UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2002.
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission File No.: 0-26086
Yardville National Bancorp
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(Exact name of registrant as specified in its charter)
New Jersey 22-2670267
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2465 Kuser Road, Hamilton, New Jersey 08690
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 585-5100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of voting Common Stock held by non-affiliates
(computed by using the closing sales price on the last business day of the
registrant's most recently completed second fiscal quarter (June 28, 2002))
was $102,354,911. An aggregate of 10,398,705 shares of Common Shares were
outstanding as of March 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders of Yardville National Bancorp to be held June 5, 2003 are
incorporated by reference into Part III of this Form 10-K.
EXPLANATORY NOTE
This Amendment to Annual Report on Form 10-K/A (the "Amendment") amends Item 7
of Part II and Item 15 of Part IV of the Annual Report on Form 10-K (the "10-
K") of Yardville National Bancorp, a New Jersey corporation (the "Company"),
filed on March 31, 2003, for the fiscal year ended December 31, 2002. This
Amendment also amends Item 1 of Part I and Items 7A and 8 of Part II of the
10-K to the extent that certain portions of Item 7 of Part II and Item 15 of
Part IV are incorporated by reference therein. The purpose of this Amendment
is to correct certain information reported in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations of the 10-K, and
in Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K of
the 10-K. Except as described above, the Company has not updated any of the
other information included in the 10-K.
ii
FORM 10-K/A
INDEX
PAGE
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 1
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................................ 31
Signatures.............................................................................................................. 32
Certifications.......................................................................................................... 33
Index to Financial Statements........................................................................................... F-1
Index to Exhibits....................................................................................................... E-1
iii
Statements contained in this Amendment to Annual Report on Form 10-K/A
regarding future events or performance are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Our
actual results could be quite different from those expressed or implied by the
forward-looking statements. Although forward-looking statements help to
provide complete information about us, readers should keep in mind that
forward-looking statements may not be reliable. Readers are cautioned not to
place undue reliance on the forward-looking statements.
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
This discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report. Throughout
this report the terms "YNB," "company," "we," "us," "our," and "corporation"
refer to Yardville National Bancorp, our wholly owned banking subsidiary The
Yardville National Bank (the "Bank") and other wholly owned subsidiaries as a
consolidated entity. The purpose of this discussion and analysis is to assist
in the understanding and the evaluation of the financial condition, changes in
financial condition and results of our operations.
2002 OVERVIEW
The rebound of our profitability in 2002 was primarily due to the significant
increase in our net interest income. The reduction in our cost of liabilities,
and continued strong loan and deposit growth in 2002 resulted in a 63.7%
increase in net income.
Loans and deposits grew 18.6% and 16.4%, respectively, this past year. Our
strong philosophy of relationship banking has contributed to the growth in
YNB's asset base, which totaled $2.2 billion at December 31, 2002.
Our goals are to further develop the earnings power of YNB's branches and
increase the value of our franchise. In 2002, we continued our retail
expansion, opening three new branches in the demographically strong markets of
Hunterdon and Middlesex Counties in New Jersey. We also expect to open our
first branch in attractive Somerset County, New Jersey in 2003.
To support the strong growth experienced and continued growth plans, we
raised additional equity capital in the last quarter of 2002. A common stock
offering, completed in December, raised net new capital of $34.3 million and
will support our ongoing expansion.
SUMMARY OF FINANCIAL RESULTS
YNB earned net income of $14.0 million or $1.68 per diluted share for the year
ended December 31, 2002, compared to $8.6 million or $1.11 for the year ended
December 31, 2001. This represents an increase of 63.7% and 51.4%,
respectively, in 2002. We posted net income of $10.3 million or $1.47 per
diluted share in 2000.
The improvement in net income of $5.4 million in 2002 was driven by an
increase of $10.4 million in net interest income. The improvement in net
interest income was primarily the result of the reduction in our cost of funds
and continued strong commercial loan growth.
YNB's cost of liabilities declined $9.1 million in 2002 from 2001.
Certificates of deposit (CDs), which represented 54.2% of our total deposit
base at December 31, 2001, repriced 224 basis points lower during 2002
reducing the cost of those funds from 5.95% in 2001 to 3.71% in 2002. Total
loans outstanding increased 18.6%, reaching a record level of $1.2 billion at
December 31, 2002. Interest and fees on loans increased $5.0 million from
$70.4 million in 2001 to $75.4 million in 2002. Overall loan quality remained
strong as nonperforming assets to total assets decreased to 0.33% in 2002.
Earnings per share, on a diluted basis, increased for the same reasons
previously discussed. Due principally to the higher average shares outstanding
related to the full impact of the private equity placement completed in August
2001 the percentage increase in diluted earnings per share in 2002 was less
than net income.
The key profitability ratios of Return on Average Assets (ROA) and Return on
Average Stockholders' Equity (ROE) rebounded in 2002 as well. Our ROA
increased to 0.67% from 0.48% in 2001, while ROE increased to 13.45% in 2002
from 9.86% in 2001. We expect that the implementation of our retail strategy
described in this Annual Report, which is designed to further lower our cost
of funds and build non-interest income, should begin to move our ROA higher in
the future. Conversely, the issuance of 2.3 million common shares from our
public common stock offering in late 2002 will have a negative impact on our
ROE and earnings per share measurements in 2003. As the new capital is put to
work over time, we expect ROE to return to levels experienced previously. Our
higher level of net interest income also had a positive impact on YNB's
efficiency ratio, which declined to 56.66% in 2002 from 65.77% in 2001.
NET INTEREST INCOME
Net interest income is the largest and most significant component of our
operating income. Net interest income is the difference between income on
interest earning assets and expense on interest bearing liabilities. Net
interest income depends upon the relative amount and mix of interest earning
assets and interest bearing liabilities, and the interest rate earned or paid
on them. Net interest income is also impacted by changes in interest rates and
the shape of market yield curves. Our goal is to optimize net interest income
performance in varying interest rate environments.
2
The following tables set forth our consolidated average balances of assets
and liabilities and the related yields and costs for the years ended December
31, 2002, 2001, 2000, 1999 and 1998. Average yields for each year are derived
by dividing income by the average balance of the related assets, and average
costs are derived by dividing expense by the average balance of the related
liabilities. The yields and costs include fees, costs, premiums and discounts,
which are considered adjustments to interest rates.
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AVERAGE BALANCES, YIELDS AND COSTS December 31, 2002 December 31, 2001
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Average Average
Average Yield/ Average Yield/
(in thousands) Balance Interest Cost Balance Interest Cost
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INTEREST EARNING ASSETS:
Deposits with other banks $ 2,887 $ 60 2.08% $ 3,816 $ 171 4.48%
Federal funds sold 72,790 1,157 1.59 74,624 2,765 3.71
Securities 863,695 43,533 5.04 747,172 45,604 6.10
Loans (1) 1,085,306 75,395 6.95 891,957 70,408 7.89
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Total interest earning assets $2,024,678 $120,145 5.93% $1,717,569 $118,948 6.93%
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NON-INTEREST EARNING ASSETS:
Cash and due from banks $ 22,965 $ 21,026
Allowance for loan losses (14,771) (11,583)
Premises and equipment, net 11,363 10,081
Other assets 51,198 52,288
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Total non-interest earning assets 70,755 71,812
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Total assets $2,095,433 $1,789,381
===================================================================================================================================
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets, and interest bearing demand $ 469,985 $ 11,228 2.39% $ 318,595 $ 9,931 3.12%
Certificates of deposit of $100,000 or more 148,119 5,184 3.50 129,340 7,581 5.86
Other time deposits 469,858 17,747 3.78 453,747 27,085 5.97
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Total interest bearing deposits 1,087,962 34,159 3.14 901,682 44,597 4.95
Borrowed funds 735,201 36,403 4.95 644,690 35,264 5.47
Trust preferred securities 32,500 3,100 9.54 31,048 2,952 9.51
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Total interest bearing liabilities $1,855,663 $ 73,662 3.97% $1,577,420 $ 82,813 5.25%
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NON-INTEREST BEARING LIABILITIES:
Demand deposits $ 118,154 $ 104,577
Other liabilities 17,493 20,617
Stockholders' equity 104,123 86,767
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Total non-interest bearing liabilities and stockholders'
equity $ 239,770 $ 211,961
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Total liabilities and stockholders' equity $2,095,433 $1,789,381
===================================================================================================================================
Interest rate spread (2) 1.96% 1.68%
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Net interest Income and margin (3) $ 46,483 2.30% $ 36,135 2.10%
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Net interest income and margin (tax equivalent basis) (4) $ 47,728 2.36% $ 37,197 2.17%
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(1) Loan origination fees are considered an adjustment to interest income. For
the purpose of calculating loan yields, average loan balances include
nonaccrual loans with no related interest income.
(2) The interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities.
(3) The net interest margin is equal to net interest income divided by average
interest earning assets.
(4) In order to present pre-tax income and resultant yields on tax exempt
investments and loans on a basis comparable to those on taxable investments
and loans, a tax equivalent adjustment is made to interest income. The tax
equivalent adjustment has been computed using a Federal income tax rate of
34% and has the effect of increasing interest income by $1,245,000,
$1,062,000, $921,000, $712,000, and $419,000 for the years ended December
31, 2002, 2001, 2000, 1999, and 1998, respectively.
3
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December 31, 2000 December 31, 1999 December 31, 1998
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Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
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$ 1,322 $ 82 6.20% $ 734 $ 45 6.13% $ 3,365 $ 175 5.20%
37,961 2,454 6.46 17,932 904 5.04 6,180 333 5.39
494,439 33,435 6.76 341,135 21,216 6.22 198,890 12,197 6.13
723,570 64,418 8.90 564,552 47,554 8.42 438,050 38,218 8.72
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$1,257,292 $100,389 7.98% $924,353 $69,719 7.54% $646,485 $50,923 7.88%
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$ 18,307 $ 16,208 $ 15,398
(9,798) (7,638) (6,102)
9,303 7,493 5,786
32,944 29,109 22,599
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50,756 45,172 37,681
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$1,308,048 $969,525 $684,166
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$ 233,012 $ 7,937 3.41% $185,504 $ 4,887 2.63% $165,534 $ 5,034 3.04%
106,851 6,918 6.47 51,290 2,643 5.15 25,550 1,386 5.42
408,414 24,772 6.07 320,809 17,528 5.46 211,790 12,152 5.74
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748,277 39,627 5.30 557,603 25,058 4.49 402,874 18,572 4.61
367,021 21,219 5.78 256,957 13,523 5.26 158,106 8,756 5.54
19,333 1,808 9.35 11,500 1,064 9.25 11,500 1,064 9.25
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$1,134,631 $ 62,654 5.52% $826,060 $39,645 4.80% $572,480 $28,392 4.96%
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$ 96,024 $ 81,843 $ 66,857
11,284 9,351 4,857
66,109 52,271 39,972
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$ 173,417 $143,465 $111,686
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$1,308,048 $969,525 $684,166
==========================================================================================================
2.46% 2.74% 2.92%
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$ 37,735 3.00% $30,074 3.25% $22,531 3.49%
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$ 38,656 3.07% $30,786 3.33% $22,950 3.55%
==========================================================================================================
4
Changes in net interest income and margin result from the interaction
between the volume and composition of interest earning assets, interest
bearing liabilities, related yields, and associated funding costs. The
following table demonstrates the impact on net interest income of changes in
the volume of interest earning assets and interest bearing liabilities and
changes in interest rates earned and paid.
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RATE/VOLUME ANALYSIS
2002 vs. 2001 2001 vs. 2000
Increase (Decrease) Increase (Decrease)
Due to Changes In: Due to Changes In:
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(in thousands) Volume Rate Total Volume Rate Total
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INTEREST EARNING ASSETS:
Deposits with other banks $ (35) $ (76) $ (111) $ 117 $ (28) $ 89
Federal funds sold (66) (1,542) (1,608) 1,665 (1,354) 311
Securities 6,512 (8,583) (2,071) 15,600 (3,431) 12,169
Loans (1) 14,040 (9,053) 4,987 13,852 (7,862) 5,990
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 20,451 (19,254) 1,197 31,234 (12,675) 18,559
===================================================================================================================================
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets, and interest bearing demand 3,986 (2,689) 1,297 2,738 (744) 1,994
Certificates of deposit of $100,000 or more 982 (3,379) (2,397) 1,358 (695) 663
Other time deposits 930 (10,268) (9,338) 2,725 (412) 2,313
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 5,898 (16,336) (10,438) 6,821 (1,851) 4,970
Borrowed funds 4,677 (3,538) 1,139 15,240 (1,195) 14,045
Trust preferred securities 139 9 148 1,113 31 1,144
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Total interest expense 10,714 (19,865) (9,151) 23,174 (3,015) 20,159
===================================================================================================================================
Change in net interest income $ 9,737 $ 611 $ 10,348 $ 8,060 $(9,660) $(1,600)
===================================================================================================================================
(1) Loan origination fees are considered adjustments to interest income.
Net interest income totaled $46.5 million in 2002, an increase of $10.4
million or 28.6% from net interest income of $36.1 million in 2001. The prior
year's decrease was 4.2% from 2000's net interest income of $37.7 million. The
principal factor contributing to the increase in net interest income in 2002
was a decrease in interest expense of $9.1 million resulting from a lower cost
of 128 basis points on interest bearing liabilities, and to a lesser extent,
the change in composition of our deposit base and the increased volumes of
loans and securities.
In 2002, the interest rate spread increased 28 basis points and the net
interest margin on a tax equivalent basis increased 19 basis points to 2.36%.
In 2001, the net interest spread declined 78 basis points and the net interest
margin declined 90 basis points to 2.17% from 3.07% in 2000.
Interest income for the year ended December 31, 2002 increased to $120.1
million, compared to $118.9 million for the year ended December 31, 2001 and
$100.4 million for the year ended December 31, 2000. Average interest earning
assets increased by $307.1 million or 17.9% to $2.0 billion for 2002 compared
to average interest earning assets of $1.7 billion and $1.3 billion in 2001
and 2000, respectively.
Due to the aggressive lowering of short-term interest rates in 2001 (Prime
rate declined 475 basis points) by the Federal Reserve and the low interest
rate environment that continued through 2002, the yield on interest earning
assets declined 100 basis points to 5.93% by year-end as compared to 2001. Led
by commercial loans, our average loan portfolio grew by 21.7% to $1.1 billion,
with loan yields averaging 6.95% in 2002 or 94 basis points lower than 2001.
YNB's floating rate commercial loans tied to the prime rate totaled
approximately 46% of the entire commercial portfolio at December 31, 2002. The
average prime rate decreased from 6.91% in 2001 to 4.68% in 2002 contributing
to the decline in our loan portfolio yield. Interest income on loans increased
7.1% due to the growth shown above.
Although our average securities portfolio increased $116.5 million in 2002,
the decline in yield of 106 basis points caused interest income on securities
to decrease $2.1 million. During 2002, we implemented a strategy to reduce the
investment portfolio duration to better position our balance sheet for rising
interest rates. This action, while improving our longer-term interest rate
risk position (for further information see "Market Risk"), negatively impacted
net interest income and our net interest margin in 2002.
5
Interest expense was $73.7 million for 2002, a decrease of $9.1 million, or
11.1% from $82.8 million a year ago. Interest expense totaled $62.7 million in
2000. The decrease in interest expense in 2002 resulted primarily from lower
rates on all interest bearing deposits, and to a lesser extent, on borrowed
funds. Lower interest expense was partially offset by higher average balances
on all interest bearing liabilities. In December 2001, we retired $50.0
million in Federal Home Loan Bank (FHLB) advances early. This transaction was
designed to reduce longer-term interest rate risk by repositioning a portion
of our borrowed funds portfolio, and also resulted in positive improvement to
net interest income and the net interest margin in 2002. Interest expense on
these funds declined approximately $1.2 million in 2002. Average interest
bearing liabilities rose $278.2 million or 17.6% to $1.9 billion for 2002
compared to average interest bearing liabilities of $1.6 billion and $1.1
billion in 2001 and 2000, respectively. The average cost of total interest
bearing liabilities decreased 128 basis points to 3.97% in 2002 from 5.25% in
2001 and 5.52% in 2000.
Net interest income was $36.1 million in 2001, a decrease of 4.2% from the
$37.7 million reported in 2000. The principal factor contributing to the
decrease in net interest income in 2001 was an increase in interest expense of
$20.2 million resulting from increased borrowed funds and time deposit
volumes. In addition, the average rate paid on interest bearing liabilities
did not decline in proportion to yields on interest earning assets in the
lower interest rate environment of 2001 compared to 2000. This was partially
offset by increased volumes of loans and securities and the related interest
income.
Other factors, such as the Investment Growth Strategy, the level of
nonaccrual loans, and the balance of non-interest bearing demand deposits have
impacted our net interest income and net interest margin.
We manage a portion of our investment portfolio with the primary objectives
of enhancing return on average stockholders' equity and earnings per share. We
refer to this as our Investment Growth Strategy. The income from this strategy
has helped to offset the costs from the growth of our infrastructure and
enhanced total net interest income. In connection with this strategy, we
utilize asset liability simulation models to analyze risk and reward
relationships in different interest rate environments, based on the
composition of investments in the portfolio and our overall interest rate risk
position. While this strategy has minimal credit risk, it does increase our
overall interest rate risk. The amount of securities managed in the Investment
Growth Strategy totaled $230.1 million at December 31, 2002, or 10.3% of our
assets, and we have currently capped the strategy at $380.0 million. The net
interest margin was negatively impacted by the Investment Growth Strategy by
approximately 30 basis points in 2002, 35 basis points in 2001, and 52 basis
points in 2000.
Effective credit management has resulted in relatively low levels of
nonaccrual loans. Nonaccrual loans totaled $5.1 million in 2002, an increase
of $1.5 million from the $3.6 million reported in 2001. Had such nonaccrual
loans been paid based upon original contract terms, we would have recognized
additional interest income of approximately $240,000 in 2002, $163,000 in
2001, and $640,000 in 2000. Moreover, YNB's net interest margin would have
been 0.01% higher in 2002 and 2001, and 0.06% higher in 2000.
The targeting of small- to mid-size businesses and individuals who value
long-term relationships and personal service has led to success in acquiring
core business and personal checking accounts. Average non-interest bearing
demand deposits increased 13.0% to $118.2 million in 2002 from $104.6 million
in 2001. Throughout the comparative periods, increases in average non-interest
bearing demand deposits have made a positive contribution to net interest
income and the net interest margin.
6
We are continuing our efforts to improve our net interest margin in 2003.
The low interest rate environment and higher than anticipated prepayment
speeds on mortgage-backed securities in the last quarter of 2002 negatively
impacted the investment portfolio yield by 50 basis points, which accounted
for the slight margin compression in the fourth quarter compared to the prior
quarters in 2002. We have implemented several strategies during 2002 and into
2003 designed to increase net interest income and our net interest margin.
Interest rate floors were instituted on approximately 77% of our floating rate
commercial loans in 2002, which should protect net interest income should
rates continue to fall. The investment portfolio has been repositioned to
generate higher levels of net interest income in what, we believe, will be a
gradually increasing interest rate environment in the second half of 2003. The
greatest opportunity, however, to enhance net interest income will be the
successful implementation of our retail strategy. The expansion of our branch
network in new and existing markets, the enhancement of our brand image and
marketing of our products and services is expected to reduce YNB's cost of
funds and raise our net interest margin over time.
NON-INTEREST INCOME
In 2002, non-interest income primarily consisted of service charges on deposit
accounts, net securities gains, earnings on Bank Owned Life Insurance (BOLI)
and other service fees. Non-interest income totaled $8.3 million in 2002
compared to $8.0 million the prior year, an increase of $267,000 or 3.3%. The
primary reason for the improvement was service charges on deposit accounts,
which increased $346,000. Non-interest income in 2001 increased by $4.6
million, or 134.6% from 2000's total of $3.4 million. The increase for that
period was due to higher securities gains and an increase in earnings on BOLI.
The major components of non-interest income are presented in the following
table.
Year Ended December 31,
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(in thousands) 2002 2001 2000
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Service charges on deposit accounts $2,203 $1,857 $1,551
Securities gains, net 3,084 3,182 46
Earnings on bank owned life insurance 1,678 1,784 822
Other service fees 1,145 990 822
Investment and insurance fees 35 29 -
Gains on sales of mortgages, net 8 14 10
Other non-interest income 151 181 175
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Total $8,304 $8,037 $3,426
===================================================================================================================================
Service charges on deposit accounts represent the largest single source of
core non-interest income. Service charges on deposit accounts increased to
$2.2 million in 2002 compared to $1.9 million in 2001 and $1.6 million in
2000. The increases were due principally to increased income from overdraft
fees and to additional branch locations generating a larger base of
transaction accounts and the related fee income. We have continued targeted
marketing campaigns on lower cost or interest free demand deposit accounts
designed to lower our cost of funds and generate additional service charge or
fee income.
Net gains on the sale of securities totaled $3.1 million in 2002 compared to
net securities gains of $3.2 million and $46,000, respectively, in 2001 and
2000. In 2002, net gains resulted primarily from the sale of fixed rate 30-
year mortgage-backed securities, 30-year fixed rate trust preferred securities
and other securities with longer duration or extension risk. This strategy
restricted the improvement in our net interest margin during 2002 to achieve
the asset and liability objective of reducing longer-term interest rate risk
in a rising interest rate environment.
Earnings on BOLI totaled $1.7 million in 2002, a decrease of $106,000 or
5.9% compared to $1.8 million in 2001. The modest decline in income was
primarily due to lower yields on the floating rate portion of BOLI assets we
own. Income from BOLI totaled $822,000 in 2000. In December 2002, we purchased
an additional $7.5 million of BOLI assets, bringing our total investment in
BOLI assets to approximately $40.9 million. The purchase of BOLI assets in
2002 had little impact on our liquidity position. As was the case with all of
our BOLI asset purchases, after the initial purchase there are no additional
premiums paid on these policies. BOLI assets offset the cost of deferred
compensation plans and reduce our overall effective tax rate.
7
We also generate non-interest income from a variety of fee-based services.
These include Second Check(R) fees, Automated Teller Machine (ATM) fees on
non-customers, cash management and other customer related service fees. Fee
schedules are reviewed annually to reflect our current costs and competitive
factors. Other service fees increased 15.7% to $1.1 million in 2002 from
$990,000 in 2001. Other service fees totaled $822,000 in 2000.
Other non-interest income is primarily composed of income derived from
mortgage servicing and safe deposit box rentals. Other non-interest income
totaled $151,000 in 2002, a decrease of $30,000 or 16.6% when compared to
$181,000 in 2001. Other non-interest income totaled $175,000 in 2000.
Non-interest income represented only 6.5% of our total revenues in 2002. As
part of our longer-term strategic objective of increasing non-interest income,
we have introduced several initiatives over the last few years and will
continue to do so. Started in 2001, YNB Financial Services, Inc. generated
$35,000 in investment and insurance fees in 2002 by offering a comprehensive
array of financial planning, investment, and insurance products to individual
and business customers through third party providers. In 2002, we introduced
enhanced Internet banking services, that include electronic bill payment.
Looking forward in 2003, we will be offering enhanced cash management
services. We anticipate these services, requested by our customers, will
provide additional non-interest income or increased non-interest bearing
balances, which would be expected to generate additional net interest income.
NON-INTEREST EXPENSE
Non-interest expense consists of salaries and employee benefits, occupancy,
equipment and all other operating expenses we incur. Non-interest expense
totaled $31.0 million in 2002, an increase of $2.0 million or 6.9%, compared
to $29.0 million in 2001. Non-interest expense in 2001 increased 27.1% from
$22.9 million in 2000. The largest increases in non-interest expense in 2002
compared to 2001 were primarily in salaries and employee benefits and
occupancy expense. In 2002, we early adopted Statement of Financial Accounting
Standards Board (FASB) No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement eliminated the treatment of the early retirement of debt expense as
an extraordinary item. Consequently, the early retirement of debt expense of
$2.2 million has been reclassified as a non-interest expense for 2001. The
increase in non-interest expense was partially offset by the absence of early
retirement of debt expense in 2002.
The following table presents the major components of non-interest expense
for the years indicated.
Year Ended December 31,
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(in thousands) 2002 2001 2000
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Salaries and employee benefits $17,890 $14,923 $11,632
Occupancy expense, net 3,507 2,817 2,404
Equipment expense 2,423 2,021 1,892
Marketing 1,104 957 1,144
Stationery and supplies 823 633 628
Communication and postage 809 694 601
Outside services and processing 595 400 269
Audit and examination fees 570 501 396
Other real estate expenses 418 831 893
Attorneys' fees 258 238 257
Insurance (other) 205 152 156
FDIC insurance premium 200 180 161
Amortization of trust preferred expenses 190 210 176
Early retirement of debt expense -- 2,217 --
Other 2,052 2,278 2,252
- -----------------------------------------------------------------------------------------------------------------------------------
Total $31,044 $29,052 $22,861
===================================================================================================================================
8
Salaries and employee benefits, which represent the largest portion of non-
interest expense, increased $3.0 million or 19.9% to $17.9 million for the
year ended December 31, 2002 compared to $14.9 million for the same period in
2001. These expenses increased $3.3 million or 28.3% over 2000. The opening of
two branches and our northern regional headquarters office during 2002
contributed to the increase in salaries and employee benefits. Also, executive
management was strengthened, and experienced retail, lending and
administrative personnel were hired as part of our strategic plan. Full time
equivalent employees increased to 330 at December 31, 2002 from 293 at
December 31, 2001. From these staffing increases and in addition to annual
merit increases, salaries rose approximately $2.2 million or 19.8%. Employee
benefit expense totaled $4.3 million, an increase of $726,000, or 20.3% from
2001. Increases in benefits costs are primarily related to higher health
benefit costs on a broader employee base, various payroll taxes, and our
Employee Stock Ownership Plan (ESOP).
Salaries and employee benefits were $14.9 million in 2001, an increase of
28.3% from $11.6 million in 2000. The increase was primarily due to the
addition of new branch staffing, administrative staff and lending
professionals. Rising health benefit expenses, payroll taxes, and costs
associated with executive deferred compensation plans also contributed to the
increase for the comparable periods.
Salaries and employee benefits, as a percent of average assets, were 0.9% in
2002, 0.8% in 2001, and 0.9% in 2000, respectively.
Net occupancy expense increased $690,000 or 24.5% to $3.5 million in 2002
from $2.8 million in 2001. Total rent expense on leased properties increased
$546,000 and was the primary reason for the increase in occupancy expense in
2002. The increase in rent expense and other facility related expenses was due
to several factors. Occupancy expense in 2002 reflected a full year's rent
expense for our operations center relocated in the last quarter of 2001 and
our Bordentown branch opened in 2001. In addition, we opened two new branches
in Hunterdon County, including one in our regional headquarters, and our first
branch in Middlesex County in 2002.
The increase in occupancy expense in 2001 compared to 2000 was due primarily
to higher rent expense from new branches in Flemington, Lawrence and
Bordentown and normal rent increases on other leased branch properties, as
well as the relocation of our operations center into a new leased facility.
Occupancy expense as a percentage of average assets remained constant at
0.2% in 2002, 2001, and 2000.
Equipment expense increased $402,000 or 19.9% to $2.4 million in 2002 from
$2.0 million in 2001. The increase in equipment expense was primarily due to
higher depreciation expense, costs related to equipment maintenance, and the
upgrade of technology to increase processing capacity, efficiency and service
levels. Expenses associated with our ATM machines also increased 21.7% in
2002. The increase in equipment expenses in 2001 compared to 2000 was due to
the same factors. Investment in technology and equipment has allowed us to
improve service response time at our branches and further develop business and
consumer products and services.
Our expense base is reflective of a growing institution. Expenses such as
communication and postage, stationery and supplies have grown as the number of
facilities, phone lines and new accounts have increased. In 2003, we are
projecting additional expenses associated with the continuing implementation
of our retail strategy.
Marketing expenses increased by $147,000 or 15.4% in 2002 to $1.1 million,
compared to $957,000 in 2001. Marketing expenses were $1.1 million in 2000. We
continue focused marketing campaigns with the goal of attracting lower cost
deposits. We also continued our support of community activities in 2002.
Projected marketing expenses for 2003 are expected to increase as we further
develop our brand image and market our products and services in both new and
existing markets.
Other real estate (ORE) expenses decreased $413,000 to $418,000 in 2002 when
compared to 2001. More efficient management and the lower level of ORE
properties held in 2002 resulted in less expenses. ORE expenses for 2001
decreased $62,000 to $831,000 from $893,000 in 2000.
9
Other expenses include various professional fees, loan-related expenses and
other operating expenses. Other expenses totaled $2.1 million in 2002 compared
to $2.3 million in 2001 and 2000. The decrease in other expenses was primarily
due to cost containment programs initiated during the year.
Our ratio of non-interest expense to average assets decreased to 1.5% for
2002 compared to 1.6% in 2001 and 1.7% for 2000.
We continuously assess the efficiency of our operations, seeking ways to
best serve our customers while reducing operating costs. An important industry
productivity measure is the efficiency ratio. The efficiency ratio is
calculated by dividing total operating expenses by net interest income and
other income. An increase in the efficiency ratio can indicate that more
resources are being utilized to generate the same volume of income while a
decrease would indicate a more efficient use of resources. YNB's efficiency
ratio decreased in 2002 to 56.66% compared to 65.77% in 2001, and 55.54% in
2000. The efficiency ratio improved in 2002 as our net interest income
increased. Excluding net securities gains and the early retirement of debt
expense, our efficiency ratio was 60.04%, 65.47% and 55.60% for 2002, 2001,
and 2000, respectively. Further improvements to the efficiency ratio depend on
increases in net interest income, the level of non-interest income and growth
in non-interest expenses.
INCOME TAXES
The provision for income taxes, which is comprised of Federal and state income
taxes, was $5.4 million in 2002 compared to $2.6 million in 2001 and $4.3
million in 2000. For 2001, the income tax expense and effective tax rate
reflect the reclassification of early retirement of debt expense. The increase
in tax expense in 2002 resulted from higher taxable income and increased New
Jersey state taxes, partially offset by higher levels of tax-exempt income. In
July 2002, the New Jersey Business Tax Reform Act was passed. This Act created
an alternative minimum assessment for companies that operate in New Jersey.
The tax was retroactive to January 1, 2002. The alternative minimum tax may be
used to offset future tax liabilities, and as such, a deferred tax asset of
approximately $400,000 was established for the excess of this tax over the
regular New Jersey corporate business tax. The provisions for income taxes for
2002, 2001, and 2000 were at effective tax rates of 27.7%, 23.6%, and 29.2%,
respectively.
FINANCIAL CONDITION YEARS ENDED DECEMBER 31, 2002 AND 2001
TOTAL ASSETS
YNB's assets were $2.2 billion at year-end 2002 versus $1.9 billion the
previous year, an increase of $288.1 million, or 14.8%. The growth in our
asset base throughout 2002 was primarily due to an increase in loans and
securities. Average loans and securities grew 21.7% and 15.6%, respectively,
in 2002. YNB's strength as a business-focused, relationship-oriented
independent community bank was reflected in our financial results in 2002.
Headquartered in Mercer County for 78 years and having established
commercial loans as the foundation for our growth, we are now focusing our
efforts in expanding our retail network in the demographically attractive
markets of Hunterdon, Somerset and Middlesex Counties in New Jersey. We
believe that the strength of our markets, relationship banking philosophy, and
experienced management team, combined with industry consolidation, provide us
with continued opportunities to expand market share and attain the goal of
enhancing our franchise value.
Average interest earning assets in 2002 were $2.0 billion, a 17.9% increase
from $1.7 billion in 2001. The growth in average interest earning assets was
principally funded by the increase in average interest bearing deposits, and,
to a lesser extent, borrowed funds. Further supporting average interest
earning asset growth was a 20.0% increase in average stockholders' equity.
YNB's ratio of average interest earning assets to average assets increased
slightly to 96.6% in 2002, compared to 96.0% in 2001.
10
SECURITIES
YNB's securities portfolio totaled $875.4 million or 39.2% of assets at
December 31, 2002 versus $812.2 million, or 41.8% of assets at December 31,
2001. This represents a $63.2 million or 7.8% increase from 2001. In addition
to providing a reliable income stream, effective investment portfolio
management has provided a stable secondary liquidity source, a tool for
managing interest rate risk and a method of reducing our overall effective tax
rate. We also manage a portion of our investment portfolio, in our Investment
Growth Strategy, with the primary goals of enhancing return on average
stockholders' equity and earnings per share. On an average basis, the
securities portfolio represented 42.7% of average interest earning assets for
the year ended December 31, 2002, compared to 43.5% of average interest
earning assets for the year ended December 31, 2001.
Securities included in the Investment Growth Strategy totaled approximately
$230.1 million at December 31, 2002, compared to approximately $372.8 million
at December 31, 2001. This represents a decrease of 38.3% in 2002. This
strategy is comprised primarily of fixed rate agency mortgage-backed
securities. We determined in mid-2002, based on the limited market
opportunities in a lower interest rate environment, not to replace cash flows
from our Investment Growth Strategy. We believe the Investment Growth
Strategy, as a percentage of our total assets, will continue to decline over
time as our asset base continues to grow.
The available for sale (AFS) securities portfolio increased $74.2 million to
$820.7 million at December 31, 2002 from $746.5 million at December 31, 2001.
The available for sale portfolio principally consists of U.S. agency mortgage-
backed securities and government agency bonds, both callable and non-callable.
A continuing lower interest rate environment, in addition to strategies
implemented to reduce longer-term interest rate risk exposure in a rising rate
environment, resulted in a change in the composition of the AFS portfolio in
2002. During 2002, we sold 30-year fixed rate mortgage-backed and trust
preferred securities, and other securities with longer duration or extension
risk to reduce the average duration of the securities portfolio and more
effectively manage longer-term interest rate risk in a rising rate
environment. Shorter-duration securities and floating rate trust preferred
securities were purchased with the sale proceeds. The repositioning of the AFS
portfolio is expected to provide more consistent cash flows to invest in
securities in what we project to be a higher interest rate environment over
the next eighteen months.
Fixed rate U.S. agency securities and fixed rate U.S. agency Collateralized
Mortgage Obligations (CMOs) increased $136.0 million and $89.4 million,
respectively in 2002, accounting primarily for the net increase in the AFS
portfolio. Shorter duration U.S. agency CMOs and short-term agency callable
bonds were purchased to meet the asset and liability objectives of managing
longer-term interest rate risk and enhancing liquidity. These securities were
also purchased to reduce higher Federal funds sold balances as the average
yield for all of 2002 was only 1.59%. Conversely, fixed rate U.S. agency
mortgage-backed securities decreased $143.0 million in 2002, indicative of
sales activity and higher than projected prepayment speeds.
The yield on the available for sale portfolio decreased 118 basis points to
4.50% in 2002. In the fourth quarter alone, our investment portfolio, which is
made up of AFS securities representing 94% of the total, dropped in yield by
approximately 50 basis points, principally due to higher prepayment speeds
which negatively impacted the yield on mortgage-backed securities. We also
continue to invest in two money market funds. The average investment in money
market funds during 2002 was $36.5 million. The yields on these funds exceeded
the yield on Federal funds sold by approximately 10 to 15 basis points in
2002.
Activity in the AFS portfolio is undertaken primarily to manage liquidity
and interest rate risk and to take advantage of market conditions that create
more attractive returns. AFS securities are reported at fair value, with
unrealized gains and losses, net of tax, included as a separate component of
stockholders' equity.
Volatility in the bond market continued throughout 2002 with the yield curve
fluctuating often. Indicative of this volatility was the change in the market
value of the AFS portfolio. To achieve previously stated asset and liability
objectives, we took advantage of the volatile yield curve to reposition
securities throughout 2002, which resulted in net securities gains of $3.1
million. At December 31, 2002, securities available for sale had net
unrealized gains of $11.1 million compared to net unrealized gains of $555,000
at December 31, 2001. The net unrealized gain, net of tax effect, was $7.4
million at December 31, 2002 compared to a net unrealized gain of $361,000 at
December 31, 2001, and is reported in "Accumulated other comprehensive income"
in stockholders' equity.
11
Trading securities are purchased specifically for short-term appreciation
with the intent of selling in the near future. Minimal net gains of $24,000
were realized on trading securities for 2002. There were no trading securities
outstanding at December 31, 2002.
Investment securities classified as held to maturity totaled $54.7 million
at December 31, 2002 compared to $65.8 million at December 31, 2001.
Securities in this category, for which there is the intent and the ability to
hold to maturity, are carried at amortized historical cost. This portfolio is
comprised of state and municipal and agency mortgage-backed securities. The
decline in the held to maturity portfolio was due to the call of $13.0 million
in callable agency securities. Partially offsetting this decline was net
growth of $1.6 million in the municipal bond portfolio. The municipal bond
portfolio grew to $50.3 million at December 31, 2002 from $48.7 million at
December 31, 2001. Municipal bonds were purchased to reduce our effective tax
rate and enhance the tax equivalent yield of the portfolio. Based on our
anticipated levels of taxable income, we expect in 2003 to increase the size
of our municipal bond portfolio. At December 31, 2002, investment securities
had unrealized gains of $2.0 million compared to net unrealized losses of
$866,000 at December 31, 2001. The yield on this portfolio increased 6 basis
points to 7.01% in 2002 as compared to 6.95% in 2001.
The following tables present the amortized cost and market values of YNB's
securities portfolios as of December 31, 2002, 2001, and 2000.
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
(in thousands) Cost Value Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of other U.S.
government agencies $245,973 $248,901 $113,862 $113,861 $173,608 $172,374
Mortgage-backed securities 468,745 478,357 521,988 523,179 338,377 336,798
Corporate obligations 55,087 53,696 72,946 72,311 26,713 27,091
Federal Reserve Bank Stock 2,411 2,411 2,381 2,381 2,036 2,036
Federal Home Loan Bank Stock 37,300 37,300 34,751 34,751 26,639 26,639
- -----------------------------------------------------------------------------------------------------------------------------------
Total $809,516 $820,665 $745,928 $746,483 $567,373 $564,938
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
(in thousands) Cost Value Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------------------------
Obligations of other U.S. government agencies $ - $ - $13,000 $13,066 $ 68,185 $ 66,439
Obligations of state and political subdivisions 50,308 52,212 48,694 47,729 38,660 38,336
Mortgage-backed securities 4,382 4,498 4,059 4,092 3,855 3,785
- -----------------------------------------------------------------------------------------------------------------------------------
Total $54,690 $56,710 $65,753 $64,887 $110,700 $108,560
===================================================================================================================================
12
The expected maturities and average weighted yields for YNB's securities
portfolios as of December 31, 2002 are shown below. Yields for tax-exempt
securities are presented on a fully taxable equivalent basis assuming a 34%
tax rate.
- -----------------------------------------------------------------------------------------------------------------------------------
SECURITY MATURITIES AND AVERAGE WEIGHTED YIELDS
SECURITIES AVAILABLE FOR SALE
December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
(in thousands) one year five years ten years ten years Total
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of other U.S. government
agencies $24,348 $193,184 $31,369 $ - $248,901
Mortgage-backed securities - - 49,573 428,784 478,357
Corporate obligations 1,287 4,861 1,000 46,548 53,696
Federal Reserve Bank Stock - - - 2,411 2,411
Federal Home Loan Bank Stock - - - 37,300 37,300
- -----------------------------------------------------------------------------------------------------------------------------------
Total $25,635 $198,045 $81,942 $515,043 $820,665
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average yield, computed on a tax equivalent basis 3.28% 3.77% 4.82% 4.79% 4.50%
===================================================================================================================================
INVESTMENT SECURITIES
December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
(in thousands) one year five years ten years ten years Total
- -----------------------------------------------------------------------------------------------------------------------------------
Obligations of state and political subdivisions $ 750 $3,588 $7,366 $38,604 $50,308
Mortgage-backed securities - - 1,174 3,208 4,382
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 750 $3,588 $8,540 $41,812 $54,690
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average yield, computed on a tax equivalent basis 6.99% 7.46% 6.77% 7.03% 7.01%
===================================================================================================================================
Expected maturities will differ from stated maturities because issuers may
have the right to call their obligations with or without call or prepayment
penalties. Mortgage-backed securities experience principal cash flows based on
the activity on the underlying mortgages.
Investments in mortgage-backed securities involve prepayment and interest
rate risk. We attempt to minimize these risks by diversifying the coupons and
final maturity dates of the mortgage-backed securities, buying seasoned
securities with consistent and predictable prepayment histories, average lives
and yields. At December 31, 2002, YNB had mortgage-backed securities totaling
$482.7 million, of which $454.3 million were fixed rate. At December 31, 2001,
YNB had mortgage-backed securities totaling $527.2 million, of which $507.6
million were fixed rate. Certain of these securities can be purchased at
premiums or discounts. The risk of fixed-rate mortgage-backed securities is
similar to fixed-rate loans. In rising interest rate environments, the rate of
prepayment on fixed-rate mortgage-backed securities tends to decrease because
of lower prepayments on the underlying mortgages, and conversely, as interest
rates fall, prepayments on such securities tend to rise. The yield and average
lives of these securities will change based on prepayment speeds and how the
premium or discount must be amortized or accreted. Significantly lower
interest rates and higher than projected prepayment speeds led to lower than
projected yields and $264.1 million in principal cash flows from mortgage-
backed securities in 2002, compared to $188.3 million in 2001.
Included in mortgage-backed securities are U.S. agency CMOs, which totaled
approximately $219.5 million at December 31, 2002, compared to $126.2 million
at December 31, 2001. A CMO is a mortgage-backed security created by
prioritizing the cash flows from the underlying mortgage pool in order to meet
different objectives. All CMOs at December 31, 2002 were held in the available
for sale portfolio.
13
LOANS
We continue to emphasize commercial real estate and commercial and industrial
lending to individuals and small to mid-sized businesses. From December 31, 1998
to December 31, 2002, we increased our total loans from $491.6 million to $1.2
billion for a 24.9% compound annual growth rate during that period. We have
achieved these results by stressing quality growth, product and industry
diversification, while maintaining strong underwriting standards in a
competitive environment.
Loans historically have been the primary component of our earning assets. By
expanding geographically into new markets, we have continued to experience
robust credit demand. Our larger capital base has resulted in a higher legal
lending limit and attracted larger loan relationships and increased business
from existing customers.
During 2002, total loans increased $187.2 million or 18.6%, reaching $1.2
billion at December 31, 2002 from $1.0 billion at December 31, 2001.
The following table sets forth YNB's loan portfolio composition at the dates
indicated.
- -----------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) Amount % Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial real estate
Owner occupied $ 164,450 13.8% $ 143,767 14.3% $135,234 16.5% $118,068 18.3% $ 85,856 17.5%
Investor occupied 321,583 26.9 255,471 25.3 198,184 24.2 173,645 26.8 109,316 22.2
Construction and
development 121,295 10.1 99,978 9.9 93,432 11.4 48,535 7.5 36,150 7.4
Residential
1-4 family 116,829 9.8 107,840 10.7 92,876 11.4 74,639 11.5 63,632 12.9
Multi-family 34,012 2.8 33,970 3.4 27,800 3.4 18,678 2.9 14,858 3.0
Commercial and industrial
Term 129,513 10.8 117,005 11.6 116,995 14.3 63,066 9.7 49,714 10.1
Lines of Credit 207,562 17.4 164,075 16.3 72,217 8.8 77,152 11.9 62,156 12.6
Demand 972 0.1 1,055 0.1 1,389 0.2 959 0.2 741 0.2
Consumer
Home Equity 70,579 5.9 58,084 5.8 50,809 6.2 45,469 7.0 45,396 9.2
Installment 19,078 1.6 19,266 1.9 22,428 2.7 20,375 3.2 18,093 3.7
Other 9,270 0.8 7,462 0.7 6,925 0.9 6,151 1.0 5,737 1.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,195,143 100.0% $1,007,973 100.0% $818,289 100.0% $646,737 100.0% $491,649 100.0%
===================================================================================================================================
Investor occupied and commercial and industrial lines of credit were the two
loan types with the highest loan growth in 2002, increasing $66.1 million and
$43.5 million, respectively. YNB's loan portfolio represented 53.6% of total
assets at December 31, 2002 versus 51.9% at year-end 2001.
At December 31, 2002, commercial real estate and commercial and industrial
loans represented 79.1% of our total loans. In underwriting these loans, we
first evaluate the cash flow capability of the borrower to repay the loan as
well as the borrower's business experience. In addition, a majority of
commercial loans are also secured by real estate and business assets, and
supported by the personal guarantees of the principals. We also diligently
monitor the composition and quality of the overall commercial loan portfolio
including significant credit concentrations by borrower or industry.
Commercial real estate loans increased by $108.1 million, or 21.7% in 2002
to $607.3 million from $499.2 million at December 31, 2001. Commercial real
estate loans consist of owner occupied, investor occupied, and construction
and development loans. Commercial real estate loans generally have a final
maturity of five to fifteen years. Construction and 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. Generally,
construction loan terms run between one and two years and are interest only,
adjustable rate loans indexed to the prime rate. Our 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. Growth in commercial real estate loans accounted for
57.8% of the total loan growth in 2002 compared to 38.2% in 2001.
14
Residential loans are comprised of 1-4 family and multi-family loans. This
segment of the portfolio totaled $150.8 million at December 31, 2002, up $9.0
million, or 6.4% from the prior year total of $141.8 million. The low interest
rate environment stimulated ongoing refinancing activity and growth in this
portfolio during 2002. Residential 1-4 family loans represented $116.8
million, or 77.5% of the total. Our residential mortgage loans are secured by
first liens on the underlying real property. We are a participating seller/
servicer with the Federal National Mortgage Association (FNMA) and the Federal
Home Loan Mortgage Corporation (FHLMC) and we generally underwrite our single-
family residential mortgage loans to conform with standards required by these
agencies. Multi-family loans, which represented $34.0 million of the total,
primarily consist of loans secured by apartment complexes.
Commercial and industrial loans include term loans, lines of credit, and
demand loans. Commercial and industrial loans increased $55.9 million, or
19.8%, at December 31, 2002 to $338.0 million from $282.1 million at December
31, 2001. Higher balances on business lines of credit from both new and
existing relationships primarily accounted for the increase in commercial and
industrial loans. These loans accounted for 29.9% of the total loan growth in
2002. Commercial and industrial loans are typically loans made to small- to
middle-market businesses and consist of working capital loans, which are used
to finance inventory, receivables, and other working capital needs of
commercial borrowers. In addition, term loans are provided for equipment
needs. As shown in the table below, we have maintained diversification of risk
within industry classification concentrations with the goal of limiting the
risk of loss from any single unexpected event or trend.
COMMERCIAL AND INDUSTRIAL LOANS
(dollars in thousands)
December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Percent Number
Industry Classification Balance of balance of loans
- -----------------------------------------------------------------------------------------------------------------------------------
Services $ 88,449 26.2% 259
Retail trade 30,859 9.1 100
Real estate-related 52,250 15.5 176
Manufacturing 18,325 5.4 74
Construction 73,373 21.7 99
Wholesale trade 13,204 3.9 52
Individuals 33,946 10.0 109
Transportation and public utilities 5,801 1.7 33
Other 21,840 6.5 57
- -----------------------------------------------------------------------------------------------------------------------------------
Total $338,047 100.0% 959
===================================================================================================================================
Consumer loans increased 16.6% to $98.9 million at December 31, 2002
compared to $84.8 million at December 31, 2001. Consumer loans include fixed
rate home equity loans, floating rate home equity lines, indirect auto loans
and other types of installment loans. Home equity loans and lines represented
71.3% of total consumer loans. In 2002, we believe that comparatively lower
interest rates and increased marketing accounted for the increased activity in
the home equity portfolio. The expansion of our retail network is expected to
generate additional opportunities to increase the size of our consumer loan
portfolio.
Substantially all of our business is with customers located within Mercer
County and contiguous counties. Changes in the region's economic environment
and real estate market conditions could affect our borrowers' ability to repay
their loans, which could result in an adverse impact to our financial
condition, performance and loan growth. Competition and future consolidation
in our markets could also impact future loan growth.
TOTAL LOAN PORTFOLIO
(In millions) 1998 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------------
$492 $647 $818 $1,008 $1,195
- -----------------------------------------------------------------------------------------------------------------------------------
15
We enter into a variety of financial instruments with off-balance sheet risk
in the normal course of business. These financial instruments include
commitments to extend credit and letters of credit, both of which involve, to
varying degrees, elements of risk in excess of the amount reflected in the
consolidated financial statements.
Credit risk for letters of credit is managed by limiting the total amount of
arrangements outstanding and by applying normal credit policies to all
activities with credit risk. Collateral is obtained based on management's
credit assessment of the customer.
The contract amounts of off-balance sheet financial instruments as of
December 31, 2002 and 2001 for commitments to extend credit were $243.1
million and $191.8 million, respectively, and for letters of credit were $19.6
million and $13.4 million, respectively.
Commitments to extend credit and letters of credit may expire without being
drawn upon, and therefore, the total commitment amounts do not necessarily
represent future cash flow requirements.
The following table provides information concerning the maturity and
interest rate sensitivity of YNB's commercial and industrial and commercial
real estate -- construction and development loan portfolios at December 31,
2002.
- -----------------------------------------------------------------------------------------------------------------------------------
After one
Within but within After
(in thousands) one year five years five years Total
- -----------------------------------------------------------------------------------------------------------------------------------
Maturities:
Commercial and industrial $174,932 $140,752 $22,363 $338,047
Commercial real estate-construction and development 75,985 45,093 217 121,295
- -----------------------------------------------------------------------------------------------------------------------------------
Total $250,917 $185,845 $22,580 $459,342
- -----------------------------------------------------------------------------------------------------------------------------------
Type:
Floating rate loans $232,744 $104,293 $ 9,156 $346,193
Fixed rate loans 18,173 81,552 13,424 113,149
- -----------------------------------------------------------------------------------------------------------------------------------
Total $250,917 $185,845 $22,580 $459,342
===================================================================================================================================
ASSET QUALITY
We have successfully grown our loan portfolio while at the same time maintaining
high asset quality standards. Our significant lending experience, collateral
based approach to lending, and the effective development and management of our
commercial lending relationships have resulted in low levels of nonperforming
assets and net charge offs.
Nonperforming assets decreased $132,000 to $7.3 million at December 31, 2002
compared to $7.4 million at December 31, 2001. For the five-years ended
December 31, 2002, YNB's nonperforming assets have averaged less than $8
million. Credit quality has remained strong during periods of robust loan
growth. Nonperforming assets represented 0.33% of total assets at December 31,
2002 and 0.38% at December 31, 2001. The improvement in this ratio was due to
both the growth in YNB's asset base and the reduction in nonperforming assets.
Nonperforming assets as a percentage of total loans and other real estate were
0.61% at December 31, 2002, compared to 0.74% at December 31, 2001. Indicative
of our collateral-based approach to lending, the ratio of net loan charge offs
as a percent of average total loans was 0.10% for the year ended December 31,
2002 and, based on year-end ratios, has averaged 0.17% for the five year
period ended December 31, 2002. Nonperforming assets consist of nonperforming
loans and other real estate owned. Nonperforming loans are composed of loans
on a nonaccrual basis, loans which are contractually past due 90 days or more
as to interest or principal payments but have not been classified as
nonaccrual and loans whose terms have been restructured to provide a reduction
or deferral of interest or principal because of a deterioration in the
financial position of the borrower.
16
Our policy regarding nonaccrual loans varies by loan type. Generally,
commercial loans are placed on nonaccrual when they are 90 days past due,
unless these loans are well secured and in the process of collection or,
regardless of the past due status of the loan, when management determines that
the complete recovery of principal or interest is in doubt. Consumer loans are
generally charged off after they become 120 days past due. Residential
mortgage loans are not generally placed on nonaccrual unless the value of the
real estate has deteriorated to the point that a potential loss of principal
or interest exists. Subsequent payments are credited to income only if
collection of principal is not in doubt. If principal and interest payments
are brought contractually current, and future collectibility is reasonably
assured, loans are returned to accrual status.
Restructured loans remain on nonaccrual until collectibility improves and a
satisfactory payment history is established, generally six consecutive monthly
payments.
The following table sets forth nonperforming assets and risk elements in
YNB's loan portfolio by type for the years indicated.
- -----------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $2,395 $ 888 $2,075 $ 733 $1,035
Residential 1,526 1,133 2,423 740 175
Commercial and industrial 1,143 1,494 851 441 594
Consumer 55 98 453 275 242
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 5,119 3,613 5,802 2,189 2,046
- -----------------------------------------------------------------------------------------------------------------------------------
Restructured loans 711 770 532 540 634
- -----------------------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due:
Residential 323 514 526 206 771
Commercial and industrial - - - 47 -
Consumer 121 228 173 96 422
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 90 days or more past due 444 742 699 349 1,193
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 6,274 5,125 7,033 3,078 3,873
Other real estate 1,048 2,329 2,041 2,585 4,957
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $7,322 $7,454 $9,074 $5,663 $8,830
===================================================================================================================================
Nonperforming loans totaled $6.27 million at December 31, 2002, an increase
of $1.14 million from the $5.13 million amount reported at December 31, 2001.
The increase in nonperforming loans resulted from an increase in nonaccrual
loans.
Nonaccrual loans were $5.1 million, or 0.43% of total loans, at December 31,
2002 an increase of $1.5 million from the December 31, 2001 total of $3.6
million. Commercial real estate loans accounted principally for the increase
in nonaccrual loans. Commercial loans represented approximately 70% of total
nonaccrual loans.
There was one restructured commercial loan totaling $711,000 at December 31,
2002 compared to $770,000 at December 31, 2001. Based upon the recent payment
history, this loan returned to accruing status in January 2003.
At December 31, 2002, loans that were 90 days or more past due but still
accruing interest represented $444,000, or 0.04% of total loans, compared to
$742,000, or 0.07% of total loans at December 31, 2001. Six residential
mortgage loans accounted for 73% of total loans 90 days or more past due.
Management's decision to accrue interest on these loans is based on the level
of collateral and the status of collection efforts.
Other real estate (ORE) totaled $1.0 million at December 31, 2002, down from
$2.3 million at December 31, 2001. The decrease in ORE for 2002 was
principally due to the sale of one property. ORE is reported at the lower of
cost or fair value at the time of acquisition and at the lower of fair value,
less estimated costs to sell, or cost thereafter.
17
We believe that our historical low level of nonperforming assets in relation
to an increasing loan portfolio is reflective of our credit culture, which
includes strict underwriting standards, active loan review, and strong credit
policies. Our objective is to maintain a high credit quality loan portfolio
regardless of the economic climate. The continuing weakness of the economy,
however, could cause nonperforming asset levels to increase from their current
or historical levels, which would have a negative impact on our earnings.
TOTAL NONPERFORMING ASSETS AS A PERCENTAGE OF TOTAL ASSETS
(Percentage) 1998 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------------
1.17% 0.50% 0.56% 0.38% 0.33%
===================================================================================================================================
ALLOWANCE FOR LOAN LOSSES
We have identified the allowance for loan losses to be a critical accounting
policy. We utilize a system to rate substantially all of our loans based on
their respective risk. Our emphasis on commercial real estate and commercial
and industrial loans has provided higher earnings. These loans, however,
entail greater risk than residential mortgage and consumer loans. The primary
emphasis in our risk rating system is on commercial real estate and commercial
and industrial loans.
Risk is measured by use of a matrix, which is customized to measure the risk
of each loan type. Risk ratings of 1 to 5 are considered to be acceptable risk
and consist of loans rated as either "minimal, modest, better than average,
average and acceptable." Loans with acceptable risk were reserved at a range
of 0.35% to 1.50% at December 31, 2002. Risk ratings of between 6 and 8 are
considered higher than acceptable risk and consist of loans rated as "special
mention, substandard and doubtful." Due to the higher level of risk, these
loans were reserved at a range of 3.75% to 50% at December 31, 2002. Loans
with a risk rating of 9 were considered to be a loss and reserved at 100% at
December 31, 2002. Residential mortgage and consumer loans are assigned
individual reserve percentages of between 0.25% for the lowest risk to 0.75%
for higher risk loans.
In setting the reserve percentage for each risk rating, we utilize a
computer software program to perform migration analysis to determine
historical loan loss experience. In addition, we use our judgment concerning
the anticipated impact on credit risk of economic conditions, real estate
values, interest rates and level of business activity. Allocations to the
allowance for loan losses, both specific and general, are determined after
this review.
We provide for possible loan losses by a charge to current operations to
maintain the allowance for loan losses at an adequate level according to our
documented allowance adequacy methodology. The provision for loan losses for
2002 was $4.4 million, compared to $3.9 million and $3.7 million for 2001 and
2000, respectively. The increase in the provision for loan losses in 2002 was
principally due to three factors. First, we continued to experience strong
loan growth, principally commercial, in 2002. Second was the modest increase
of $1.1 million in nonperforming loans. A third factor was the weakening of
credit quality of certain borrowers as reflected by risk rating downgrades in
2002. We believe that most of these downgrades reflected the impact of a
slowing economy on the level of business activity. If these trends continue in
2003, there may be an increase in nonperforming loans.
Our gross charge offs in 2002 totaled $1.2 million, compared with $1.7
million in 2001 and $1.9 million in 2000. Losses on loans and loans which are
determined to be uncollectible are charged against the allowance and
subsequent recoveries, if any, are credited to it. Our gross recoveries
totaled $92,000 in 2002, compared to $382,000 in 2001 and $136,000 in 2000.
18
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
At or for the year ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance balance, beginning of year $ 13,542 $ 10,934 $ 8,965 $ 6,768 $ 5,570
Charge offs:
Commercial real estate (78) (696) (356) (233) (453)
Residential (168) - (288) - -
Commercial and industrial (719) (591) (896) (278) (94)
Consumer (223) (412) (327) (574) (296)
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge offs (1,188) (1,699) (1,867) (1,085) (843)
===================================================================================================================================
Recoveries:
Commercial real estate 1 - - 20 4
Commercial and industrial 11 31 - - 3
Consumer 80 351 136 87 59
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 92 382 136 107 66
===================================================================================================================================
Net charge offs (1,096) (1,317) (1,731) (978) (777)
Provision charged to operations 4,375 3,925 3,700 3,175 1,975
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance balance, end of year $ 16,821 $ 13,542 $ 10,934 $ 8,965 $ 6,768
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, end of year $1,195,143 $1,007,973 $818,289 $646,737 $491,649
Average loans outstanding $1,085,306 $ 891,957 $723,570 $564,552 $438,050
Allowance for loan losses to total loans 1.41% 1.34% 1.34% 1.39% 1.38%
Net charge offs to average loans outstanding 0.10 0.15 0.24 0.17 0.18
Nonperforming loans to total loans 0.52 0.51 0.86 0.48 0.79
Nonperforming assets to total assets 0.33 0.38 0.56 0.50 1.17
Nonperforming assets to total loans and other real estate owned 0.61 0.74 1.11 0.87 1.78
Allowance for loan losses to
nonperforming assets 229.73 181.67 120.50 158.31 76.65
Allowance for loan losses to
nonperforming loans 268.11% 264.23% 155.47% 291.26% 174.75%
===================================================================================================================================
At December 31, 2002, the allowance for loan losses totaled $16.8 million,
an increase of $3.3 million or 24.2% from $13.5 million at December 31, 2001,
which compares to $10.9 million at December 31, 2000. The increase of the
allowance reflected the extensive analysis previously discussed. It is our
assessment, based on our judgment and analysis, that the allowance is
appropriate in relation to the credit risk at December 31, 2002. The ratio of
the allowance for loan losses to total loans was 1.41%, 1.34%, and 1.34%, at
December 31, 2002, 2001, and 2000, respectively. Another measure of the
adequacy of the allowance for loan losses is the ratio of the allowance to
total nonperforming loans. At December 31, 2002 this ratio was 268.11% versus
264.23% at December 31, 2001.
Extending credit to businesses and consumers exposes us to credit risk. We
manage credit risk in the loan portfolio through adherence to strict
underwriting standards, guidelines and limitations. Various approval levels,
based on the amount of the loan and other credit considerations, have also
been established.
We recognize that despite our best efforts to minimize risk, losses will
occur. In times of economic slowdown, either within our markets or nationally,
the risk inherent in YNB's loan portfolio will increase. The timing and amount
of loan losses that may occur is dependent upon several factors, most notably
current and expected general, regional and local economic conditions and the
specific financial condition of our borrowers. Although we use the best
information available, the level of the allowance for loan losses remains an
estimate which is subject to significant judgment and short-term changes.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following table describes the allocation for loan losses among various
categories of loans and certain other information as of the dates indicated.
An unallocated allowance is distributed proportionately among each loan
category. This unallocated portion of the loan loss allowance is important to
maintain the overall allowance at a level that is adequate to absorb potential
credit losses inherent in the total loan portfolio. The allocation is made for
analytical purposes only and is not necessarily indicative of the categories
in which future loan losses may occur. The total allowance is available to
absorb losses from any segment of loans.
19
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to Reserve Percent of Loans to
(in thousands) Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial real
estate $ 8,189 48.7% 50.8% $ 6,843 50.5% 49.5% $ 6,303 57.6% 52.1%
Residential 1,063 6.3 12.6 1,106 8.2 14.1 1,118 10.2 14.8
Commercial and
industrial 6,886 40.9 28.3 4,974 36.7 28.0 2,739 25.1 23.3
Consumer 683 4.1 8.3 619 4.6 8.4 774 7.1 9.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total $16,821 100.0% 100.0% $13,542 100.0% 100.0% $10,934 100.0% 100.0%
===================================================================================================================================
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to
(in thousands) Amount Allowance Total Loans Amount Allowance Total Loans
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial real
estate $5,229 58.3% 52.6% $3,594 53.1% 47.1%
Residential 840 9.4 14.4 598 8.8 15.9
Commercial and
industrial 2,303 25.7 21.8 1,994 29.5 22.9
Consumer 593 6.6 11.2 582 8.6 14.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total $8,965 100.0% 100.0% $6,768 100.0% 100.0%
===================================================================================================================================
DEPOSITS
Deposits represent our primary funding source supporting earning asset growth.
YNB's deposit base consists of non-interest and interest bearing demand
deposits, savings and money market accounts, and time deposits. In 2002, we
continued to implement our retail strategy. Our goal is to further develop the
earnings power and increase the value of our retail franchise. To achieve
these goals, we plan to further reduce our cost of funds and increase our non-
interest income by attracting lower cost transaction and other core deposit
accounts.
In 2002, we continued our geographic expansion into the demographically
attractive markets of Hunterdon and Middlesex Counties with a planned entry
into Somerset County by mid-2003. Through marketing of our expanded deposit
product offerings, we expect to attract core deposits in our primary Mercer
County market in addition to targeted markets such as Hunterdon, Somerset and
Middlesex Counties.
Total deposits grew to $1.3 billion at December 31, 2002 compared to $1.1
billion at year-end 2001, an increase of 16.4%. The successful opening of
branches in new markets and increased marketing resulted in growth across all
deposit types. The growth in our deposit base in 2002 was primarily in money
market deposits, and, to a lesser extent, time deposits. Average total
deposits for 2002 totaled $1.2 billion compared to $1.0 billion for 2001, an
increase of 19.9%. The average rate paid on YNB's deposits during 2002 was
2.83%, a 160 basis point decrease from the 4.43% average rate for 2001. As
anticipated, our cost of funds dropped dramatically as higher costing time
deposits repriced lower in 2002.
Due to the lower interest rate environment in 2002 and a strong liquidity
position supported by cash flows from the investment portfolio we have
aggressively lowered rates on time deposits. Our depositors' preference in
2002 was our competitively priced Premier Money Market account. The result has
been a lower cost of funds and change of composition in our deposit base. Time
deposits were almost 60% of total deposits at the end of 2000 and have
declined to 49.3% of our deposit base at December 31, 2002. Growth in money
markets accounted for almost 62% of the total increase in deposits in 2002.
Deposit growth experienced in 2001 was also led primarily by money markets.
20
The following table provides information concerning average balances and
rates of deposits for the years indicated:
- -----------------------------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSIT BALANCES AND RATES
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
% of % of % of
(in thousands) Balance Rate Total Balance Rate Total Balance Rate Total
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand deposits $ 118,154 -% 9.8% $ 104,577 -% 10.4% $ 96,024 -% 11.4%
Interest bearing demand deposits 113,261 2.38 9.4 88,765 2.70 8.8 67,443 2.60 8.0
Money market deposits 276,506 2.75 22.9 154,901 4.02 15.4 89,232 4.85 10.6
Savings deposits 80,218 1.16 6.7 74,929 1.75 7.4 76,337 2.43 9.0
Certificates of deposit of $100,000 or more 148,119 3.50 12.3 129,340 5.86 12.9 106,581 6.47 12.7
Other time deposits 469,858 3.78 38.9 453,747 5.97 45.1 408,414 6.07 48.3
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,206,116 2.83% 100.0% $1,006,259 4.43% 100.0% $844,301 4.69% 100.0%
===================================================================================================================================
In addition to marketing CDs through our branch network, we also market them
through a computer-based service, which allows us to place our CDs nationally.
During 2002, we continued our strategy of reducing these generally higher
costing CDs generated through this service. These CDs, which totaled $107.0
million at December 31, 2001, declined to $96.8 million at year-end 2002. The
average maturity of these CDs is approximately eleven months. This funding
source has represented a dependable source of secondary liquidity during times
of increased loan demand. We will continue our efforts to reduce our reliance
on this generally higher cost of funds through the successful implementation
of our retail strategy.
The average balance of non-interest bearing demand deposits was $118.2
million during 2002, an increase of $13.6 million, or 13.0% from $104.6
million during 2001. Non-interest bearing demand deposits represent a stable,
interest-free source of funds. The increase in demand deposits is primarily
from the growth in new and existing business relationships. The increase in
business and personal checking accounts has contributed positively to net
interest income.
Average interest bearing demand, money market and savings deposits increased
27.6%, 78.5%, and 7.1%, respectively, from 2001 to 2002. Our primary deposit
gathering strategy emphasizes growth in non-interest bearing demand deposits
and other low cost core deposits, such as interest bearing demand and money
market accounts. In 2002, we marketed our core deposit accounts to both
business and personal depositors. Money market deposits experienced the
highest average growth, increasing by $121.6 million. The average cost of
these deposits decreased from 4.02% in 2001 to 2.75% in 2002 due to the lower
interest rate environment.
Total average time deposits, which consist of certificates of deposit of
$100,000 or more and other time deposits, which include individual retirement
accounts, increased 6.0% or $34.9 million to $618.0 million from $583.1
million in 2001. The average months to maturity on the entire CD portfolio at
December 31, 2002 was approximately twelve months. As we expected, the cost of
average time deposits decreased modestly in 2001, due to the repricing
characteristics of these deposits. As these time deposits matured in 2002, the
cost of these deposits significantly decreased due to the lower interest rate
environment and the aggressive lowering of CD or time deposit rates. The
average cost of time deposits declined 224 basis points in 2002 to 3.71% from
5.95% in 2001. As we move into 2003, time deposit costs should continue to
drop.
21
The following table details amounts and maturities for certificates of
deposit of $100,000 or more for the years indicated:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Maturity range:
Within three months $ 46,683 $ 60,878
After three months but within six months 22,015 28,096
After six months but within twelve months 36,466 44,017
After twelve months 40,027 4,693
- --------------------------------------------------------------------------------
Total $145,191 $137,684
================================================================================
Certificates of deposit of $100,000 or more totaled $145.2 million, or 11.4%
of deposits, at December 31, 2002 compared to $137.7 million, or 12.6% of
deposits at December 31, 2001.
TOTAL DEPOSITS AT YEAR END
(In millions) 1998 1999 2000 2001 2002
- -----------------------------------------------------------------------------------------------------------------------------------
$520 $744 $950 $1,093 $1,272
===================================================================================================================================
We believe the successful implementation of our retail strategy, which
includes the expansion of our branch network, enhancing our brand image, and
upgrading our technology infrastructure, will be the critical factors in
attracting lower cost deposits and reducing our overall cost of funds. By
creating and expanding relationships in our established and new markets, we
believe we can expand our net interest margin. Competition in our markets, our
ability to fund our loan growth with lower costing core deposits, and the
depositors' desire to achieve the highest return possible on their money when
interest rates eventually move higher, could affect net interest income levels
and our net interest margin.
BORROWED FUNDS
We utilize borrowed funds for our earning asset growth not supported by
deposit generation and for asset and liability, and liquidity management
purposes. Borrowed funds consist primarily of FHLB advances and, to a much
lesser extent, securities sold under agreements to repurchase.
Borrowed funds totaled $757.7 million at December 31, 2002, an increase of
$50.6 million or 7.2% when compared to $707.1 million at December 31, 2001.
The increase in borrowed funds was due to the addition of FHLB advances. At
December 31, 2002, borrowed funds represented 34.0% of our assets compared to
36.4% at year-end 2001.
FHLB advances totaled $746.0 million at December 31, 2002 compared to $695.0
million at December 31, 2001. The $51.0 million increase in advances in 2002
was attributable to the purchase of callable advances with extended lockout
periods to reduce interest rate risk exposure in a rising rate environment.
Our FHLB advance portfolio includes callable advances that have terms of two
to ten years and are callable after periods ranging from three months to five
years. Callable borrowings totaled $629.0 million at December 31, 2002, of
which $487.0 million have call dates in 2003. Generally, when rates rise, some
or all of these advances could be called and would then be replaced with
higher costing borrowings. Conversely, when interest rates fall, advances will
not be called and the duration would extend. Based on an analysis at year-end
2002, an increase of 400 basis points in interest rates in 2003 would not
trigger significant calls.
Since 1994, we have been a member of the FHLB of New York and have utilized
advances for funding earning asset growth, enhancing liquidity, managing
interest rate risk and, to a lesser extent, funding for the Investment Growth
Strategy. FHLB advances require no deposit insurance premiums and operational
overhead costs are considerably less than those associated with deposits.
In December 2001, $50.0 million in FHLB advances were retired early, which
resulted in a pre-tax loss of $2.2 million. The purpose of this transaction
was to strategically reposition a portion of our borrowed funds portfolio to
meet asset and liquidity objectives designed to reduce longer-term interest
rate risk. Interest expense reduction on these liabilities totaled $1.2
million in 2002.
22
In April 2001, management curtailed the use of 10-year callable advances for
purposes of the Investment Growth Strategy. Much of the longer-term interest
rate risk in our balance sheet is embedded in the FHLB callable advances. With
the decreasing level of the Investment Growth Strategy, FHLB advances are not
expected to be used for that purpose in 2003.
Borrowed funds also include $400,000 related to our Employee Stock Ownership
Plan (ESOP). Initiated in 1999, the ESOP purchased 155,340 shares of YNB's
common stock with a loan from a nonaffiliated financial institution.
Borrowed funds averaged $735.2 million in 2002, an increase of $90.5 million
from the $644.7 million average reported in 2001. The average cost of borrowed
funds decreased 52 basis points during the year to 4.95% compared with 5.47%
in 2001. The retirement of callable FHLB advances in late 2001 and
repositioning into floating rate LIBOR based advances primarily accounted for
the decrease in the cost of borrowed funds in 2002.
It is our goal in 2003 to reduce our level of FHLB borrowings. There are
$56.0 million in advances maturing in 2003. Based on our current liquidity
projections our intent is to pay off these advances as they become due. Within
approved policy guidelines, we will, however, continue to use borrowed funds
as an alternative funding source or to meet desired business, asset and
liability, and liquidity objectives.
ASSET AND LIABILITY MANAGEMENT
The objective of asset and liability management is the prudent control of
liquidity risk, market risk, and the appropriate use of capital, while
maximizing profitability. Our asset/liability and investment committees
provide oversight to the interest rate risk management process and recommend
policy guidelines regarding exposure to interest rates for approval by the
Board of Directors. Adherence to these policies is monitored on an ongoing
basis and decisions related to the management of interest rate exposure due to
changes in balance sheet composition and/or market interest rates are made
when appropriate and agreed to by these committees and approved by the Board
of Directors.
LIQUIDITY
Liquidity represents the ability to maintain adequate cash flows to satisfy
all of our present and anticipated financial obligations and commitments.
Liquidity management refers to YNB's ability to support asset growth while
satisfying the borrowing needs and deposit withdrawal requirements of our
customers. In addition to maintaining liquid assets, factors such as our
capital position, profitability, asset quality and availability of funding
affect our ability to meet liquidity needs.
Traditional sources of liquidity include deposit growth, asset maturities
and asset prepayments. Our focus on increasing core deposits to strengthen
liquidity is ongoing. In addition, we may use borrowed funds to further
support and enhance liquidity. Liquidity can also be generated by the
acquisition of funds through liability management. As previously discussed, we
strategically utilize a nationwide computer-based service to generate CDs to
bolster liquidity and fund loan growth as well. Asset prepayments include
proceeds from principal on loans and mortgage-backed securities (MBS). While
maturities and scheduled amortization of loans and MBS are generally a
predictable source of funds, deposit flows and investment prepayments are
greatly influenced by interest rates and competition. Brokered CD facilities
are also available as another source of liquidity. As part of liquidity
management, we also have a contingency funding plan in place. Our contingency
funding plan is structured to manage potential liquidity concerns due to
changes in interest rates, credit markets or other external risks.
Liquidity was again actively managed in 2002, as strong earning asset growth
continued. We maintain a portion of our assets in a diversified portfolio of
marketable securities, including U.S. Government agency and mortgage-backed
instruments, from which funds could be promptly generated. Total unpledged
securities were approximately $308.7 million at December 31, 2002 and $246.8
million at December 31, 2001. We have built the unpledged security position by
purchasing short-term high quality securities with comparatively modest market
value risk. A higher level of Federal funds sold may be experienced from time
to time instead of building the unpledged security position. This may be due
to projected loan growth or investment opportunities in the marketplace.
23
Liquidity can be further analyzed by utilizing our Consolidated Statements
of Cash Flows. During 2002, net cash provided by financing activities was
$261.8 million. This was primarily due to net increases in non-interest
bearing demand, money market, and savings deposits of $144.7 million and
borrowed funds of $50.6 million. Net cash used by investing activities was
$250.4 million, consisting primarily of $679.3 million in purchases of
securities available for sale and a $188.3 million net increase in loans,
partially offset by maturities, calls, paydowns, and proceeds from sales of
securities available for sale of $617.0 million. Net cash provided by
operating activities was $23.0 million. Overall, cash and cash equivalents
increased $34.4 million at year-end 2002 compared to year-end 2001.
We are eligible to borrow additional funds from the FHLB subject to its
stock level and collateral requirements, and individual advance proposals
based on FHLB credit standards. FHLB advances are collateralized by securities
as well as residential and commercial mortgage loans. We also have the ability
to borrow at the Federal Reserve discount window. We also maintain unsecured
Federal funds lines totaling $25 million with four correspondent banks for
daily funding needs.
Active liquidity management remains a strategic focus, due to the strong
asset growth we have experienced over the last several years. We continue to
develop additional funding sources to ensure our ability to continue to grow
while maintaining sufficient liquidity. Our entry into new markets and branch
expansion in our primary market, Mercer County, should help to build our
deposit base and further enhance our liquidity profile.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Market risk arises principally from interest rate risk inherent in
lending, investment, deposit and borrowing activities. We seek to manage our
asset and liability portfolios to help reduce any adverse impact on net
interest income caused by fluctuating interest rates. Interest rate risk due
to a sudden and significant change in interest rates may adversely impact our
earnings to the extent that the interest rates of assets and liabilities do
not change at the same speed, to the same extent or on the same basis.
Accordingly, we actively analyze and manage our interest rate exposures.
The primary goal of our interest rate risk management is to control exposure
to interest rate risk inherent in the balance sheet, determine the level of
risk appropriate given our strategic objectives, and manage the risk
consistent with the Board of Directors' approved limits and guidelines. These
limits and guidelines reflect our tolerance for interest rate risk over both
short- and long-term time horizons. Our asset and liability and investment
committees meet monthly to discuss pertinent asset and liability issues. On a
quarterly basis, management provides a detailed review of our interest rate
risk position to the Board of Directors.
Our interest rate risk, and the related risk to net interest income, is
derived from the difference in the maturity and repricing characteristics
between assets and liabilities. In 2002, time deposits, which represented over
50% of YNB's deposit base at December 31, 2001, repriced significantly lower
throughout the year based on the aggressive lowering of short-term rates by
the Federal Reserve in 2001 and the maturity characteristics of time deposits.
The liability sensitive position of the balance sheet in the first half of
2002 resulted in increased net interest income levels.
We control interest rate risk by identifying and quantifying interest rate
risk exposures using simulation and economic value risk models, as well as a
simpler gap analysis described below. We currently do not participate in
hedging programs, interest rate swaps or other activities involving the use of
off-balance sheet derivative financial instruments, but may do so in the
future to mitigate interest rate risk.
24
One measure of interest rate risk is the gap ratio, which is defined as the
difference between the dollar volume of interest earning assets and interest
bearing liabilities maturing or repricing within a specified period of time as
a percentage of total assets. A positive gap results when the volume of
interest rate-sensitive assets exceeds that of interest rate-sensitive
liabilities within comparable time periods. A negative gap results when the
volume of interest rate-sensitive liabilities exceeds that of interest rate-
sensitive assets within comparable time periods.
The following table sets forth certain information at December 31, 2002
relating to YNB's assets and liabilities by scheduled repricing for adjustable
assets and liabilities, or by contractual maturity for fixed-rate assets and
liabilities.
- -----------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS AND LIABILITIES
December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Six More than More than More than More than
Under months one year two years five years ten years
six through through through through and not
(in thousands) months one year two years five years ten years repricing Total
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ - $ - $ - $ - $ - $ 28,608 $ 28,608
Federal funds sold and interest bearing
deposits 74,986 - - - - - 74,986
Available for sale securities 254,357 140,575 183,891 131,987 33,409 76,446 820,665
Investment securities 971 997 1,682 4,341 7,361 39,338 54,690
Loans 306,140 124,550 157,339 380,615 161,247 65,252 1,195,143
Other assets, net - 15,911 - - - 41,455 57,366
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $636,454 $282,033 $342,912 $516,943 $ 202,017 $251,099 $2,231,458
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing demand $ - $ - $ - $ - $ - $126,183 $ 126,183
Savings and interest bearing demand 37,001 - 15,600 152,215 - - 204,816
Money markets 190,804 - - 123,725 - - 314,529
Certificates of deposit of $100,000
or more 68,698 36,466 23,169 16,858 - - 145,191
Other time deposits 158,518 104,203 141,478 77,368 - - 481,567
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits $455,021 $140,669 $180,247 $370,166 $ - $126,183 $1,272,286
Borrowed funds 144,311 - 400 22,500 590,500 - 757,711
Trust preferred securities 11,500 - - - - 21,000 32,500
Other liabilities - - - - - 23,022 23,022
Stockholders' equity - - - - - 145,939 145,939
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $610,832 $140,669 $180,647 $392,666 $ 590,500 $316,144 $2,231,458
===================================================================================================================================
Gap 25,622 141,364 162,265 124,277 (388,483) (65,045)
Cumulative gap 25,622 166,986 329,251 453,528 65,045 -
Cumulative gap to total assets 1.1% 7.5% 14.8% 20.3% 2.9% -
- -----------------------------------------------------------------------------------------------------------------------------------
As indicated in the table above, our one-year gap position at December 31,
2002 was a positive 7.5%. Generally, a financial institution with a positive
gap position will most likely experience an increase in net interest income
during periods of rising rates and decreases in net interest income during
periods of falling interest rates.
Included in the analysis of our gap position are certain savings deposits,
money markets and interest checking accounts, which are less sensitive to
fluctuations in interest rates than other interest-bearing sources of funds.
In determining the sensitivity of such deposits, we review the recent movement
(last 12 months) of deposit rates relative to market rates. Historically, we
have used regression analysis to determine deposit sensitivity, but due to the
sudden and significant drop in the last two years, recent patterns are
considered a more accurate tool.
25
The negative gap in the one-year timeframe turned positive in the third
quarter of 2002. The change in our gap position resulted from a combination of
a longer liability structure and at the same time a shorter asset structure.
Liability durations were primarily driven longer by two-year term CDs
resulting from deposit promotions in new markets and the purchase of FHLB
advances with five-year lockout periods. On the asset side, the acceleration
in actual and expected prepayment speeds in addition to securities sales
shortened asset durations. The one-year cumulative gap position policy
guideline is measured as a percentage of assets within a +10/-25% range. At
December 31, 2002, the gap position was within the policy guideline. While gap
analysis represents a useful asset/liability management tool, it may not
necessarily indicate the effect of interest rate movements on our net interest
income due to discretionary repricing of some assets and liabilities, balance
sheet options, and other competitive pressures.
Simulation analysis involves dynamically modeling our interest income and
expenses over specified time periods under various interest rate scenarios and
balance sheet structures. We use simulation analysis primarily to measure the
sensitivity of net interest income over 12- and 24-month time horizons, based
on assumptions approved by the asset and liability committee and ratified by
the Board of Directors. In YNB's base case sensitivity scenario using a static
balance sheet, the model measures the variance from a flat or unchanging rate
environment in net interest income with a change in interest rates of plus and
minus 200 basis points over a 12-month period and a continuation of rates at
that level for the second year. We utilized a minus 100 basis point scenario
due to the low interest rate environment that existed at year-end. The plus
and minus base case scenario is measured within a policy guideline of -7%
change in net interest income in year one and -14% change in year two. To
measure the change in interest rates, the following table reflects the
estimated exposure of YNB's net interest income in the base case scenario
measured for a two-year period beginning January 1, 2003, based on the
December 31, 2002 balance sheet:
Percentage Change in Net
Interest Income
-------------------------------
Change in Market Interest Rates 2003 2004
- --------------------------------------------------------------------------------
+200 basis points 5.6 3.4
Flat - -
- -100 basis points (2.7) (2.3)
- --------------------------------------------------------------------------------
The actions we have taken during 2002 have resulted in a more balanced
interest rate risk position over the next 12 and 24-month period. From an
asset perspective, we have taken actions to protect net interest income in the
policy simulation or base case scenario. Interest rate floors have been
instituted on the majority of our floating rate commercial loan assets. Should
interest rates move lower, income from these earning assets will not decline
below the floor. The repositioning of our investment portfolio, previously
discussed, will provide additional income in a rising interest rate
environment. YNB's net interest income will benefit most from a gradually
higher interest rate environment in 2003. Our simulation results indicate
that, if interest rates increase 2%, net interest income will improve by
approximately 5.6% in 2003. If interest rates decrease 1%, net interest income
decreases by approximately 2.7% in 2003. We also measure, through simulation
analysis, the impact to net interest income based on projected balance sheet
growth scenarios in addition to rate ramps greater than 2% over 12 and 24-
month periods.
There are several factors that management evaluates when constructing short-
term and longer-term interest rate risk models. There is uncertainty regarding
the maturity, repricing and runoff characteristics of some of our assets and
liabilities. Money market deposits, for example, have no contractual maturity,
meaning customers have the ability to add or withdraw funds from these deposit
accounts freely. These deposits may fluctuate unexpectedly due to changes in
market rates or even competitive factors. Accordingly, rates on money market
deposits may have to be increased more or reduced less than expected. Given
the uncertainties of deposit composition or repricing characteristics, the
interest rate sensitivity of bank deposits cannot be calculated precisely.
This uncertainty also reflects options embedded in financial instruments,
which include mortgage-backed securities, callable bonds and FHLB advances. To
deal with the many uncertainties when constructing either short or longer-term
interest rate risk measurements, management has developed a number of
assumptions. Depending on the product or behavior in question, each assumption
will reflect some combination of market data, research analysis and business
judgment. Assumptions are reviewed periodically with changes made when
appropriate.
26
We also measure 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 longer time horizon, discounting
those cash flows at appropriate interest rates, and then aggregating the
discounted cash flows. Our 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. The sensitivity of
EVE to changes in the level of interest rates is a measure of the sensitivity
of long-term earnings to changes in interest rates. We use 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's
percentage change in EVE in a plus or minus 200 basis point rate shock at
December 31, 2002 and 2001. Due to the low interest rate environment in 2002
and 2001, not all interest rates could be shocked 200 basis points. Based on
the underlying assumptions used:
Percentage Change
in EVE
-------------------------------
Change in Market Interest Rates
(Rate Shock) 2002 2001
- --------------------------------------------------------------------------------
+200 basis points -11 -45
- -100 basis points -18 -1
- --------------------------------------------------------------------------------
Our longer-term interest rate risk profile has improved in 2002 and now
reflects a more balanced position in the event of an immediate increase or
decrease in interest rates. The addition of new capital in late 2002 had a
positive impact to the measurements. Certain shortcomings are inherent in the
methodology used in the previously discussed interest rate risk measurements.
Modeling changes in the simulation and 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 these models provide an indication of our 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.
We believe that more likely scenarios include gradual changes in interest
rate levels. We continue to monitor our gap and rate shock analyses to detect
changes to our exposure to fluctuating interest rates. We have the ability to
shorten or lengthen maturities on assets, sell securities, enter into
derivative financial instruments, or seek funding sources with different
repricing characteristics in order to change our asset and liability structure
for the purpose of mitigating the effect of interest rate risk.
STOCKHOLDERS' EQUITY AND CAPITAL RESOURCES
The management of capital in a regulated environment requires a balance between
earning the highest return for stockholders while maintaining sufficient capital
levels for proper risk management, satisfying regulatory requirements, and for
future expansion. Our proactive capital management is designed to assure that we
are always well capitalized as defined by regulatory authorities and have the
necessary capital for our expansion plans.
On December 13, 2002, we completed the sale of 2.3 million shares of our
common stock in an underwritten common stock offering. The common stock was
sold at a price of $16.25 per share and generated gross proceeds of $37.4
million. Net proceeds after underwriting and other offering expenses were
$34.3 million, of which $33.0 million was contributed to the Bank to support
asset growth.
Stockholders' equity at December 31, 2002 totaled $145.9 million compared to
$93.2 million at December 31, 2001. This represents an increase of $52.7
million or 56.5%. This increase resulted from earnings of $14.0 million, net
proceeds of $34.3 million from the public common stock offering, proceeds of
$602,000 from exercised stock options, a positive adjustment to equity of $7.0
million related to the improvement in market value of securities available for
sale, proceeds of $400,000 from allocated ESOP shares, and an increase of
$110,000 associated with the fair market value adjustment related to the
allocation of shares from the ESOP, offset by cash dividend payments of $3.5
million and treasury shares acquired at an aggregate price of $124,000.
27
On August 22, 2001, we completed the private placement of 596,654 shares of
common stock. The shares were sold to a limited number of accredited investors
at an aggregate purchase price of approximately $7.8 million and net proceeds
of $7.4 million.
We have an Employee Stock Ownership Plan (ESOP) that permits eligible
employees to share in the growth of YNB through stock ownership. Initiated in
1999, we initially sold 155,340 shares to the ESOP for $2 million. The ESOP
financed the stock purchase with a nonaffiliated financial institution. The
financing is for a term of five years with an interest rate of 7.00% with a
maturity date of December 31, 2003. The full balance of the loan will be
repaid in equal installments over the term of the loan. The shares purchased
by the ESOP were used as collateral for the loan. The balance of unallocated
ESOP shares at December 31, 2002 was $400,000. The annual expenses associated
with the ESOP were $483,000 in 2002, $439,000 in 2001 and $376,000 in 2000.
These expenses include compensation expense, debt service on the loan and any
adjustment required due to changes in the fair value of the shares at time of
allocation. The reason for the increase in cost was primarily the result of
adjustments related to the change in the fair value of our common stock.
We have not complied with certain regulatory requirements and Nasdaq
standards. These issues involved Securities and Exchange Commission
registration and information distribution requirements for our employees'
savings plan and shareholder dividend reinvestment and stock purchase plan and
Nasdaq shareholder approval requirements for certain non-employee director
stock options. Upon learning of our non-compliance, we promptly commenced
steps to address these issues and expect to complete these steps in the near
future. For a discussion of these matters, see "Notes to Consolidated
Financial Statements - Notes 10 and 11."
Dividends declared on common stock totaled $0.44 per share for 2002 and for
2001. The dividend payout ratio was 25.3% for 2002, compared to 39.1% at year-
end 2001. The decrease in the dividend payout ratio is a reflection of our net
income growth in 2002.
YNB's common stock trades on the Nasdaq National Market under the symbol
YANB. The quarterly market price ranges and dividends declared per common
share for the last two years are shown below.
Cash
Dividend
2002 Quarter High Low Declared
- -----------------------------------------------------------------------------------------------------------------------------------
First $13.45 $12.25 $0.11
Second 19.94 12.89 0.11
Third 21.20 16.05 0.11
Fourth 19.05 16.35 0.11
- -----------------------------------------------------------------------------------------------------------------------------------
Total $0.44
===================================================================================================================================
2001 Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
First $14.25 $12.06 $0.11
Second 14.45 13.56 0.11
Third 14.10 11.00 0.11
Fourth 12.80 10.96 0.11
- -----------------------------------------------------------------------------------------------------------------------------------
Total $0.44
===================================================================================================================================
We are subject to minimum risk-based and leverage capital guidelines under
Federal banking regulations. These banking regulations relate a company's
regulatory capital to the risk profile of its total assets and off-balance
sheet items, and provide the basis for evaluating capital adequacy. Regulatory
capital adequacy is measured using three ratios: Tier I leverage, Tier I risk-
based, and total risk-based capital. These guidelines require minimum risk-
based capital ratios of 4% and 8% of risk-weighted assets for Tier I and total
risk-based capital measurements. Total regulatory capital is comprised of all
of the components of Tier I capital plus qualifying subordinated debt
instruments and the reserve for loan losses, subject to certain limits. In
addition, the current minimum regulatory guideline for the Tier I leverage
ratio is 4%.
28
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five capital level designations ranging from "well capitalized" to
"critically undercapitalized." A bank is considered "well capitalized" if it
has minimum Tier I and total risk-based capital ratios of 6% and 10%,
respectively, and a minimum Tier I leverage ratio of 5%. At December 31, 2002,
our capital ratios exceeded the above ratios required by regulatory definition
to be considered well capitalized. The table below summarizes YNB's capital
ratios for the years indicated:
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Tier I leverage 8.2% 6.9% 8.1%
Tier I risk-based 11.8% 10.0% 10.6%
Total risk-based 13.0% 11.3% 11.6%
===================================================================================================================================
On March 28, 2001, Yardville Capital Trust III (Trust III), a statutory
business trust and a wholly owned subsidiary of Yardville National Bancorp,
issued $6.0 million of 10.18% Trust Preferred Securities in a private
placement and $190,000 of 10.18% Common Securities to Yardville National
Bancorp. Proceeds from the issuance of the Trust Preferred Securities were
immediately used by Trust III to purchase $6.2 million of 10.18% Subordinated
Debentures maturing June 8, 2031 from Yardville National Bancorp. Trust III
exists for the sole purpose of issuing Trust Preferred Securities and
investing the proceeds in Subordinated Debentures of Yardville National
Bancorp. These Subordinated Debentures constitute the sole assets of Trust
III. These Subordinated Debentures are redeemable in whole or part prior to
maturity after June 8, 2011. Trust III is obligated to distribute all proceeds
of a redemption, whether voluntary or upon maturity, to holders of the Trust
Preferred Securities. Yardville National Bancorp's obligation with respect to
the Trust Preferred Securities and the Subordinated Debentures, when taken
together, provide a full and unconditional guarantee on a subordinated basis
by Yardville National Bancorp of the obligations of Trust III to pay amounts
when due on the Trust Preferred Securities.
Of the total proceeds raised by the private trust preferred securities and
equity offerings in 2001, approximately $11.5 million was contributed to the
Bank to support future asset growth.
In 1997, Yardville Capital Trust (the Trust) issued $11.5 million of 9.25%
Trust Preferred Securities and $356,000 of 9.25% Common Securities to
Yardville National Bancorp. Proceeds were used by the Trust to purchase $11.9
million of 9.25% Subordinated Debentures maturing November 1, 2027. Those
debentures became redeemable in whole or in part prior to maturity after
November 1, 2002. We intend to redeem these securities on March 31, 2003 with
a portion of the proceeds of a new trust preferred offering. (See "Notes to
Consolidated Financial Statements - Footnote 8)
On February 19, 2003, Yardville Capital Trust IV (Trust IV), a statutory
business trust, and a wholly owned subsidiary of Yardville National Bancorp,
issued $15.0 million of floating rate Trust Preferred Securities in a private
placement transaction and $464,000 of floating rate Common Securities to
Yardville National Bancorp. The floating rate is based on three month LIBOR
plus 340 basis points. Proceeds from the issuance of the Trust Preferred
Securities were immediately used by Trust IV to purchase $15.5 million of
floating rate Subordinated Debentures maturing March 1, 2033 from Yardville
National Bancorp. Trust IV exists for the sole purpose of issuing Trust
Preferred Securities and investing the proceeds in Subordinated Debentures of
Yardville National Bancorp. These Subordinated Debentures constitute the sole
assets of Trust IV. These Subordinated Debentures are redeemable in whole or
part prior to maturity after March 1, 2008. Trust IV is obligated to
distribute all proceeds of a redemption, whether voluntary or upon maturity,
to holders of the Trust Preferred Securities. Yardville National Bancorp's
obligation with respect to the Trust Preferred Securities and the Subordinated
Debentures, when taken together, provides a full and unconditional guarantee
on a subordinated basis by Yardville National Bancorp of the obligations of
Trust IV to pay amounts when due on the Trust Preferred Securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In December, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
additional disclosure requirements of SFAS No. 148 are effective for fiscal
years ended after December 15, 2002. The Company has adopted the expanded
disclosure provisions of this statement effective December 31, 2002.
29
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN. 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." The Interpretation requires
that the Bank recognize the fair value of guarantee and indemnification
arrangements issued or modified by the Bank after December 31, 2002, if these
arrangements are within the scope of that Interpretation. In addition, under
previously existing generally accepted accounting principles, the Bank
continues to monitor the conditions that are subject to the guarantees and
indemnifications to identify whether it is probable that a loss has occurred,
and would recognize any such losses under the guarantees and indemnifications
when those losses are estimable. Management does not anticipate that the
initial adoption of FIN. 45 will have a significant impact on the Bank's
financial statements.
CRITICAL ACCOUNTING POLICIES
The disclosures included in this Annual Report are based on our audited
consolidated financial statements. These statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an ongoing basis, we evaluate the estimates used,
including the adequacy of allowances for loan losses. We believe our policies
with respect to the determination of the allowance for loan losses involve a
high degree of complexity and require us to make difficult and subjective
judgments which often require assumptions or estimates about highly uncertain
matters. Estimates are based upon historical experience, current economic
conditions and other factors that we consider reasonable under the
circumstances. These estimates result in judgments regarding the carrying values
of assets and liabilities where these values are not readily available from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Our significant accounting policies are described in
the "Notes to Consolidated Financial Statements" under "Summary of Significant
Accounting Policies."
Unaudited quarterly results are summarized as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) December 31 September 30 June 30 March 31
- -----------------------------------------------------------------------------------------------------------------------------------
2002
Interest income $30,520 $30,835 $29,898 $28,892
Interest expense 18,389 18,719 18,310 18,244
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,131 12,116 11,588 10,648
Provision for loan losses 1,450 1,300 1,075 550
Non-interest income 1,872 2,212 2,318 1,902
Non-interest expense 8,058 7,861 7,926 7,199
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 4,495 5,167 4,905 4,801
Income tax expense 1,212 1,473 1,373 1,306
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,283 $ 3,694 $ 3,532 $ 3,495
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share - basic $ 0.39 $ 0.46 $ 0.44 $ 0.44
Earnings per share - diluted 0.38 0.44 0.43 0.43
- -----------------------------------------------------------------------------------------------------------------------------------
2001
Interest income $29,295 $30,295 $29,494 $29,864
Interest expense 20,052 21,388 20,991 20,382
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 9,243 8,907 8,503 9,482
Provision for loan losses 1,525 825 650 925
Non-interest income 2,294 2,263 1,914 1,566
Non-interest expense 9,082 7,023 6,543 6,404
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 930 3,322 3,224 3,719
Income tax (benefit) expense (4) 831 823 992
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 934 $ 2,491 $ 2,401 $ 2,727
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share - basic $ 0.12 $ 0.33 $ 0.33 $ 0.37
Earnings per share - diluted 0.12 0.32 0.32 0.37
- -----------------------------------------------------------------------------------------------------------------------------------
30
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports On Form 8-K
Exhibits and Financial Statement Schedules
Financial Statements
For a list of the Financial statements filed herewith, see the Index to
Financial Statements on page F-1. No schedules are included with the financial
statements because the required information is inapplicable or is presented in
the financial statements or notes thereto.
Exhibits
The exhibits filed or incorporated by reference as a part of this report are
listed in the Index to Exhibits which appears at page E-1.
Reports on Form 8-K
Current Report on Form 8-K for the announcement of earnings for the third
quarter ended September 30, 2002 filed on October 21, 2002, as amended by Form
8-K/A filed with the SEC on February 13, 2003.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized on May 2, 2003.
YARDVILLE NATIONAL BANCORP
By: /s/ Patrick M. Ryan
----------------------------------------------
Patrick M. Ryan, President and
Chief Executive Officer
32
CERTIFICATION
I, Patrick M. Ryan, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K/A of Yardville National
Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 2, 2003 By: /s/ Patrick M. Ryan
- -------------------------------- --------------------------------
Name: Patrick M. Ryan
Title: President and Chief
Executive Officer
33
CERTIFICATION
I, Stephen F. Carman, Vice President and Treasurer, certify that:
1. I have reviewed this annual report on Form 10-K/A of Yardville National
Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 2, 2003 By: /s/ Stephen F. Carman
- -------------------------------- --------------------------------
Name: Stephen F. Carman
Title: Vice President and
Treasurer
34
INDEX TO FINANCIAL STATEMENTS
Description Page
- ----------- ----
Consolidated Statements of Condition at December 31, 2002 and 2001 F-2
Consolidated Statements of Income for each of the years ended December
31, 2002, 2001 and 2000 F-3
Consolidated Statements of Changes in Stockholders' Equity for each of
the years ended December 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6
Independent Auditors' Report F-28
F-1
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED
Statements of Condition
December 31,
- --------------------------------------------------------------------------------
(in thousands, except share data) 2002 2001
- --------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 28,608 $ 27,771
Federal funds sold 72,485 38,960
- --------------------------------------------------------------------------------
Cash and Cash Equivalents 101,093 66,731
- --------------------------------------------------------------------------------
Interest bearing deposits with banks 2,501 2,320
Securities available for sale 820,665 746,483
Investment securities (market value of $56,710 in
2002 and $64,887 in 2001) 54,690 65,753
Loans 1,195,143 1,007,973
Less: Allowance for loan losses (16,821) (13,542)
- --------------------------------------------------------------------------------
Loans, net 1,178,322 994,431
Bank premises and equipment, net 12,208 10,910
Other real estate 1,048 2,329
Bank Owned Life Insurance 40,850 31,764
Other assets 20,081 22,668
- --------------------------------------------------------------------------------
Total Assets $2,231,458 $1,943,389
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits
Non-interest bearing $ 126,183 $ 114,405
Interest bearing 1,146,103 978,285
- --------------------------------------------------------------------------------
Total Deposits 1,272,286 1,092,690
- --------------------------------------------------------------------------------
Borrowed funds
Securities sold under agreements to repurchase 10,000 10,000
Federal Home Loan Bank advances 746,000 695,008
Obligation for Employee Stock Ownership Plan (ESOP) 400 800
Other 1,311 1,305
- --------------------------------------------------------------------------------
Total Borrowed Funds 757,711 707,113
- --------------------------------------------------------------------------------
Company - obligated Mandatorily Redeemable Trust
Preferred Securities of Subsidiary Trust holding
solely junior Subordinated Debentures of the
Company 32,500 32,500
Other liabilities 23,022 17,841
- --------------------------------------------------------------------------------
Total Liabilities $2,085,519 $1,850,144
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities
Stockholders' equity
Preferred stock: no par value
Authorized 1,000,000 shares, none issued
Common stock: no par value
Authorized 12,000,000 shares
Issued 10,576,157 shares in 2002 and 8,214,568
shares in 2001 89,297 54,334
Surplus 2,205 2,205
Undivided profits 50,633 40,175
Treasury stock, at cost: 180,248 shares in 2002 and
172,000 shares in 2001 (3,154) (3,030)
Unallocated ESOP shares (400) (800)
Accumulated other comprehensive income 7,358 361
- --------------------------------------------------------------------------------
Total Stockholders' Equity 145,939 93,245
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,231,458 $1,943,389
================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-2
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED
Statements of Income
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $ 75,395 $ 70,408 $ 64,418
Interest on deposits with banks 60 171 82
Interest on securities available for sale 40,498 39,866 27,146
Interest on investment securities:
Taxable 690 3,722 4,647
Exempt from Federal income tax 2,345 2,016 1,642
Interest on Federal funds sold 1,157 2,765 2,454
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 120,145 118,948 100,389
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on savings account deposits 11,228 9,931 7,937
Interest on certificates of deposit of $100,000 or more 5,184 7,581 6,918
Interest on other time deposits 17,747 27,085 24,772
Interest on borrowed funds 36,403 35,264 21,219
Interest on trust preferred securities 3,100 2,952 1,808
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 73,662 82,813 62,654
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 46,483 36,135 37,735
Less provision for loan losses 4,375 3,925 3,700
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision For Loan Losses 42,108 32,210 34,035
- -----------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income:
Service charges on deposit accounts 2,203 1,857 1,551
Securities gains, net 3,084 3,182 46
Income on Bank Owned Life Insurance 1,678 1,784 822
Other non-interest income 1,339 1,214 1,007
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 8,304 8,037 3,426
- -----------------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense:
Salaries and employee benefits 17,890 14,923 11,632
Occupancy expense, net 3,507 2,817 2,404
Equipment expense 2,423 2,021 1,892
Early retirement of debt expense - 2,217 -
Other non-interest expense 7,224 7,074 6,933
- -----------------------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 31,044 29,052 22,861
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 19,368 11,195 14,600
Income tax expense 5,364 2,642 4,259
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 14,004 $ 8,553 $ 10,341
===================================================================================================================================
Earnings Per Share:
Basic $ 1.72 $ 1.13 $ 1.47
Diluted $ 1.68 $ 1.11 $ 1.47
===================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-3
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED
Statements of Changes in Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002, 2001 and 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Unallocated other
(in thousands, except share Common Common Undivided Treasury ESOP comprehensive
amounts) shares stock Surplus profits stock shares (loss) income Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 6,745,794 $40,052 $2,205 $27,462 $(3,030) $(1,600) $(6,264) $ 58,825
Net income 10,341 10,341
Unrealized gain - securities
available for sale, net of tax
of $2,536 4,712 4,712
Less reclassification of
realized net gain on
sale of securities
available for sale, net of
tax of $16 (30) (30)
--------
Total comprehensive income 15,023
--------
Cash dividends (2,840) (2,840)
ESOP fair value adjustment (75) (75)
Common stock issued:
Exercise of stock options 14,420 69 69
Common shares issued 685,000 6,835 6,835
ESOP shares allocated 400 400
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2000 7,445,214 $46,881 $2,205 $34,963 $(3,030) $(1,200) $(1,582) $ 78,237
Net income 8,553 8,553
Unrealized gain - securities
available for sale, net of
tax of $2,129 4,043 4,043
Less reclassification of
realized net gain on sale of
securities available for sale,
net of tax of $1,082 (2,100) (2,100)
--------
Total comprehensive income 10,496
--------
Cash dividends (3,341) (3,341)
ESOP fair value adjustment 8 8
Common stock issued:
Exercise of stock options 700 6 6
Common shares issued 596,654 7,439 7,439
ESOP shares allocated 400 400
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2001 8,042,568 $54,334 $2,205 $40,175 $(3,030) $ (800) $ 361 $ 93,245
Net income 14,004 14,004
Unrealized gain - securities
available for sale,
net of tax of $4,646 9,032 9,032
Less reclassification of
realized net gain on sale of
securities available for sale,
net of tax of $1,049 (2,035) (2,035)
--------
Total comprehensive income 21,001
--------
Cash dividends (3,546) (3,546)
ESOP fair value adjustment 110 110
Common stock issued:
Exercise of stock options 61,589 602 602
Common shares issued 2,300,000 34,251 34,251
ESOP shares allocated 400 400
Treasury shares acquired (8,248) (124) (124)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2002 10,395,909 $89,297 $2,205 $50,633 $(3,154) $ (400) $ 7,358 $145,939
===================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-4
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED
Statements of Cash Flows
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 14,004 $ 8,553 $ 10,341
Adjustments:
Provision for loan losses 4,375 3,925 3,700
Depreciation 1,894 1,608 1,521
ESOP fair value adjustment 110 8 (75)
Amortization and accretion 2,909 1,040 146
Gain on sales of securities available for sale (3,084) (3,182) (46)
Writedown of other real estate 232 569 599
Loss on sale of other real estate - 38 25
Increase in other assets (2,598) (4,344) (8,862)
Increase (decrease) in other liabilities 5,181 (1,993) 8,257
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 23,023 6,222 15,606
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest bearing deposits with banks (181) (1,729) 364
Purchase of securities available for sale (679,333) (864,841) (363,424)
Maturities, calls and paydowns of securities available for sale 379,487 360,152 65,692
Proceeds from sales of securities available for sale 237,492 328,301 49,240
Proceeds from maturities and paydowns of investment securities 15,755 63,352 5,263
Purchase of investment securities (5,751) (18,429) (7,841)
Purchase of Bank Owned Life Insurance (7,500) - (15,000)
Net increase in loans (188,282) (192,469) (173,989)
Expenditures for bank premises and equipment (3,190) (3,090) (1,549)
Proceeds from sale of other real estate 1,065 572 626
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (250,438) (328,181) (440,618)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in non-interest bearing demand, money market, and
savings deposits 144,721 118,904 92,760
Net increase in certificates of deposit 34,875 23,478 113,751
Net increase in borrowed funds 50,598 162,690 246,534
Proceeds from issuance of trust preferred securities - 6,000 15,000
Proceeds from issuance of common stock 34,853 7,445 6,904
Decrease in unallocated ESOP shares 400 400 400
Treasury shares acquired (124) - -
Dividends paid (3,546) (3,341) (2,840)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 261,777 315,576 472,509
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 34,362 (6,383) 47,497
Cash and cash equivalents as of beginning of year 66,731 73,114 25,617
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of End of Year $ 101,093 $ 66,731 $ 73,114
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 75,204 $ 85,140 $ 56,700
Income taxes 1,097 3,745 6,922
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to other real estate, net of charge offs $ 16 $ 1,466 $ 706
- -----------------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
F-5
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTES TO CONSOLIDATED
Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Yardville National Bancorp is a registered financial holding company which
conducts a general commercial and retail banking business through its
principal operating subsidiary, The Yardville National Bank (the Bank). The
Bank provides a broad range of lending, deposit and other financial products
and services with an emphasis on commercial real estate and commercial and
industrial lending to small- to mid-sized businesses and individuals. Our
existing and target markets are located in the corridor between New York City
and Philadelphia. We operate 19 full-service branches, including 13 branches
in our primary market of Mercer County, New Jersey. We have expanded our
franchise into demographically attractive markets. In the past three years, we
have opened three branches in Hunterdon County, New Jersey, one branch in
Burlington County, New Jersey, and one branch in Middlesex County, New Jersey.
The Bank is subject to competition from other financial institutions and non-
bank providers of financial services. The Bank is also subject to the
regulations of certain Federal agencies and undergoes periodic examinations by
those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the balance sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans.
A. Consolidation. The consolidated financial statements include the accounts
of Yardville National Bancorp and its subsidiaries, Yardville Capital Trust,
Yardville Capital Trust II, Yardville Capital Trust III, and the Bank and the
Bank's wholly owned subsidiaries (collectively, the Corporation). All
significant inter-company balances and transactions have been eliminated in
consolidation.
B. Cash and Cash Equivalents. For purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, and Federal funds sold. Generally, Federal funds are purchased or sold
for one day periods.
C. Securities. The Corporation's securities portfolio is classified into three
separate portfolios: available for sale, held to maturity and trading.
Securities classified as available for sale may be used by the Corporation as
funding and liquidity sources and can be used to manage the Corporation's
interest rate sensitivity position. These securities are carried at their
estimated market value with their unrealized gains and losses carried, net of
income tax, as adjustments to stockholders' equity. If the market value loss
is determined to be other than temporary, the security is written down to its
market value with the loss recognized in the Income Statement. All securities
are evaluated quarterly to determine whether any unrealized losses are other
than temporary. Amortization of premium or accretion of discount are
recognized as adjustments to interest income, on a level yield basis. Gains
and losses on disposition are included in earnings using the specific
identification method.
Investment securities are composed of securities that the Corporation has
the positive intent and ability to hold to maturity. These securities are
stated at cost, adjusted for amortization of premium or accretion of discount.
The premium or discount adjustments are recognized as adjustments to interest
income, on a level yield basis. Unrealized losses due to fluctuations in
market value are recognized as investment security losses when a decline in
value is assessed as being other than temporary.
F-6
Trading securities are purchased specifically for short-term appreciation
with the intent of selling in the near future. Trading securities are carried
at fair value with realized and unrealized gains and losses reported in non-
interest income.
D. Loans. Interest on loans is recognized based upon the principal amount
outstanding. Loans are stated at face value, less unearned income and net
deferred fees. A loan is considered past due when a payment has not been
received in accordance with the contractual terms. Generally, commercial loans
are placed on a nonaccrual status when they are 90 days past due unless they
are well secured and in the process of collection or, regardless of the past
due status of the loan, when management determines that the complete recovery
of principal and interest is in doubt. Commercial loans are generally charged
off after an analysis is completed which indicates that collection of the full
principal balance is in doubt. Consumer loans are generally charged off after
they become 120 days past due. Mortgage loans are not generally placed on a
nonaccrual status unless the value of the real estate has deteriorated to the
point that a potential loss of principal or interest exists. Subsequent
payments are credited to income only if collection of principal is not in
doubt. If principal and interest payments are brought contractually current
and future collectibility is reasonably assured, loans are returned to accrual
status. Mortgage loans are generally charged off when the value of the
underlying collateral does not cover the outstanding principal balance. Loan
origination and commitment fees less certain costs are deferred and the net
amount amortized as an adjustment to the related loan's yield. Loans held for
sale are recorded at the lower of aggregate cost or market.
E. Allowance for Loan Losses. The provision for loan losses charged to
operating expense is determined by management and is based upon a periodic
review of the loan portfolio, past experience, the economy, and other factors
that may affect a borrower's ability to repay the loan. This provision is
based on management's estimates and actual losses may vary from these
estimates. These estimates are reviewed and adjustments, as they become
necessary, are reported in the periods in which they become known. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions,
particularly in New Jersey. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Corporation's allowance for loan losses and the valuation of other real
estate. Such agencies may require the Corporation to recognize additions to
the allowance or adjustments to the carrying value of other real estate based
on their judgments about information available to them at the time of their
examination.
Management utilizes a system to rate substantially all of its loans based on
their respective risk. Consumer and residential mortgage loans are evaluated
as a group with only those loans that are delinquent evaluated separately. The
primary emphasis of the risk rating system is on commercial and industrial
loans and commercial real estate loans. Risk is measured by use of a matrix,
which is customized to measure the risk of each loan type. Risk ratings of 1
to 5 are considered to be acceptable risk and are reserved at a range of 0.35%
to 1.50%. Risk ratings of between 6 and 8 are considered higher than
acceptable risk and are reserved at a range of 3.75% to 50% depending on the
rating. Loans with a risk rating of 9 are considered losses and reserved at
100%. In setting the reserve percentage for each risk rating, management uses
a computer software program to perform migration analysis to determine
historic loan loss experience. In addition, management relies on its judgment
concerning the anticipated impact on credit risk of economic conditions, real
estate values, interest rates and level of business activity.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or fair value of the collateral. Losses on impaired loans are
included in the allowance for loan losses through provisions charged to
income.
F-7
F. Bank Premises and Equipment. Bank premises and equipment, including
leasehold improvements, are stated at cost less accumulated depreciation.
Depreciation is computed on straight-line and accelerated methods over the
estimated useful lives of the assets ranging from three years to forty years
depending on the asset or lease. Charges for maintenance and repairs are
expensed as they are incurred.
G. Other Real Estate (ORE). ORE comprises real properties acquired through
foreclosure or deed in lieu of foreclosure in partial or total satisfaction of
problem loans. The properties are recorded at the lower of cost or fair value
less estimated disposal costs at the date acquired. When a property is
acquired, the excess of the loan balance over the fair value is charged to the
allowance for loan losses. Any subsequent writedowns that may be required to
the carrying value of the property are included in other non-interest expense.
Gains realized from the sale of other real estate are included in other non-
interest income, while losses are included in non-interest expense.
H. Income Taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in the tax rates is recognized
in income in the period of the enactment date.
I. Stock Based Compensation.
The Corporation applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for stock options in the
consolidated financial statements. The following table illustrates the effect
on net income and earnings per share if the Corporation had applied the fair
value recognition provisions of FASB Statement No. 123, "Accounting for Stock-
Based Compensation", to stock-based employee compensation.
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Net income as reported:
As reported $14,004 $8,553 $10,341
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects 331 158 1,859
- -----------------------------------------------------------------------------------------------------------------------------------
Pro forma net income $13,673 $8,395 $ 8,482
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic:
As reported $ 1.72 $ 1.13 $ 1.47
Pro forma 1.68 1.10 1.21
Diluted:
As reported $ 1.68 $ 1.11 $ 1.47
Pro forma 1.64 1.09 1.21
===================================================================================================================================
The fair value of options granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002, 2001, and 2000, respectively: (1) an
expected annual dividend rate of $0.46, $0.44, and $0.44 (2) risk free rate of
2.7%, 4.3%, and 5.0% (3) expected life of approximately five years in 2002,
2001, and 2000 (4) expected volatility of 36% in 2002, 38% in 2001 and 40% in
2000.
J. Earnings Per Share. Basic net income per common share is calculated by
dividing net income, less the dividends on preferred stock, if any, by the
weighted average common shares outstanding during the period.
F-8
Diluted net income per common share is computed similarly to basic net
income per common share except the denominator is increased to include the
additional common shares that would have been outstanding if all potentially
dilutive common shares, principally stock options, were issued during the
reporting period.
Weighted average shares for the basic net income per share computation for
the years ended December 31, 2002, 2001, and 2000 were 8,124,000, 7,601,000,
and 7,022,000, respectively. For the diluted net income per share computation,
common stock equivalents of 195,000, 77,000, and 17,000 are included for the
years ended December 31, 2002, 2001, and 2000, respectively. Common stock
equivalents that were antidilutive were 410,000, 654,000, and 1,020,000 in
2002, 2001, and 2000, respectively.
K. Comprehensive Income. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes items recorded
directly to equity, such as unrealized gains and losses on securities
available for sale, net of tax. Comprehensive income is presented in the
Consolidated Statements of Changes in Stockholders' Equity.
L. Reclassification. Certain reclassifications have been made in the
consolidated financial statements for 2001 and 2000 to conform to the
classification presented in 2002.
2. CASH AND DUE FROM BANKS
The Corporation maintains various deposits with other banks. As of December
31, 2002 and 2001, the Corporation maintained sufficient cash on hand to
satisfy Federal regulatory requirements.
3. SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of other
U.S. government agencies $245,973 $ 2,928 $ - $248,901 $113,862 $ 914 $ (915) $113,861
Mortgage-backed securities 468,745 10,157 (545) 478,357 521,988 3,204 (2,013) 523,179
Corporate obligations 55,087 417 (1,808) 53,696 72,946 779 (1,414) 72,311
Federal Reserve Bank Stock 2,411 - - 2,411 2,381 - - 2,381
Federal Home Loan Bank
Stock 37,300 - - 37,300 34,751 - - 34,751
- -----------------------------------------------------------------------------------------------------------------------------------
Total $809,516 $13,502 $(2,353) $820,665 $745,928 $4,897 $(4,342) $746,483
===================================================================================================================================
The amortized cost and estimated market value of investment securities are
as follows:
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ - $ - $ - $ - $13,000 $ 67 $ (1) $13,066
Obligations of state and
political subdivisions 50,308 1,938 (34) 52,212 48,694 367 (1,332) 47,729
Mortgage-backed securities 4,382 121 (5) 4,498 4,059 48 (15) 4,092
- -----------------------------------------------------------------------------------------------------------------------------------
Total $54,690 $2,059 $(39) $56,710 $65,753 $482 $(1,348) $64,887
===================================================================================================================================
F-9
The amortized cost and estimated market value of securities available for
sale and investment securities as of December 31, 2002 by contractual maturity
are shown below. The contractual maturity of Federal Reserve Bank and Federal
Home Loan Bank stock is shown as due after 10 years. Expected maturities will
differ from contractual maturities because issuers may have the right to call
their obligations with or without call or prepayment penalties.
SECURITIES AVAILABLE FOR SALE
Estimated
Amortized Market
(in thousands) Cost Value
- --------------------------------------------------------------------------------
Due in 1 year or less $ 25,294 $ 25,635
Due after 1 year through 5 years 195,789 198,045
Due after 5 years through 10 years 31,997 32,369
Due after 10 years 87,691 86,259
- --------------------------------------------------------------------------------
Subtotal 340,771 342,308
Mortgage-backed securities 468,745 478,357
- --------------------------------------------------------------------------------
Total $809,516 $820,665
================================================================================
INVESTMENT SECURITIES
Estimated
Amortized Market
(in thousands) Cost Value
- --------------------------------------------------------------------------------
Due in 1 year or less $ 750 $ 753
Due after 1 year through 5 years 3,588 3,823
Due after 5 years through 10 years 7,366 7,775
Due after 10 years 38,604 39,861
- --------------------------------------------------------------------------------
Subtotal 50,308 52,212
Mortgage-backed securities 4,382 4,498
- --------------------------------------------------------------------------------
Total $54,690 $56,710
================================================================================
Proceeds from sale of securities available for sale during 2002, 2001, and
2000 were $237.5 million, $328.3 million, and $49.2 million, respectively.
Gross gains of $3,383,000, $3,575,000, and $162,000 were realized on those
sales in 2002, 2001, and 2000, respectively. Gross losses of $299,000,
$393,000, and $116,000 were realized on those sales in 2002, 2001 and 2000,
respectively.
Securities with a carrying value of approximately $566.7 million as of
December 31, 2002 were pledged to secure borrowed funds, public deposits and
for other purposes as required or permitted by law. As of December 31, 2002,
Federal Home Loan Bank (FHLB) stock with a carrying value of $37.3 million was
held by the Corporation as required by the FHLB.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table shows comparative year-end detail of the loan portfolio
and includes unamortized deferred fees of $834,000 and $464,000 at December
31, 2002 and 2001, respectively:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Commercial real estate $ 607,328 $ 499,216
Residential 150,841 141,810
Commercial and industrial 338,047 282,135
Consumer 98,927 84,812
- --------------------------------------------------------------------------------
Total loans $1,195,143 $1,007,973
================================================================================
Residential mortgage loans held for sale amounted to $1.0 million and $1.4
million as of December 31, 2002 and 2001, respectively. These loans are
accounted for at the lower of aggregate cost or market value and are included
in the table above.
F-10
The Corporation originates and sells mortgage loans to FHLMC and FNMA.
Generally, servicing on such loans is retained by the Corporation. As of
December 31, 2002 and 2001, loans serviced for FNMA and FHLMC were $20.4
million and $29.4 million, respectively.
The Corporation has extended credit in the ordinary course of business to
directors, officers, and their associates on substantially the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with other customers of the Corporation.
The following table summarizes activity with respect to such loans:
Year Ended
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Balance as of beginning of year $37,409 $14,671
Additions 29,724 29,255
Reductions 24,137 6,517
- --------------------------------------------------------------------------------
Balance as of end of year $42,996 $37,409
================================================================================
None of these loans were past due or on nonaccrual status as of December 31,
2002 and 2001.
The majority of the Corporation's business is with customers located within
Mercer County, New Jersey and contiguous counties. Accordingly, the ultimate
collectibility of the loan portfolio and the recovery of the carrying amount
of real estate are subject to changes in the region's economic environment and
real estate market. A portion of the total portfolio is secured by real
estate. The principal areas of exposure are construction and development
loans, which are primarily commercial and residential projects, and commercial
mortgage loans. Commercial mortgage loans are completed projects and are
generally owner-occupied or tenanted investment projects, creating cash flow.
Changes in the allowance for loan losses are as follows:
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of beginning of year $13,542 $10,934 $ 8,965
Loans charged off (1,188) (1,699) (1,867)
Recoveries of loans charged off 92 382 136
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge offs (1,096) (1,317) (1,731)
Provision charged to operations 4,375 3,925 3,700
- -----------------------------------------------------------------------------------------------------------------------------------
Balance as of end of year $16,821 $13,542 $10,934
===================================================================================================================================
The detail of loans charged off is as follows:
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial real estate $ (78) $ (696) $ (356)
Residential (168) - (288)
Commercial and industrial (719) (591) (896)
Consumer (223) (412) (327)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $(1,188) $(1,699) $(1,867)
===================================================================================================================================
Nonperforming assets include nonperforming loans and other real estate. The
nonperforming loan category includes loans on which accrual of interest has
been discontinued (nonaccrual); loans 90 days past due or more on which
interest is still accruing; and restructured loans. Nonperforming loans as a
percentage of total loans were 0.52% as of December 31, 2002 and 0.51% as of
December 31, 2001.
F-11
A summary of nonperforming assets follows:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $2,395 $ 888
Residential 1,526 1,133
Commercial and industrial 1,143 1,494
Consumer 55 98
- --------------------------------------------------------------------------------
Total nonaccrual loans $5,119 $3,613
================================================================================
Restructured loans $ 711 $ 770
- --------------------------------------------------------------------------------
Loans past due 90 days or more:
Residential $ 323 $ 514
Consumer 121 228
- --------------------------------------------------------------------------------
Total loans past due 90 days or more 444 742
================================================================================
Total nonperforming loans 6,274 5,125
Other real estate 1,048 2,329
- --------------------------------------------------------------------------------
Total nonperforming assets $7,322 $7,454
================================================================================
The Corporation has defined the population of impaired loans to be all
nonaccrual commercial loans. Impaired loans are individually assessed to
determine whether the loan's carrying value is in excess of the fair value of
the collateral or the present value of the loan's expected cash flows. Smaller
balance homogeneous loans that are collectively evaluated for impairment,
including residential mortgage and consumer loans, are specifically excluded
from the impaired loan portfolio.
The recorded investment in loans receivable for which an impairment has been
recognized as of December 31, 2002 and 2001 was $4.2 million and $3.2 million,
respectively. The related allowance for loan losses on these loans as of
December 31, 2002 and 2001 was $1.0 million and $848,000, respectively. The
average recorded investment in impaired loans during 2002 and 2001 was $3.8
million and $3.2 million, respectively. There was no interest income
recognized on impaired loans in 2002, 2001 and 2000. There are no commitments
to lend additional funds to debtors whose loans are nonperforming.
Additional income before income taxes amounting to approximately $240,000 in
2002, $163,000 in 2001 and $640,000 in 2000 would have been recognized if
interest on all loans had been recorded based upon original contract terms.
5. BANK PREMISES AND EQUIPMENT, NET
The following table represents comparative information for premises and
equipment:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Land and improvements $ 510 $ 854
Buildings and improvements 7,910 7,507
Furniture and equipment 15,035 11,586
Construction in process 1,364 1,680
- --------------------------------------------------------------------------------
Total 24,819 21,627
Less accumulated depreciation 12,611 10,717
- --------------------------------------------------------------------------------
Bank premises and equipment, net $12,208 $10,910
================================================================================
F-12
6. DEPOSITS
Total deposits consist of the following:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Non-interest bearing demand deposits $ 126,183 $ 114,405
Interest bearing demand deposits 122,015 105,354
Money market deposits 314,529 203,872
Savings deposits 82,801 77,168
Certificates of deposit of $100,000 or more 145,191 137,684
Other time deposits 481,567 454,207
- --------------------------------------------------------------------------------
Total $1,272,286 $1,092,690
================================================================================
A summary of certificates of deposit by maturity is as follows:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Within one year $367,885 $542,966
One to two years 164,647 34,545
Two to three years 36,547 6,551
Three to four years 9,496 4,605
Four to five years 48,183 3,224
- --------------------------------------------------------------------------------
Total $626,758 $591,891
================================================================================
7. BORROWED FUNDS
Borrowed funds include securities sold under agreements to repurchase, FHLB
advances, and obligation for ESOP. Other borrowed funds consist of Federal
funds purchased and Treasury tax and loan deposits.
The following table presents comparative data related to borrowed funds of
the Corporation as of and for the years ended December 31, 2002, 2001, and
2000.
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase $ 10,000 $ 10,000 $ 10,000
FHLB advances 746,000 695,008 532,768
Obligation for ESOP 400 800 1,200
Other 1,311 1,305 1,255
- -----------------------------------------------------------------------------------------------------------------------------------
Total $757,711 $707,113 $545,223
===================================================================================================================================
Maximum amount outstanding at any month end $757,711 $707,113 $545,223
Average interest rate on year-end balance 4.85% 4.97% 5.79%
Average amount outstanding during the year $735,201 $644,690 $367,021
Average interest rate for the year 4.95% 5.47% 5.78%
===================================================================================================================================
There are $10.0 million in securities sold under agreements to repurchase
with an expected maturity over 90 days as of December 31, 2002. The
outstanding amount is a callable repurchase agreement with a maturity of ten
years and a call date of one year. Due to the call provision, the expected
maturity could differ from the contractual maturity.
The FHLB advances as of December 31, 2002, mature as follows:
- --------------------------------------------------------------------------------
(in thousands) 2002
- --------------------------------------------------------------------------------
Within one year $ 56,000
Over one to two years 87,000
Over four to five years 10,000
Over five years 593,000
- --------------------------------------------------------------------------------
Total $746,000
================================================================================
F-13
The outstanding amount includes $629.0 million in callable advances with two
to ten year maturities and call dates of three months to five years. Due to
the call provisions, expected maturities could differ from contractual
maturities.
In December 2001, the Corporation retired $50.0 million in convertible FHLB
advances early. The $50.0 million consisted of ten year original maturity
borrowings with lockout dates ranging from three months to two years. The
borrowings had an average rate of 4.38% and an average maturity of 8.8 years.
As a result of the transaction, the Corporation recognized a loss on the early
retirement of the debt of $2.2 million ($1.5 million net of tax benefit of
$753,000). The retirement was funded through short term floating rate FHLB
advances. The transaction was undertaken to improve the interest rate risk
profile of the Corporation. In 2002, the Corporation adopted Financial
Accounting Standards Board (FASB) No. 145 "Rescission of FASB Statement No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." This
statement eliminated the extraordinary item treatment of the early retirement
of debt on the transaction conducted in December of 2001. As a result, the
Consolidated Statement of Income for 2001 has been reclassified to reflect the
loss on this transaction as early retirement of debt expense in non-interest
expense.
Interest expense on borrowed funds is comprised of the following:
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase $ 624 $ 624 $ 1,281
FHLB advances 35,722 34,535 19,785
Obligation for ESOP 44 72 100
Other 13 33 53
- -----------------------------------------------------------------------------------------------------------------------------------
Total $36,403 $35,264 $21,219
===================================================================================================================================
8. 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, Yardville Capital Trust III (Trust III), a statutory business
trust, and a wholly owned subsidiary of Yardville National Bancorp, issued $6.0
million of 10.18% Trust Preferred Securities in a private placement transaction
and $190,000 of 10.18% Common Securities to Yardville National Bancorp. Proceeds
from the issuance of the Trust Preferred Securities were immediately used by
Trust III to purchase $6.2 million of 10.18% Subordinated Debentures maturing
June 8, 2031 from Yardville National Bancorp. Trust III exists for the sole
purpose of issuing Trust Preferred Securities and investing the proceeds into
Subordinated Debentures of Yardville National Bancorp. These Subordinated
Debentures constitute the sole assets of Trust III. These Subordinated
Debentures are redeemable in whole or part prior to maturity after June 8, 2011.
Trust III is obligated to distribute all proceeds of a redemption, whether
voluntary or upon maturity, to holders of the Trust Preferred Securities.
Yardville National Bancorp's obligation with respect to the Trust Preferred
Securities and the Subordinated Debentures, when taken together, provides a full
and unconditional guarantee on a subordinated basis by Yardville National
Bancorp of the obligations of Trust III to pay amounts when due on the Trust
Preferred Securities.
On June 23, 2000, Yardville Capital Trust II (Trust II), a statutory
business trust and a wholly owned subsidiary of Yardville National Bancorp,
issued $15.0 million of 9.50% Trust Preferred Securities in a private
placement transaction and $464,000 of 9.50% Common Securities to Yardville
National Bancorp. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by Trust II to purchase $15.5 million of 9.50%
Subordinated Debentures maturing June 22, 2030 from Yardville National
Bancorp. Trust II exists for the sole purpose of issuing Trust Preferred
Securities and investing the proceeds into Subordinated Debentures of
Yardville National Bancorp. These Subordinated Debentures constitute the sole
assets of Trust II. These Subordinated Debentures are redeemable in whole or
part prior to maturity after June 23, 2010. Trust II is obligated to
distribute all proceeds of a redemption, whether voluntary or upon maturity,
to holders of the Trust Preferred Securities. Yardville National Bancorp's
obligation with respect to the Trust Preferred Securities and the Subordinated
Debentures, when taken together, provides a full and unconditional guarantee
on a subordinated basis by Yardville National Bancorp of the obligations of
Trust II to pay amounts when due on the Trust Preferred Securities.
F-14
In 1997, Yardville Capital Trust (the Trust) issued $11.5 million of 9.25%
Trust Preferred Securities and $356,000 of 9.25% Common Securities to
Yardville National Bancorp. Proceeds were used by the Trust to purchase
$11.9 million of 9.25% Subordinated Debentures maturing November 1, 2027.
Those debentures are redeemable in whole or in part prior to maturity after
November 1, 2002.
On February 19, 2003, Yardville Capital Trust IV (Trust IV), a statutory
business trust and a wholly owned subsidiary of Yardville National Bancorp,
issued $15.0 million of floating rate Trust Preferred Securities in a private
placement transaction and $464,000 of floating rate Common Securities to
Yardville National Bancorp. The floating rate is based on three month LIBOR
plus 340 basis points. Proceeds from the issuance of the Trust Preferred
Securities were immediately used by Trust IV to purchase $15.5 million of
floating rate Subordinated Debentures maturing March 1, 2033 from Yardville
National Bancorp. Trust IV exists for the sole purpose of issuing Trust
Preferred Securities and investing the proceeds into Subordinated Debentures
of Yardville National Bancorp. These Subordinated Debentures constitute the
sole assets of Trust IV. These Subordinated Debentures are redeemable in whole
or part prior to maturity after March 1, 2008. Trust IV is obligated to
distribute all proceeds of a redemption, whether voluntary or upon maturity,
to holders of the Trust Preferred Securities. Yardville National Bancorp's
obligation with respect to the Trust Preferred Securities and the Subordinated
Debentures, when taken together, provides a full and unconditional guarantee
on a subordinated basis by Yardville National Bancorp of the obligations of
Trust IV to pay amounts when due on the Trust Preferred Securities.
On February 20, 2003, the Corporation announced the redemption of the
$11.5 million of 9.25% Subordinated Debentures due November 1, 2027 and the
9.25% Common Securities. The redemption date is March 31, 2003 at the price of
100% of principal amount plus accrued and unpaid distributions.
9. INCOME TAXES
Income taxes reflected in the consolidated financial statements for 2002, 2001,
and 2000 are as follows:
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Federal:
Current $ 6,357 $ 3,587 $ 5,330
Deferred (1,120) (1,025) (1,179)
State:
Current 669 80 108
Deferred (542) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total tax expense $ 5,364 $ 2,642 $ 4,259
===================================================================================================================================
F-15
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax assets and liabilities for 2002 and 2001
are as follows:
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 6,718 $ 5,409
Writedown of basis of ORE properties 61 149
Deferred income 11 14
Nonaccrual loans 3 -
Net state operating loss carryforwards 397 46
Depreciation 91 -
Deferred compensation 1,403 1,022
- --------------------------------------------------------------------------------
Total deferred tax assets $ 8,684 $ 6,640
- --------------------------------------------------------------------------------
Valuation allowance (78) (78)
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated other comprehensive income (3,791) (194)
Deferred income (1,414) (1,065)
Unamortized discount accretion (97) (77)
Depreciation - 40
Other - (27)
- --------------------------------------------------------------------------------
Total deferred tax liabilities $(5,302) $(1,323)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 3,304 $ 5,239
================================================================================
The Corporation has established the valuation allowance against certain
temporary differences. The Corporation is not aware of any factors which would
generate significant differences between taxable income and pre-tax accounting
income in future years, except for the effects of the reversal of current or
future net deductible temporary differences. Management believes, based upon
current information, that it is more likely than not that there will be
sufficient taxable income through carryback to prior years to realize the net
deferred tax asset. However, there can be no assurance regarding the level of
earnings in the future.
A reconciliation of the tax expense computed by multiplying pre-tax
accounting income by the statutory Federal income tax rate of 34% is as
follows:
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax expense at statutory rate $6,585 $3,806 $4,964
State income taxes, net of Federal benefit 84 53 71
Changes in taxes resulting from:
Tax exempt interest (822) (701) (591)
Tax exempt income (571) (606) (279)
Non-deductible expenses 88 90 94
- -----------------------------------------------------------------------------------------------------------------------------------
Total $5,364 $2,642 $4,259
===================================================================================================================================
10. BENEFIT PLANS
Retirement Savings Plan. The Corporation has a 401(k) plan which covers
substantially all employees with one or more years of service. The plan
permits all eligible employees to make basic contributions to the plan up to
12% of base compensation. Under the plan, the Corporation provided a matching
contribution of 50% in 2002, 2001 and 2000 up to 6% of base compensation.
Employer contributions to the plan amounted to $209,000 in 2002, $178,000 in
2001, and $151,000 in 2000.
Postretirement Benefits. The Corporation provides additional postretirement
benefits, namely life and health insurance, to retired employees over the age
of 62 who have completed 15 years of service. The plan calls for retirees to
contribute a portion of the cost of providing these benefits in relation to
years of service.
F-16
The cost of retiree health and life insurance benefits is recognized over
the employees' period of service. There were $128,000 in periodic
postretirement benefit costs under FASB Statement No. 106 in 2002, $84,000 in
2001 and none for 2000. The actuarial present value of benefit obligations was
$967,000 in 2002 and $839,000 in 2001.
Stock Option Plans. The Corporation maintains stock option plans for both
officers and directors. In March 1988, the stockholders approved the 1988 plan
for key employees (Employee Plan). The Employee Plan allowed for the granting
of up to 328,000 shares of the Corporation's common stock at an option price
no less than the market value of the stock on the date such options are
granted. As of February 28, 1998, no incentive stock options may be granted
under the Employee Plan.
In April 1997, the stockholders approved the 1997 stock option plan for key
employees (The 1997 Plan). The 1997 Plan allows for the granting of 1,070,000
shares of the Corporation's common stock at an option price to be no less than
the market value of the stock on the date such options are granted. Options
typically have a ten-year term and vest ratably over a five-year period. At
December 31, 2002, there were 208,688 shares available for grant under The
1997 Plan.
In April 1994, the Board of Directors approved a non-qualified stock option
plan for non-employee directors (Director Plan). The Director Plan allowed for
the granting of 228,820 shares of the Corporation's common stock at an option
price to be no less than the market value of the stock on the date such
options are granted. As of November 1, 2002, options to purchase an aggregate
of 125,980 shares of our common stock were outstanding under the plan (at
exercise prices ranging from $10.94 to $17.20 per share, with vesting over a
period of four years and terms of ten years). In addition, an aggregate of
8,248 shares had been acquired upon exercise of vested options by two
directors. On three occasions (once in 1998, once in 2000 and once in 2002),
the number of shares available for the grant of options under this plan was
increased by the Board of Directors. Each of these increases was inadvertently
implemented without obtaining shareholder approval required under applicable
rules of the Nasdaq Stock Market. Upon being advised of this shareholder
approval requirement, the Corporation cancelled the increases in the number of
shares available under the plan, and the non-employee directors holding
options granted without shareholder approval have rescinded and terminated
such options. These terminations were completed in November 2002. In addition,
the Corporation and the two directors that had exercised vested options agreed
to rescind the exercise by taking back shares that had been acquired upon
exercise of such options in exchange for a return of the exercise price
(aggregating approximately $124,000) to the applicable holder. These
terminations were completed in November 2002. These transactions did not have
a material adverse effect on the Corporation's financial condition or results
of operations. At December 31, 2002, there were no shares available for grant
under the Director Plan.
F-17
The tables below list the activity in our stock option plans for each of the
years in the three-year period ended December 31, 2002.
Weighted Average
Director Plan Shares Exercise Price
- --------------------------------------------------------------------------------
Balance, December 31, 1999 73,800 $16.37
- --------------------------------------------------------------------------------
Shares:
Granted 82,500 10.95
Exercised 2,680 8.77
Expired 3,280 10.27
- --------------------------------------------------------------------------------
Balance, December 31, 2000 150,340 $13.66
- --------------------------------------------------------------------------------
Shares:
Exercised 600 10.49
Expired 1,640 10.06
- --------------------------------------------------------------------------------
Balance, December 31, 2001 148,100 $13.67
- --------------------------------------------------------------------------------
Shares:
Granted 7,500 12.52
Exercised 8,248 14.92
Expired 28,684 12.94
Terminated 118,668 13.74
- --------------------------------------------------------------------------------
Balance, December 31, 2002 - $ 0.00
- --------------------------------------------------------------------------------
Shares exercisable as of December 31, 2002 - $ 0.00
================================================================================
Weighted Average
1988 and 1997 Plans Shares Exercise Price
- --------------------------------------------------------------------------------
Balance, December 31, 1999 420,719 $15.64
- --------------------------------------------------------------------------------
Shares:
Granted 429,560 10.95
Exercised 11,740 3.90
Expired 2,192 13.68
- --------------------------------------------------------------------------------
Balance, December 31, 2000 836,347 $13.39
- --------------------------------------------------------------------------------
Shares:
Granted 39,200 12.74
Exercised 100 3.90
Expired 6,100 16.44
- --------------------------------------------------------------------------------
Balance, December 31, 2001 869,347 $13.34
- --------------------------------------------------------------------------------
Shares:
Granted 56,000 17.45
Exercised 53,341 8.97
Expired 4,752 12.32
- --------------------------------------------------------------------------------
Balance, December 31, 2002 867,254 $13.88
- --------------------------------------------------------------------------------
Shares exercisable as of December 31, 2002 449,439 $14.73
================================================================================
The table below lists information on stock options outstanding at December
31, 2002:
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Number
Range of Number Remaining Average of Shares Weighted
Exercise Of Shares Contractual Exercise Exercisable Average
Prices Outstanding Life in Years Price at Period End Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3.90 - $ 5.85 6,490 0.42 $ 3.90 6,490 $ 3.90
9.875 - 14.81 469,876 7.93 11.19 169,764 11.16
16.00 - 20.12 390,888 5.70 17.29 273,185 17.20
- -----------------------------------------------------------------------------------------------------------------------------------
$ 3.90 - $20.12 867,254 7.56 $13.88 449,439 $14.73
===================================================================================================================================
Benefit Plans. The Corporation has a salary continuation plan for key
executives and a director deferred compensation plan for its board members.
The plans provide for yearly retirement benefits to be paid over a specified
period. In addition, there is an officer group term life insurance plan for
divisional officers. The present value of the benefits accrued under these
plans as of December 31, 2002 and 2001 is approximately $2.4 million and
$1.7 million, respectively, and is included in other liabilities in the
accompanying consolidated statements of condition. Compensation expense of
approximately $744,000, $780,000, and $140,000 is included in the accompanying
consolidated statements of income for the years ended December 31, 2002, 2001,
and 2000, respectively.
In connection with the benefit plans, the Corporation has purchased life
insurance policies on the lives of the executives, directors, and divisional
officers. The Corporation is the owner and beneficiary of the policies. The
cash surrender values of the policies are approximately $40.9 million and
$31.8 million as of December 31, 2002 and 2001, respectively.
F-18
11. COMMON STOCK
On November 14, 2002, the Corporation repurchased 8,248 shares of the
Corporation's common stock for approximately $124,000 from two directors
relating to the termination of the Director Plan. See Note 10 - Benefit Plans.
In 1999, the Bank established an Employee Stock Ownership Plan and related
trust (ESOP) for eligible employees. The ESOP is a tax-qualified plan subject
to the requirements of the Employee Retirement Income Security Act of 1974
(ERISA). Employees with twelve months of employment with the Bank and who have
worked at least 1,000 hours are eligible to participate. The ESOP borrowed $2
million from an unaffiliated financial institution and purchased 155,340
shares of common shares, no par value, of the Corporation. Shares purchased by
the ESOP are held in a suspense account pending allocation among participants
as the loan is repaid. Compensation expense is recognized based on the fair
value of the stock when it is committed to be released.
Compensation expense amounted to $445,000, $367,000 and $275,000 for the
years ended December 31, 2002, 2001, and 2000, respectively. The fair value of
unearned shares at December 31, 2002 is $536,000. The number of shares
allocated as of December 31, 2002 was 124,272.
Unallocated shares are deducted from common shares outstanding for earnings
per share purposes with shares which are committed to be released during the
year added back into weighted average shares outstanding.
On June 23, 2000, the Corporation completed the private placement of 68,500
units, each unit consisting of 10 shares of common stock and 1 common stock
purchase warrant. The warrants have an expiration date of June 23, 2010 and a
purchase price of $12.00 per share. The units were sold to a limited number of
accredited investors and generated gross proceeds of $6.9 million. Net
proceeds after offering costs were $6.8 million. Nearly all the net proceeds
were contributed to the Bank to support future asset growth.
On August 22, 2001, the Corporation completed the private placement of
596,654 shares of common stock for an aggregate purchase price of $7.8
million. Net proceeds after offering costs were $7.4 million. Of the net
proceeds, $6.0 million was contributed to the Bank to support future asset
growth.
On December 18, 2002, the Corporation completed the sale of 2,300,000 shares
of its common stock in an underwritten public offering. The common stock was
offered at a price of $16.25 per share and generated gross proceeds of $37.4
million. Net proceeds after the underwriting discount and other offering costs
were $34.3 million. Of the net proceeds, $33.0 million was contributed to the
Bank to support future asset growth.
The Bank's 401(k) savings plan has, since August 1998, included an option
for the bank employees to invest a portion of their plan accounts in a fund
(YNB Stock Fund) that has acquired shares of the Corporation's common stock in
the open market. In connection with the addition to the plan of the YNB Stock
Fund, the Corporation inadvertently did not register with the Securities and
Exchange Commission the 401(k) savings plan interests or the shares of common
stock acquired by the YNB Stock Fund and may not have distributed certain
information to plan participants on a timely basis as required by securities
laws. After being advised of those requirements, the Corporation promptly
completed the registration and distributed the required information to plan
participants. The Board of Directors has approved the discontinuance of the
YNB Stock Fund, which will involve the sale of the shares of the Corporation's
common stock owned by the YNB Stock Fund and application of the proceeds of
such sale to other investment choices within the 401(k) savings plan at the
direction of the participants. It is anticipated that such sale will occur in
the near future and the shares of common stock in the YNB Stock Fund will be
purchased by the YNB Employee Stock Ownership Plan. As of October 31, 2002
(the most recent date for which data was available), there was a total of
approximately $5.2 million held in investments by participants in the 401(k)
savings plan, of which approximately $738,000 was invested in the YNB Stock
Fund (which owned approximately 41,847 shares of common stock as of such
date). While it is possible that the Corporation may have liability based on
the requirements applicable to the 401(k) savings plan, the Corporation does
not believe that any such liabilities or claims, if asserted, would have a
material adverse effect on the financial condition or results of operations
based on our year-end stock price. That conclusion is based in part on the
expectation that the sale of shares of the Corporation's common stock in the
YNB Stock Fund will occur in the near future and at a price at or near the
year-end market price of our common stock. There can be no assurances that the
Corporation will be able to complete the sale of shares by the 401(k) plan in
the time period or at the prices currently contemplated.
F-19
The Corporation also maintained a dividend reinvestment and stock purchase
plan (YNB DRIP) pursuant to which shareholders may elect to have their cash
dividends used to purchase shares of the Corporation's common stock and may
make additional purchases (up to monthly limits) of shares of the
Corporation's common stock through the YNB DRIP. In addition, employees of the
Corporation are permitted to purchase shares through the YNB DRIP through
payroll withholding (subject to monthly limits), and such employees need not
otherwise be shareholders or participate in the dividend reinvestment feature
of the YNB DRIP. All purchases of shares were handled by an independent
administrator and were purchased in open market transactions at prevailing
market prices. Shares acquired through the YNB DRIP are held by an independent
custodian until a participant directs that they be distributed. The
Corporation covered the administrative costs of the YNB DRIP and all brokerage
costs relating to purchases and sales of shares in the YNB DRIP. In connection
with the dividend reinvestment feature only, in 1997 the Corporation modified
the YNB DRIP to permit participating shareholders to acquire the shares in the
YNB DRIP at a 3% discount to the market price on the date of purchase. This
discount is not provided for other direct purchases by shareholders or
employees in the YNB DRIP. In connection with the addition of the 3% discount
to the dividend reinvestment feature of the YNB DRIP, the Corporation
inadvertently did not register with the Securities and Exchange Commission the
shares of common stock acquired by the YNB DRIP and may not have distributed
certain information to plan participants as required by securities laws. After
recently being advised of those requirements, the Corporation promptly
temporarily suspended operation of the YNB DRIP and has remitted to plan
participants cash funds equal to all amounts not yet used to acquire shares of
common stock. The Corporation is currently preparing to register the shares of
common stock acquired (and to be acquired) by the YNB DRIP, and expect the
registration to be completed in the near future. In addition, the Board of
Directors has approved an offer to be made to all YNB DRIP participants to
rescind their purchases of common stock through the YNB DRIP since December 1,
1997. Approximately 125,993 shares of common stock (as adjusted for stock
splits and stock dividends) have been acquired through the YNB DRIP since
December 1, 1997, at prices ranging from $8.88 to $19.93 per share. As of
December 31, 2002, the market price of the Corporation's common stock was
$17.24 per share. It is anticipated that the rescission offer will commence in
the near future (subject to completion of required filings with the Securities
and Exchange Commission). It is management's belief that participants will not
be likely to accept the rescission offer if the market price of the common
stock is then close to or higher than the rescission price (an amount equal to
the original purchase price of the shares, plus interest at a statutory rate
since the date of purchase and less any amounts received by the participant
with respect to such shares, including subsequent cash dividends whether or
not they were reinvested in shares of common stock). In the event some
participants do accept the rescission offer, it is management's belief, based
upon the year-end market price of the common stock, that the aggregate amount
of rescission payments would not have a material adverse effect on the
Corporation's financial condition or results of operations. There can be no
assurances that the Corporation will be able to complete the rescission offer
in the time period currently contemplated.
F-20
12. OTHER NON-INTEREST EXPENSE
Other non-interest expense included the following:
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Marketing $1,104 $ 957 $1,144
Stationery and supplies 823 633 628
Communication and postage 809 694 601
Outside services and processing 595 400 269
Audit and examination fees 570 501 396
ORE expenses 418 831 893
Attorneys' fees 258 238 257
Insurance (other) 205 152 156
FDIC insurance premium 200 180 161
Amortization of trust preferred expenses 190 210 176
Other 2,052 2,278 2,252
- -----------------------------------------------------------------------------------------------------------------------------------
Total $7,224 $7,074 $6,933
===================================================================================================================================
13. RELATED PARTY TRANSACTIONS
The Corporation has had and expects in the future to have other transactions in
the ordinary course of business with many of its directors, senior officers and
other affiliates (and their associates) on substantially the same terms as those
prevailing for comparable transactions with others. For a discussion of credit
transactions, see Note 4 - Loans and Allowance for Loan Losses. Listed below is
a summary of material relationships or transactions with the Corporation's
directors, senior officers and other affiliates.
In October 1999, upon expiration of the initial five year term, the Bank
renewed its lease for a five year period for its Trenton, New Jersey branch
office, which is owned by The Lalor Urban Renewal Limited Partnership. The
Lalor Corporation, which is the general partner of the limited partnership is
owned by Sidney L. Hofing, a director of the Corporation and the Bank. Under
the lease, the Bank is obligated to pay approximately $2,600 per month,
excluding utilities and maintenance expenses.
In July 2000, the Bank signed a ten year lease with 4 five year renewal
options for its Lawrence, New Jersey branch office. The property is owned by
Union Properties LLC. Sidney L. Hofing, a director of the Corporation and the
Bank, has an ownership interest in Union Properties LLC. Under the terms of
the lease, the Bank is obligated to pay approximately $7,300 per month,
excluding utilities and maintenance expense.
In May 2001, the Bank signed a ten year lease with 3 five year renewal
options for its Bordentown, New Jersey branch office. The Bank acquired the
property from the bankruptcy estate of a borrower and sold the property to BYN
LLC a limited liability company of which Mr. Hofing, a director of the
Corporation and the Bank is a member. The purchase price was $529,237. Under
the terms of the lease, the Bank is obligated to pay approximately $7,000 per
month, excluding utilities and maintenance expenses.
In October 2001, the Bank signed a fifteen year lease with 3 five year
renewal terms for its Hunterdon County Regional Headquarters. The property is
owned by FYNB, LLC. Sidney Hofing, a director of the Corporation and the Bank
had an ownership interest in FYNB, LLC, but several members of Mr. Hofing's
family including his spouse continue to have an ownership interest. Under the
terms of the lease, the Bank is obligated to pay approximately $17,500 per
month, excluding utilities and maintenance expenses.
Except as described in Note 4 - Loans and Allowance for Loan Losses, there
were no new material relationships or transactions with Directors, senior
officers or their affiliates established in 2002.
F-21
Subsequent to year-end 2002, on February 24, 2003, the Bank entered into a
contract of sale on its former operations center to Christopher S. Vernon, a
director of the Corporation and the Bank. The purchase price is $650,000 and
the Bank will record a gain on the sale of the property at closing. The
transaction should close in the second quarter of 2003. The sale is contingent
on Mr. Vernon and the Bank finalizing a lease on basement space in that
building for a term of less than one year.
14. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation enters into a variety of financial instruments with off- balance
sheet risk in the normal course of business. These financial instruments include
commitments to extend credit and letters of credit, both of which involve, to
varying degrees, elements of risk in excess of the amount recognized in the
consolidated financial statements.
Credit risk, the risk that a counterparty of a particular financial
instrument will fail to perform, is the contract amount of the commitments to
extend credit and letters of credit. The credit risk associated with these
financial instruments is essentially the same as that involved in extending
loans to customers. Credit risk is managed by limiting the total amount of
arrangements outstanding and by applying normal credit policies to all
activities with credit risk. Collateral is obtained based on management's
credit assessment of the customer.
The contract amounts of off-balance sheet financial instruments as of
December 31, 2002 and 2001 for commitments to extend credit were $243.1
million and $191.8 million, respectively. For letters of credit, the contract
amounts were $19.6 million and $13.4 million, respectively.
As part of its normal course of business, the Corporation issues standby
letters of credit as part of an overall lending relationship. These standby
letters of credit are primarily related to performance guarantees on real
estate development. At December 31, 2002, the amount of standby letters of
credit outstanding and the maximum liability of the Corporation was $16.6
million. The Corporation typically obtains collateral to secure standby
letters of credit. At December 31, 2002, total collateral securing standby
letters of credit was $14.1 million and is available to offset potential
losses.
Commitments to extend credit and letters of credit may expire without being
drawn upon, and therefore, the total commitment amounts do not necessarily
represent future cash flow requirements.
The Corporation maintains lines of credit with four of its correspondent
banks. There were $25.0 million in lines of credit available as of December
31, 2002. Subject to collateral requirements, the Corporation also maintains
lines of credit with the FHLB and three brokerage firms. There were
approximately $300.0 million in lines available at December 31, 2002.
The Corporation leases various banking offices, its corporate headquarters
and operations center. Total lease rental expense was $1.9 million, $1.3
million, and $1.0 million for the years ended December 31, 2002, 2001, and
2000, respectively. Minimum rentals under the terms of the leases are
approximately $2.1 million per year in 2003 through 2007.
The Corporation and the Bank are party, in the ordinary course of business,
to litigation involving collection matters, contract claims and other
miscellaneous causes of action arising from their business. Management does
not consider that any such proceedings depart from usual routine litigation,
and in its judgment, the Corporation's consolidated financial position or
results of operations will not be affected materially by the final outcome of
any pending legal proceedings.
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
F-22
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets, and of Tier
I capital to average assets (as defined in the regulations). Management
believes, as of December 31, 2002, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2002, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Permission from the Comptroller of the Currency is required if the total of
dividends declared in a calendar year exceeds the total of the Bank's net
profits, as defined by the Comptroller, for that year, combined with its
retained net profits of the two preceding years. The retained net profits of
the Bank available for dividends are approximately $14.3 million as of
December 31, 2002.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC
Improvement Act") primarily addresses additional sources of funding for the
Bank Insurance Fund, which insures the deposits of commercial banks and saving
banks. It also imposes a number of mandatory supervisory measures on savings
associations and banks.
The following table presents the Corporation's and Bank's actual capital
amounts and ratios:
----------------------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL
Per Regulatory Guidelines
- -----------------------------------------------------------------------------------------------------------------------------------
"Well
Actual Minimum Capitalized"
- -----------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002:
Corporation
Total capital (to risk-weighted assets) $187,897 13.0% $115,626 8.0% $144,533 10.0%
Tier I capital (to risk-weighted assets) 171,076 11.8 57,813 4.0 86,720 6.0
Tier I capital (to average assets) 171,076 8.2 83,817 4.0 104,772 5.0
Bank
Total capital (to risk-weighted assets) $181,251 12.6% $115,515 8.0% $144,393 10.0%
Tier I capital (to risk-weighted assets) 164,430 11.4 57,757 4.0 86,636 6.0
Tier I capital (to average assets) 164,430 7.9 83,493 4.0 104,367 5.0
As of December 31, 2001:
Corporation
Total capital (to risk-weighted assets) $138,919 11.3% $ 98,752 8.0% $123,441 10.0%
Tier I capital (to risk-weighted assets) 123,838 10.0 49,376 4.0 74,064 6.0
Tier I capital (to average assets) 123,838 6.9 71,575 4.0 89,469 5.0
Bank
Total capital (to risk-weighted assets) $134,163 10.9% $ 98,476 8.0% $123,095 10.0%
Tier I capital (to risk-weighted assets) 120,621 9.8 49,238 4.0 73,857 6.0
Tier I capital (to average assets) 120,621 6.8 71,309 4.0 89,136 5.0
===================================================================================================================================
F-23
The FDIC Improvement Act requires financial institutions to take certain
actions relating to their internal operations, including: providing annual
reports on financial condition and management to the appropriate Federal
banking regulators, having an annual independent audit of financial statements
performed by an independent public accountant and establishing an independent
audit committee composed solely of outside directors. The FDIC Improvement Act
also imposes certain operational and managerial standards on financial
institutions relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits.
Bank holding companies and banks are subject to extensive supervision and
regulation under both Federal and state laws. The regulation and supervision
is designed primarily for the protection of consumers, depositors and the
FDIC, and not the Corporation or its stockholders. Enforcement actions for
failure to comply with applicable requirements may include the imposition of a
conservator or receiver, cease-and-desist orders and written agreements, the
termination of insurance on deposits, the imposition of civil money penalties
and removal and prohibition orders. In addition, private parties may assert
claims. If any enforcement action is taken by a banking regulator or private
claims are asserted, the value of an equity investment in the Corporation
could be substantially reduced or eliminated.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value estimates, methods and assumptions were used to
measure the fair value of each class of financial instruments for which it is
practical to estimate that value:
Cash and Cash Equivalents. For such short-term investments, the carrying
amount was considered to be a reasonable estimate of fair value.
Interest Bearing Deposits with Banks. For interest bearing deposits with
banks, the carrying amount was considered to be a reasonable estimate of fair
value.
Securities and Mortgage-backed Securities. The fair value of securities and
mortgage-backed securities is based on bid prices published in financial
newspapers or bid quotations received from securities dealers.
Loans. Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial and
industrial, commercial real estate, residential mortgage and other consumer.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
The fair value of performing loans, except residential mortgage loans, is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest
rate risk inherent in the loan. The estimate of maturity is based on the
Corporation's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of current
economic and lending conditions. For performing residential mortgage loans,
fair value is estimated by discounting contractual cash flows adjusted for
prepayment estimates using discount rates based on secondary market sources
adjusted to reflect differences in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
Deposit Liabilities. The fair value of deposits with no stated maturity, such
as non-interest bearing demand deposits, interest bearing demand deposits,
money market, and savings deposits, is considered to be equal to the amount
payable on demand. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining
maturities.
F-24
Borrowed Funds. For securities sold under agreements to repurchase and FHLB
advances, fair value was based on rates currently available to the Corporation
for agreements with similar terms and remaining maturities. For convertible
securities sold under agreements to repurchase and FHLB advances, option
adjusted spread pricing (OAS) was obtained from sources believed to be
reliable. For other borrowed funds, the carrying amount was considered to be a
reasonable estimate of fair values.
The estimated fair values of the Corporation's financial instruments are as
follows:
December 31, 2002
- --------------------------------------------------------------------------------
Carrying Fair
(in thousands) Value Value
- --------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 101,093 $ 101,093
Interest bearing deposits with banks 2,501 2,501
Securities available for sale 820,665 820,665
Investment securities 54,690 56,710
Loans, net 1,178,322 1,192,076
Financial Liabilities:
Deposits 1,272,286 1,285,063
Borrowed funds 757,711 847,216
Trust preferred securities 32,500 35,084
================================================================================
December 31, 2002
- --------------------------------------------------------------------------------
Carrying Fair
(in thousands) Value Value
- --------------------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 66,731 $ 66,731
Interest bearing deposits with banks 2,320 2,320
Securities available for sale 746,483 746,483
Investment securities 65,753 64,887
Loans, net 994,431 1,003,888
Financial Liabilities:
Deposits 1,092,690 1,099,097
Borrowed funds 707,113 748,604
Trust preferred securities 32,500 34,223
================================================================================
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, and as the fair value for
these financial instruments was not material, these disclosures are not
included above.
Limitations. Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Corporation's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. Significant assets that are not considered
financial assets include the deferred tax assets and bank premises and
equipment. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in many of the estimates.
F-25
17. PARENT CORPORATION INFORMATION
The condensed financial statements of the parent company only are presented
below:
YARDVILLE NATIONAL BANCORP
(PARENT CORPORATION)
CONDENSED STATEMENTS OF CONDITION
December 31,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001
- --------------------------------------------------------------------------------
Assets:
Cash $ 5,696 $ 2,224
Securities available for sale - 105
Investment in subsidiaries 172,798 121,992
Other assets 1,630 3,418
- --------------------------------------------------------------------------------
Total Assets $180,124 $127,739
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Other liabilities $ 275 $ 184
Obligation for ESOP 400 800
Subordinated debentures 33,510 33,510
Stockholders' equity 145,939 93,245
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $180,124 $127,739
================================================================================
F-26
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Income:
Dividends from subsidiary $ 6,647 $ 6,294 $ 4,648
Interest income 2 12 14
Other income 444 472 501
- -----------------------------------------------------------------------------------------------------------------------------------
Total Operating Income 7,093 6,778 5,163
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Expense:
Interest expense 3,143 3,024 1,909
Other expense 996 833 668
- -----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expense 4,139 3,857 2,577
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed income of subsidiaries 2,954 2,921 2,586
Federal income tax benefit (1,243) (1,144) (701)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiaries 4,197 4,065 3,287
Equity in undistributed income of subsidiaries 9,807 4,488 7,054
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $14,004 $ 8,553 $10,341
===================================================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 14,004 $ 8,553 $ 10,341
Adjustments:
Decrease (increase) in other assets 1,788 (1,606) (196)
Equity in undistributed income of subsidiaries (9,807) (4,488) (7,054)
Increase in other liabilities 91 56 98
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,076 2,515 3,189
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Investing in subsidiaries (33,787) (10,895) (22,626)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (33,787) (10,895) (22,626)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Decrease in obligation for ESOP (400) (400) (400)
Proceeds from issuance of subordinated debentures - 6,190 15,464
Proceeds from shares issued 35,253 7,845 7,304
Treasury shares acquired (124) - -
Dividends paid (3,546) (3,341) (2,840)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 31,183 10,294 19,528
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 3,472 1,914 91
Cash as of beginning of year 2,224 310 219
- -----------------------------------------------------------------------------------------------------------------------------------
Cash as of end of year $ 5,696 $ 2,224 $ 310
===================================================================================================================================
F-27
INDEPENDENT
Auditors' Report
THE BOARD OF DIRECTORS AND STOCKHOLDERS
YARDVILLE NATIONAL BANCORP:
We have audited the accompanying consolidated statements of condition of
Yardville National Bancorp and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Yardville
National Bancorp and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As disclosed in Note 7 to the consolidated financial statements, the
Corporation adopted Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections" effective December 31, 2002.
KPMG LLP
Short Hills, New Jersey
January 27, 2003, except for
Note 8, which is as of
February 20, 2003
F-28
INDEX TO EXHIBITS
Exhibit
Number Description Page
- -----------------------------------------------------------------------------------------------------------------------------------
+ 3.1 Restated Certificate of Incorporation of the Company, as corrected by the Certificate of
Correction thereto filed on July 6, 1995 and as amended by the Certificate of Amendment
thereto filed on March 6, 1998.
(A) 3.2 By-Laws of the Company
(A) 4.1 Specimen Share of Common Stock
(B) 4.2 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.
(B) 4.3 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.
(B) 4.4 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.
4.5 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, 2030: (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
and The Bank of New York, as trustee, relating to 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.
4.6 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.
E-1
Exhibit
Number Description Page
- -----------------------------------------------------------------------------------------------------------------------------------
4.7 The Registrant will furnish to the Commission upon request copies of the following documents
relating to the Registrant's Floating Rate Junior Subordinated Deferrable Interest Debentures
due March 1, 2033: (i) Amended and Restated Declaration of Trust dated February 19, 2003,
among the Registrant, Wilmington Trust Company, as property trustee, and the Administrative
Trustees of Yardville Capital Trust IV; (ii) Indenture dated as of February 19, 2003, between
the Registrant and Wilmington Trust Company, as trustee, relating to the Registrant's Floating
Rate Junior Subordinated Deferrable Interest Debentures due March 1, 2033; and (iii) Capital
Securities Guarantee Agreement dated as of February 19, 2003, between the Registrant and
Wilmington Trust Company, as trustee, relating to the Floating Rate Capital Securities of
Yardville Capital Trust IV.
+ 10.1 Employment Contract between Registrant and Stephen F. Carman*
+ 10.2 Employment Contract between Registrant and Jay G. Destribats*
+ 10.3 Employment Contract between Registrant and James F. Doran*
+ 10.4 Employment Contract between Registrant and Frank Durand III*
+ 10.5 Employment Contract between Registrant and Howard N. Hall*
+ 10.6 Employment Contract between Registrant and Timothy J. Losch*
+ 10.7 Employment Contract between Registrant and Eugene C. McCarthy*
+ 10.8 Employment Contract between Registrant and Daniel J. O'Donnell*
+ 10.9 Employment Contract between Registrant and Patrick M. Ryan*
+ 10.10 Employment Contract between Registrant and John P. Samborski*
+ 10.11 Employment Contract between Registrant and Sarah J. Strout*
+ 10.12 Employment Contract between Registrant and Stephen R. Walker*
+ 10.13 Supplemental Executive Retirement Plan*
+ 10.14 Supplemental Executive Retirement Plan Summary for the Benefit of
Jay G. Destribats*
+ 10.15 Supplemental Executive Retirement Plan Summary for the Benefit of
Patrick M. Ryan*
+ 10.16 Supplemental Executive Retirement Plan Summary for the Benefit of Stephen F. Carman*
+ 10.17 Supplemental Executive Retirement Plan Summary for the Benefit of
Timothy J. Losch*
+ 10.18 1988 Stock Option Plan*
(D) 10.19 1994 Stock Option Plan*
+ 10.20 Directors' Deferred Compensation Plan*
(C) 10.21 1997 Stock Option Plan*
E-2
Exhibit
Number Description Page
- -----------------------------------------------------------------------------------------------------------------------------------
(F) 10.22 Yardville National Bank Employee Stock Ownership Plan, as amended*
(E) 10.23 Lease agreement between Crestwood Construction and the Bank dated May 25, 1998
(G) 10.24 Real property lease between the Bank and BYN, LLC for our branch located at 1041 Route 206,
Bordentown, New Jersey
(G) 10.25 Real property lease between the Bank and FYNB, LLC for our branch located in Raritan, New
Jersey
(G) 10.26 Real property lease between the Bank and Union Properties, LLC for our branch located at 1575
Brunswick Avenue, Lawrence, New Jersey
(G) 10.27 Real property lease between the Bank and The Lalor Urban Renewal Limited Partnership for our
branch located in the Lalor Plaza in Trenton, New Jersey
+ 21 List of Subsidiaries of the Registrant
23 Consent of KPMG LLP
99.1 Certification by Patrick M. Ryan, President and CEO
99.2 Certification by Stephen F. Carman, Vice President and Treasurer
+ Previously filed
(A) Incorporated by reference to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-78050)
(B) Incorporated by reference to the Registrant's Registration Statement on Form S-2 (Registration
Nos. 333-35061 and 333-35061-01)
(C) Incorporated by reference to the Registrant's definitive proxy statement, filed April 8, 2000,
for the Annual Meeting of Stockholders of Yardville National Bancorp held May 2, 2000
(D) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998, as amended by Form 10-Q/A filed June 9, 1998
(E) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998
(F) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration
No. 333-71741)
(G) Incorporated by reference to the Registrant's Registration Statement on Form S-3 (Registration
No. 333-99269)
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K.
E-3