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 September 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 October 29, 2001, the
following class and number of shares were outstanding:
Common Stock, no par value 8,042,568
- -------------------------- ----------------------------
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 3
September 30, 2001 and December 31, 2000
Consolidated Statements of Income 4
Three months ended September 30, 2001 and 2000
Consolidated Statements of Income 5
Nine months ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows 6
Nine months ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 29
About Market Risk
PART 2 OTHER INFORMATION
- ------------------------------
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES
2
Item 1. Financial Statements
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
September 30, December 31,
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(in thousands, except share data) 2001 2000
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Assets:
Cash and due from banks $ 23,618 $ 19,099
Federal funds sold 106,635 54,015
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Cash and Cash Equivalents 130,253 73,114
- -----------------------------------------------------------------------------------------------------------
Interest bearing deposits with banks 3,785 591
Securities available for sale 687,620 564,938
Investment securities (market value of $99,845 in 2001 and
$108,560 in 2000) 98,773 110,700
Loans 926,205 818,289
Less: Allowance for loan losses (12,161) (10,934)
- -----------------------------------------------------------------------------------------------------------
Loans, net 914,044 807,355
Bank premises and equipment, net 10,585 9,428
Other real estate 2,698 2,041
Other assets 51,963 51,145
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Total Assets $ 1,899,721 $ 1,619,312
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Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 103,521 $ 102,718
Interest bearing 965,106 847,600
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Total Deposits 1,068,627 950,318
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Borrowed funds
Securities sold under agreements to repurchase 10,000 10,000
Federal Home Loan Bank advances 665,337 532,768
Obligation for Employee Stock Ownership Plan (ESOP) 900 1,200
Other 1,222 1,255
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Total Borrowed Funds 677,459 545,223
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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 21,921 19,034
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Total Liabilities $ 1,800,507 $ 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 8,214,468 in 2001 and 7,617,214 shares in 2000 54,342 46,881
Surplus 2,205 2,205
Undivided profits 40,125 34,963
Treasury stock, at cost: 172,000 shares (3,030) (3,030)
Unallocated ESOP shares (900) (1,200)
Accumulated other comprehensive income (loss) 6,472 (1,582)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 99,214 78,237
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Total Liabilities and Stockholders' Equity $ 1,899,721 $ 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
September 30,
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(in thousands, except per share amounts) 2001 2000
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INTEREST INCOME:
Interest and fees on loans $17,708 $16,684
Interest on deposits with banks 59 18
Interest on securities available for sale 10,138 7,444
Interest on investment securities:
Taxable 1,014 1,150
Exempt from Federal income tax 516 421
Interest on Federal funds sold 860 790
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Total Interest Income 30,295 26,507
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INTEREST EXPENSE:
Interest on savings account deposits 2,413 2,064
Interest on certificates of deposit of $100,000 or more 1,831 2,032
Interest on other time deposits 7,116 6,436
Interest on borrowed funds 9,253 5,372
Interest on trust preferred securities 775 622
- ---------------------------------------------------------------------------------------------------
Total Interest Expense 21,388 16,526
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Net Interest Income 8,907 9,981
Less provision for loan losses 825 1,200
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Net Interest Income After Provision for Loan Losses 8,082 8,781
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NON-INTEREST INCOME:
Service charges on deposit accounts 492 380
Securities gains, net 1,011 9
Other non-interest income 760 477
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Total Non-Interest Income 2,263 866
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NON-INTEREST EXPENSE:
Salaries and employee benefits 3,746 2,969
Occupancy expense, net 711 644
Equipment expense 466 471
Other non-interest expense 2,100 1,761
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Total Non-Interest Expense 7,023 5,845
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Income before income tax expense 3,322 3,802
Income tax expense 831 1,110
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Net Income $ 2,491 $ 2,692
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EARNINGS PER SHARE:
Basic $ 0.33 $ 0.37
Diluted $ 0.32 $ 0.37
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Weighted average shares outstanding:
Basic 7,648 7,349
Diluted 7,703 7,366
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See Accompanying Notes to Unaudited Consolidated Financial Statements
4
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Nine Months Ended
September 30,
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(in thousands, except per share amounts) 2001 2000
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INTEREST INCOME:
Interest and fees on loans $52,651 $46,667
Interest on deposits with banks 147 54
Interest on securities available for sale 29,795 18,902
Interest on investment securities:
Taxable 3,243 3,518
Exempt from Federal income tax 1,449 1,194
Interest on Federal funds sold 2,368 1,552
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Total Interest Income 89,653 71,887
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INTEREST EXPENSE:
Interest on savings account deposits 7,328 5,502
Interest on certificates of deposit of $100,000 or more 5,958 4,704
Interest on other time deposits 21,126 17,831
Interest on borrowed funds 26,172 14,492
Interest on trust preferred securities 2,177 1,186
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Total Interest Expense 62,761 43,715
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Net Interest Income 26,892 28,172
Less provision for loan losses 2,400 2,900
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Net Interest Income After Provision for Loan Losses 24,492 25,272
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NON-INTEREST INCOME:
Service charges on deposit accounts 1,372 1,141
Securities gains, net 2,139 4
Other non-interest income 2,232 1,346
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Total Non-Interest Income 5,743 2,491
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NON-INTEREST EXPENSE:
Salaries and employee benefits 11,031 8,625
Occupancy expense, net 2,032 1,876
Equipment expense 1,475 1,415
Other non-interest expense 5,432 4,960
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Total Non-Interest Expense 19,970 16,876
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Income before income tax expense 10,265 10,887
Income tax expense 2,646 3,170
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Net Income $ 7,619 $ 7,717
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EARNINGS PER SHARE:
Basic $ 1.02 $ 1.12
Diluted $ 1.01 $ 1.11
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Weighted average shares outstanding:
Basic 7,473 6,912
Diluted 7,542 6,929
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
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(in thousands) 2001 2000
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Cash Flows from Operating Activities:
Net Income $ 7,619 $ 7,717
Adjustments:
Provision for loan losses 2,400 2,900
Depreciation 1,153 1,122
ESOP fair value adjustment 16 (67)
Amortization and accretion 259 205
Gains on sales of securities available for sale (2,139) (4)
Loss on sale of other real estate 37 16
Writedown of other real estate 563 599
Increase in other assets (5,156) (6,623)
Increase in other liabilities 2,887 6,665
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Net Cash Provided by Operating Activities 7,639 12,530
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Cash Flows From Investing Activities:
Net increase in interest bearing deposits with banks (3,194) (369)
Purchase of securities available for sale (648,193) (188,280)
Maturities, calls, and paydowns of securities available for sale 292,304 28,160
Proceeds from sales of securities available for sale 247,490 47,342
Proceeds from maturities and paydowns of investment
Securities 26,739 4,886
Purchase of investment securities (14,822) (5,478)
Net increase in loans (110,556) (122,045)
Expenditures for bank premises and equipment (2,311) (914)
Proceeds from sale of other real estate 210 265
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Net Cash Used by Investing Activities (212,333) (236,433)
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Cash Flows from Financing Activities:
Net increase in non-interest bearing demand,
Money market, and savings deposits 65,398 61,373
Net increase in certificates of deposit 52,911 78,239
Net increase in borrowed funds 132,236 94,276
Proceeds from issuance of trust preferred securities 6,000 15,000
Proceeds from issuance of common stock 7,445 6,887
Decrease in unallocated ESOP shares 300 300
Dividends paid (2,457) (2,096)
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Net Cash Provided by Financing Activities 261,833 253,979
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Net increase in cash and cash equivalents 57,139 30,076
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 $ 130,253 $ 55,693
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Supplemental Disclosure of Cash Flow Information:
Cash paid during period for:
Interest 61,197 39,642
Income taxes 2,923 3,912
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Supplemental Schedule of Non-cash Investing and Financing
Activities:
Transfers from loans to other real estate, net of charge offs 1,466 547
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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 Nine Months Ended September 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 the United States of America. 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 nine months ended
September 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 September 30, 2001 and 2000 were 7,648,000 and 7,349,000
respectively. For the diluted net income per share computation, potential common
stock of 55,000 and 17,000 are included for the three months ended September 30,
2001 and 2000, respectively.
Weighted average shares for the basic net income per share calculation for the
nine months ended September 30, 2001 and 2000 were 7,473,000 and 6,912,000
respectively. For the diluted net income per share computation, potential common
stock of 69,000 and 17,000 are included for the nine months ended September 30,
2001 and 2000, respectively.
8
3. Comprehensive Income
Below is a summary of comprehensive income for the three and nine months ended
September 30, 2001 and 2000.
Comprehensive Income Three Months Ended September 30
--------------------------------------------------------------------------------------------------
(in thousands) 2001 2000
--------------------------------------------------------------------------------------------------
Net Income $ 2,491 $ 2,692
--------------------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain (loss) for the period,
net of tax 7,770 1,653
Reclassification of realized net gain on sale of
securities available for sale, net of tax 667 6
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Holding gain (loss) arising during the period,
net of tax and reclassification 8,437 1,659
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Reclassification adjustment for realized net
gain, net of tax (667) (6)
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Other comprehensive income (loss)
for the period, net of tax 7,770 1,653
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Total comprehensive income $ 10,261 $ 4,345
==================================================================================================
Comprehensive Income Nine Months Ended September 30
--------------------------------------------------------------------------------------------------
(in thousands) 2001 2000
--------------------------------------------------------------------------------------------------
Net Income $ 7,619 $ 7,717
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Other comprehensive income
Net change in unrealized gain (loss) for the period,
net of tax 8,054 366
Reclassification of realized net gain (loss) on sale of
securities available for sale, net of tax 1,412 3
--------------------------------------------------------------------------------------------------
Holding gain (loss) arising during the period,
net of tax and reclassification 9,466 369
--------------------------------------------------------------------------------------------------
Reclassification adjustment for realized net
gain (loss), net of tax (1,412) (3)
--------------------------------------------------------------------------------------------------
Other comprehensive income (loss)
for the period, net of tax 8,054 366
--------------------------------------------------------------------------------------------------
Total comprehensive income $ 15,673 $ 8,083
==================================================================================================
9
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 September 30, 2001 were $1.9 billion, an increase
of $280.4 million or 17.3% compared to $1.6 billion at December 31, 2000. The
growth in YNB's asset base during the first nine 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 $374.2 million
purchased utilizing primarily Federal Home Loan Bank advances (Investment Growth
Strategy)
Federal funds sold
At September 30, 2001 Federal funds sold totaled $106.6 million compared to
$54.0 million at December 31, 2000. The increased level of Federal funds sold at
September 30, 2001 was primarily due to strong deposit and borrowed fund growth.
The average Federal funds sold balance for the first nine months of 2001 was
$74.9 million compared to $32.4 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.
10
Securities
The following tables present the amortized cost and market value of YNB's
securities portfolios as of September 30, 2001 and December 31, 2000.
Securities Available For Sale September 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 $ 93,276 $ 94,909 $ 173,608 $ 172,374
Mortgage-backed securities 509,140 517,836 338,377 336,798
Corporate obligations 39,628 39,257 26,713 27,091
All other securities 35,618 35,618 28,675 28,675
- ----------------------------------------------- ------------- ---------------- --------------- ----------------
Total $ 677,662 $ 687,620 $ 567,373 $ 564,938
=============================================== ============= ================ =============== ================
Investment Securities September 30, 2001 December 31, 2000
- ----------------------------------------------- --------------------------------- ----------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ----------------------------------------------- ---------------- ---------------- --------------- ------------
Obligations of other U.S.
government agencies $ 49,186 $ 49,527 $ 68,185 $ 66,439
Obligations of state and
political subdivisions 45,090 45,761 38,660 38,336
Mortgage-backed securities 4,497 4,557 3,855 3,785
- ----------------------------------------------- ------------- ---------------- --------------- ----------------
Total $ 98,773 $ 99,845 $ 110,700 $ 108,560
=============================================== ============= ================ =============== ================
Securities represented 41.4% of total assets at September 30, 2001 and 41.7% at
December 31, 2000. Total securities increased $110.8 million or 16.4% at
September 30, 2001 to $786.4 million compared to $675.6 million at year-end
2000. The available for sale portfolio represented 87.4% of the total security
holdings of YNB at September 30, 2001, compared to 83.6% at year-end 2000.
Net unrealized gain, net of tax effect, was $6.5 million as reported in
accumulated other comprehensive income (loss) in Stockholders' Equity at
September 30, 2001, and $1.6 million net unrealized loss reported at December
31, 2000. The change from a net unrealized loss to a net unrealized gain is
primarily due to the changes in interest rates from December 31, 2000 to
September 30, 2001.
11
Securities available for sale increased $122.7 million or 21.7% at September 30,
2001 when compared to the December 31, 2000 balance of $564.9 million. U.S.
Treasury securities and obligations of other U.S. government agencies decreased
$77.5 million in the first nine months 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. Mortgage-backed securities, including
collateralized mortgage obligations (CMOs), increased $181.0 million. Fixed rate
mortgage backed securities, including fixed rate CMOs increased $311.2 million.
Offsetting this increase was a decline of $84.6 million in floating rate CMOs
due to sales and paydowns and a decline of $45.6 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 a determination, as part of
the overall risk management process of YNB, that there was a reduced need for
adjustable rate investments.
Investment securities decreased $11.9 million to $98.8 million at September 30,
2001 from $110.7 million at December 31, 2000. The decrease was due to a $19.0
million decline in callable agency bonds, partially offset by a $6.4 million
increase in tax-free obligations of state and political subdivisions and
$700,000 increase in mortgage backed securities.
The Investment Growth Strategy securities increased $34.1 million over the
year-end 2000 level. The percentage of the Investment Growth Strategy portfolio
represented by fixed rate securities and adjustable or floating rate securities,
respectively, was 88.7% and 11.3% at September 30, 2001 and 66.2% and 33.8% 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 percentage of fixed rate mortgage backed securities
in the Investment Growth Strategy as part of the overall risk management process
of YNB.
12
Loans
Total loans increased $107.9 million or 13.2% to $926.2 million at September 30,
2001 from $818.3 million at December 31, 2000. YNB's loan portfolio represented
48.8% of total assets at September 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, and the lower interest rate environment, has resulted in
comparatively lower yields on new and established lending relationships. In
addition, borrowers' concerns over the economy and real estate prices 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 September 30, 2001.
Loan Portfolio Composition
- ---------------------------------------------------------------------------------------------------
(in thousands) 9/30/01 12/31/00 Change % change
- ---------------------------------------------------------------------------------------------------
Commercial real estate
Owner occupied $ 140,591 $ 135,234 $ 5,357 4.0%
Investor occupied 238,771 198,184 40,587 20.5
Construction and development 82,097 93,432 (11,335) 12.1
- ---------------------------------------------------------------------------------------------------
461,459 426,850 34,609 8.1
Residential
Multi-family 25,020 27,800 (2,780) 10.0
1- 4 family 100,304 92,876 7,428 8.0
- ---------------------------------------------------------------------------------------------------
125,324 120,676 4,648 3.9
Commercial and industrial
Term 103,366 116,995 (13,629) 11.6
Line of credit 151,892 72,217 79,675 110.3
Demand 952 1,389 (437) 31.5
- ---------------------------------------------------------------------------------------------------
256,210 190,601 65,609 34.4
Consumer
Home equity 55,063 50,809 4,254 8.4
Installment 20,593 22,428 (1,835) 8.2
Other 7,556 6,925 631 9.1
- ---------------------------------------------------------------------------------------------------
83,212 80,162 3,050 3.8
===================================================================================================
Total loans $ 926,205 $ 818,289 $107,916 13.2%
===================================================================================================
Commercial real estate loans include owner and investor occupied properties and
construction and development loans. Commercial real estate loans accounted for
49.8% of YNB's total loan portfolio at September 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
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 $34.6 million or 8.1% in the first nine months of 2001.
The majority of the growth was in investor-occupied commercial real estate
loans. Growth in commercial real estate loans accounted for 32.1% of the total
loan growth for the first nine months of 2001.
13
Residential loans include multi-family and 1-4 family loans. The residential 1-4
family loans include mortgages of $100.3 million which represent 80.0% 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 increased $4.6 million or 3.9% primarily due to an increase in 1-4 family
loans partially offset by a decline in multi-family residential loans. 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
$65.6 million or 34.4% to $256.2 million at September 30, 2001 from $190.6
million at December 31, 2000. The reason for the increase was higher balances of
business lines of credit from both new loan relationships and increased activity
from existing borrowers. Growth in commercial and industrial loans accounted for
60.8% of the total loan growth for the first nine months of 2001.
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 $3.1 million or 3.8% to $83.2 million at September 30, 2001 from $80.2
million at December 31, 2000. The increase was caused by higher home equity
loans and to a lesser extent higher other consumer 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.
14
Deposit liabilities
The following table provides information concerning YNB's deposit base at
September 30, 2001 and December 31, 2000.
Deposits
- -----------------------------------------------------------------------------------------------
(in thousands) 9/30/01 12/31/00 Change % Change
- -----------------------------------------------------------------------------------------------
Non-interest bearing demand
Deposits $ 103,521 $ 102,718 $ 803 0.8%
Interest bearing demand deposits 93,146 77,110 16,036 20.8
Money market deposits 173,332 128,489 44,843 34.9
Savings deposits 77,297 73,588 3,709 5.0
Certificates of deposit of $100,000
or more 139,472 131,011 8,461 6.5
Other time deposits 481,859 437,402 44,457 10.2
- -----------------------------------------------------------------------------------------------
Total $1,068,627 $ 950,318 $ 118,309 12.4%
===============================================================================================
YNB's deposit base is the principal source of funds supporting interest-earning
assets. Total deposits increased $118.3 million or 12.4% to $1.1 billion at
September 30, 2001 compared to $950.3 million at December 31, 2000. The growth
in YNB's deposit base in 2001 was primarily the result of competitive pricing of
certificates of deposit to promote new branches, fund loan growth and improve
liquidity. In addition, deposits increased as a result of aggressive marketing
of core deposit accounts.
Total certificates of deposit, which include certificates of deposit of $100,000
or over and other time deposits decreased $52.9 million or 9.3% to $621.3
million at September 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 based service. Management has pursued a strategy to run off
higher costing certificates of deposit generated through this service without
negatively impacting liquidity. At September 30, 2001, YNB had approximately
$87.4 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 reach; the deposits
obtained through that service generally result in higher interest expense
relative to other deposits and no opportunity to cross sell other YNB products
and services. 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. Certificates of deposit
continue to be an important source of funding for YNB in 2001, representing
58.1% of the total deposits at September 30, 2001 compared to 59.8% at year end
2000. 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. YNB competitively priced certificates of deposit
in the first nine 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.
15
Non-interest bearing demand deposits increased $803,000 or 0.8% to $103.5
million at September 30, 2001 compared to $102.7 million at December 31, 2000.
On an average basis, third quarter 2001 average non-interest bearing demand
deposits totaled $112.6 million compared to $99.3 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 $16.0 million or 20.8% to $93.1
million at September 30, 2001 from $77.1 million at year-end 2000. In addition,
money market balances increased $44.8 million or 34.9% to $173.3 million at
September 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 $3.7 million or
5.0% to $77.3 million at September 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
branches 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 core 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 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 $677.5 million at September 30, 2001, an increase of
$132.2 million or 24.3% when compared to $545.3 million at December 31, 2000.
The increase in borrowed funds resulted from increased Federal Home Loan Bank
(FHLB) 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 does not anticipate
any call activity if interest rates remain at or near the levels at September
30, 2001. This means that if rates continue to decline, the cost of existing
callable borrowed funds will not decline.
16
YNB had FHLB advances outstanding of $665.3 million at September 30, 2001, an
increase of $132.5 million or 24.9% when compared to $532.8 million at December
31, 2000. YNB utilized callable FHLB advances to fund both Investment Growth
Strategy purchases as well as other earning assets. At September 30, 2001
callable advances totaled $615.0 million or 91.1% 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 September 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 September 30, 2001 borrowed funds included $0.9 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 September 30, 2001, $30.9 million or 95.1% of the $32.5 million in Trust
Preferred Securities outstanding qualify as Tier I capital. The remaining $1.6
million is treated as Tier II capital. Management anticipates that all Trust
preferred securities outstanding at September 30, 2001 would qualify as Tier I
capital within the next twelve months.
17
Equity Capital
On August 22, 2001, YNB completed a private equity placement in which the
Company issued and sold 596,654 shares of common stock for an aggregate purchase
price of approximately $7.8 million. The proceeds will be used primarily to
support future growth including strategic geographic expansion.
Stockholders' equity at September 30, 2001 totaled $99.2 million, an increase of
$21.0 million or 26.8%, compared to $78.2 million at December 31, 2000. This net
increase resulted from the following factors:
(i) YNB earned net income of $7.6 million and paid cash dividends of $2.5
million for the nine months ended September 30, 2001.
(ii) The net unrealized gain on securities available for sale was $6.5
million at September 30, 2001 compared to a net unrealized loss of $1.6
million at December 31, 2000. This change from a net unrealized loss to
a net unrealized gain resulted in a $8.1 million increase in
stockholders' equity.
(iii) YNB received $7.5 million in net proceeds from the recently completed
private equity offering, $6,000 in connection with the exercise of
stock options by directors and employees and a $16,000 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 $300,000 to $900,000 at September
30, 2001 from $1.2 million at December 31, 2000 resulted in an increase
of $300,000 increase 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 09/30/01 12/31/00 09/30/01 12/31/00
- ------------------------------------------------------------------------------------------------
Risk-based capital:
Tier 1:
Holding Company $ 123,647 $ 106,310 10.8% 10.6%
Bank 120,786 104,633 10.6 10.4
- ------------------------------------------------------------------------------------------------
Total:
Holding Company 137,395 117,244 12.1 11.6
Bank 132,947 115,567 11.7 11.5
- ------------------------------------------------------------------------------------------------
Tier 1 leverage:
Holding Company 123,647 106,310 7.1 8.1
Bank 120,786 104,633 6.4 8.0
- ------------------------------------------------------------------------------------------------
18
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 September 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.
Credit Quality
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type as of September 30, 2001 and December 31, 2000.
Nonperforming Assets
- -------------------------------------------------------------------------------------
(in thousands) 09/30/01 12/31/00
- -------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $ 769 $ 2,075
Residential 1,211 2,423
Commercial and industrial 1,662 851
Consumer 101 453
- -------------------------------------------------------------------------------------
Total 3,743 5,802
- -------------------------------------------------------------------------------------
Restructured loans 775 532
- -------------------------------------------------------------------------------------
Loans 90 days or more past due:
Residential 706 526
Consumer 302 173
- -------------------------------------------------------------------------------------
Total 1,008 699
- -------------------------------------------------------------------------------------
Total nonperforming loans 5,526 7,033
- -------------------------------------------------------------------------------------
Other real estate 2,698 2,041
- -------------------------------------------------------------------------------------
Total nonperforming assets $ 8,224 $ 9,074
- -------------------------------------------------------------------------------------
Allowance for loan losses to total loans, end of period 1.31% 1.34%
Allowance for loan losses to nonperforming loans, end of
period 220.07% 155.47%
=====================================================================================
At September 30, 2001, nonperforming loans, which are loans 90 days or more past
due, restructured loans and nonaccrual loans, totaled $5.5 million, a $1.5
million or 21.4% 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 September 30, 2001 totaled $2.7 million, a $657,000 or
32.2% 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.
19
Nonperforming assets at September 30, 2001 totaled $8.2 million, a $850,000 or
9.4% decrease from the $9.1 million level at December 31, 2000. Total
nonperforming assets as a percentage of total assets were 0.43% at September 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.
Allowance for Loan Losses
The allowance for loan losses totaled $12.2 million at September 30, 2001, an
increase of $1.3 million from the $10.9 million at year-end 2000. The provision
for loan losses for the first nine months of 2001 was $2.4 million compared to
$2.9 million for the same period of 2000. Gross charge-offs were $1.5 million
for the first nine months of 2001 compared to $1.7 million for the same period
in 2000. Gross recoveries were $371,000 for the first nine months of 2001
compared to $113,000 for the same period in 2000. Annualized net charge-offs as
a percentage of average loans were 0.18% for the first nine months of 2001 and
0.30% for the same nine 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 1.31% at September 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 220.07% at September 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 $7.6 million for the nine months ended September 30,
2001, a decrease of $98,000 or 1.3% compared to the $7.7 million for the same
period in 2000. The decrease in net income for the nine months of 2001 compared
to the same period in 2000 is attributable to lower net interest income and
increased non-interest expenses partially offset by higher non-interest income.
Basic earnings per share for the nine months ended September 30, 2001 decreased
$0.10 or 8.9% to $1.02 compared to $1.12 for the same period in 2000. Diluted
earnings per share for the nine months ended September 30, 2001 decreased $0.10
or 9.0% to $1.01 compared to $1.11 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 both last year's and this year's private common
equity placement and lower net income.
20
On a quarterly basis, net income for the third quarter of 2001 was $2.5 million,
a decrease of $201,000 or 7.5% compared to the net income of $2.7 million 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 third quarter of 2001 was $0.33, a
decrease of $0.04 or 10.8% when compared to the same period in 2000. Diluted
earnings per share declined $0.05 or 13.5% to $0.32 for the third quarter of
2001 compared to $0.37 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.
Net Interest Income
YNB's net interest income for the first nine months of 2001 was $26.9 million, a
decrease of $1.3 million or 4.5% from the same period in 2000 principally
because interest expense increased by a greater amount than interest income. For
the first nine months of 2001, interest income increased by $17.8 million
compared to the same period in 2000 while interest expense increased by $19.0
million compared to the same period in 2000. Although loan and security balances
increased during the first nine 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 nine months of 2001
was 2.20%, a 101 basis point or 31.5% decline compared to 3.21% 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 nine 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 decline, the yield
on earning assets declined 85 basis points, while over the same period the cost
of interest bearing liabilities increased 4 basis points. The primary cause for
the increased cost of liabilities related to costs associated with certificates
of deposit of under $100,000. Since certificates of deposit do not reprice until
the maturity date, these costs have not declined as quickly as earning asset
rates. Management believes as certificates of deposit mature and reprice to
current market levels, throughout the remainder of 2001 and into 2002, interest
expenses on these deposits will decline. The result should be an improving net
interest margin, however, further reductions in interest rates will impede the
improvement in YNB's net interest margin.
On a quarterly basis, net interest income was $8.9 million, a decrease of $1.1
million or 10.8% when compared to the third quarter of 2000. The net interest
margin (tax equivalent basis) for the three months ended September 30, 2001 was
2.06%, a 111 basis point or 35.0% decline from the same period in 2000. The
third quarter of 2000 included an adjustment of $412,000 relating to FHLB
dividends that increased the quarterly net interest margin by 13 basis points.
The decline in the net interest margin was due to a 142 basis point drop in the
yield on earning assets to 6.80% for the quarter compared to 8.22% for the same
period in 2000. Over this same time period, the cost of interest bearing
liabilities decreased 46 basis points to 5.22% for the quarter compared to 5.68%
for the same period in 2000.
21
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 September 30, 2001 were approximately $374.2
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
typically 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.
Interest Income
For the first nine months of 2001, total interest income was $89.7 million, an
increase of $17.8 million or 24.7% when compared to interest income of $71.9
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 $161.8 million or 23.1% while the yield
on loans decreased 73 basis points to 8.13% from 8.86%. The lower loan yield
reflected the lower overall interest rate environment in the first nine months
of 2001 when compared to the same period in 2000. Interest and fees on loans for
the nine months ended September 30, 2001 increased $6.0 million or 12.8% to
$52.7 million from $46.7 million for the same period in 2000. Average securities
for the nine months ended September 30, 2001 increased $268.1 million or 57.7%
to $732.5 million when compared to the $464.4 million for the same period in
2000. Over the same period, the yield on the securities portfolio decreased 50
basis points to 6.28% from 6.78%. The increase in the average balance, partially
offset by the lower yield, resulted in interest on securities increasing $10.9
million or 46.0% to $34.5 million for the nine months ended September 30, 2001
compared to $23.6 million for the same period in 2000. Overall, the yield on
YNB's interest earning asset portfolio decreased 85 basis points to 7.14% for
the nine months ended September 30, 2001 from the 7.99% for the same period in
2000.
For the third quarter of 2001, total interest income was $30.3 million an
increase of $3.8 million or 14.3% when compared to the $26.5 million for the
third 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 third quarter of 2001 was 6.80%, a 142
basis point decline from the 8.22% 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 nine months of 2001 compared to the same period in
2000.
Interest Expense
Total interest expense increased $19.1 million or 43.6% to $62.8 million for the
first nine months of 2001 compared to $43.7 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, partially offset
by lower rates paid on borrowed funds. Average interest bearing liabilities were
$1.5 billion for the nine months ended September 30, 2001 reflecting an increase
of $460.4 million or 42.6% when compared to an average balance of $1.1 billion
for the same period in 2000. The average rate paid on interest bearing
liabilities for the nine months ended September 30, 2001 increased 4 basis
points to 5.43% from 5.39% for the same period of 2000.
22
Interest on other time deposits increased $3.3 million to $21.1 million for the
nine months ended September 30, 2001 from $17.8 million for the same period in
2000. This increase was caused by both an increase of $51.4 million in the
average outstanding balance to $452.6 million for the nine months ended
September 30, 2001, when compared to the outstanding average balance of $401.2
million for the same period in 2000, and an increase of 29 basis points in the
cost to 6.22% from 5.93% for the same periods as described above. Interest
expense on other time deposits accounted for 33.7% of total interest expense for
the nine months ended September 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, it is anticipated that the reduction in costs will be
significant over the next six months.
Interest on certificates of deposit (CDs) of $100,000 or more increased $1.3
million or 26.7% to $6.0 million for the nine months ended September 30, 2001
from $4.7 million for the same period in 2000. The increase was caused by an
increase in the average outstanding balance of $27.1 million or 27.2% to $126.7
million for the nine months ended September 30, 2001 when compared to the
outstanding average balance of $99.6 million for the same period in 2000. The
cost of CDs of $100,000 or more decreased 3 basis points to 6.27% for the first
nine months of 2001 from 6.30% for the same period in 2000. Management
anticipates that as these certificates of deposit mature the overall costs
should decline. To the extent that rates continue to decline, the cost of
certificates of deposit will continue to lag the decrease in rates.
Interest expense on borrowed funds increased $11.7 million or 80.6% to $26.2
million for the nine months of 2001 when compared to $14.5 million for the same
period in 2000. The increased expense was primarily caused by a $291.2 million
or 85.8% increase in the average balance outstanding in the first nine months of
2001 to $630.5 million when compared to the $339.3 million for the same period
in 2000. The rate paid on borrowed funds decreased 17 basis points for the nine
months ended September 30, 2001 to 5.53% from the 5.70% 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 without a prepayment penalty. 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 $1.8 million or 33.2% to $7.3 million for the first nine months of
2001 when compared to the $5.5 million for the same period in 2000. The primary
cause for this increase was an increase in the average balance of $77.1 million
or 34.5% to $300.7 million for the nine months ended September 30, 2001 from
$223.6 million for the same period in 2000. The growth experienced has been
primarily in Premier Money Market balances. The cost of all funds in this
category decreased 3 basis points to 3.25% for the nine months ended September
30, 2001 compared to 3.28% for the same period in 2000. The primary cause for
the decline in cost of these deposit types has been the overall decline in
interest rates. 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.
23
For the third quarter of 2001, total interest expense was $21.4 million, an
increase of $4.9 million or 29.4% when compared to the $16.5 million for the
same period in 2000. The overall cost of interest bearing liabilities decreased
46 basis points to 5.22% for the third quarter of 2001 compared to 5.68% for the
third quarter of 2000. The increase in interest expense was due to the higher
average balance of interest bearing liabilities offset by lower rates.
While YNB seeks to fund asset growth with lower costing savings, money market,
interest bearing checking and non-interest bearing demand deposits, this is not
generally possible, as asset growth rates can exceed the growth rate in these
deposit types. To attract lower costing 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 costing 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 nine months ended September 30, 2001 was $2.4
million, a $500,000 decrease compared to the $2.9 million provision recorded for
the same period of 2000. The decrease in the provision for the first nine months
of 2001 was primarily due to lower net charge-offs, 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 September 30, 2001 the provision for loan losses was
$825,000, a $375,000 decrease from the $1.2 million 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 first nine months of 2001 was $5.7 million, an
increase of $3.2 million or 130.6% over non-interest income of $2.5 million for
the same period in 2000. The increase was due principally to net securities
gains and increased earnings on bank owned life insurance.
Service charges on deposit accounts increased $231,000 or 20.2% to $1.4 million
for the nine months ended September 30, 2001 compared to $1.1 million for the
same period in 2000. Service charge income has primarily increased in the first
nine months of 2001 due to increased income from overdraft fees. Management
remains focused on increasing the level of service charges collected on deposit
accounts.
24
Net gains on sale of securities totaled $2.1 million in the first nine months of
2001 compared to $4,000 in net gains on sale of securities for the same period
in 2000. The gains resulted primarily from the sale of both higher coupon fixed
rate mortgage-backed securities, callable bonds and agency debentures 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.
Other non-interest income increased $0.9 million or 65.8% to $2.2 million for
the nine months ended September 30, 2001 from $1.3 million for the same period
in 2000. The primary cause for the increase was a $717,000 or 116.9% increase in
the earnings on bank owned life insurance. This increase resulted from the
purchase of $15,000,000 in additional bank owned life insurance 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, which totaled $1.3 million
for the first nine months of 2001 as compared to $614,000 for the same period in
2000. This income represented 58.2% and 45.6% of total other non-interest income
for the first nine months of 2001 and 2000, respectively.
For the three months ended September 30, 2001 total non-interest income
increased $1.4 million or 161.3% to $2.3 million from $866,000 for the same
period in 2000. The key factors accounting for this increase were a $1.0 million
increase in net gains on sale of securities and a $247,000 increase in income
derived from bank owned life insurance.
Non-interest income represented 6.0% of YNB's total revenue in the first nine
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. 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 $3.1 million or 18.3% to $20.0 million for
the first nine months of 2001 compared to $16.9 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 nine months of 2001 compared to 1.80% 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 nine months of 2001 was
61.19% compared to 55.04% 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.
25
Salaries and employee benefits increased $2.4 million or 27.9% to $11.0 million
for the first nine months of 2001 compared to $8.6 million for the same period
in 2000. Salary and benefits expense accounted for 55.2% of total non-interest
expenses for the first nine months of 2001 compared to 51.1% for the same period
in 2000. Full time equivalent employees increased to 284 at September 30, 2001
compared to 258 at September 30, 2000. Salary expense increased $1.5 million or
22.3% reflecting increased staffing levels throughout YNB as the organization
continues to grow and normal salary increases. Benefit expense increased
$886,000 or 49.1% 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 nine months of 2001 accounted for 77.8% of the total increase in
non-interest expense when the first nine months of 2001 is compared to the same
period in 2000.
Occupancy expense for the first nine months of 2001 was $2.0 million, an
increase of $156,000 or 8.3% compared to $1.9 million for the same period in
2000. Total rent expense on leased properties increased $175,000 and was the
primary reason for the increase in occupancy expense. The rent expense increase
resulted primarily from the leases on the new branches in Flemington, Lawrence,
and Bordentown, 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 $60,000 or 4.2% to $1.5 million for the first nine
months of 2001 from $1.4 million 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 $472,000 or 9.5% to $5.4 million for the
first nine months of 2001 when compared to the $5.0 million for the same period
in 2000. The modest growth rate in other non-interest expenses experienced in
the first nine 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 September 30, 2001 total non-interest expense
increased $1.2 million or 20.2% to $7.0 million from $5.8 million for the same
period in 2000. The primary factors for this increase was a $777,000 or 26.2%
increase in salary and benefit expense to $3.7 million for the three months
ended September 30, 2001 when compared to the $3.0 million for the same period
in 2000. Another factor was a $339,000 or 19.3% increase in other non-interest
expense to $2.1 million for the three months ended September 30, 2001 compared
to $1.8 million for the same period in 2000. The primary cause for this increase
was a $161,000 increase in other real estate expenses. YNB also had a modest
increase in occupancy expense.
26
Income Tax Expense
The effective income tax rate for the nine months ended September 30, 2001 was
25.8% 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 nine months ended September 30, 2001
was $2.6 million, a decrease of $524,000 from the $3.2 million for the same
period in 2000. The decrease in tax expense resulted from lower taxable income
and a lower effective tax rate.
The effective tax rate for the three months ended September 30, 3001 was 25.0%
compared to 29.2% for the same period in 2000. Total income tax expense for the
three months ended September 30, 2001 was $831,000, a decrease of $279,000 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 modest
decrease in risk to lower rates (-200 basis points) at September 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 -7.2% 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 6.0% compared to 5.0% at year-end 2000. The cumulative
one-year gap shifted to a negative $28.0 million or 1.5% of total assets at
September 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 $175.4 million. This shift in
the gap was the result of strategies implemented to reduce the positive gap.
This strategy involved decreasing floating rate investments and increasing
floating rate borrowed funds and shorter-term certificates of deposit.
Management's current focus is to maintain a negative gap in the near term.
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. Management seeks to maintain this variance within a negative 3%
boundary.
27
At September 30, 2001, the EVPE changes by -2.14% for rate shifts of +200 and
- -3.70% 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
- -3.86% and -2.26% at September 30, 2000.
The primary causes for this risk to falling rates are primarily due to the
callable FHLB advances associated with the Investment Growth Strategy 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
On August 22, 2001 the registrant issued and sold 596,654 shares of common stock
for an aggregate purchase price of $7.8 million to a limited number of
accredited investors in a transaction exempt from registration pursuant to Rule
506 of the Securities Act of 1933. The company has agreed to file a registration
statement with the U.S. Securities and Exchange Commission covering the offer
and sale of the shares by the investors. YNB intends to use the net proceeds
from this private placement primarily to support the future growth, including
strategic geographic expansion.
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 (see Index to Exhibits)
(b) Reports on Form 8-K.
On August 23, 2001, the Company filed an 8-K dated August 23, 2001 on
the completion of a private equity offering.
On October 1, 2001, the Company filed an amended 8-K dated September
28, 2001 relating to changes in the net proceeds of the recently
completed private equity offering.
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: November 14, 2001 By:/s/ Stephen F. Carman
----------------- ------------------------
Stephen F. Carman
Secretary/Treasurer
32