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 June 30, 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
--------------------------
(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 August 12, 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 (unaudited)
Consolidated Statements of Condition
June 30, 2001 and December 31, 2000
Consolidated Statements of Income
Three months ended June 30, 2001 and 2000
Consolidated Statements of Income
Six months ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows
Six months ended June 30, 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)
June 30, December 31,
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(in thousands, except share data) 2001 2000
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Assets:
Cash and due from banks $ 22,502 $ 19,099
Federal funds sold 42,335 54,015
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Cash and Cash Equivalents 64,837 73,114
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Interest bearing deposits with banks 4,098 591
Securities available for sale 645,877 564,938
Investment securities (market value of $105,180 in 2001 and
$108,560 in 2000) 106,080 110,700
Loans 882,811 818,289
Less: Allowance for loan losses (11,449) (10,934)
- ---------------------------------------------------------------------------------------------------
Loans, net 871,362 807,355
Bank premises and equipment, net 9,663 9,428
Other real estate 2,855 2,041
Other assets 49,487 51,145
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Total Assets $ 1,754,259 $ 1,619,312
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Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 104,649 $ 102,718
Interest bearing 847,569 847,600
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Total Deposits 952,218 950,318
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Borrowed funds
Securities sold under agreements to repurchase 10,000 10,000
Federal Home Loan Bank advances 655,341 532,768
Obligation for Employee Stock Ownership Plan (ESOP) 1,000 1,200
Other 786 1,255
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Total Borrowed Funds 667,127 545,223
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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 20,184 19,034
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Total Liabilities $ 1,672,029 $ 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 46,900 46,881
Surplus 2,205 2,205
Undivided profits 38,453 34,963
Treasury stock, at cost: 172,000 shares (3,030) (3,030)
Unallocated ESOP shares (1,000) (1,200)
Accumulated other comprehensive loss (1,298) (1,582)
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Total Stockholders' Equity 82,230 78,237
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Total Liabilities and Stockholders' Equity $ 1,754,259 $ 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
June 30,
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(in thousands, except per share amounts) 2001 2000
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INTEREST INCOME:
Interest and fees on loans $17,180 $15,629
Interest on deposits with banks 69 21
Interest on securities available for sale 9,934 6,012
Interest on investment securities:
Taxable 1,079 1,178
Exempt from Federal income tax 471 389
Interest on Federal funds sold 761 549
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Total Interest Income 29,494 23,778
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INTEREST EXPENSE:
Interest on savings account deposits 2,353 1,850
Interest on certificates of deposit of $100,000 or more 1,998 1,461
Interest on other time deposits 7,047 5,933
Interest on borrowed funds 8,818 4,790
Interest on trust preferred securities 775 298
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Total Interest Expense 20,991 14,332
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Net Interest Income 8,503 9,446
Less provision for loan losses 650 900
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Net Interest Income After Provision for Loan Losses 7,853 8,546
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NON-INTEREST INCOME:
Service charges on deposit accounts 480 384
Securities gains, net 683 40
Other non-interest income 751 468
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Total Non-Interest Income 1,914 892
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NON-INTEREST EXPENSE:
Salaries and employee benefits 3,698 2,848
Occupancy expense, net 650 610
Equipment expense 499 476
Other non-interest expense 1,696 1,775
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Total Non-Interest Expense 6,543 5,709
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Income before income tax expense 3,224 3,729
Income tax expense 823 1,100
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Net Income $ 2,401 $ 2,629
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EARNINGS PER SHARE:
Basic $ 0.33 $ 0.39
Diluted $ 0.32 $ 0.39
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Weighted average shares outstanding:
Basic 7,384 6,723
Diluted 7,460 6,740
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Six Months Ended
June 30,
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(in thousands, except per share amounts) 2001 2000
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INTEREST INCOME:
Interest and fees on loans $ 34,943 $ 29,983
Interest on deposits with banks 88 36
Interest on securities available for sale 19,657 11,458
Interest on investment securities:
Taxable 2,229 2,368
Exempt from Federal income tax 933 773
Interest on Federal funds sold 1,508 762
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Total Interest Income 59,358 45,380
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings account deposits 4,915 3,438
Interest on certificates of deposit of $100,000 or more 4,127 2,672
Interest on other time deposits 14,010 11,395
Interest on borrowed funds 16,919 9,120
Interest on trust preferred securities 1,402 564
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Total Interest Expense 41,373 27,189
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Net Interest Income 17,985 18,191
Less provision for loan losses 1,575 1,700
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Net Interest Income After Provision for Loan Losses 16,410 16,491
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NON-INTEREST INCOME:
Service charges on deposit accounts 880 761
Securities gains, (losses) net 1,128 (5)
Other non-interest income 1,472 869
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Total Non-Interest Income 3,480 1,625
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NON-INTEREST EXPENSE:
Salaries and employee benefits 7,285 5,656
Occupancy expense, net 1,321 1,232
Equipment expense 1,009 944
Other non-interest expense 3,332 3,199
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Total Non-Interest Expense 12,947 11,031
- ----------------------------------------------------------------------------------------
Income before income tax expense 6,943 7,085
Income tax expense 1,815 2,060
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Net Income $ 5,128 $ 5,025
- ----------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 0.69 $ 0.75
Diluted $ 0.69 $ 0.75
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Weighted average shares outstanding:
Basic 7,384 6,691
Diluted 7,460 6,708
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended June 30,
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(in thousands) 2001 2000
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Cash Flows from Operating Activities:
Net Income $ 5,128 $ 5,025
Adjustments:
Provision for loan losses 1,575 1,700
Depreciation 784 758
ESOP fair value adjustment 13 (55)
Amortization and accretion (178) 126
(Gains) losses on sales of securities available for sale (1,128) 5
Loss on sale of other real estate -- 15
Writedown of other real estate 14 179
(Increase) decrease in other assets 1,505 (1,583)
Increase in other liabilities 1,149 4,415
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Net Cash Provided by Operating Activities 8,862 10,585
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Cash Flows From Investing Activities: (3,507) (176)
Net increase in interest bearing deposits with banks (451,105) (92,366)
Purchase of securities available for sale
Maturities, calls, and paydowns of securities available for sale 233,794 15,782
Proceeds from sales of securities available for sale 138,119 41,460
Proceeds from maturities and paydowns of investment
securities 14,538 2,123
Purchase of investment securities (9,921) (2,070)
Net increase in loans (66,517) (79,262)
Expenditures for bank premises and equipment (1,018) (586)
Proceeds from sale of other real estate 107 265
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Net Cash Used by Investing Activities (145,510) (114,830)
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Cash Flows from Financing Activities:
Net increase in non-interest bearing demand,
money market, and savings deposits 25,421 41,732
Net (decrease) increase in certificates of deposit (23,522) 78,911
Net increase in borrowed funds 121,904 39,233
Proceeds from issuance of trust preferred securities 6,000 15,000
Proceeds from issuance of common stock 6 6,887
Decrease in unallocated ESOP shares 200 200
Dividends paid (1,638) (1,351)
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Net Cash Provided by Financing Activities 128,371 180,612
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Net (decrease) increase in cash and cash equivalents (8,277) 76,367
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 $ 64,837 $ 101,984
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Supplemental Disclosure of Cash Flow Information:
Cash paid during period for:
Interest expense 37,839 24,429
Income taxes 2,923 1,162
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Supplemental Schedule of Non-cash Investing and Financing
Activities:
Transfers to other real estate from loans, net of charge offs 934 204
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
6
Yardville National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 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 and six months ended
June 30, 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.
7
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 June 30, 2001 and 2000 were 7,384,000 and 6,723,000
respectively. For the diluted net income per share computation, potential common
stock of 76,000 and 17,000 are included for the three months ended June 30, 2001
and 2000, respectively.
Weighted average shares for the basic net income per share calculation for the
six months ended June 30, 2001 and 2000 were 7,384,000 and 6,691,000
respectively. For the diluted net income per share computation, potential common
stock of 76,000 and 17,000 are included for the six months ended June 30, 2001
and 2000, respectively.
8
3. Comprehensive Income
Below is a summary of comprehensive income for the three and six months ended
June 30, 2001 and 2000.
Comprehensive Income Three Months Ended June 30
- -----------------------------------------------------------------------------------------
(in thousands) 2001 2000
- -----------------------------------------------------------------------------------------
Net Income $ 2,401 $ 2,629
- -----------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain (loss) for the period,
net of tax (1,616) 1,628
Reclassification of realized net gain on sale of
Securities available for sale, net of tax 451 26
- -----------------------------------------------------------------------------------------
Holding gain (loss) arising during the period,
net of tax and reclassification (1,165) 1,654
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Reclassification adjustment for realized net
gain, net of tax (451) (26)
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Other comprehensive income (loss)
for the period, net of tax (1,616) 1,628
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Total comprehensive income $ 785 $ 4,257
=========================================================================================
Comprehensive Income Six Months Ended June 30
- -----------------------------------------------------------------------------------------
(in thousands) 2001 2000
- -----------------------------------------------------------------------------------------
Net Income $ 5,128 $ 5,025
- -----------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain (loss) for the period,
net of tax 284 (340)
Reclassification of realized net gain (loss) on sale of
Securities available for sale, net of tax 744 (3)
- -----------------------------------------------------------------------------------------
Holding gain (loss) arising during the period,
net of tax and reclassification 1,028 (343)
- -----------------------------------------------------------------------------------------
Reclassification adjustment for realized net
gain (loss), net of tax (744) 3
- -----------------------------------------------------------------------------------------
Other comprehensive income (loss)
for the period, net of tax 284 (340)
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Total comprehensive income $ 5,412 $ 4,685
=========================================================================================
4. Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and
Other Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies the criteria acquired intangible assets must
meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
9
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Statement 142 requires that goodwill and any intangible asset determined to have
an indefinite useful life acquired after June 30, 2001 will not be amortized,
but will continue to be evaluated for impairment in accordance with the
appropriate pre-Statement 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
The Company is required to adopt the provisions of Statement 141 immediately.
The initial adoption of Statement 141 had no impact on the Company's
consolidated financial statements. The Company is required to adopt Statement
142 effective January 1, 2002. The Company currently has no recorded goodwill or
intangible assets and does not anticipate that the initial adoption of Statement
142 will have a significant impact on the Company's consolidated financial
statements.
10
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 June 30, 2001 were $1.75 billion an increase of
$134.9 million or 8.3% compared to $1.62 billion at December 31, 2000. The
growth in YNB's asset base during the first six months of 2001 was primarily due
to increases in loans 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 pre-eminent
business community bank in Mercer County specializing in commercial lending.
YNB's asset base includes US agency securities of approximately $378.0 million
purchased utilizing primarily Federal Home Loan Bank advances (Investment Growth
Strategy). The Investment Growth Strategy securities at June 30, 2001 increased
approximately $37.9 million or 11.1% from the reported total of $340.1 million
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.
Federal funds sold
At June 30, 2001 Federal funds sold totaled $42.3 million compared to $54.0
million at December 31, 2000. The lower level of Federal funds sold at June 30,
2001 was primarily due to slower deposit growth and strong loan and investment
11
growth. The average Federal funds sold balance for the first six months of 2001
was $61.8 million compared to $24.8 million 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 June 30, 2001 and December 31, 2000.
Securities Available For Sale June 30, 2001 December 31, 2000
- ------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and
obligations of other U.S.
government agencies $ 99,822 $ 99,662 $ 173,608 $ 172,374
Mortgage-backed securities 475,510 474,202 338,377 336,798
Corporate obligations 37,588 37,060 26,713 27,091
All other securities 34,953 34,953 28,675 28,675
- ------------------------------------------------------------------------------------------------------------------
Total $ 647,873 $ 645,877 $ 567,373 $ 564,938
==================================================================================================================
Investment Securities June 30, 2001 December 31, 2000
- ------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ 61,185 $ 60,405 $ 68,185 $ 66,439
Obligations of state and
political subdivisions 41,461 41,364 38,660 38,336
Mortgage-backed securities 3,434 3,411 3,855 3,785
- ------------------------------------------------------------------------------------------------------------------
Total $ 106,080 $ 105,180 $ 110,700 $ 108,560
==================================================================================================================
Securities represented 42.9% of total assets at June 30, 2001 and 41.7% at
December 31, 2000. Total securities increased $76.4 million or 11.3% at June 30,
2001 to $752.0 million compared to $675.6 million at year-end 2000. The
available for sale portfolio represented 85.9% of the total security holdings of
YNB at June 30, 2001, compared to 83.6% at year-end 2000.
The net unrealized loss on securities available for sale was $2.0 million as of
June 30, 2001 compared to a net unrealized loss of $2.4 million at December 31,
2000. Net unrealized loss, net of tax effect, was $1.3 million as reported in
accumulated other comprehensive loss in Stockholders' Equity at June 30, 2001,
and $1.6 million reported at December 31, 2000. The change in the net unrealized
loss on securities available for sale is primarily due to the changes in
interest rates from December 31, 2000 to June 30, 2001.
Securities available for sale increased $80.9 million or 14.3% at June 30, 2001
when compared to the December 31, 2000 balance of $564.9 million. U.S. Treasury
and obligations of other U.S. government agencies decreased $72.7 million in the
first six months of 2001. This decrease was due to the maturity of shorter-term
12
discount notes and increased call activity from the agency callable portfolio.
These cash flows were primarily reinvested into fixed rate mortgage backed
securities. Mortgage-backed securities, including CMOs, increased $137.4
million. Fixed rate mortgage back securities, including fixed rate CMOs
increased $246.4 million. Offsetting this increase was a decline of $63.7
million in floating rate CMOs due to sales and paydowns and a decline of $45.3
million resulting from the sale of nearly all the adjustable rate mortgage
backed securities owned by YNB. These securities were sold due to increased
paydowns and YNB's reduced need for adjustable rate investments.
Investment securities decreased $4.6 million to $106.1 million at June 30, 2001
from $110.7 million at December 31, 2000. The decrease was due to a $7.0 million
decline in callable agency bonds and a $421,000 decline in mortgage backed
securities due to principal paydowns, offset by a $2.8 million increase in
tax-free obligations of state and political subdivisions.
The Investment Growth Strategy securities increased $37.9 million over the
year-end 2000 level. The largest increase was in fixed rate mortgages-backed
securities, including fixed rate CMOs, which increased $121.7 million, followed
by an $11.3 million increase in agency debentures. Offsetting these increases
were declines in callable bonds (down $29.0 million), floating rate CMOs (down
$35.5 million) and adjustable rate mortgage backed securities (down $30.6
million). The percentage of the Investment Growth Strategy portfolio represented
by fixed rate securities and adjustable or floating rate securities,
respectively, was 87.0% and 13.0% at June 30, 2001 and 66.2% and 36.1% at
year-end 2000. Management continues to actively manage the assets and
liabilities in the Investment Growth Strategy and is currently following a
strategy of increasing the fixed rate percentage of the strategy as part of the
overall risk management process of the YNB.
13
Loans
Total loans increased $64.5 million or 7.9% to $882.8 million at June 30, 2001
from $818.3 million at December 31, 2000. YNB's loan portfolio represented 50.3%
of total assets at June 30, 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 non-bank 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 December 31, 2000 to
June 30, 2001.
Loan Portfolio Composition
- ----------------------------------------------------------------------------------------------------------------
(in thousands) 6/30/01 12/31/00 Change % change
- ----------------------------------------------------------------------------------------------------------------
Commercial real estate
Owner occupied $ 139,647 $ 135,234 $ 4,413 3.3%
Investor occupied 211,147 198,184 12,963 6.5
Construction and development 104,668 93,432 11,236 12.0
- ----------------------------------------------------------------------------------------------------------------
455,462 426,850 28,612 6.7
Residential
Multi-family 26,605 27,800 (1,195) 4.3
1- 4 family 93,167 92,876 291 0.3
- ----------------------------------------------------------------------------------------------------------------
119,772 120,676 (904) 0.7
Commercial and industrial
Term 112,042 116,995 (4,953) 4.2
Line of credit 112,141 72,217 39,924 55.3
Demand 1,203 1,389 (186) 13.3
- ----------------------------------------------------------------------------------------------------------------
225,386 190,601 34,785 18.3
Consumer
Home equity 54,290 50,809 3,481 6.9
Installment 20,724 22,428 (1,704) 7.6
Other 7,177 6,925 252 3.6
- ----------------------------------------------------------------------------------------------------------------
82,191 80,162 2,029 2.5
================================================================================================================
Total loans $ 882,811 $ 818,289 $ 64,522 7.9%
================================================================================================================
Commercial real estate loans include owner and investor occupied properties and
construction and development loans. Commercial real estate loans accounted for
51.6% of YNB's total loan portfolio at June 30, 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
14
commercial projects as well as land loans. YNB continues to be an active
participant in both commercial and residential construction lending. These loans
are 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
closely monitored with advances made only after work is completed and
independently inspected and verified by qualified professionals. Commercial real
estate loans increased $28.6 million or 6.7% in the first six months of 2001.
The majority of the growth was in investor-occupied commercial real estate loans
and construction and development loans. Growth in commercial real estate loans
accounted for 44.3% of the total loan growth for the first six months of 2001.
Residential loans include multi-family and 1-4 family loans. The residential 1-4
family loans include residential mortgages of $77.5 million which represent
64.7% 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 $904,000 or 0.7% 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
$34.8 million or 18.3% to $225.4 million at June 30, 2001 from $190.6 million at
December 31, 2000. The primary reason for the increase was higher balances of
business lines of credit.
Consumer loans include fixed rate home equity loans, floating rate home equity
lines, indirect auto loans and other types of installment loans. Consumer loans
increased $2.0 million or 2.5% to $82.2 million at June 30, 2001 from $80.2
million at December 31, 2000. The increase was caused by higher home equity
loans offset by a decrease in installment loans. Management believes that there
continues to be opportunities to increase the consumer loan portfolio. However,
competition for quality loan relationships remains strong.
15
Deposit liabilities
The following table provides information concerning YNB's deposit base at June
30, 2001 and December 31, 2000.
Deposits
- ----------------------------------------------------------------------------------------------------------------
(in thousands) 6/30/01 12/31/00 Change % Change
- ----------------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits $ 104,649 $ 102,718 $ 1,931 1.9%
Interest bearing demand deposits 87,041 77,110 9,931 12.9
Money market deposits 139,795 128,489 11,306 8.8
Savings deposits 75,841 73,588 2,253 3.1
Certificates of deposit of $100,000
or over 110,689 131,011 (20,322) 15.5
Other time deposits 434,203 437,402 (3,199) 0.7
- ----------------------------------------------------------------------------------------------------------------
Total $ 952,218 $ 950,318 $ 1,900 0.2%
================================================================================================================
YNB's deposit base is the principal source of funds supporting interest-earning
assets. Total deposits increased $1.9 million or 0.2% to $952.2 million at June
30, 2001 compared to $950.3 million at December 31, 2000. Management has pursued
a strategy to run off higher costing certificates of deposit generated through a
computer-based service without negatively impacting liquidity. To accomplish
this goal, management has competitively priced in-market certificates of deposit
to promote new branches and acquired comparatively lower cost borrowed funds.
This accounts for the relatively low deposit growth rate experienced in the
first six months of 2001 compared to prior periods.
Total certificates of deposit, which include certificates of deposit of $100,000
or over and other time deposits decreased $23.5 million or 4.2% to $544.9
million at June 30, 2001 from $568.4 million at December 31, 2001. YNB markets
its certificates of deposit through its branch network and through a nationwide
computer service. The decrease in such deposits is the result of management's
decision to reduce the use of the service to attract deposits. At June 30, 2001,
YNB had approximately $63.3 million in outstanding certificates of deposit that
YNB had obtained through the service, compared to approximately $128.7 million
at December 31, 2000. Although the service has enabled YNB to offer such
deposits to a greater number of potential customers than YNB otherwise could do,
the deposits obtained through that service generally result in higher interest
expense relative to other deposits. Therefore, management intends to continue to
reduce YNB's outstanding balance of deposits obtained through the service to the
extent possible given YNB's need for funds from time to time. Despite the
decrease, certificates of deposit continue to be an important source of funding
for YNB in 2001, representing 57.2 of the total deposits at June 30, 2001.
Management believes that such deposits will continue to play an important role
in funding future loan growth and enhancing liquidity and intends to continue to
seek such deposits. For example, YNB competitively priced certificates of
deposit in the first six months of 2001 as part of promotions associated with
the opening of YNB's Flemington, Lawrence and Bordentown offices, which resulted
in deposits of approximately $41.9 million.
16
Non-interest bearing demand deposits increased $1.9 million or 1.9% to $104.6
million at June 30, 2001 compared to $102.7 million at December 31, 2000. On an
average basis, second quarter 2001 average non-interest bearing demand deposits
totaled $99.3 million compared to $96.6 million for the same period in 2000.
Management remains focused on attracting non-interest bearing demand deposits
from both commercial and retail customers.
Interest bearing demand deposits increased $9.9 million or 12.9% to $87.0
million at June 30, 2001 from $77.1 million at year-end 2000. In addition, money
market balances increased $11.3 million or 8.8% to $139.8 million at June 30,
2001 from $128.5 million at December 31, 2000. These increases resulted from the
continued focus on promoting lower cost deposit accounts to both retail and
commercial customers. Savings deposits increased $2.2 million or 3.1% to $75.8
million at June 30, 2001 from $73.6 million 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.
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, YNB opened two new offices
in 2001. The three newest branches for YNB are its Flemington branch in
Hunterdon County, its Lawrence branch in Mercer County and its Bordentown branch
in Burlington County. Management continues to evaluate new branch sites in YNB's
marketplace to attract lower-cost deposits. There are currently two branch
applications filed with the regulatory authorities for branches in Hunterdon
County. Management expects to open a branch on Main Street in downtown
Flemington in the third or fourth quarter of 2001. The second branch will be
located in YNB's Hunterdon regional headquarters to be located right outside
Flemington. In addition to a full service branch, this site will 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. In addition to
opening new branches, management has initiated efforts to improve the marketing
of lower cost deposit products by staff at existing branches.
Borrowed Funds
Borrowed funds totaled $667.1 million at June 30, 2001, an increase of $121.9
million or 22.4% when compared to $545.2 million 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 asset growth. The continued 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 June 30, 2001. This means that
if rates continue to decline the cost of existing callable borrowed funds will
not decline.
17
YNB had FHLB advances outstanding of $655.3 million at June 30, 2001, an
increase of $122.5 million or 23.0% when compared to $532.8 million 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 June
30, 2001 callable advances totaled $615.0 million or 93.9% of advances
outstanding compared to $525.0 million 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 $358.5 million in callable
advances with call dates in 2001 outstanding as of June 30, 2001. Management
anticipates at the current interest rate level there will be limited FHLB
advances called in 2001. In the second quarter of 2001, management shifted its
borrowing strategy away from longer-term callable advances into floating rate
LIBOR based borrowings. Management believes that this type of borrowing will
help to protect income should interest rates continue to decline.
As of June 30, 2001 borrowed funds included $1.0 million 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 $25.0 million 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
$6.0 million of 10.18% Trust Preferred Securities in a private placement.
On June 23, 2000, the Holding Company, through Trust II, completed the sale of
$15.0 million of 9.50% Trust Preferred Securities to a nonaffiliated financial
institution.
On October 16, 1997, the Holding Company, through Trust I, completed the sale of
$11.5 million of 9.25% Trust Preferred Securities to the public.
As of June 30, 2001, $27.8 million or 85.7% of the $32.5 million in Trust
Preferred Securities outstanding qualify as Tier I capital. The remaining $4.7
million is treated as Tier II capital. Management anticipates that all Trust
Preferred outstanding at June 30, 2001 would qualify for Tier I capital within
the next two years.
18
Equity Capital
Stockholders' equity at June 30, 2001 totaled $82.2 million, an increase of $4.0
million or 5.1%, compared to $78.2 million at December 31, 2000. This net
increase resulted from the following factors:
(i) YNB earned net income of $5.1 million and paid cash dividends of $1.6
million for the six months ended June 30, 2001.
(ii) The net unrealized loss on securities available for sale was $1.3
million at June 30, 2001 compared to a net unrealized loss of $1.6
million at December 31, 2000. This decrease in the net loss resulted in
a $284,000 increase in stockholders' equity.
(iii) YNB received $6,000 in connection with the exercise of stock options by
directors and employees and a $13,000 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 ESOP of $200,000 to $1.0 million at June
30, 2001 from $1.2 million at December 31, 2000 resulted in an increase
of $200,000 in Stockholders' equity.
The table below presents the actual capital amounts and ratios of the Holding
Company and the Bank:
Amount Ratios
- ----------------------------------------------------------------------------------------------------------------
dollars in thousands 06/30/01 12/31/00 06/30/01 12/31/00
- ----------------------------------------------------------------------------------------------------------------
Risk-based capital:
Tier 1:
Holding Company $ 111,371 $ 106,310 10.4% 10.6%
Bank 113,312 104,633 10.6 10.4
- ----------------------------------------------------------------------------------------------------------------
Total:
Holding Company 124,469 117,244 11.9 11.6
Bank 124,761 115,567 11.7 11.5
- ----------------------------------------------------------------------------------------------------------------
Tier 1 leverage:
Holding Company 111,371 106,310 6.7 8.1
Bank $ 113,312 $ 104,633 6.5% 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 June 30, 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.
19
Credit Quality
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type as of June 30, 2001 and December 31, 2000.
Nonperforming Assets
- ------------------------------------------------------------------------
(in thousands) 06/30/01 12/31/00
- ------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $ 1,301 $ 2,075
Residential 1,276 2,423
Commercial 1,090 851
Consumer 66 453
- ------------------------------------------------------------------------
Total 3,733 5,802
- ------------------------------------------------------------------------
Restructured loans 780 532
- ------------------------------------------------------------------------
Loans 90 days or more past due:
Residential 521 526
Consumer 274 173
- ------------------------------------------------------------------------
Total 795 699
- ------------------------------------------------------------------------
Total nonperforming loans 5,308 7,033
- ------------------------------------------------------------------------
Other real estate 2,855 2,041
- ------------------------------------------------------------------------
Total nonperforming assets $ 8,163 $ 9,074
- ------------------------------------------------------------------------
Allowance for loan losses to total loans,
end of period 1.30% 1.34%
Allowance for loan losses to nonperforming
loans, end of period 215.69% 155.47%
=======================================================================
At June 30, 2001, nonperforming loans, which are loans 90 days or more past due,
restructured loans and nonaccrual loans, totaled $5.3 million, a $1.7 million or
24.5% decrease from the $7.0 million 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 June 30, 2001 totaled $2.9 million, a $814,000 or 39.9%
increase when compared to $2.0 million at December 31, 2000. The increase in
other real estate was principally due to the reclassification of one residential
mortgage loan as other real estate.
Nonperforming assets at June 30, 2001 totaled $8.2 million, a $911,000 or 10.0%
decrease from the $9.1 million level at December 31, 2000. Total nonperforming
assets as a percentage of total assets were 0.47% at June 30, 2001 compared to
0.56% at December 31, 2000. The improvement in this ratio is due to both the
growth in total assets and the reduction in nonperforming loans. Management
remains focused on closely monitoring credit quality. The slow down in the
economy could cause nonperforming asset levels to increase from the current
levels.
20
Allowance for Loan Losses
The allowance for loan losses totaled $11.4 million at June 30, 2001, an
increase of $515,000 from the $10.9 million at year-end 2000. The provision for
loan losses for the first six months of 2001 was $1.6 million compared to $1.7
million for the same period of 2000. Gross charge-offs were $1.4 million for the
first six months of 2001 compared to $975,000 for the same period in 2000. Gross
recoveries were $310,000 for the first six months of 2001 compared to $86,000
for the same period in 2000. Annualized net charge-offs as a percentage of
average loans were 0.25% for the first six months of 2001 and 0.26% for the same
six 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 its 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 1.30% at June 30, 2001 and 1.34% at 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
215.69% at June 30, 2001 compared to 155.47% at December 31, 2000. The
improvement in this ratio was due to a drop in nonperforming loans and a higher
reserve level.
Results of Operations
Net Income
YNB reported net income of $5.1 million for the six months ended June 30, 2001,
an increase of $103,000 or 2.0% over the $5.0 million for the same period in
2000. The increase in net income for the six months of 2001 compared to the same
period in 2000 is attributable to higher non-interest income offset by lower net
interest income and increased non-interest expenses. Basic and diluted earnings
per share for the six months ended June 30, 2001 decreased $0.06 or 8.0% to
$0.69 compared to $0.75 for the same period in 2000. The decrease in the
earnings per share was due to the higher average number of shares outstanding
resulting from last year's private common equity placement.
On a quarterly basis, net income for the second quarter of 2001 was $2.4
million, a decrease of $228,000 or 8.7% compared to the net income for the same
period in 2000. The primary reason for the decline in net income for the
comparative quarters was lower net interest income and higher non-interest
expenses partially offset by increased non-interest income. On a per share
basis, basic earnings per share for the second quarter of 2001 was $0.33, a
decrease of $0.06 or 15.4% when compared to the same period in 2000. Diluted
earnings per share declined $0.07 or 17.9% to $0.32 for the second quarter of
2001 compared to $0.39 for the same period in 2000. The reason for the decline
in the earnings per share basis was due to the lower level of net income and the
higher number of average shares outstanding.
21
Net Interest Income
YNB's net interest income for the first six months of 2001 was $18.0 million, a
decrease of $206,000 or 1.1% from the same period in 2000 principally because
interest expense increased by a greater amount than interest income. For the
first six months of 2001, interest income increased by $14.0 million compared to
the same period in 2000 while interest expense increased by $14.2 million
compared to the same period in 2000. Although loan and security balances
increased during the first six months of 2001, those assets earned lower rates
of return in 2001 than in 2000. At the same time, YNB's average balances of
certificate of deposits and borrowed funds increased and the cost of all
interest-bearing deposits increased relative to the costs in 2000.
The net interest margin (tax equivalent basis), which is net interest income
divided by average interest earning assets, for the first six months of 2001 was
2.28%, a 95 basis point or 29.4% decline compared to 3.23% for the same period
in 2000. The principal factors causing the narrowing of the net interest margin
was the sharp decline in interest rates during the first six months 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 54 basis points. Over the same period the cost of
interest bearing liabilities increased 31 basis points. The primary cause for
the increased cost of liabilities related to costs associated with certificates
of deposit. Since certificates of deposit do not reprice until the maturity
date, certificates of deposit costs have not declined as quickly as earning
asset rates. Management believes as certificates of deposit mature or reprice to
current market levels throughout the remainder of 2001, interest expenses on
these deposits will decline. The result should be an improving net interest
margin, Further reductions in interest rates, however, will impede the
improvement in YNB's net interest margin.
On a quarterly basis, net interest income was $8.5 million a decrease of
$943,000 or 10.0% when compared to the second quarter of 2000. The net interest
margin (tax equivalent basis) for the three months ended June 30, 2001 was
2.10%, a 114 basis point or 35.2% decline from the same period in 2000. The
decline in the net interest margin was due to an 88 basis point drop in the
yield on earning assets to 7.08% for the quarter compared to 7.96% for the same
period in 2000. Over this same time period, the cost of interest bearing
liabilities increased 14 basis points to 5.47% for the quarter compared to 5.33%
for the same period in 2000.
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 June 30, 2001 were approximately $378.0 million
compared to $340.1 million at December 31, 2000. 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, the 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.
22
Interest Income
For the first six months of 2001, total interest income was $59.4 million, an
increase of $14.0 million or 30.8% when compared to interest income of $45.4
million for the same period in 2000. This increase was primarily due to higher
average balances on loans and securities partially offset by lower investment
and loan yields. Average loans increased $164.5 million or 24.2% while the yield
on loans decreased 54 basis points to 8.28% from 8.82%. The lower loan yield
reflected the lower overall interest rate environment in the first six months of
2001 when compared to the same period in 2000. Interest and fees on loans for
the six months ended June 30, 2001 increased $4.9 million or 16.5% to $34.9
million from $30.0 million for the same period in 2000. Average securities for
the six months ended June 30, 2001 increased $262.9 million or 58.6% to $711.8
million when compared to the $448.9 million for the same period in 2000. Over
the same period, the yield on the securities portfolio decreased 9 basis points
to 6.41% from 6.50%. The increase in the average balance resulted in interest on
securities increasing $8.2 million or 56.3% to $22.8 million for the six months
ended June 30, 2001 compared to $14.6 million for the same period in 2000.
Overall, the yield on YNB's interest earning asset portfolio decreased 54 basis
points to 7.32% for the six months ended June 30, 2001 from the 7.86% for the
same period in 2000.
For the second quarter of 2001, total interest income was $29.5 million an
increase of $5.7 million or 24.0% when compared to the $23.8 million for the
second quarter of 2000. The increase in interest income was due to higher
average balances of loans and securities offset by lower yields on both asset
types. The overall yield on earning assets for the second quarter of 2001 was
7.08%, a 88 basis point decline from the 7.96% for the same period in 2000. The
decrease in the yield on earning assets was primarily due to the lower interest
rate environment in the first six months of 2001 compared to the same period in
2000.
Interest Expense
Total interest expense increased $14.2 million or 52.2% to $41.4 million for the
first six months of 2001 compared to $27.2 million 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 Trust Preferred Securities.
The average rate paid on interest bearing liabilities for the six months ended
June 30, 2001 increased 31 basis points to 5.54% from 5.23% for the same period
of 2000.
Interest on other time deposits increased $2.6 million to $14.0 million for the
six months ended June 30, 2001 from $11.4 million for the same period in 2000.
This increase was caused by both an increase of $42.6 million in the average
outstanding balance to $438.6 million for the six months ended June 30, 2001,
when compared to the outstanding average balance of $396.0 million for the same
period in 2000, and an increase of 63 basis points in the cost to 6.39% from
5.76% for the same periods as described above. Interest expense on other time
deposits accounted for 33.9% of total interest expense for the six months ended
June 30, 2001. Management anticipates that the cost of other time deposits will
decline, as current market rates are significantly lower than the existing cost
of these funds. Based on the maturity schedule of YNB's time deposits, the
reduction in costs will be more significant in the last six months of 2001.
23
Interest on certificates of deposit (CDs) of $100,000 or more increased $1.4
million or 54.5% to $4.1 million for the six months ended June 30, 2001 from
$2.7 million for the same period in 2000. The increase was caused by an increase
in the average outstanding balance of $36.1 million or 40.6% to $124.9 million
for the six months ended June 30, 2001 when compared to the outstanding average
balance of $88.8 million for the same period in 2000. The cost of CDs of
$100,000 or more increased 59 basis points to 6.61% for the first six months of
2001 from 6.02% for the same period in 2000. Management anticipates that as
these certificates of deposit mature the overall costs should decline
significantly. However, since this 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 $7.8 million or 85.5% to $16.9
million for the six months of 2001 when compared to $9.1 million for the same
period in 2000. The increased expense was primarily caused by a $282.5 million
increase in the average balance outstanding in the first six months of 2001 to
$607.8 million when compared to the $325.3 million for the same period in 2000.
The rate paid on borrowed funds decreased 4 basis points for the six months
ended June 30, 2001 to 5.57% from the 5.61% for the same period last year. 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.
Interest expense on savings, money markets and interest bearing demand accounts
increased $1.5 million or 43.0% to $4.9 million for the six months of 2001 when
compared to the $3.4 million for the same period in 2000. The primary cause for
this increase was an increase in the average balance of $74.4 million or 34.3%
to $291.5 million for the six months ended June 30, 2001 from $217.1 million for
the same period in 2000. The growth experienced has been primarily in Premier
Money Market balances. This product, which is market sensitive, has grown as a
result of an aggressive marketing campaign, attractive rates as compared to
other core deposit accounts, and the movement of maturing certificates of
deposit into this category by depositors. As a result, the cost of all funds in
this category increased 20 basis points to 3.37% for the six months ended June
30, 2001 compared to 3.17% for the same period in 2000. Management has focused
on these core deposit types as the preferred source to fund earning asset
growth. Money market accounts are historically less expensive than CDs and
present more opportunities to cross sell other bank products and services.
For the second quarter of 2001, total interest expense was $21.0 million, an
increase of $6.7 million or 46.5% when compared to the $14.3 million for the
same period in 2000. The overall cost of interest bearing liabilities increased
14 basis points to 5.47% for the second quarter of 2001 compared to 5.33% for
the second quarter of 2000. The reasons for this increase in interest expense
are the same as discussed above.
24
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 six months ended June 30, 2001 was $1.6
million, a $125,000 decrease compared to the $1.7 million provision recorded for
the same period of 2000. The decrease in the provision for the first six months
of 2001 was primarily due to stable net charge-offs, a moderating loan growth
rate and a decline in nonperforming loans. Management believes that the
allowance for loan losses is adequate in relation to the credit risk exposure
levels.
For the three months ended June 30, 2001 the provision for loan losses was
$650,000, a $250,000 decrease from the $900,000 in the provision for the same
period in 2000. The primary cause for the lower provision were the same as
discussed above.
Non-interest Income
Total non-interest income for the six months of 2001 was $3.5 million, an
increase of $1.9 million or 114.2% over non-interest income of $1.6 million for
the same period in 2000. The increase was due principally to net securities
gains and increased other non-interest income.
Service charges on deposit accounts increased $119,000 or 15.6% to $880,000 for
the six months ended June 30, 2001 compared to $761,000 for the same period in
2000. Service charge income has primarily increased in the first half of 2001
due to increased income from overdraft fees. Management remains focused on
increasing the level of service charges on deposit accounts.
Net gains on sale of securities totaled $1.1 million in the first six months of
2001 compared to $5,000 in net losses on sale of securities for the same period
in 2000. The gain resulted primarily from the sale of both higher coupon fixed
rate mortgage-backed securities and callable bonds due to favorable shifts in
the treasury yield curve. In addition, securities were repositioned or sold
during the period as part of the management of longer-term interest rate risk.
25
Other non-interest income increased $603,000 or 69.4% to $1.5 million for the
six months ended June 30, 2001 from $869,000 for the same period in 2000. The
primary cause for the increase was a $471,000 or 114.6% 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 $882,000
for the first six months of 2001 as compared to $411,000 for the same period in
2000. This income represented 59.9% and 47.3% of total other non-interest income
for the first six months of 2001 and 2000, respectively.
For the three months ended June 30, 2001 total non-interest income increased
$1.0 million or 114.6% to $1.9 million from $892,000 for the same period in
2000. The key factors accounting for this increase were a $643,000 increase in
net gains on sale of securities and a $224,000 increase in income derived from
bank owned life insurance assets.
Non-interest income represented 5.5% of YNB's total revenue in the first six
months of 2001 compared to 3.5% 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 have yet to contribute any significant earnings. However, management
believes that both of these initiatives 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 $1.9 million or 17.4% to $12.9 million for
the first six months of 2001 compared to $11.0 million 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 1.53% for the first six months of 2001 compared to 1.83% 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 six months of 2001 was 60.32%
compared to 55.67% 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. The increase in the
efficiency ratio was due to both the narrowing of the net interest margin and
the increase in non-interest expense for the comparative period.
26
Salaries and employee benefits increased $1.6 million or 28.8% to $7.3 million
for the first six months of 2001 compared to $5.7 million for the same period in
2000. Salary and benefits expense accounted for 56.3% of total non-interest
expenses for the first six months of 2001 compared to 51.3% for the same period
in 2000. Full time equivalent employees increased to 270 at June 30, 2001
compared to 232 at June 30, 2000. Salary expense increased $1.0 million or 22.5%
reflecting increased staffing levels throughout YNB as the organization
continues to grow and normal salary increases. Benefit expense increased
$626,000 or 52.7% primarily due to higher costs associated with deferred
compensation plans, and to a lesser extent, increased benefit costs relating to
the higher number of employees. The increase in salary and benefit expense in
the first six months of 2001 accounted for 85.0% of the total increase in
non-interest expense when the first six months of 2001 is compared to the same
period in 2000.
Occupancy expense for the first six months of 2001 was $1.3 million, an increase
of $89,000 or 7.2% compared to $1.2 million for the same period in 2000. Total
rent expense on leased properties increased $103,000 and was the primary reason
for the increase in occupancy expense. The rent expense increase resulted from
the leases on the new branches in Flemington and Lawrence, New Jersey and normal
rent increases on other leased properties. In the fourth quarter of 2001, YNB
will relocate its operations center into a leased facility. This new space will
ensure that YNB has adequate back office support to continue to grow. The
minimum annual rent expense over the next five years is $235,000.
Equipment expense increased $65,000 or 6.9% to $1.0 million for the first six
months of 2001 from $944,000 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 $133,000 or 4.2% to $3.3 million for the
first six months of 2001 when compared to the $3.2 million for the same period
in 2000. The modest growth rate in other non-interest expenses experienced in
the first six months of 2001 was primarily due to the larger size of YNB and the
related expenses associated with that growth offset by decreased costs
associated with problem loans including other real estate expense. 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.
For the three months ended June 30, 2001 total non-interest expense increased
$834,000 or 14.6% to $6.5 million from $5.7 million for the same period in 2000.
The primary factor for this increase was a $850,000 or 29.8% increase in salary
and benefit expense to $3.7 million for the three months ended June 30, 2001
when compared to the $2.8 million for the same period in 2000. YNB also had
modest increases in occupancy and equipment expense and a modest decline in
other non-interest expense.
Income Tax Expense
The effective income tax rate for the six months ended June 30, 2001 was 26.1%
compared to 29.1% 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 six months ended June 30, 2001 was $1.8
million, a decrease of $245,000 from the $2.1 million for the same period in
2000. The decrease in tax expense resulted from lower taxable income and a lower
effective tax rate.
27
The effective tax rate for the three months ended June 30, 3001 was 25.5%
compared to 29.5% for the same period in 2000. Total income tax expense for the
three months ended June 30, 2001 was $823,000, a decrease of $277,000 from the
$1.1 million for the same period in 2000. The reasons for the decreases are the
same as discussed above.
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
increased risk to lower rates (-200 basis points) at June 30, 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 -8.4% 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 5.5% compared to 5.0% at year-end 2000. The cumulative
one-year gap remained a positive $12.8 million or 0.7% of total assets at June
30, 2001 compared to a positive $147.4 million or 9.1% of assets at year-end
2000. The dollar change in the gap was $134.6 million. 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 June 30, 2001, the EVPE changes by -2.94% for rate shifts of +200 and -4.45%
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
- -0.64% and -6.10% at March 31, 2001.
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.
28
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable.
Item 2: Changes in Securities and Use of Proceeds
Not Applicable.
Item 3: Defaults Upon Senior Securities
Not Applicable.
Item 4: Submission of Matters to a Vote of Securities Holders
The annual stockholders meeting of Yardville National Bancorp was held Tuesday,
May 1, 2001.
The following nominees were elected as directors:
Votes for Votes withheld
Elbert G. Basolis, Jr. 6,140,115 445,042
Anthony M. Giampetro 6,491,583 93,574
Patrick M. Ryan 6,414,437 170,720
Martin Tuchman 6,221,740 363,417
F. Kevin Tylus 6,223,280 361,877
The following directors terms continued beyond the annual stockholders meeting:
C. West Ayres Lorraine Buklad
Jay G. Destribats, Chairman of the Board Sidney L. Hofing
James J. Kelly Gilbert W. Lugossy
Louis R. Matlack Weldon J. McDaniel, Jr.
There were no other matters voted upon at the annual stockholders meeting.
Item 5: Other Information
Not Applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits (see Index to Exhibits).
(b) Reports on Form 8-K. There were no Form 8-K reports filed during the quarter
for which this report is filed.
29
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.
30
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)
31
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: August 14, 2001 By: /s/ Stephen F. Carman
------------------ -------------------------
Stephen F. Carman
Secretary/Treasurer
32