UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended March 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES ACT OF 1934
For transition period from
Commission File Number: 0-26086
YARDVILLE NATIONAL BANCORP
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(Exact name of registrant as specified in its charter)
New Jersey 22-2670267
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2465 Kuser Road, Hamilton, New Jersey 08690
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(Address of principal executive offices)
(609) 585-5100
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former
fiscal year, if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of April 30, 2002, 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
March 31, 2002 and December 31, 2001
Consolidated Statements of Income 4
Three months ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows 5
Three months ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 24
About Market Risk
PART 2 OTHER INFORMATION
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Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES
2
Item 1. Financial Statements
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
March 31, December 31,
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(in thousands, except share data) 2002 2001
- -------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 21,281 $ 27,771
Federal funds sold 77,960 38,960
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Cash and Cash Equivalents 99,241 66,731
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Interest bearing deposits with banks 3,037 2,320
Securities available for sale 711,751 746,483
Investment securities (market value of $64,869 in 2002 and
$64,887 in 2001) 65,414 65,753
Loans 1,051,496 1,007,973
Less: Allowance for loan losses (14,046) (13,542)
- -------------------------------------------------------------------------------------------------
Loans, net 1,037,450 994,431
Bank premises and equipment, net 11,115 10,910
Other real estate 2,322 2,329
Other assets 56,878 54,432
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Total Assets $ 1,987,208 $ 1,943,389
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Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 114,129 $ 114,405
Interest bearing 1,022,436 978,285
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Total Deposits 1,136,565 1,092,690
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Borrowed funds
Securities sold under agreements to repurchase 10,000 10,000
Federal Home Loan Bank advances 695,006 695,008
Obligation for Employee Stock Ownership Plan (ESOP) 700 800
Other 1,306 1,305
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Total Borrowed Funds 707,012 707,113
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Company-obligated Mandatorily Redeemable Trust Preferred
Securities of Subsidiary Trust holding solely junior
Subordinated Debentures of the Company 32,500 32,500
Other liabilities 18,614 17,841
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Total Liabilities $ 1,894,691 $ 1,850,144
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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 8,214,568 shares in 2002 and 2001 54,337 54,334
Surplus 2,205 2,205
Undivided profits 42,785 40,175
Treasury stock, at cost: 172,000 shares (3,030) (3,030)
Unallocated ESOP shares (700) (800)
Accumulated other comprehensive (loss) income (3,080) 361
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Total Stockholders' Equity 92,517 93,245
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Total Liabilities and Stockholders' Equity $ 1,987,208 1,943,389
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
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(in thousands, except per share amounts) 2002 2001
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INTEREST INCOME:
Interest and fees on loans $17,569 $17,763
Interest on deposits with banks 16 19
Interest on securities available for sale 10,160 9,723
Interest on investment securities:
Taxable 263 1,150
Exempt from Federal income tax 582 462
Interest on Federal funds sold 302 747
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Total Interest Income 28,892 29,864
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INTEREST EXPENSE:
Interest on savings account deposits 2,784 2,562
Interest on certificates of deposit of $100,000 or more 1,385 2,129
Interest on other time deposits 4,633 6,963
Interest on borrowed funds 8,667 8,101
Interest on trust preferred securities 775 627
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Total Interest Expense 18,244 20,382
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Net Interest Income 10,648 9,482
Less provision for loan losses 550 925
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Net Interest Income After Provision for Loan Losses 10,098 8,557
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NON-INTEREST INCOME:
Service charges on deposit accounts 516 400
Securities gains, net 643 445
Bank owned life insurance 411 440
Other non-interest income 332 281
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Total Non-Interest Income 1,902 1,566
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NON-INTEREST EXPENSE:
Salaries and employee benefits 4,242 3,587
Occupancy expense, net 817 671
Equipment expense 544 510
Other non-interest expense 1,596 1,636
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Total Non-Interest Expense 7,199 6,404
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Income before income tax expense 4,801 3,719
Income tax expense 1,306 992
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Net Income $ 3,495 $ 2,727
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EARNINGS PER SHARE:
Basic $ 0.44 $ 0.37
Diluted $ 0.43 $ 0.37
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Weighted average shares outstanding:
Basic 8,012 7,384
Diluted 8,092 7,442
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
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(in thousands) 2002 2001
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Cash Flows from Operating Activities:
Net Income $ 3,495 $ 2,727
Adjustments:
Provision for loan losses 550 925
Depreciation 427 399
ESOP fair value adjustment 2 5
Amortization and accretion 803 (453)
Gains on sales of securities available for sale (643) (445)
Loss on sale of other real estate 7 --
Writedown of other real estate -- 12
(Decrease) increase in other assets (593) 3,130
Increase in other liabilities 776 879
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Net Cash Provided by Operating Activities 4,824 7,179
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Cash Flows From Investing Activities:
Net increase in interest bearing deposits with banks (717) (1,191)
Purchase of securities available for sale (156,963) (229,533)
Maturities, calls, and paydowns of securities available for sale 65,244 146,114
Proceeds from sales of securities available for sale 121,009 59,243
Proceeds from maturities and paydowns of investment
securities 724 11,683
Purchase of investment securities (396) (2,000)
Net increase in loans (43,569) (27,456)
Expenditures for bank premises and equipment (635) (722)
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Net Cash Used by Investing Activities (15,303) (43,862)
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Cash Flows from Financing Activities:
Net increase in non-interest bearing demand,
money market, and savings deposits 62,149 9,016
Net (decrease) increase in certificates of deposit (18,274) 6,924
Net (decrease) increase in borrowed funds (101) 68,977
Proceeds from issuance of trust preferred securities -- 6,000
Proceeds from issuance of common stock -- 6
Decrease in unallocated ESOP shares 100 100
Dividends paid (885) (819)
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Net Cash Provided by Financing Activities 42,989 90,204
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Net increase in cash and cash equivalents 32,510 53,521
Cash and cash equivalents as of beginning of period 66,731 73,114
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Cash and Cash Equivalents as of End of Period $ 99,241 $ 126,635
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Supplemental Disclosure of Cash Flow Information:
Cash paid during period for:
Interest 19,852 17,075
Income taxes -- 1,500
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Supplemental Schedule of Non-cash Investing and Financing
Activities:
Transfers from loans to other real estate, net of charge offs -- 62
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See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
Yardville National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2002
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation:
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America as
applied to the banking industry. 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 reported revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and other real estate, management
obtains independent appraisals for significant properties.
The consolidated financial data as of and for the three months ended March 31,
2002 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, 2002.
Consolidation
The consolidated financial statements include the accounts of Yardville National
Bancorp (the "Holding Company") and its subsidiaries, Yardville Capital Trust
("Trust I"), Yardville Capital Trust II ("Trust II"), Yardville Capital Trust
III ("Trust III") and The Yardville National Bank (the "Bank"), and the Bank's
wholly owned subsidiaries (collectively "YNB").
Allowance for Loan Losses
The provision for loan losses charged to operating expense is determined by
management and based upon a periodic review of the loan portfolio, past
experience, the economy, and other factors that may affect a borrower's ability
to repay the loan. This provision is based on management's estimates, and actual
losses may vary from these estimates. These estimates are reviewed and
adjustments, as they become necessary, are reported in the periods in which they
become known. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions, particularly in New Jersey. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses and the valuation of other real estate.
Such agencies may require the Bank to recognize additions to the allowance or
adjustments to the carrying value of other real estate based on their judgement
about information available at the time of their examination.
6
Company-Obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On March 28, 2001, Trust III, a statutory business trust and a wholly owned
subsidiary of the Holding Company, issued $6,000,000 of 10.18% Trust Preferred
Securities in a private placement and $190,000 of Common Securities to the
Holding Company. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by Trust III to purchase $6,190,000 of 10.18% Subordinated
Debentures due June 8, 2031 from the Holding Company. The Trust exists for the
sole purpose of issuing Trust Preferred Securities and investing the proceeds in
Subordinated Debentures of the Holding Company. These Subordinated Debentures
constitute the sole assets of the Trust.
2. Earnings Per Share
Weighted average shares for the basic net income per share calculation for the
three months ended March 31, 2002 and 2001 were 8,012,000 and 7,384,000
respectively. For the diluted net income per share computation, potential common
stock of 80,000 and 58,000 are included for the three months ended March 31,
2002 and 2001, respectively.
3. Comprehensive Income
Below is a summary of comprehensive income for the three months ended March 31,
2002 and 2001.
Comprehensive Income Three Months Ended March 31,
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(in thousands) 2002 2001
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Net Income $ 3,495 $ 2,727
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Other comprehensive income
Net change in unrealized (loss) gain for the period,
net of tax (3,441) 1,900
Reclassification of realized net gain on sale of
securities available for sale, net of tax 424 326
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Holding (loss) gain arising during the period,
Net of tax and reclassification (3,017) 2,226
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Total comprehensive income $ 478 $ 4,953
==============================================================================================
7
4. Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 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."
SFAS No. 142 requires that after December 31, 2001, goodwill and any intangible
asset determined to have an indefinite useful life will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-SFAS No. 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 SFAS No. 142.
We were required to adopt SFAS No. 142 effective January 1, 2002. We currently
have no recorded goodwill or intangible assets and the initial adoption of SFAS
No. 142 did not have a significant impact on our consolidated financial
statements.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental
provisions of that Statement. The Statement is effective for fiscal years
beginning after December 15, 2001. The initial adoption of SFAS No. 144 did not
have a significant impact on our consolidated financial statements.
8
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES (YNB)
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This financial review presents management's discussion and analysis of the
financial condition and results of operations. It should be read in conjunction
with the 2001 Annual Report to stockholders and Form 10-K for the fiscal year
ended December 31, 2001 as well as with the unaudited consolidated financial
statements and the accompanying notes in this Form 10-Q.
This Form 10-Q report contains express and implied statements relating to the
future financial condition, results of operations, plans, objectives,
performance, and business of YNB, which are considered forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These include statements that relate to, among other things,
profitability, liquidity, loan loss reserve adequacy, plans for growth, interest
rate sensitivity, market risk, and financial and other goals. Actual results may
differ materially from those expected or implied as a result of certain risks
and uncertainties, including, but not limited to, changes in economic
conditions, interest rate fluctuations, continued levels of loan quality and
origination volume, competitive product and pricing pressures within YNB's
markets, continued relationships with major customers including sources for
loans and deposits, personal and corporate customers' bankruptcies, legal and
regulatory barriers and structure, inflation, and technological changes, as well
as other risks and uncertainties detailed from time to time in the filings of
YNB with the U.S. Securities and Exchange Commission.
Financial Condition
Assets
Total consolidated assets at March 31, 2002 were $1.99 billion, an increase of
$43.8 million or 2.3% compared to $1.94 billion at December 31, 2001. The growth
in YNB's asset base during the first three months of 2002 was primarily due to
increases in loans and Federal funds sold partially offset by decreases in the
investment portfolio. YNB's strength as a commercial real estate and business
lender was again reflected in the first quarter results. By establishing its
niche as a strong commercial lender and expanding YNB's relationship banking
philosophy into new markets, such as Hunterdon County, YNB continues to
experience consistent asset growth.
Federal funds sold
At March 31, 2002 Federal funds sold totaled $78.0 million compared to $39.0
million at December 31, 2001. Federal funds sold are the primary source of on
balance sheet liquidity for YNB. The increased level of Federal funds sold at
March 31, 2002 was primarily due to deposit growth. The average Federal funds
sold balance for the first three months of 2002 was $73.9 million compared to
$54.2 million for the same period in 2001. Management has competitively
positioned YNB's deposit products to attract funds for loan growth and to
achieve the goal of enhancing YNB's liquidity profile.
9
Securities
The following tables present the amortized cost and market value of YNB's
securities portfolios as of March 31, 2002 and December 31, 2001.
Securities Available For Sale March 31, 2002 December 31, 2001
- ----------------------------------------------------------------------------- --------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
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U.S. Treasury securities and
obligations of other U.S.
government agencies $ 125,259 $ 123,759 $ 113,862 $ 113,861
Mortgage-backed securities 501,212 499,289 521,988 523,179
Corporate obligations 52,087 50,772 72,946 72,311
All other securities 37,931 37,931 37,132 37,132
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Total $ 716,489 $ 711,751 $ 745,928 $ 746,483
==============================================================================================================
Investment Securities March 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ 13,000 $12,778 $ 13,000 $ 13,066
Obligations of state and
political subdivisions 48,738 48,397 48,694 47,729
Mortgage-backed securities 3,676 3,694 4,059 4,092
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Total $ 65,414 $ 64,869 $ 65,753 $ 64,887
==============================================================================================================
Securities represented 39.1% of total assets at March 31, 2002 and 41.8% at
December 31, 2001. Total securities decreased $35.1 million or 4.3% at March 31,
2002 to $777.2 million compared to $812.2 million at year-end 2001. The
available for sale portfolio represented 91.6% of the total security holdings of
YNB at March 31, 2002, compared to 91.9% at year-end 2001.
At March 31, 2002 securities available for sale had a net unrealized loss, net
of tax effect, of $3.1 million as reported in accumulated other comprehensive
income (loss) in Stockholders' Equity, and a $361,000 net unrealized gain, net
of tax effect, reported at December 31, 2001. The change from a net unrealized
gain to a net unrealized loss is primarily due to volatility in the treasury
market and shifts in the yield curve.
Securities available for sale decreased $34.7 million or 4.7% to $711.8 million
at March 31, 2002 when compared to the December 31, 2001 balance of $746.5
million. The decline in securities available for sale is primarily the result of
decreases in mortgage-backed and corporate securities. To reduce longer-term
interest rate risk in the first quarter 30-year fixed rate mortgage-backed
securities were sold to reduce the average duration of the securities portfolio.
When interest rates rise the average life of mortgage-backed securities tend to
lengthen. The proceeds from the sales were used to purchase other
mortgage-related product with less extension risk and shorter term US agency
bonds. This action resulted in mortgage backed securities declining $23.9
million in the first quarter. The transactions described above will provide
consistent cash flows to invest in a projected higher interest rate environment
over the next two years. Corporate obligations declined $21.5 million primarily
due to the sale of a $25.0 million investment in a money market fund. Management
also began to shift its corporate bond holdings out of longer term fixed rate
bonds and into LIBOR based floating rate structures. Partially offsetting these
declines were increases in US Agency bonds.
10
Investment securities decreased $339,000 to $65.4 million at March 31, 2002 from
$65.8 million at December 31, 2001. The decrease was due to principal paydowns
on mortgage backed securities partially offset by an increase in tax-free
municipal bonds.
Management continues to use an investment leverage strategy (Investment Growth
Strategy) to increase net interest income by purchasing investments utilizing
borrowed funds. The Investment Growth Strategy securities decreased $11.7
million over the year-end 2001 level to $361.1 million. The percentage of the
Investment Growth Strategy represented by fixed rate securities and floating
rate securities, respectively, was 95.5% and 4.5%, respectively, at March 31,
2002. Management utilizes asset liability simulation models to analyze risk and
reward relationships and the degree of interest rate risk exposure associated
with this strategy. The income generated from this strategy has offset the costs
associated with the growth of YNB's infrastructure and enhanced total net
interest income. This strategy, which continues to positively contribute to
earnings per share and return on average equity, has been capped at $380.0
million for 2002.
Loans
The loan portfolio represents YNB's largest earning asset class and is a
significant source of interest income. Total loans increased $43.5 million or
4.3% to $1.05 billion at March 31, 2002 from $1.0 billion at December 31, 2001.
YNB's loan portfolio represented 52.9% of total assets at March 31, 2002
compared to 51.9% at December 31, 2000. YNB's lending focus continues to be on
commercial real estate loans, as well as commercial and industrial 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 to competition,
borrowers' concerns over the economy, real estate prices and interest rates
could all be factors in slowing future loan growth. The majority of YNB's
business is with customers located within Mercer County, New Jersey and
contiguous counties. Accordingly, the ultimate collectability of the loan
portfolio and the recovery of the carrying amount of real estate are subject to
changes in the region's economic environment and real estate market. The table
below lists loan growth by type for the period of March 31, 2002 to December 31,
2001.
11
Loan Portfolio Composition
- ------------------------------------------------------------------------------------------
(in thousands) 03/31/02 12/31/01 Change % change
- ------------------------------------------------------------------------------------------
Commercial real estate
Owner occupied $ 150,428 $ 143,767 $ 6,661 4.6%
Investor occupied 257,533 255,471 2,062 0.8
Construction and development 114,518 99,978 14,540 14.5
- ------------------------------------------------------------------------------------------
522,479 499,216 23,263 4.7
Residential
Multi-family 36,721 33,970 2,751 8.1
1- 4 family 110,607 107,840 2,767 2.6
- ------------------------------------------------------------------------------------------
147,328 141,810 5,518 3.9
Commercial and industrial
Term 117,019 117,005 14 0.0
Lines of credit 175,778 164,075 11,703 7.1
Demand 844 1,055 (211) 20.0
- ------------------------------------------------------------------------------------------
293,641 282,135 11,506 4.1
Consumer
Home equity 60,696 58,084 2,612 4.5
Installment 18,520 19,266 (746) 3.9
Other 8,832 7,462 1,370 18.4
- ------------------------------------------------------------------------------------------
88,048 84,812 3,236 3.8
==========================================================================================
Total loans $1,051,496 $1,007,973 $ 43,523 4.3%
==========================================================================================
Commercial real estate loans consist of owner occupied, investor occupied, and
construction and land development loans. Construction and land development loans
include residential and commercial projects. Loans are typically made to
experienced residential or commercial construction 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. YNB's
lending policies generally require an 80% or lower loan-to-value ratio for
commercial real estate mortgages. Collateral values are established based upon
independently prepared appraisals. Commercial real estate loans increased $23.3
million with the growth primarily in construction and land development loans
which increased $14.5 million. Growth in commercial real estate loans accounted
for 53.4% of the total loan growth in the quarter.
Residential loans include multi-family and 1-4 family loans. The residential 1-4
family loans include mortgages of $110.6 million which represent 75.1% 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 which totaled $36.7 million are multi-family or other 1-4 family
loans that are not secured by first liens or do not meet the underwriting
standards of FNMA or FHLMC. Total residential loans increased $5.5 million or
3.9% due to increases in both 1-4 family and multifamily loans. Falling interest
rates have increased the refinance activity particularly in the 1-4 family loan
category.
12
Commercial and industrial loans are typically loans made to small and middle
market businesses for a wide variety of needs including working capital loans,
which are used to finance inventory, receivable, and other working capital needs
of commercial borrowers. Term loans are provided for equipment needs. Commercial
and industrial loans include term loans, lines of credit and demand loans.
Commercial and industrial loans increased $11.5 million or 4.1% to $293.6
million at March 31, 2002 from $282.1 million at December 31, 2001. 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 26.4% of the total loan growth for
the first three months of 2002.
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 $3.2 million or 3.8% to $88.0 million at March 31, 2002 from $84.8
million at December 31, 2001. The growth was caused by increased home equity
loans and lines, 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 consumer loan relationships remains strong.
Deposit liabilities
The following table provides information concerning YNB's deposit base at March
31, 2002 and December 31, 2001.
Deposits
- --------------------------------------------------------------------------------------------------
(in thousands) 3/31/02 12/31/01 Change % Change
- --------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits $ 114,129 $ 114,405 $ (276) 0.2%
Interest bearing demand deposits 100,605 105,354 (4,749) 4.5
Money market deposits 269,975 203,872 66,103 32.4
Savings deposits 78,248 77,168 1,080 1.4
Certificates of deposit of $100,000
or over 147,677 137,684 9,993 7.3
Other time deposits 425,931 454,207 (28,276) 6.2
- --------------------------------------------------------------------------------------------------
Total $1,136,565 $1,092,690 $ 43,875 4.0%
==================================================================================================
YNB's deposit base is the principal source of funds supporting interest-earning
assets. Total deposits increased $43.9 million or 4.0% to $1.1 billion at March
31, 2002 compared to $1.09 billion at December 31, 2001. The growth in YNB's
deposit base in the first three months of 2002 was primarily driven by growth in
money market balances partially offset by a decline in other time deposits. In
this lower interest rate environment, depositors have shown a strong preference
for YNB's competitively priced Premier money market deposit accounts as opposed
to locking in rates with longer term certificates of deposit (CDs).
13
YNB markets its CDs through its branch network and through a nationwide computer
based service. Total CDs, which include CDs of $100,000 or over and other time
deposits, decreased $18.3 million or 3.1% to $573.6 million at March 31, 2002
from $591.9 million at December 31, 2001. The decrease resulted from a decline
in CDs raised through the branch network partially offset by an increase in CDs
raised through the previously mentioned nationwide computer based service. At
March 31, 2002, YNB had approximately $145.8 million in CDs obtained through
this service, compared to approximately $107.0 million at December 31, 2001. The
increase in funds obtained through this service were used to fund earning asset
growth and enhance liquidity. In market CDs declined, as customers preferred to
other deposit product alternatives. Certificates of deposit continue to be an
important source of funding for YNB in 2002, representing 50.5% of the total
deposits at March 31, 2002 compared to 54.2% at year-end 2001. While CDs will
continue to represent an important funding vehicle management will continue its
efforts to further expand lower cost core deposits and reduce the need for
higher costing funding sources in both new and existing markets.
Non-interest bearing demand deposits decreased $276,000 or 0.2% to $114.1
million at March 31, 2002 compared to $114.4 million at December 31, 2001. On an
average basis non-interest bearing demand deposits totaled $109.6 million for
the first quarter of 2002 compared to $94.4 million for the same period in 2001.
Management's goal is to on attract non-interest-bearing demand deposits from
both commercial and retail customers.
Interest bearing demand deposits decreased $4.7 million or 4.5% to $100.6
million at March 31, 2002 from $105.4 million at year-end 2001. In addition,
money market balances increased $66.1 million or 32.4% to $270.0 million at
March 31, 2002 from $203.9 million at December 31, 2001. The increase in money
market balances resulted from depositors shifting money out of CDs into YNB's
competitively positioned Premier money market accounts. Depositors have
preferred to invest their funds in liquid money market accounts in anticipation
of higher interest rates later in 2002. Savings deposits increased $1.1 million
or 1.4% to $78.2 million at March 31, 2002 from $77.2 million at December 31,
2001.
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 generally not adequate to meet current or projected loan demand. YNB's
ability to generate lower cost deposits could affect net interest income levels.
The continuing reliance on higher cost certificates of deposit to fund asset
growth is the principal 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 and interest-free deposits to replace higher-costing
certificates of deposit. The recently opened Hunterdon regional headquarter
along with another branch to be opened in Flemington in the second quarter
should help YNB attract core deposits in the Hunterdon County market. YNB has
also filed an application with the regulatory authorities to open a branch in
Middlesex County. YNB currently has loan relationships in that marketplace and
the opening of a branch will allow YNB to capture more of the deposit business
of these customers. The branch is expected to open in the fourth quarter of
2002. Management continues to evaluate new branch locations in its existing
markets as well as new markets.
14
Borrowed Funds
YNB uses borrowed funds for its earning asset growth not supported by deposit
generation and for asset liability management purposes. Borrowed funds consist
primarily of securities sold under agreement to repurchase and Federal Home Loan
Bank (FHLB) advances. Borrowed funds totaled $707.0 million at March 31, 2002, a
decline of $101,000 from the $707.1 million outstanding at December 31, 2002.
The modest decline in borrowed funds resulted from several factors. With the
capping of the Investment Growth Strategy at $380.0 million, FHLB advances will
be used for asset/liability purposes.
YNB had FHLB advances outstanding of $695.0 million at March 31, 2002 and
December 31, 2001. YNB has utilized callable FHLB advances and floating rate
FHLB advances to fund both Investment Growth Strategy purchases as well as other
earning assets. At March 31, 2002 callable advances totaled $568.0 million or
81.7% of advances outstanding compared to $555.0 million or 79.9% at December
31, 2001. Callable FHLB advances have terms of two to ten years and are callable
after periods ranging from three months to five years. There are $433.5 million
in callable advances with call dates in 2002 outstanding as of March 31, 2002.
Management anticipates at the current interest rate level there will be limited
FHLB advances called in 2002. In the first quarter of 2002, management shifted
its borrowing strategy away from floating rate LIBOR based borrowing and
targeted longer-term callable borrowings with extended lockout periods.
Management believes that this type of borrowing will help to protect future
income and reduce longer-term interest rate risk should interest rates begin to
increase.
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 utilize 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 March 31, 2002, $31.9 million or 98.0% of the $32.5 million in Trust
Preferred Securities outstanding qualify as Tier I capital. The remaining
$600,000 is treated as Tier II capital. Management anticipates that all Trust
preferred securities outstanding at March 31, 2002 will qualify as Tier I
capital within the next twelve months.
15
Equity Capital
Stockholders' equity at March 31, 2002 totaled $92.5 million, a decrease of
$728,000 or 0.8%, compared to $93.2 million at December 31, 2001. This net
decrease resulted from the following factors:
(i) YNB earned net income of $3.5 million and paid cash dividends of
$885,000 for the three months ended March 31, 2002.
(ii) The net unrealized loss on securities available for sale was $3.1
million at March 31, 2002 compared to a net unrealized gain of $361,000
at December 31, 2001. This change from a net unrealized gain to a net
unrealized loss resulted in a $3.4 million decrease in stockholders'
equity.
(iii) YNB booked a $3,000 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 $100,000 to $700,000 at March 31,
2002 from $800,000 at December 31, 2001 resulted in an increase of
$100,000 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 03/31/02 12/31/01 03/31/02 12/31/01
- ------------------------------------------------------------------------------------------------------
Risk-based capital:
Tier 1:
Holding Company $ 127,456 $ 123,838 10.0% 10.0%
Bank 123,038 120,621 9.7 9.8
- ------------------------------------------------------------------------------------------------------
Total:
Holding Company 142,137 138,919 11.2 11.3
Bank 137,084 134,163 10.8 10.9
- ------------------------------------------------------------------------------------------------------
Tier 1 leverage:
Holding Company $ 127,456 $ 123,838 6.5 6.9
Bank 123,038 120,621 6.2% 6.8
- ------------------------------------------------------------------------------------------------------
The minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based
capital ratio of 4.0% and a total risked based capital ratio of 8.0%. To be
considered "well capitalized," an institution must have a minimum Tier 1 capital
and total risk-based capital ratio of 6.0% and 10.0%, respectively, and a
minimum Tier 1 leverage ratio of 5.0%. At March 31, 2002, 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.
16
Credit Quality
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type as of March 31, 2002 and December 31, 2001.
Nonperforming Assets
- -------------------------------------------------------------------------------------------
(in thousands) 03/31/02 12/31/01
- -------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $ 765 $ 888
Residential 1,700 1,133
Commercial and industrial 1,464 1,494
Consumer 170 98
- -------------------------------------------------------------------------------------------
Total 4,099 3,613
- -------------------------------------------------------------------------------------------
Restructured loans 758 770
- -------------------------------------------------------------------------------------------
Loans 90 days or more past due:
Residential 433 514
Consumer 167 228
- -------------------------------------------------------------------------------------------
Total 600 742
- -------------------------------------------------------------------------------------------
Total nonperforming loans 5,457 5,125
- -------------------------------------------------------------------------------------------
Other real estate 2,322 2,329
- -------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,779 $ 7,454
- -------------------------------------------------------------------------------------------
Allowance for loan losses to total loans, end of period 1.34% 1.34%
Allowance for loan losses to nonperforming loans,
end of period 257.39% 264.23%
===========================================================================================
At March 31, 2002, nonperforming loans, which are loans 90 days or more past
due, restructured loans and nonaccrual loans, totaled $5.5 million, a $332,000
or 6.5% increase from the $5.1 million at December 31, 2001. The increase in
nonperforming loans resulted from an increase in nonaccrual loans partially
offset by decreases in restructured and loans 90 days or more past due.
Other real estate at March 31, 2002 totaled $2.3 million, reflecting a modest
decrease from the year-end 2001 level. YNB continues to aggressively work to
reduce the level of other real estate owned. Other real estate properties have
been written down to the lower of cost or fair value less disposition expenses.
Nonperforming assets at March 31, 2002 totaled $7.8 million, a $325,000 or 4.4%
increase from the $7.5 million level at December 31, 2001. Total nonperforming
assets as a percentage of total assets were 0.39% at March 31, 2002 compared to
0.38% at December 31, 2001. The modest increase in this ratio resulted from a
modest increase in nonperforming assets and a modest increase in total assets.
Management's chief objective is to maintain a high credit quality loan portfolio
regardless of the economic climate. The slow down in the economy could cause
nonperforming asset levels to increase from the current levels.
17
Allowance for Loan Losses
The allowance for loan losses totaled $14.0 million at March 31, 2002, an
increase of $504,000 from the $13.5 million at year-end 2001. The provision for
loan losses for the first three months of 2002 was $550,000 compared to $925,000
for the same period of 2001. Gross charge-offs were $62,000 for the first three
months of 2001 compared to $603,000 for the same period in 2001. Gross
recoveries were $16,000 for the first three months of 2002 compared to $63,000
for the same period in 2001. Annualized net charge-offs as a percentage of
average loans were 0.02% for the first three months of 2002 compared to 0.27%
for the same period in 2001. This compares to net charge-offs as a percentage of
average loans ratio of 0.15% for the year ended December 31, 2001. Management
believes that the 2001 net charge-off percentage of average loans is a better
indicator of YNB's future charge-offs then the actual first quarter 2002
results.
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 1.34% at both March 31, 2002 and December 31, 2001.
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
257.39% at March 31, 2002 compared to 264.23% at December 31, 2001.
Results of Operations
Net Income
YNB reported net income of $3.5 million for the three months ended March 31,
2002, an increase of $768,000 or 28.2% compared to the $2.7 million for the same
period in 2001. The increase in net income for the first three months of 2002
compared to the same period in 2001 is attributable to higher net interest
income, improved noninterest income and lower provision for loan losses
partially offset by an increase in noninterest expense. Basic earnings per share
for the three months ended March 31, 2002 increased $0.07 or 18.9% to $0.44
compared to $0.37 for the same period in 2001. Diluted earnings per share for
the three months ended March 31, 2002 increased $0.06 or 16.2% to $0.43 compared
to $0.37 for the same period in 2001. The increase in the earnings per share was
due to higher net income partially offset by the higher average number of shares
outstanding resulting from last year's private common equity placement.
Net Interest Income
YNB's net interest income for the first three months of 2002 was $10.6 million,
an increase of $1.2 million or 12.3% from the same period in 2001 principally
because interest expense declined at a quicker rate than interest income. For
the first three months of 2002, interest income decreased by $972,000 compared
to the same period in 2001 while interest expense decreased by $2.1 million
compared to the same period in 2001. The most important factor in the
improvement in net interest income was the reduction in the cost of other time
deposits which declined 225 basis points to 4.18% for the first three months of
2002 compared to 6.43% for the same period in 2001.
18
The net interest margin (tax equivalent basis), which is net interest income
divided by average interest earning assets, for the first three months of 2002
was 2.30%, a 16 basis point or 6.5% decline compared to 2.46% for the same
period in 2001. The modest decrease in the margin was due to slightly higher
growth in interest earning assets compared to interest bearing liabilities
combined with earning asset yield dropping 3 basis points more than interest
bearing liabilities. The net interest margin's best performance was in the first
quarter of 2001. YNB's net interest margin declined throughout 2001 as interest
rates dropped. The margin stabilized in the fourth quarter of 2001 at 2.07% when
the Federal Reserve concluded their rate reduction cycle. While interest earning
asset yields stabilized, YNB's time deposit based continued to reprice lower
reducing YNB's cost of funds. The result was an improvement in the net interest
margin to 2.30%. Management anticipates based on current interest rate
environment continued improvement in the net interest margin throughout 2002.
The net interest margin for the 2002 and 2001 comparative periods was also
negatively impacted by the Investment Growth Strategy. The securities in the
Investment Growth Strategy at March 31, 2002 were approximately $361.1 million
compared to $372.8 million at December 31, 2001. The targeted spread on this
strategy is 75 basis points after tax. Because of the targeted spread on this
strategy, there is a negative impact to the net interest margin and typically
return on average assets. Conversely, the strategy is designed to increase both
return on average stockholders' equity and earnings per share, the primary goals
of the strategy. The goals of this strategy continue to be achieved.
Interest Income
For the first three months of 2002, total interest income was $28.9 million, a
decrease of $972,000 or 3.3% when compared to interest income of $29.9 million
for the same period in 2001. This decrease was primarily due lower loan and
investment yields as a result of the aggressive lowering of short-term interest
rates (475 basis points in 2001) by the Federal Reserve partially offset by
higher average balances of loans and securities. Average loans increased $185.3
million or 22.2% while the yield on loans decreased 163 basis points to 6.90%
for the quarter ended March 31, 2002 from 8.53% for the same period in 2001. The
lower loan yield reflected the lower overall interest rate environment in the
first three months of 2002 when compared to the same period in 2001. Interest
and fees on loans for the first three months ended March 31, 2002 decreased
$194,000 or 1.1% to $17.6 million from $17.8 million for the same period in
2001. Average securities for the three months ended March 31, 2002 increased
$121.2 million or 17.6% to $810.7 million when compared to the $689.5 million
for the same period in 2001. Over the same period, the yield on the securities
portfolio decreased 115 basis points to 5.43% from 6.58%. The increase in the
average balance, partially offset by the lower yield, resulted in interest on
securities decreasing $330,000 or 2.9% to $11.0 million for the three months
ended March 31, 2002 compared to $11.3 million for the same period in 2001.
Overall, the yield on YNB's interest earning asset portfolio decreased 150 basis
points to 6.07% for the three months ended March 31, 2002 from the 7.57% for the
same period in 2001.
19
Interest Expense
Total interest expense decreased $2.1 million or 10.5% to $18.2 million for the
first three months of 2002 compared to $20.4 million for the same period in
2001. The decrease in interest expense for the comparable time periods resulted
primarily from lower rates paid on time deposits and borrowed funds partially
offset by higher overall average balances on these interest-bearing liabilities.
Average interest bearing liabilities were $1.8 billion for the three months
ended March 31, 2002 reflecting an increase of $307.2 million or 21.2% when
compared to the average balance of $1.5 billion for the same period in 2001. The
average rate paid on interest bearing liabilities for the three months ended
March 31, 2002 decreased 147 basis points to 4.15% from 5.62% for the same
period of 2001.
Interest expense on savings, money markets and interest bearing demand accounts
increased $222,000 or 8.7% to $2.8 million for the first three months of 2002
when compared to the $2.6 million for the same period in 2001. The primary cause
for this increase resulted from the higher average balance of $136.4 million or
47.3% to $424.8 million for the three months ended March 31, 2002 from $288.3
million for the same period in 2001. The majority of the growth has been in
Premier Money Market balances. The combination of new accounts and depositors
reinvesting proceeds from maturing CDs into YNB's competitively priced money
market account resulted in the growth described above. The cost of all funds in
this category decreased 93 basis points to 2.62% for the three months ended
March 31, 2002 compared to 3.55% for the same period in 2001. The primary cause
for the decline in cost of these deposit types has been the overall decline in
interest rates previously discussed. 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.
Interest on other time deposits decreased $2.3 million to $4.6 million for the
three months ended March 31, 2002 from $7.0 million for the same period in 2001.
This decrease was caused by a modest increase of $10.0 million in the average
outstanding balance to $442.9 million for the three months ended March 31, 2002,
when compared to the average balance of $432.9 million for the same period in
2001, declined 225 basis points in the cost of other time deposits to 4.18% from
6.43% for the same periods as described above. Interest expense on other time
deposits accounted for 25.4% of total interest expense for the three months
ended March 31, 2002 compared to 24.2% of total interest expense for the same
period in 2001. Management anticipates that the cost of other time deposits will
continue to decline, as current market rates are lower than the existing cost of
these funds.
Interest on certificates of deposit (CDs) of $100,000 or more decreased $744,000
or 34.9% to $146.0 million for the three months ended March 31, 2002 from $2.1
million for the same period in 2001. The decrease was caused by the decline in
the average rate paid of 304 basis points to 3.72% for the first three months of
2002 from 6.76% for the same period in 2001 partially offset by the increase in
the average outstanding balance of $22.9 million or 18.2% to $148.9 million for
the comparative period. The sharp decline in the cost of certificates of deposit
of $100,000 or more reflects the significant decline in interest rate since the
first quarter of 2001.
20
Interest expense on borrowed funds increased $566,000 or 7.0% to $8.7 million
for the first three months of 2002 when compared to $8.1 million for the same
period in 2001. The increased expense was caused by a $132.1 million or 22.9%
increase in the average balance outstanding in the first three months of 2002 to
$708.5 million when compared to the $576.4 million for the same period in 2001.
The rate paid on borrowed funds decreased 73 basis points for the three months
ended March 31, 2002 to 4.89% from the 5.62% for the same period last year. The
decline in the rate on borrowed funds resulted from a change in the borrowing
mix implemented in 2001. The majority of new borrowings in 2001 were floating
rate FHLB advances tied to three month LIBOR. As rates continued to fall in 2001
these borrowings repriced lower. In addition, the retirement of $50.0 million in
callable advances and their replacement into floating rate borrowings also
contributed to the lower rate on borrowed funds. 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.
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 have historically exceeded 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 three months ended March 31, 2002 was
$550,000, a $375,000 decrease compared to the $925,000 provision recorded for
the same period of 2001. The decrease in the provision for the first three
months of 2002 was primarily due to lower net charge-offs. Management believes
that the allowance for loan losses is adequate in relation to the credit risk
exposure levels.
Non-interest Income
Total non-interest income for the first three months of 2001 was $1.9 million,
an increase of $336,000 or 21.5% over non-interest income of $1.6 million for
the same period in 2001. The increase was due principally to higher net
securities gains and increased service charges on deposit accounts for the
comparable periods.
21
Service charges on deposit accounts increased $116,000 or 29.0% to $516,000 for
the three months ended March 31, 2002 compared to $400,000 for the same period
in 2001. Service charge income has primarily increased in the first three months
of 2002 due to increased income from overdraft fees and growth in the core
deposit base. Management believes as YNB focuses its efforts on increasing lower
cost deposits that service charge income will continue to experience positive
results.
Net gains on sale of securities totaled $643,000 in the first three months of
2002 compared to $445,000 in net gains on sale of securities for the same period
in 2001. The gains resulted primarily as a result of the sale of fixed rate
30-year mortgage backed securities and fixed rate trust preferred securities.
These securities were sold to achieve the asset/liability objective of reducing
longer-term interest rate in an increasing interest rate environment.
Earnings on bank owned life insurance were $411,000 for the first three months
of 2002 compared to $440,000 for the same period in 2001. The decline in income
was due to lower yields on floating rate bank owned life insurance assets. The
income earned on these assets is used to offset the benefit costs of deferred
compensation programs.
Other non-interest income increased $51,000 or 18.1% to $332,000 for the three
months ended March 31, 2002 from $281,000 for the same period in 2001. Other
non-interest income includes a variety of fee-based services. As YNB's customer
base has broadened the income from these services has increased.
Non-interest income represented 6.2% of YNB's total revenue in the first three
months of 2002 compared to 5.0% for the same period in 2001. The improvement in
this ratio was due to greater gains on sale of securities and increased service
charge income. As part of YNB's longer-term strategic goal to increase
non-interest income YNB Financial Services, Inc. has established alliances with
several local insurance agencies to offer insurance products to our customers.
YNB's marketing agreement with Salomon Smith Barney to offer brokerage services
to our customers has solidified relationships while modestly enhancing
non-interest income. Management believes that both of these initiatives will
contribute to future additional non-interest income for YNB. These initiatives,
started in 2000, have not generated to date, significant non-interest income.
Management continues to closely evaluate both traditional and non-traditional
sources of potential non-interest income.
Non-interest Expense
Total non-interest expense increased $795,000 or 12.4% to $7.2 million for the
first three months of 2002 compared to $6.4 million for the same period in 2001.
The increase in non-interest expense was primarily due to increases in salaries
and employee benefits and occupancy expense. Total non-interest expenses, on an
annualized basis, as a percentage of average assets were 1.46% for the first
three months of 2002 compared to 1.56% for the same period of 2001. The
improvement in this ratio is due to the strong asset growth partially offset by
the modest increase in non-interest expenses experienced by YNB. YNB's
efficiency ratio for the first three months of 2002 was 57.36% compared to
57.97% for the same period in 2001. 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 improvement in the efficiency ratio
was due to both increased net interest income and noninterest income partially
offset by higher noninterest expense.
22
Salaries and employee benefits increased $655,000 or 18.3% to $4.2 million for
the first three months of 2002 compared to $3.6 million for the same period in
2001. Salaries and employee benefits expense accounted for 58.9% of total
non-interest expenses for the first three months of 2002 compared to 56.0% for
the same period in 2001. Full time equivalent employees increased to 293 at
March 31, 2002 compared to 267 at March 31, 2001. Salary expense increased
$457,000 or 17.2% reflecting increased staffing levels throughout YNB as the
organization continues to grow and normal salary increases. Benefit expense
increased $199,000 or 21.5% primarily due to higher costs associated with the
increased number of employees at YNB as well as increased costs associated with
medical insurance premiums.
Occupancy expense for the first three months of 2002 was $817,000, an increase
of $146,000 or 21.8% compared to $671,000 for the same period in 2001. Total
rent expense on leased properties increased $148,000 and was the primary reason
for the increase in occupancy expense. The rent expense increase resulted
primarily from the costs associated with YNB's new operations center and the
Hunterdon regional headquarters as well as occupancy costs associated with new
branches opened after the first quarter of 2001..
Equipment expense increased $34,000 or 6.7% to $544,000 for the first three
months of 2002 from $510,000 for the same period in 2001. The increase in
equipment costs reflects the continuing efforts of YNB to maintain and upgrade
technology and systems in order to provide the highest quality products and
service.
Other non-interest expenses decreased $40,000 or 2.4% to $1.6 million for the
first three months of 2002. This compares to the same approximate expense for
the same period in 2001. The modest decline in other non-interest expenses
experienced in the first three months of 2002 was primarily due to a decline in
other real estate expenses partially offset by increases in other non-interest
expense categories. The increases in these costs reflect the infrastructure of
YNB. Management closely monitors non-interest expenses and seeks to control the
growth of these expenses. However, as YNB continues to grow, the costs
associated with properly managing the organization will also continue to
increase.
Income Tax Expense
The effective income tax rate for the three months ended March 31, 2002 was
27.2% compared to 26.7% for the same period in 2001. The increase in the tax
rate and increased tax expense resulted from the growth in overall income
exceeding the growth in tax-free income. Total income tax expense for the three
months ended March 31, 2002 was $1.3 million, an increase of $314,000 from $1.0
million for the same period in 2001.
23
Item 3: Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in YNB's market risk from December 31, 2001
except as discussed below. For information regarding YNB's market risk refer to
the Company's 2001 Annual Report to Stockholders.
Management controls interest rate risk by identifying and quantifying interest
rate risk exposures using simulation analysis, economic value risk models and
simpler gap analysis. At March 31, 2002 the cumulative one year gap was a
negative $188.8 million or 9.5% of total assets compared to a negative $223.8
million or 11.5% of total assets at December 31, 2001.
Simulation analysis involves dynamically modeling YNB's interest income and
interest expense over a specified time period under various interest rate
scenarios and balance sheet structures. YNB uses simulation analysis primarily
to measure the sensitivity of net interest income over 12 and 24-month time
horizons. In YNB's base case sensitivy scenario, the model estimates the
variance in net interest income with a change in interest rates of plus and
minus 200 basis points over a 12-month period. Management utilized a minus 150
basis points scenario due to the low interest rate environment that existed at
March 31, 2002 and December 31, 2001. The plus and minus base case scenario is
measured within a policy limit of -7%.
Changes in interest rate in basis Percentage Change in Net Interest Income
points over 12 months
3/31/02 12/31/01
- -----------------------------------------------------------------------------------------
+200 2.1 0.4
- -150 -2.4 -4.6
The larger asset structure and shorter liability structure continue to present a
balanced interest rate risk profile over the next 12 to 24 months at March 31,
2002. YNB's net interest income will benefit most from a flat to modestly higher
interest rate environment over the next twelve months. At the same time, the
exposure to falling rates has been reduced. The simulation models rely on
assumptions concerning among other things, the reaction of non-maturity deposit
products and the impact of embedded options in borrowed fund positions. In the
event that asset and liability behavior is different from the assumptions in the
simulation model the outcome could be significantly different. Management
attempts to reduce the uncertainty by using market data, research analysis and
business judgment in developing the assumptions that support the model.
YNB measures longer-term interest rate risk through the Economic Value of Equity
("EVE") model. This model involves projecting future cash flows from YNB's
current assets and liabilities over a very long time horizon, discounting those
cash flows at an appropriate interest rate, and than aggregating the discounted
cash flows. YNB's EVE is the estimated net present value of these discounted
cash flows. The variance in the economic value of equity is measured as a
percentage of the present value of equity. YNB uses the sensitivity of EVE
principally to measure the exposure of equity to changes in interest rates over
a relatively long time horizon. The following table lists YNB percentage change
in EVE in a plus or minus 200 basis point rate shock at March 31, 2002 and
December 31, 2001. Due to the low level of interest rates at both dates, not all
interest rates could be shocked 200 basis points.
24
Changes in interest rate in basis Percentage Change EVE
points (Rate Shock) 3/31/02 12/31/01
- -----------------------------------------------------------------------------------------
+200 -39 -45
- -200 1 -1
Certain shortcomings are inherent in the methodology used in the previously
discussed interest rate risk measurements. Modeling changes in EVE analysis
require the making of certain assumptions, which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. Accordingly, although the EVE model provides an indication of YNB's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of change in
market interest rates on YNB's net interest income and will differ from actual
results.
25
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable.
Item 2: Changes in Securities and Use of Proceeds
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.
26
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ---------- ------------- ---------------------------------------------------------------------------------- --------
(A) 3.1 Restated Certificate of Incorporation of the Company, as amended by the
Certificate of Amendment thereto filed on March 6, 1998.
(B) 3.2 By-Laws of the Company
(B) 4.1 Specimen Share of Common Stock
4.2 See Exhibits 3.1 and 3.2 for the Registrant's Certificate of Incorporation
and By-Laws, which contain provisions defining the rights of stockholders
of the Registrant.
(B) 4.3 Amended and Restated Trust Agreement dated October 16, 1997, among the
Registrant, as depositor, Wilmington Trust Company, as property trustee,
and the Administrative Trustees of Yardville Capital Trust.
(C) 4.4 Indenture dated October 16, 1997, between the Registrant and Wilmington
Trust Company, as trustee, relating to the Registrant's 9.25% Subordinated
Debentures due 2027.
(C) 4.5 Preferred Securities Guarantee Agreement dated as of October 16, 1997, between
the Registrant and Wilmington Trust Company, as trustee, relating to the
Preferred Securities of Yardville Capital Trust.
4.6 The Registrant will furnish to the Commission upon request copies of the
following documents relating to the Registrant's Series A 9.50% Junior
Subordinated Deferrable Interest Debentures due June 22, 2000: (i) Amended
and Restated Declaration of Trust dated June 23, 2000, among the
Registrant, The Bank of New York, as property trustee, and the
Administrative Trustees of Yardville Capital Trust II; (ii) Indenture dated
as of June 23, 2000, between the Registrant's Series A 9.50% Junior
Subordinated Deferrable Interest Debentures due June 22, 2030; and (iii)
Series A Capital Securities Guarantee Agreement dated as of June 23, 2000
between the Registrant and The Bank of New York, as trustee, relating to
the Series A Capital Securities of Yardville Capital Trust II.
4.7 The Registrant will furnish to the Commission upon request copies of the
following documents relating to the Registrant's Series A 10.18% Junior
Subordinated Deferrable Interest Debentures due June 8, 2031: (i) Amended
and Restated Declaration of Trust dated March 28, 2001, among the
Registrant, Wilmington Trust Company, as property trustee, and the
Administrative Trustees of Yardville Capital Trust III; (ii) Indenture
dated as of March 28, 2001, between the Registrant and Wilmington Trust
Company, as trustee, relating to the Registrant's Series A 10.18% Junior
Subordinated Deferrable Interest Debentures due June 8, 2031; and (iii)
Series A Capital Securities Guarantee Agreement dated as of March 28, 2001
between the Registrant and Wilmington Trust Company, as trustee, relating
to the Series A Capital Securities of Yardville Capital Trust III.
27
Exhibit
Number Description Page
- ---------- -------------- --------------------------------------------------------------------------------- ---------
(A) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997
(B) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (Registration No. 33-78050)
(C) Incorporated by reference to the Registrant's Registration Statement on Form
S-2 (Registration Nos. 333-35061 and 333-35061-01)
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YARDVILLE NATIONAL BANCORP
--------------------------------------
(Registrant)
Date: May 14, 2002 By:/s/ Stephen F. Carman
-------------------------- ------------------------
Stephen F. Carman
Treasurer
29