% of assets under the FHLB advance program subject to FHLB stock requirements,
collateral requirements and other restrictions. YNB also maintains unsecured
federal funds lines with four commercial banks totaling $25,000,000 for daily
funding needs. YNB's funding strategy is to rely on deposits to fund new loan
growth whenever possible and to rely on borrowed funds as a secondary funding
source for loans.
Company - Obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On March 28, 2001 the Holding Company, through Trust III, completed the sale
of $6,000,000 of 10.18% Trust Preferred Securities in a private placement.
On June 23, 2000, the Holding Company, through Trust II, completed the sale of
$15,000,000 of 9.50% Trust Preferred Securities to a nonaffiliated financial
institution.
On October 16, 1997, the Holding Company through the Trust, completed the sale
of $11,500,000, of 9.25% Trust Preferred Securities to the public.
As of March 31, 2001, $27,279,000 or 83.9% of the $32,500,000 in Trust Preferred
Securities outstanding qualify as Tier I capital. The remaining $5,221,000 is
treated as Tier II capital. Management anticipates that all Trust Preferred
outstanding at March 31, 2001 would qualify for Tier I capital within the next
two years.
16
Equity Capital
Stockholders' equity at March 31, 2001 totaled $82,156,000, an increase of
$3,919,000 or 5.0%, compared to $78,237,000 at December 31, 2000. This net
increase resulted from the following factors:
(i) YNB earned net income of $2,727,000 and paid cash dividends of
$819,000 for the three months ended March 31, 2001.
(ii) The net unrealized gain on securities available for sale was $318,000
at March 31, 2001 compared to a net unrealized loss of $1,582,000 at
December 31, 2000. This shift from a net unrealized loss to a net
unrealized gain resulted in a $1,900,000 increase in stockholders'
equity.
(iii) YNB received $6,000 in connection with the exercise of stock options by
directors and employees and a $5,000 increase associated with the fair
market value adjustment related to the allocation of shares to employee
accounts in the ESOP.
(iv) A reduction in commitment to the ESOP of $100,000 to $1,100,000 at
March 31, 2001 from $1,200,000 at December 31, 2000 resulted in an
increase of $100,000 in stockholders' equity.
The table below presents the Holding Company and Bank actual capital amounts and
ratios:
Amount Ratios
- ------------------------------------------------------------------------------------------------
dollars in thousands 03/31/01 12/31/00 03/31/01 12/31/00
- ------------------------------------------------------------------------------------------------
Risk-based capital:
Tier 1:
Holding Company $ 109,108 $ 106,310 10.5% 10.6%
Bank 111,902 104,633 10.8 10.4
- ------------------------------------------------------------------------------------------------
Total:
Holding Company 125,628 117,244 12.1 11.6
Bank 123,201 115,567 11.9 11.5
- ------------------------------------------------------------------------------------------------
Tier 1 leverage:
Holding Company 109,108 106,310 6.6 8.1
Bank $ 111,902 $ 104,633 7.5% 8.0%
- ------------------------------------------------------------------------------------------------
The minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 leverage ratio of 4.0%; a Tier 1 risk-based
capital ratio of 4.0% and a total risked based capital ratio of 8.0%. To be
considered "well capitalized" an institution must have a minimum Tier 1 capital
and total risk-based capital ratio of 6.0% and 10.0%, respectively, and a
minimum Tier 1 leverage ratio of 5.0%. At March 31, 2001, the ratios of the
Holding Company and the Bank exceeded the ratios required to be considered well
capitalized. It is management's goal to provide YNB with adequate capital to
continue to support asset growth, and maintain its status as a well capitalized
institution.
17
Credit Quality
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type as of March 31, 2001 and December 31, 2000.
Nonperforming Assets
- -------------------------------------------------------------------------------
(in thousands) 03/31/01 12/31/00
- -------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $ 1,325 $ 2,075
Residential 1,969 2,423
Commercial 796 851
Consumer 395 453
- -------------------------------------------------------------------------------
Total 4,485 5,802
- -------------------------------------------------------------------------------
Restructured loans 785 532
- -------------------------------------------------------------------------------
Loans 90 days or more past due:
Residential 608 526
Consumer 307 173
- -------------------------------------------------------------------------------
Total 915 699
- -------------------------------------------------------------------------------
Total nonperforming loans 6,185 7,033
- -------------------------------------------------------------------------------
Other real estate 2,091 2,041
- -------------------------------------------------------------------------------
Total nonperforming assets $ 8,276 $ 9,074
- -------------------------------------------------------------------------------
Allowance for loan losses to total loans, end of
period 1.34% 1.34%
Allowance for loan losses to nonperforming
loans, end of period 182.68% 155.47%
===============================================================================
At March 31, 2001, nonperforming loans, which are loans 90 days or more past
due, restructured loans and nonaccrual loans, totaled $6,185,000, a $848,000 or
12.1% decrease from the $7,033,000 at December 31, 2000. The decline in
nonperforming loans resulted from a decline in nonaccrual loans partially offset
by increases in restructured and loans 90 days or more past due.
Other real estate at March 31, 2001 totaled $2,091,000, a $50,000 or 2.4%
increase when compared to $2,041,000 at December 31, 2000. The increase in other
real estate was principally due to one new other real estate property.
18
Nonperforming assets at March 31, 2000 totaled $8,276,000, a $799,000 or 9.6%
decrease from the $9,074,000 level at December 31, 2000. Total nonperforming
assets as a percentage of total assets were 0.48% at March 31, 2001 compared to
0.56% at December 31, 2000. The decrease in nonperforming assets is primarily
due to the reduction in nonaccrual loans. The improvement in the nonperforming
asset as a percentage of total assets is due to both the decrease in
nonperforming assets and the increase in total assets. Management remains
focused on closely monitoring credit quality. The current slow down in the
economy could cause nonperforming asset levels to increase from the current
levels.
Allowance for Loan Losses
The allowance for loan losses totaled $11,299,000 at March 31, 2001, an increase
of $365,000 from the $10,934,000 at year-end 2000. The provision for loan losses
for the first three months of 2001 was $925,000 compared to $800,000 for the
same period of 2000. Gross charge offs were $603,000 for the first three months
of 2001 compared to $350,000 for the same period in 2000. Gross recoveries were
$43,000 for the first three months of 2001 compared to $63,000 for the same
period in 2000. Annualized net charge offs as a percentage of average loans were
0.27% for the first three months of 2001 and 0.17% for the same three months in
2000. This compares to net charge offs as a percentage of average loans ratio of
0.24% for the year ended December 31, 2000.
Management maintains the allowance for loan losses at a level determined in
accordance with management's documented allowance adequacy methodology. It is
management's assessment, based on management's estimates, that the allowance is
adequate in relation to the credit risk exposure levels. One measure of the
adequacy of the allowance for loan losses is the ratio of allowance for loan
losses to total loans. This ratio was 1.34% at both March 31, 2001 and December
31, 2000. Another measure of the adequacy of the allowance for loan losses is
the ratio of the allowance for loan losses to total nonperforming loans. This
ratio was 182.7% at March 31, 2001 compared to 155.5% at December 31, 2000.
Results of Operations
Net Income
YNB reported net income of $2,727,000 for the three months ended March 31, 2001,
an increase of $331,000 or 13.8% over the $2,396,000 for the same period in
2000. The increase in net income for the three months of 2001 compared to the
same period in 2000 is attributable to higher net interest income and increased
non-interest income offset by increased non-interest expenses and, to a lesser
extent, a higher provision for loan losses. Basic and diluted earnings per share
for the three months ended March 31, 2001 increased $0.01 or 2.8% to $0.37
compared to $0.36 for the same period in 2000.
Net Interest Income
YNB's net interest income for the first three months of 2001 was $9,482,000, an
increase of $737,000 or 8.4% from the same period in 2000. The principal factor
contributing to this increase was an increase in interest income of $8,262,000
resulting from increased loan balances and increased security balances at higher
rates. Offsetting this increase was a $7,525,000 increase in interest expense.
This increase in interest expense was primarily due to both higher average
balances of time deposits and borrowed funds and higher rates on both liability
types.
19
The net interest margin (tax equivalent basis), which is net interest income
divided by average interest earning assets, for the first three months of 2001
was 2.46%, a 75 basis point or 23.4% decline compared to 3.21% for the same
period in 2000. The principal factor causing the narrowing of the net interest
margin was the sharp decline in interest rates in the first quarter of 2001.
This resulted in yields on floating rate loans tied to the prime rate and
floating rate investments tied to one-month LIBOR to decline more quickly than
YNB's interest bearing liabilities. As a result of the rate movement, the yield
on earning assets declined 18 basis points. Over the same period the cost of
interest bearing liabilities increased 49 basis points.
The net interest margin for the 2001 and 2000 comparative periods was also
negatively impacted by the Investment Growth Strategy. The securities in the
Investment Growth Strategy at March 31, 2001, were approximately $354,400,000
compared to $340,000,000 at December 31, 2001. The targeted spread on this
strategy is 75 basis points after tax. Because of the targeted spread on this
strategy, there is a negative impact to the net interest margin and return on
average assets. Conversely, this strategy is designed to increase both return on
average equity and earnings per share, the primary goals of the strategy. The
goals of this strategy continue to be achieved.
Interest Income
For the first three months of 2001, total interest income was $29,864,000, an
increase of $8,262,000 or 38.2% when compared to interest income of $21,602,000
for the same period in 2000. This increase was primarily due to higher average
balances on loans and securities, partially offset by a lower loan yield.
Average loans increased $171,119,000 or 25.9% while the yield on loans decreased
15 basis points to 8.53% from 8.68%. The lower loan yield reflected the lower
overall interest rate environment in the first quarter of 2001 when compared to
the same period in 2000. Interest and fees on loans for the three months ended
March 31, 2001 increased $3,409,000 or 23.7% to $17,763,000 from $14,354,000 for
the same period in 2000. Average securities for the three months ended March 31,
2001 increased $251,701,000 or 57.5% to $689,496,000 when compared to the
$437,795,000 for the same period in 2000. Over the same period, the yield on the
securities portfolio increased 17 basis points to 6.58% from 6.41%. The increase
in the average balance and yield resulted in interest on securities increasing
$4,315,000 or 61.5% to $11,335,000 for the three months ended March 31, 2001
compared to $7,020,000 for the same period in 2000. Overall, the yield on YNB's
interest earning asset portfolio decreased 18 basis points to 7.57% for the
three months ended March 31, 2001 from the 7.75% for the same period in 2000.
Interest Expense
Total interest expense increased $7,525,000 or 58.5% to $20,382,000 for the
first three months of 2001 compared to $12,857,000 for the same period in 2000.
The increase in interest expense for the comparable time periods resulted
primarily from higher levels of interest bearing liabilities, higher rates paid
on deposits, and to a lesser extent, higher costs of borrowed funds and Trust
Preferred Securities. The average rate paid on interest bearing liabilities for
the three months ended March 31, 2001 increased 49 basis points to 5.62% from
5.13% for the same period of 2000.
20
Interest on other time deposits under $100,000 increased $1,501,000 to
$6,963,000 for the three months ended March 31, 2001 from $5,462,000 for the
same period in 2000. This increase was caused by both an increase of $44,543,000
in the average outstanding balance to $432,880,000 for the three months ended
March 31, 2001, when compared to the outstanding average balance of $388,337,000
for the three months ended March 31, 2000, and an increase of 80 basis points in
the cost to 6.43% from 5.63% for the same periods as described above. Interest
expense on certificates of deposit under $100,000 accounted for 34.2% of total
interest expense for the three months ended March 31, 2001 and 42.5% of the
total increase in interest expense from the same period last year. Management
anticipates that the cost of other time deposits under $100,000 will decline, as
current market rates are significantly lower than the existing cost of these
funds. However, since this repricing only occurs when the certificates mature
the reduction in costs will not be significant until the second half of 2001.
Interest on certificates of deposit (CDs) of $100,000 or more increased $918,000
or 75.8% to $2,129,000 for the three months ended March 31, 2001 from $1,211,000
for the same period in 2000. The increase was caused by an increase in the
average outstanding balance of $42,717,000 or 51.3% to $125,998,000 for the
three months ended March 31, 2001 when compared to the outstanding average
balance of $83,281,000 for the three months ended March 31, 2000. The cost of
CDs of $100,000 or more increased 94 basis points to 6.76% for the three months
of 2001 from 5.82% for the same period in 2000. Besides attracting CDs of
$100,000 or more in its markets, YNB also utilizes a software program, which
allows YNB to market its CDs nationwide. Management anticipates that as these
certificates of deposit mature the overall costs should decline significantly.
However, since the repricing only occurs when the CDs mature the reduction in
costs will not be significant until the second half of 2001.
Interest expense on borrowed funds increased $3,771,000 or 87.1% to $8,101,000
for the three months of 2001 when compared to $4,330,000 for the same period in
2000. The increased expense was primarily caused by a $264,063,000 increase in
the average balance outstanding in the first three months of 2001 to
$576,420,000 when compared to the $312,357,000 for the same period in 2000. The
rate paid on borrowed funds increased 8 basis points for the three months ended
March 31, 2001 to 5.62% from the 5.54% for the same period last year. The
primary cause for the increase in interest expense on borrowed funds is the
higher average balance of borrowed funds, and to a lesser extent, the higher
rate. Since a significant portion of the borrowed funds outstanding are callable
and at rates above the current rates offered on similar borrowings, management
anticipates there will be few calls in the near future. In addition, YNB may not
prepay these borrowings. This means that there are limited opportunities to
reprice these borrowings lower as rates decline. Management therefore
anticipates the overall costs of borrowed funds to remain stable in both a
modestly falling or rising rate environment.
21
Interest expense on savings, money markets and interest bearing demand accounts
increased $974,000 or 61.3% to $2,562,000 for the three months of 2001 when
compared to the $1,588,000 for the same period in 2000. Money market accounts
are historically less expensive than CDs and present more opportunities to cross
sell other bank products and services. YNB has already experienced substantial
growth in Premier Money Market balances due to the higher rate and aggressive
marketing campaign conducted to promote the product. The cost of savings, money
markets and interest bearing demand deposits increased 49 basis points to 3.55%
for the first three months of 2001 when compared to 3.06% for the same period in
2000. At the same time, the average balance of these deposit types increased
$80,570,000 or 38.8% to $288,333,000 for the first three months of 2001 from
$207,763,000 for the same period in 2000. Management has lowered the cost on
these deposit types as overall market rates have declined.
While YNB seeks to fund asset growth with lower cost savings, money market,
interest bearing checking and non-interest bearing demand deposits, this is not
always possible, as asset growth rates can exceed the growth rate in these
deposit types. To attract lower cost deposits to fund asset growth, management
has continued to aggressively market several lower costing products including
Premier Money Market accounts and a free checking product. Management
anticipates that over time, these new products, along with additional branches
in new markets, should result in lower cost core deposits providing a higher
percentage of the new funding than has been experienced recently. This
anticipated improvement in the deposit mix will help to control interest expense
going forward. However, the ability of YNB to lower the cost of interest bearing
liabilities is dependent on market conditions.
Provision for Loan Losses
YNB provides for possible loan losses by a charge to current operations. The
provision for loan losses for the three months ended March 31, 2001 was
$925,000, a $125,000 or 15.6% increase over the $800,000 provision recorded for
the same period of 2000. The increase in the provision for the quarter was
primarily due to increased net charge-offs and loan growth. Management believes
that the allowance for loan losses is adequate in relation to the credit risk
exposure levels.
Non-interest Income
Total non-interest income for the first three months of 2001 was $1,566,000, an
increase of $833,000 or 113.6% over non-interest income of $733,000 for the same
period in 2000. The increase was due principally to gains on sale of securities
and increased other non-interest income.
Service charges on deposit accounts increased $23,000 or 6.1% to $400,000 for
the first three months ended March 31, 2001 compared to $377,000 for the same
period in 2000. Management remains focused on increasing the level of service
charges on deposit accounts.
Net gains on sale of securities totaled $445,000 in the first three months of
2001 compared to $45,000 in net losses on sale of securities for the same period
in 2000. The gain resulted primarily from the sale of higher coupon fixed rate
mortgage-backed securities, that management felt would prepay faster in a
falling interest rate environment. Further, adjustable rate mortgage backed
securities that were showing increased prepayment speeds and coupons that would
reprice downward were also sold as YNB's need for adjustable rate securities has
declined.
22
Other non-interest income increased $320,000 or 79.8% to $721,000 for the three
months ended March 31, 2001 from $401,000 for the same period in 2000. The
primary cause for the increase was a $247,000 or 128.0% increase in the earnings
on bank owned life insurance assets. This increase resulted from the purchase of
$15,000,000 in additional bank owned life insurance assets at the end of 2000.
The income earned on these assets is used to offset the cost of deferred
compensation programs. The single largest component of other non-interest income
was income derived from bank owned life insurance assets, which totaled $440,000
for the first three months of 2001 as compared to $193,000 for the same period
in 2000. This income represented 61.0% and 48.1% of total other non-interest
income for the first three months of 2001 and 2000, respectively.
Non-interest income represented 5.0% of YNB's total revenue in the first three
months of 2001 compared to 3.3% for the same period in 2000. The improvement in
this ratio was due to the gains on sale of securities and increased earnings on
bank owned life insurance assets. As discussed in the 2000 Annual Report, YNB
formed alliances with several local insurance agencies to offer insurance
products to our customers. Also in 2000, YNB signed a marketing agreement with
Salomon Smith Barney to offer brokerage services to our customers. Both of these
initiatives are still in the formation stage and to date have not contributed
any significant earnings. However, management believes that both of these
products will generate future additional non-interest income for YNB. As part of
YNB's ongoing strategic planning process, management continues to closely
evaluate both traditional and non-traditional sources of new non-interest
income.
Non-interest Expense
Total non-interest expense increased $1,082,000 or 20.3% to $6,404,000 for the
first three months of 2001 compared to $5,322,000 for the same period in 2000.
The increase in non-interest expense was primarily due to increases in salaries
and employee benefits and other non-interest expenses. Total non-interest
expenses, on an annualized basis, as a percentage of average assets were 1.6%
for the first three months of 2001 compared to 1.8% for the same period of
2000. The improvement in this ratio is due to the strong asset growth
experienced by YNB. YNB's efficiency ratio for the first three months of 2001
was 58.0% compared to 56.2% for the same period in 2000. The efficiency ratio is
computed 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.
Salaries and employee benefits increased $779,000 or 27.7% to $3,587,000 for the
first three months of 2001 compared to $2,808,000 for the same period in 2000.
Salary and benefits expense accounted for 56.0% of total non-interest expenses
for the first three months of 2001 compared to 52.8% for the same period in
2000. Salary expense increased $473,000 or 21.6% reflecting increased staffing
levels throughout YNB as the organization continues to grow and normal salary
increases. Benefit expense increased $306,000 or 49.5% primarily due to higher
costs associated with deferred compensation plans, increased medical insurance
and ESOP expense. The increase in salary and benefit expense in the first three
months of 2001 accounted for 72.0% of the total increase in non-interest expense
when the first three months of 2001 is compared to the same period in 2000.
23
Occupancy expense for the first three months of 2001 was $671,000, an increase
of $49,000 or 7.9% compared to $622,000 for the same period in 2000. Total rent
expense on leased properties increased $36,000 and accounted for 73.5% of the
total increase for the period. The rent expense increase resulted from the
leases on the new branches in Flemington and Lawrence, New Jersey.
Equipment expense increased $42,000 or 9.0% to $510,000 for the first three
months of 2001 from $468,000 for the same period in 2000. The increase in
equipment costs reflects the continuing efforts of YNB to maintain and upgrade
technology in order to provide the highest quality products and service.
Other non-interest expenses increased $212,000 or 14.9% to $1,636,000 for the
first three months of 2001 when compared to the $1,424,000 for the same period
in 2000. Marketing expense accounted for 34.4% of the total increase. Marketing
expense for the three months ended March 31, 2001 increased $73,000 or 30.4% to
$313,000 from $240,000 for the same period in 2000. This increase resulted from
increased efforts to promote lower cost deposit products. In addition,
professional fees, loan-related expenses and other operating expenses associated
with a growing institution account primarily for the rest of the increase.
Management closely monitors non-interest expenses and seeks to control the
growth of these expenses. However, as YNB continues to grow, the costs
associated with properly managing the organization will also continue to
increase.
Income Tax Expense
The effective income tax rate for the three months ended March 31, 2001 was
26.8% compared to 28.6% for the same period in 2000. The decrease in the tax
rate resulted from the growth in tax-free income exceeding the growth in overall
income. Total income tax expense for the three months ended March 31, 2001 was
$992,000, an increase of $32,000 from the $960,000 for the same period in 2000.
The increase in tax expense resulted from higher taxable income offset by a
lower effective tax rate.
24
Item 3: Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in YNB's market risk from December 31, 2000
except as discussed below. For information regarding YNB's market risk refer to
the Company's 2000 Annual Report to stockholders.
Changes in Earnings Risk
Net interest income over the next twelve-month period indicates a slightly
reduced risk to lower rates (-200 basis points) at March 31, 2001 than reported
at December 31, 2000. Comparing the simulation results of this low rate scenario
to the flat rate interest rate scenario indicates a change in net interest
income of -7.9% compared to -8.3% at year end 2000. At the same time, YNB's
exposure to higher rates (+200 basis points) indicates that net interest income
would increase by 6.3% compared to 5.03% at year-end 2000. The cumulative
one-year gap remained a positive $114,780,000 or 6.7% of total assets at March
31, 2001 compared to a positive $147,378,000 or 9.1% of assets at year-end 2000.
The dollar change in the gap was $32,598,000. Management currently is
implementing strategies to make the gap less positive and reduce YNB's exposure
to lower interest rates.
Changes in Market risk
Management measures longer-term market risk through the Economic Value of
Portfolio Equity ("EVPE"). The present value of asset and liability cash flows
are subjected to rate shocks of plus or minus 200 basis points. The variance in
the residual, or economic value of equity is measured as a percentage of total
assets. This variance is managed within a negative 3% boundary.
At March 31, 2001, the EVPE changes by -0.64% for rate shifts of +200 and -6.10%
for rate shifts of -200 basis points. The non-symmetry of the results is
indicative of the callable funding utilized to fund earning asset growth. This
compares to changes of -2.20% and -5.35% respectively at December 31, 2000 and
- -3.50% and -1.01% at March 31, 2000.
The primary causes for this risk to falling rates are primarily due to the
callable FHLB advances that will not be called in a down rate environment.
Management has initiated strategies designed to bring this measurement back
within policy guidelines.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable.
25
Item 2: Changes in Securities and Use of Proceeds
On March 28, 2001, Trust III, a wholly owned subsidiary of the Holding Company,
issued 6,000 Series A 10.18% Capital Securities, at an offering price of $1,000
per security, to an institutional investor, and 190 10.18% Common Securities at
an offering price of $1,000 per security, to the Holding Company. The gross
proceeds of this offering totaled $6,190,000. Trust III used the proceeds from
this offering to purchase $6,190,000 of Series A 10.18% Junior Deferrable
Interest Debentures, due June 8, 2031, of the Holding Company.
The Holding Company intends to use the net proceeds from this offering for
general corporate purposes, as well as contributions to the Bank, to fund its
operations.
Item 3: Defaults Upon Senior Securities
Not Applicable.
Item 4: Submission of Matters to a Vote of Securities Holders
Not Applicable.
Item 5: Other Information
Not Applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K. There were no Form 8-K reports filed during the quarter
for which this report is filed.
26
INDEX TO EXHIBITS
Exhibit
Number Description Page
- --------------------------------------------------------------------------------
(A) 3.1 Restated Certificate of Incorporation of the Company, as
amended by the Certificate of Amendment thereto filed on
March 6, 1998.
(B) 3.2 By-Laws of the Company
(B) 4.1 Specimen Share of Common Stock
4.2 See Exhibits 3.1 and 3.2 for the Registrant's Certificate
of Incorporation and By-Laws, which contain provisions
defining the rights of stockholders of the Registrant.
(C) 4.3 Amended and Restated Trust Agreement dated October 16,
1997, among the Registrant, as depositor, Wilmington Trust
Company, as property trustee, and the Administrative
Trustees of Yardville Capital Trust.
(C) 4.4 Indenture dated October 16, 1997, between the Registrant
and Wilmington Trust Company, as trustee, relating to the
Registrant's 9.25% Subordinated Debentures due 2027.
(C) 4.5 Preferred Securities Guarantee Agreement dated as of
October 16, 1997, between the Registrant and Wilmington
Trust Company, as trustee, relating to the Preferred
Securities of Yardville Capital Trust.
4.6 The Registrant will furnish to the Commission upon request
copies of the following documents relating to the
Registrant's Series A 9.50% Junior Subordinated Deferrable
Interest Debentures due June 22, 2000: (i) Amended and
Restated Declaration of Trust dated June 23, 2000, among
the Registrant, The Bank of New York, as property trustee,
and the Administrative Trustees of Yardville Capital Trust
II; (ii) Indenture dated as of June 23, 2000, between the
Registrant's Series A 9.50% Junior Subordinated Deferrable
Interest Debentures due June 22, 2030; and (iii) Series A
Capital Securities Guarantee Agreement dated as of June 23,
2000 between the Registrant and The Bank of New York, as
trustee, relating to the Series A Capital Securities of
Yardville Capital Trust II.
4.7 The Registrant will furnish to the Commission upon request
copies of the following documents relating to the
Registrant's Series A 10.18% Junior Subordinated Deferrable
Interest Debentures due June 8, 2031: (i) Amended and
Restated Declaration of Trust dated March 28, 2001, among
the Registrant, Wilmington Trust Company, as property
trustee, and the Administrative Trustees of Yardville
Capital Trust III; (ii) Indenture dated as of March 28,
2001, between the Registrant and Wilmington Trust Company,
as trustee, relating to the Registrant's Series A 10.18%
Junior Subordinated Deferrable Interest Debentures due June
8, 2031; and (iii) Series A Capital Securities Guarantee
Agreement dated as of March 28, 2001 between the Registrant
and Wilmington Trust Company, as trustee, relating to the
Series A Capital Securities of Yardville Capital Trust III.
27
Exhibit
Number Description Page
- --------------------------------------------------------------------------------
(A) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997
(B) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-78050)
(C) Incorporated by reference to the Registrant's Registration
Statement on Form S-2 (Registration Nos. 333-35061 and
333-35061-01)
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YARDVILLE NATIONAL BANCORP
--------------------------
(Registrant)
Date: May 15, 2001 By: /s/ Stephen F. Carman
-------------- ------------------------------
Stephen F. Carman
Executive Vice President and
Chief Financial Officer
29