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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES ACT OF 1934
For transition period from
Commission File Number: 0-26086
YARDVILLE NATIONAL BANCORP
--------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2670267
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2465 Kuser Road, Hamilton, New Jersey 08690
-------------------------------------------
(Address of principal executive offices)
(609) 585-5100
-------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of July 31, 2002, the
following class and number of shares were outstanding:
Common Stock, no par value 8,076,343
- --------------------------- ----------------------------
Class Number of shares outstanding
1
INDEX
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION PAGE NO.
- -------------------------------------------------------------------------------
Item 1. Financial Statements (unaudited)
Consolidated Statements of Condition
June 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income
Three months ended June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Income
Six months ended June 30, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
PART 2 OTHER INFORMATION
- ---------------------------------
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
INDEX TO EXHIBITS
2
Item 1. Financial Statements
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
June 30, December 31,
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 28,158 $ 27,771
Federal funds sold 109,035 38,960
- ---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 137,193 66,731
- ---------------------------------------------------------------------------------------------------------------
Interest bearing deposits with banks 4,129 2,320
Securities available for sale 795,148 746,483
Investment securities (market value of $64,052 in 2002 and
$64,887 in 2001) 62,904 65,753
Loans 1,073,070 1,007,973
Less: Allowance for loan losses (15,098) (13,542)
- ---------------------------------------------------------------------------------------------------------------
Loans, net 1,057,972 994,431
Bank premises and equipment, net 11,341 10,910
Other real estate 1,257 2,329
Other assets 49,851 54,432
- ---------------------------------------------------------------------------------------------------------------
Total Assets $ 2,119,795 $ 1,943,389
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 124,360 $ 114,405
Interest bearing 1,095,169 978,285
- ---------------------------------------------------------------------------------------------------------------
Total Deposits 1,219,529 1,092,690
- ---------------------------------------------------------------------------------------------------------------
Borrowed funds
Securities sold under agreements to repurchase 10,000 10,000
Federal Home Loan Bank advances 735,004 695,008
Obligation for Employee Stock Ownership Plan (ESOP) 600 800
Other 1,221 1,305
- ---------------------------------------------------------------------------------------------------------------
Total Borrowed Funds 746,825 707,113
- ---------------------------------------------------------------------------------------------------------------
Company-obligated Mandatorily Redeemable Trust Preferred
Securities of Subsidiary Trust holding solely junior
Subordinated Debentures of the Company 32,500 32,500
Other liabilities 17,174 17,841
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities $ 2,016,028 $ 1,850,144
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock: no par value
Authorized 1,000,000 shares, none issued
Common stock: no par value
Authorized 12,000,000 shares
Issued 8,248,343 shares in 2002 and 8,214,568 in 2001 54,760 54,334
Surplus 2,205 2,205
Undivided profits 45,432 40,175
Treasury stock, at cost: 172,000 shares (3,030) (3,030)
Unallocated ESOP shares (600) (800)
Accumulated other comprehensive income 5,000 361
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 103,767 93,245
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 2,119,795 $ 1,943,389
- ---------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended
June 30,
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 18,342 $ 17,180
Interest on deposits with banks 14 69
Interest on securities available for sale 10,362 9,934
Interest on investment securities:
Taxable 248 1,079
Exempt from Federal income tax 579 471
Interest on Federal funds sold 353 761
- ------------------------------------------------------------------------------------------------------------------
Total Interest Income 29,898 29,494
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings account deposits 2,943 2,353
Interest on certificates of deposit of $100,000 or more 1,325 1,998
Interest on other time deposits 4,298 7,047
Interest on borrowed funds 8,969 8,818
Interest on trust preferred securities 775 775
- ------------------------------------------------------------------------------------------------------------------
Total Interest Expense 18,310 20,991
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income 11,588 8,503
Less provision for loan losses 1,075 650
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 10,513 7,853
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges on deposit accounts 552 480
Securities gains, net 983 683
Bank owned life insurance 432 442
Other non-interest income 351 309
- ------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 2,318 1,914
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,346 3,698
Occupancy expense, net 863 650
Equipment expense 601 499
Other non-interest expense 2,116 1,696
- ------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 7,926 6,543
- ------------------------------------------------------------------------------------------------------------------
Income before income tax expense 4,905 3,224
Income tax expense 1,373 823
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 3,532 $ 2,401
- ------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 0.44 $ 0.33
Diluted $ 0.43 $ 0.32
- ------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 8,025 7,384
Diluted 8,229 7,460
- ------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Six Months Ended
June 30,
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 35,911 $ 34,943
Interest on deposits with banks 30 88
Interest on securities available for sale 20,522 19,657
Interest on investment securities:
Taxable 511 2,229
Exempt from Federal income tax 1,161 933
Interest on Federal funds sold 655 1,508
- ------------------------------------------------------------------------------------------------------------------
Total Interest Income 58,790 59,358
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings account deposits 5,727 4,915
Interest on certificates of deposit of $100,000 or more 2,710 4,127
Interest on other time deposits 8,931 14,010
Interest on borrowed funds 17,636 16,919
Interest on trust preferred securities 1,550 1,402
- ------------------------------------------------------------------------------------------------------------------
Total Interest Expense 36,554 41,373
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income 22,236 17,985
Less provision for loan losses 1,625 1,575
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 20,611 16,410
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges on deposit accounts 1,068 880
Securities gains, net 1,626 1,128
Bank owned life insurance 843 882
Other non-interest income 683 590
- ------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 4,220 3,480
- ------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 8,588 7,285
Occupancy expense, net 1,680 1,321
Equipment expense 1,145 1,009
Other non-interest expense 3,712 3,332
- ------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 15,125 12,947
- ------------------------------------------------------------------------------------------------------------------
Income before income tax expense 9,706 6,943
Income tax expense 2,679 1,815
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 7,027 $ 5,128
- ------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 0.88 $ 0.69
Diluted $ 0.86 $ 0.69
- ------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 8,018 7,384
Diluted 8,170 7,460
- ------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
- ------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 7,027 $ 5,128
Adjustments:
Provision for loan losses 1,625 1,575
Depreciation 904 784
ESOP fair value adjustment 26 13
Amortization and accretion 1,318 (178)
Gains on sales of securities available for sale (1,626) (1,128)
Writedown of other real estate 222 14
Decrease in other assets 2,083 1,505
(Decrease) increase in other liabilities (667) 1,149
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,912 8,862
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net increase in interest bearing deposits with banks (1,809) (3,507)
Purchase of securities available for sale (363,202) (451,105)
Maturities, calls and paydowns of securities available for sale 135,850 233,794
Proceeds from sales of securities available for sale 186,170 138,119
Proceeds from maturities and paydowns of investment
securities 4,246 14,538
Purchase of investment securities (1,435) (9,921)
Net increase in loans (65,182) (66,517)
Expenditures for bank premises and equipment (1,335) (1,018)
Proceeds from sale of other real estate 866 107
- ------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (105,831) (145,510)
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in non-interest bearing demand,
money market, and savings deposits 88,450 25,421
Net increase (decrease) in certificates of deposit 38,388 (23,522)
Net increase in borrowed funds 39,712 121,904
Proceeds from issuance of trust preferred securities -- 6,000
Proceeds from issuance of common stock 400 6
Decrease in unallocated ESOP shares 200 200
Dividends paid (1,769) (1,638)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 165,381 128,371
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 70,462 (8,277)
Cash and cash equivalents as of beginning of period 66,731 73,114
- ------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of End of Period $ 137,193 $ 64,837
- ------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest 37,698 37,839
Income taxes 4,678 2,923
- ------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Non-cash Investing and Financing
Activities:
Transfers from loans to other real estate, net of charge offs 16 934
- ------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements.
6
Yardville National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2002
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation:
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America as
applied to the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and reported revenues and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and other real estate, management
obtains independent appraisals for significant properties.
The consolidated financial data as of and for the three and six months ended
June 30, 2002 includes, in the opinion of management, all adjustments,
consisting of only normal recurring accruals necessary for a fair presentation
of such periods. The consolidated financial data for the interim periods
presented is not necessarily indicative of the results of operations that might
be expected for the entire year ending December 31, 2002.
Consolidation
The consolidated financial statements include the accounts of Yardville National
Bancorp (the "Holding Company" or the "Company") and its subsidiaries, Yardville
Capital Trust ("Trust I"), Yardville Capital Trust II ("Trust II"), Yardville
Capital Trust III ("Trust III") and The Yardville National Bank (the "Bank"),
and the Bank's wholly owned subsidiaries (collectively "YNB").
Allowance for Loan Losses
The provision for loan losses charged to operating expense is determined by
management 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 appropriate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in New Jersey. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses and the valuation of other real estate.
Such agencies may require the Bank to recognize additions to the allowance or
adjustments to the carrying value of other real estate based on their judgments
about information available to them at the time of their examination.
7
Company-obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust holding solely junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On March 28, 2001, Trust III, a statutory business trust and wholly owned
subsidiary of the Holding Company, issued $6,000,000 of 10.18% Trust Preferred
Securities in a private placement and $190,000 of Common Securities to the
Holding Company. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by Trust III to purchase $6,190,000 of 10.18% Subordinated
Debentures due June 8, 2031 from the Holding Company. The Trust exists for the
sole purpose of issuing Trust Preferred Securities and investing the proceeds in
Subordinated Debentures of the Holding Company. These Subordinated Debentures
constitute the sole assets of the Trust.
2. Earnings Per Share
Weighted average shares for the basic net income per share calculation for the
three months ended June 30, 2002 and 2001 were 8,025,000 and 7,384,000
respectively. For the diluted net income per share computation, potential common
stock equivalents of 204,000 and 76,000 are included for the three months ended
June 30, 2002 and 2001, respectively.
Weighted average shares for the basic net income per share calculation for the
six months ended June 30, 2002 and 2001 were 8,018,000 and 7,384,000
respectively. For the diluted net income per share computation, potential common
stock equivalents of 152,000 and 76,000 are included for the six months ended
June 30, 2002 and 2001, respectively.
3. Comprehensive Income
Below is a summary of comprehensive income for the three and six months ended
June 30, 2002 and 2001.
Comprehensive Income Three Months Ended June 30,
- -------------------------------------------------------------------------------------------
(in thousands) 2002 2001
- -------------------------------------------------------------------------------------------
Net Income $ 3,532 $ 2,401
- -------------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain (loss) for the period,
net of tax 8,729 (1,165)
Less reclassification of realized net gain on sale of
securities available for sale, net of tax 649 451
- -------------------------------------------------------------------------------------------
Holding gain (loss) arising during the period,
Net of tax and reclassification 8,080 (1,616)
- -------------------------------------------------------------------------------------------
Total comprehensive income $11,612 $ 785
===========================================================================================
8
Comprehensive Income Six Months Ended June 30,
- -------------------------------------------------------------------------------------------
(in thousands) 2002 2001
- -------------------------------------------------------------------------------------------
Net Income $ 7,027 $ 5,128
- -------------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain for the period,
net of tax 5,712 1,028
Less reclassification of realized net gain on sale of
securities available for sale, net of tax 1,073 744
- -------------------------------------------------------------------------------------------
Holding gain arising during the period,
Net of tax and reclassification 4,639 284
- -------------------------------------------------------------------------------------------
Total comprehensive income $11,666 $ 5,412
===========================================================================================
4. Recent Accounting Pronouncements
In April, 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 145 (SFAS No. 145), "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The Statement was issued to eliminate an inconsistency in the
required accounting for sale-leaseback transactions and certain lease
modifications that were similar to sale-leaseback transactions and to rescind
SFAS No. 44, "Accounting for Intangible Assets of Motor Carrier" as well as
amending other existing authoritative pronouncements to make various technical
corrections.
SFAS No. 145 also rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishments of Debt" and SFAS No. 64 "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." Under SFAS No. 4, as amended by SFAS No. 64,
gains and losses from the extinguishment of debt were required to be classified
as an extraordinary item, if material. Under SFAS No. 145, gains or losses from
the extinguishment of debt are to be classified as a component of operating
income, rather than an extraordinary item. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002, with early adoption of the provisions
related to the rescission of SFAS No. 4 encouraged. Upon adoption, companies
must reclassify prior period amounts previously classified as an extraordinary
item. Management does not anticipate that the initial adoption of SFAS 145 will
have a significant impact on our consolidated financial statements.
In July, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002.
9
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This financial review presents management's discussion and analysis of the
financial condition and results of operations. It should be read in conjunction
with the 2001 Annual Report to stockholders and Form 10-K for the fiscal year
ended December 31, 2001 as well as with the unaudited consolidated financial
statements and the accompanying notes in this Form 10-Q.
This Form 10-Q contains express and implied statements relating to the future
financial condition, results of operations, plans, objectives, performance, and
business of YNB, which are considered forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These include
statements that relate to, among other things, profitability, liquidity, loan
loss reserve adequacy, plans for growth, interest rate sensitivity, market risk,
and financial and other goals. Actual results may differ materially from those
expected or implied as a result of certain risks and uncertainties, including,
but not limited to, changes in economic conditions, interest rate fluctuations,
continued levels of loan quality and origination volume, competitive product and
pricing pressures within YNB's markets, continued relationships with major
customers including sources for loans and deposits, personal and corporate
customers' bankruptcies, legal and regulatory requirements, inflation,
technological changes, the success of our growth strategy and the management of
growth, as well as other risks and uncertainties detailed from time to time in
the filings of YNB with the U.S. Securities and Exchange Commission.
Although YNB believes that the expectations in the forward-looking statements
are reasonable, YNB cannot guarantee future results, levels of activity,
performance, growth, earnings per share or achievements. Neither YNB nor any
other person assumes responsibility for the accuracy and completeness of such
statements. YNB is under no duty to update any of the forward-looking statements
after the date of this Form 10-Q report to conform such statements to actual
results.
Financial Condition
Assets
Total consolidated assets at June 30, 2002 were $2.12 billion, an increase of
$176.4 million or 9.1% compared to $1.94 billion at December 31, 2001. The
growth in YNB's asset base during the first six months of 2002 was primarily
reflected in increases in loans, Federal funds sold and securities available for
sale. YNB's emphasis on commercial real estate and business lending was again
reflected in the results. By establishing its niche as a strong commercial
lender and expanding YNB's relationship banking philosophy into new markets,
such as Hunterdon County, New Jersey, YNB continued to experience ongoing asset
growth.
Federal funds sold
At June 30, 2002 Federal funds sold totaled $109.0 million compared to $39.0
million at December 31, 2001. Federal funds sold are the primary source of
balance sheet liquidity for YNB. The increased level of Federal funds sold at
June 30, 2002 was primarily due to deposit growth. The average Federal funds
sold balance for the first six months of 2002 was $81.1 million compared to
10
$61.8 million for the same period in 2001. During the first half of 2002,
certificates of deposit (CDs) and Premier money market accounts were
competitively priced to provide funding for loan growth as well as stimulating
deposit growth in the Hunterdon County, New Jersey market which YNB has targeted
for strategic expansion. The resulting growth in deposits throughout our branch
network primarily accounted for the increased level of Federal funds sold in the
first half of 2002. This has enhanced YNB's liquidity profile and is expected to
assist in providing the funding for projected earning asset growth.
Securities
The following tables present the amortized cost and market value of YNB's
securities portfolios as of June 30, 2002 and December 31, 2001.
Securities Available For Sale June 30, 2002 December 31, 2001
- -----------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ------------------------------------------- ---------------- --------------- ---------------- -------------
U.S. Treasury securities and
obligations of other U.S.
government agencies $ 161,198 $ 162,641 $ 113,862 $ 113,861
Mortgage-backed securities 537,935 545,362 521,988 523,179
Corporate obligations 49,041 47,863 72,946 72,311
All other securities 39,282 39,282 37,132 37,132
- ------------------------------------------- ---------------- --------------- ---------------- -------------
Total $ 787,456 $ 795,148 $ 745,928 $ 746,483
===========================================================================================================
Investment Securities June 30, 2002 December 31, 2001
- -----------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ------------------------------------------- ---------------- --------------- ---------------- -------------
Obligations of other U.S.
government agencies $ 11,000 $ 11,028 $ 13,000 $ 13,066
Obligations of state and
political subdivisions 48,915 49,972 48,694 47,729
Mortgage-backed securities 2,989 3,052 4,059 4,092
- ------------------------------------------- ---------------- --------------- ---------------- -------------
Total $ 62,904 $ 64,052 $ 65,753 $ 64,887
===========================================================================================================
Securities represented 40.5% of total assets at June 30, 2002 and 41.8% at
December 31, 2001. Total securities increased $45.8 million or 5.6% to $858.0
million at June 30, 2002 compared to $812.2 million at year-end 2001. The
available for sale portfolio represented 92.7% of the total security holdings of
YNB at June 30, 2002, compared to 91.9% at year-end 2001.
At June 30, 2002 securities available for sale (AFS) had a net unrealized gain,
net of tax effect, of $5.0 million as reported in accumulated other
comprehensive income in Stockholders' Equity, as compared to a $361,000 net
unrealized gain, net of tax effect, at December 31, 2001. Economic uncertainty
has resulted in rapid shifts in the U.S. treasury yield curve. These changes can
impact the market value of YNB's securities both positively and negatively.
Changes in the treasury yield curve in the second quarter resulted in a net
unrealized gain in our AFS portfolio at June 30, 2002 compared to an unrealized
loss position at March 31, 2002.
11
Securities available for sale increased $48.6 million or 6.5% to $795.1 million
at June 30, 2002 when compared to the December 31, 2001 balance of $746.5
million. The increase in securities available for sale is primarily the result
of a $48.8 million increase in US agency bonds and a net $22.2 million increase
in mortgage-backed securities partially offset by a $24.4 million decrease in
corporate obligations. To reduce longer-term interest rate risk, in the first
six months of 2002, YNB sold 30-year fixed rate mortgage-backed securities,
longer term fixed rate trust preferred securities and other securities with
longer duration or extension risk to reduce the average duration of the
securities portfolio. The proceeds from the sales were used to purchase other
mortgage-related securities with less extension risk, shorter term US agency
callable bonds and floating rate trust preferred securities. The repositioning
of the AFS portfolio to reduce average duration is expected to provide more
consistent cash flows to invest in what management projects to be a higher
interest rate environment over the next two years. Corporate obligations
declined $24.4 million primarily due to the sale of a $25.0 million investment
in a money market fund.
Investment securities decreased $2.9 million to $62.9 million at June 30, 2002
from $65.8 million at December 31, 2001. The decrease was due to principal
paydowns on mortgage backed securities and calls on US agency bonds, partially
offset by an increase in tax-free municipal bonds.
Management continues to use an investment leverage strategy (Investment Growth
Strategy) to increase net interest income by purchasing securities utilizing
borrowed funds. At June 30, 2002, the Investment Growth Strategy securities
decreased $10.1 million from the year-end 2001 level to $362.7 million.
Management utilizes asset liability simulation models to analyze risk and reward
relationships and the degree of interest rate risk exposure associated with this
strategy. The income generated from this strategy has offset the costs
associated with the growth of YNB's infrastructure and enhanced total net
interest income. This strategy has continued to positively contribute to
earnings per share and return on average equity and has been capped at $380.0
million for 2002.
Loans
The loan portfolio represents YNB's largest earning asset class and is a
significant source of interest income. Total loans increased $65.1 million or
6.5% to $1.07 billion at June 30, 2002 from $1.01 billion at December 31, 2001.
By establishing its niche as a strong commercial lender while expanding
geographically, YNB has continued to experience ongoing growth. YNB's loan
portfolio represented 50.6% of total assets at June 30, 2002 compared to 51.9%
at December 31, 2001. YNB's lending focus continues to be on commercial real
estate loans, as well as commercial and industrial loans. Strong competition
from both bank and non-bank competitors, and the lower interest rate
environment, has resulted in comparatively lower yields on new and established
lending relationships. In addition to competition, borrowers' concerns over the
economy, real estate prices and interest rates could all be factors in slowing
future loan growth. The majority of YNB's business is with customers located
within Mercer County, New Jersey and contiguous counties. Accordingly, the
ultimate collectability of the loan portfolio and the recovery of the carrying
amount of real estate are subject to changes in the region's economic
environment and real estate market. The table below lists loan growth by type
for the period of December 31, 2001 to June 30, 2002.
12
Loan Portfolio Composition
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 06/30/02 12/31/01 Change % change
- -------------------------------------------------- -----------------------------------------------------------------
Commercial real estate
Owner occupied $ 161,370 $ 143,767 $ 17,603 12.2%
Investor occupied 287,063 255,471 31,592 12.4
Construction and development 98,035 99,978 (1,943) (1.9)
- -------------------------------------------------- -----------------------------------------------------------------
546,468 499,216 47,252 9.5
Residential
Multi-family 42,974 33,970 9,004 26.5
1- 4 family 112,217 107,840 4,377 4.1
- -------------------------------------------------- -----------------------------------------------------------------
155,191 141,810 13,381 9.4
Commercial and industrial
Term 118,018 117,005 1,013 0.9
Lines of credit 158,379 164,075 (5,696) (3.5)
Demand 969 1,055 (86) (8.2)
- -------------------------------------------------- -----------------------------------------------------------------
277,366 282,135 (4,769) (1.7)
Consumer
Home equity 66,411 58,084 8,327 14.3
Installment 21,497 19,266 2,231 11.6
Other 6,137 7,462 (1,325) (17.8)
- -------------------------------------------------- -----------------------------------------------------------------
94,045 84,812 9,233 10.9
================================================== =================================================================
Total loans $ 1,073,070 $ 1,007,973 $ 65,097 6.5%
===================================================================================================================
Commercial real estate loans consist of owner occupied, investor occupied, and
construction and land development loans. Construction and land development loans
include residential and commercial projects. Loans are typically made to
experienced residential or commercial construction developers. Residential
construction loans include single family, multi-family, and condominium
projects. Commercial construction loans include office and professional
development, retail development and other commercial related projects. YNB's
lending policies generally require an 80% or lower loan-to-value ratio for
commercial real estate mortgages. Collateral values are established based upon
independently prepared appraisals. Commercial real estate loans increased $47.3
million in the first six months of 2002 with growth in investor occupied and
owner occupied loans which increased $49.2 million. Growth in commercial real
estate loans accounted for 72.6% of the total loan growth year to date.
Residential loans include multi-family and 1-4 family loans. This portion of the
portfolio totaled $155.2 million at June 30, 2002, up $13.4 million or 9.4% from
year-end 2001. The residential 1-4 family loans include mortgages of $112.2
million which represent 72.3% of the total residential loans. YNB's residential
mortgage loans are secured by first liens on the underlying real property. YNB
is a participating seller/servicer with FNMA and FHLMC and generally underwrites
its single family residential mortgage loans to conform to the standards
required by these agencies. Multi-family loans, which represented $43.0 million
of the total residential loans, are multi-family or other 1-4 family loans that
are not secured by first liens or do not meet the underwriting standards of FNMA
or FHLMC. Total residential loans increased due to increases in both 1-4 family
and multi-family loans. Low interest rates have increased refinance activity and
accounted for the modest growth experienced in residential loans in 2002.
13
Commercial and industrial loans are typically loans made to small and middle
market businesses for a wide variety of needs including working capital loans,
which are used to finance inventory, receivable, and other working capital needs
of commercial borrowers. Term loans are provided for equipment needs. Commercial
and industrial loans include term loans, lines of credit and demand loans.
Commercial and industrial loans decreased $4.7 million or 1.7% to $277.4 million
at June 30, 2002 from $282.1 million at December 31, 2001. The reason for the
decrease was a decline in business lines of credit outstanding and demand loans
partially offset by an increase in term loans. Management believes that concerns
about the economy have slowed business activity which accounts for the decrease
in commercial and industrial loans in the first half of 2002.
Consumer loans include fixed rate home equity loans, floating rate home equity
lines, indirect auto loans and other types of installment loans. Consumer loans
increased $9.2 million or 10.9% to $94.0 million at June 30, 2002 from $84.8
million at December 31, 2001. The growth was reflected in increased home equity
loans and lines, and to a lesser extent, higher installment loans offset by a
decrease in other consumer loans. Comparatively lower interest rates accounted
for the increased activity in the home equity portfolio in 2002. YNB's focus on
the expansion of its retail network is expected to generate opportunities to
increase the size of the consumer loan portfolio.
As part of YNB's internal monitoring of credit extension and regulatory
compliance, YNB recently determined that extensions of credit to companies
presumed under applicable regulations to be controlled by one of its
non-management directors (in many of which the director has a minority
interest), which total approximately $29 million, together with direct
extensions of credit to that director of approximately $1 million, are presumed
to be in excess of applicable regulatory limitations. As of the date of this
report, all of the extensions of credit to the director and companies controlled
by the director are current and performing. YNB has notified the Office of the
Comptroller of the Currency of its findings. We are evaluating steps to address
this matter, which may include selling participations in certain loans to other
banks, or divestitures by the director of his control over certain companies.
The director is fully cooperating and assisting in this process. YNB is also
taking steps to review and revise its internal policies and procedures to ensure
future compliance with these rules. Based upon YNB's preliminary review of this
matter and actions taken to date, YNB does not anticipate that this matter will
have any material adverse impact on the results of operations or financial
condition of YNB.
Deposit liabilities
The following table provides information concerning YNB's deposit base at June
30, 2002 and December 31, 2001.
Deposits
- --------------------------------------------------------------------------------------------------------------------
(in thousands) 6/30/02 12/31/01 Change % Change
- --------------------------------------------- ----------------------------------------------------------------------
Non-interest bearing demand
deposits $ 124,360 $ 114,405 $ 9,955 8.7%
Interest bearing demand deposits 115,604 105,354 10,250 9.7
Money market deposits 268,187 203,872 64,315 31.5
Savings deposits 81,108 77,168 3,940 5.1
Certificates of deposit of $100,000
and over 152,798 137,684 15,114 11.0
Other time deposits 477,472 454,207 23,265 5.1
- --------------------------------------------- ----------------------------------------------------------------------
Total $1,219,529 $1,092,690 $ 126,839 11.6%
====================================================================================================================
YNB's deposit base is the principal source of funds supporting interest-earning
assets. Total deposits increased $126.8 million or 11.6% to $1.22 billion at
June 30, 2002 compared to $1.09 billion at December 31, 2001. The growth in
YNB's deposit base in the first six months of 2002 was primarily driven by
growth in money market balances and other time deposits. In this lower interest
rate environment, YNB's depositors have shown a preference for our Premier money
market deposit accounts as opposed to CDs.
14
YNB markets its CDs through its branch network and through a computer based
service provided by an independent third party which enables YNB to place CDs
nationally. Total CDs, which include CDs of $100,000 and over and other time
deposits, increased $38.4 million or 6.5% to $630.3 million at June 30, 2002
from $591.9 million at December 31, 2001. The increase resulted from modestly
higher balances of CDs raised through the branch network and an increase in CDs
raised through the previously mentioned nationwide computer based service. At
June 30, 2002, YNB had approximately $141.9 million in CDs obtained through this
service, compared to approximately $107.0 million at December 31, 2001. The
increase in funds obtained through this service were used to fund earning asset
growth and enhance liquidity. In-market CDs generated through the branch network
increased modestly as the bank actively marketed longer-term (2 to 3 year) CDs
as part of the promotion associated with the opening of its two newest branches
in Hunterdon County, New Jersey. CDs continue to be an important source of
funding for YNB in 2002, representing 51.7% of the total deposits at June 30,
2002 compared to 54.2% at year-end 2001. While CDs will continue to represent an
important funding vehicle, management is continuing its efforts to further
expand lower cost core deposits and reduce the need for higher cost funding
sources in both new and existing markets.
Non-interest bearing demand deposits increased $10.0 million or 8.7% to $124.4
million at June 30, 2002 compared to $114.4 million at December 31, 2001. On an
average basis non-interest bearing demand deposits totaled $113.0 million for
the first six months of 2002 compared to $96.9 million for the same period in
2001. The increase in demand deposits is primarily attributable to the growth in
business checking accounts.
Interest bearing demand deposits increased $10.3 million or 9.7% to $115.6
million at June 30, 2002 from $105.3 million at year-end 2001. Depositor and
sales force incentives, in addition to active marketing, contributed to the
growth in interest bearing demand deposits experienced in 2002. In addition,
money market balances increased $64.3 million or 31.5% to $268.2 million at June
30, 2002 from $203.9 million at December 31, 2001. The increase in money market
balances resulted from new money market account customers and existing
depositors shifting out of CDs into YNB's Premier money market accounts.
Management believes this reflects our depositors' preference to invest their
funds in liquid money market accounts in anticipation of higher interest rates
later in 2002. Savings deposits increased $3.9 million or 5.1% to $81.1 million
at June 30, 2002 from $77.2 million at December 31, 2001.
While it is management's strategy to fund earning asset growth with the lowest
cost deposits, core deposit growth levels, excluding certificates of deposit,
have historically not been adequate to meet loan demand and are not expected to
be adequate to fully meet loan demand in the future. YNB's ability to generate
lower cost deposits could affect net interest income levels. The continuing
reliance on higher cost CDs to fund asset growth is the principal factor in the
continued pressure on YNB's net interest margin.
Management believes that expansion of YNB's branch network will play an
important role in reducing the overall cost of deposits by attracting lower-cost
and interest-free deposits to reduce YNB's reliance on higher-cost CDs. The
recently opened Hunterdon, New Jersey regional headquarters and the 8 Main
Street branch in Flemington, New Jersey should help YNB attract core deposits in
the Hunterdon County, New Jersey market. In addition, YNB has received
regulatory approval to open its first branch in Middlesex County, New Jersey.
YNB currently has loan relationships in that marketplace and the opening of a
branch is expected to allow YNB to increase its share of the deposit business of
these customers. The branch is expected to open in the fourth quarter of 2002.
Management continues to evaluate new branch locations in its existing markets as
well as new markets.
15
Borrowed Funds
YNB's primary funding strategy is to rely on deposits to fund new loan growth
whenever possible and to utilize borrowed funds as a secondary funding source
for loans. YNB uses borrowed funds for its earning asset growth not supported by
deposit generation and for asset liability management purposes. Borrowed funds
consist primarily of securities sold under agreements to repurchase and Federal
Home Loan Bank (FHLB) advances. Borrowed funds totaled $746.8 million at June
30, 2002, an increase of $39.7 million from the $707.1 million outstanding at
December 31, 2001. The increase in borrowed funds resulted primarily from an
increase in FHLB advances to manage interest rate risk exposure specifically if
interest rates rise.
YNB had FHLB advances outstanding of $735.0 million at June 30, 2002 compared to
$695.0 million at December 31, 2001. YNB has utilized callable FHLB advances and
floating rate FHLB advances to fund both Investment Growth Strategy purchases as
well as other earning assets. At June 30, 2002 callable advances totaled $598.0
million or 81.4% of advances outstanding compared to $555.0 million or 79.9% at
December 31, 2001. Callable FHLB advances have terms of two to ten years and are
callable after periods ranging from three months to five years. There were
$456.0 million in callable advances with call dates in 2002 outstanding as of
June 30, 2002. Management anticipates at the current interest rate level there
will be limited FHLB advances called in 2002. In the first quarter of 2002,
management shifted its borrowing strategy away from floating rate borrowings and
targeted longer-term callable borrowings with extended lockout periods.
Management believes that this type of borrowing will help to protect future
income and reduce longer-term interest rate risk should interest rates begin to
increase. While this strategy may result in a higher cost of borrowed funds in
the current period, it reduces the overall risk exposure of YNB to rising
interest rates.
In addition to the FHLB advance program, YNB also has the ability to borrow from
the FHLB through its line of credit program, subject to collateral requirements
and other restrictions. YNB also maintains unsecured Federal funds lines with
four commercial banks totaling $25.0 million for daily funding needs.
Company - obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust holding solely junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On March 28, 2001 the Holding Company, through Trust III, completed the sale of
$6.0 million of 10.18% Trust Preferred Securities in a private placement.
16
On June 23, 2000, the Holding Company, through Trust II, completed the sale of
$15.0 million of 9.50% Trust Preferred Securities to a nonaffiliated financial
institution.
On October 16, 1997, the Holding Company, through Trust I, completed the sale of
$11.5 million of 9.25% Trust Preferred Securities to the public. These
securities are redeemable in whole or in part prior to maturity after November
1, 2002.
As of June 30, 2002, all $32.5 million in Trust Preferred Securities outstanding
qualify as Tier 1 capital.
Equity Capital
Stockholders' equity at June 30, 2002 totaled $103.8 million, an increase of
approximately $10.6 million or 11.3%, compared to $93.2 million at December 31,
2001. This increase resulted from the following factors:
(i) YNB earned net income of $7.0 million and paid cash dividends of
$1.7 million for the six months ended June 30, 2002.
(ii) The net unrealized gain on securities available for sale was $5.0
million at June 30, 2002 compared to a net unrealized gain of $361,000
at December 31, 2001. The increase in the net unrealized gain resulted
in a $4.6 million increase in Stockholders' equity.
(iii) Proceeds of $400,000 from the exercise of stock options by directors
and officers and a $26,000 increase associated with the fair market
value adjustment related to the allocation of shares to employee
accounts in the ESOP.
(iv) A reduction in unallocated ESOP shares of $200,000 to $600,000 at
June 30, 2002 from $800,000 at December 31, 2001 resulted
in an increase of $200,000 in Stockholders' equity.
The table below presents the actual capital amounts and ratios of the Holding
Company and the Bank:
Amount Ratios
- --------------------------------------------------------------------------------------------------------------------
(amounts in thousands) 06/30/02 12/31/01 06/30/02 12/31/01
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
Risk-based capital:
Tier 1:
Holding Company $131,261 $123,838 10.0% 10.0%
Bank 126,537 120,621 9.7 9.8
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
Total:
Holding Company 146,359 138,919 11.2 11.3
Bank 141,635 134,163 10.8 10.9
- --------------------------------------------- ----------------- ----------------- ---------------- -----------------
Tier 1 leverage:
Holding Company $131,261 $123,838 6.5 6.9
Bank 126,537 120,621 6.3% 6.8
- --------------------------------------------------------------------------------------------------------------------
17
The minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 leverage ratio of at least 4.0%, a Tier 1
risk-based capital ratio of at least 4.0% and a total risk-based capital ratio
of at least 8.0%. To be considered "well capitalized," an institution must have
a minimum Tier 1 capital and total risk-based capital ratio of 6.0% and 10.0%,
respectively, and a minimum Tier 1 leverage ratio of 5.0%. At June 30, 2002, the
ratios of the Holding Company and the Bank exceeded the ratios required to be
considered well capitalized. It is management's goal to maintain adequate
capital to continue to support YNB's asset growth and maintain its status as a
well-capitalized institution.
Credit Quality
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type as of June 30, 2002 and December 31, 2001.
Nonperforming Assets
- --------------------------------------------------------------------------------------------------
(in thousands) 06/30/02 12/31/01
- --------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $1,443 $ 888
Residential 1,710 1,133
Commercial and industrial 1,465 1,494
Consumer 171 98
- --------------------------------------------------------------------------------------------------
Total 4,789 3,613
- --------------------------------------------------------------------------------------------------
Restructured loans 745 770
- --------------------------------------------------------------------------------------------------
Loans 90 days or more past due:
Residential 403 514
Consumer 157 228
- --------------------------------------------------------------------------------------------------
Total 560 742
- --------------------------------------------------------------------------------------------------
Total nonperforming loans 6,094 5,125
- --------------------------------------------------------------------------------------------------
Other real estate 1,257 2,329
- --------------------------------------------------------------------------------------------------
Total nonperforming assets $7,351 $7,454
- --------------------------------------------------------------------------------------------------
Allowance for loan losses to total loans, end of period 1.41% 1.34%
Allowance for loan losses to nonperforming loans, end of period 247.75% 264.23%
==================================================================================================
Nonperforming assets, which consist of nonperforming loans and other real
estate, totaled $7.4 million at June 30, 2002, a $100,000 or 1.4% decrease from
the $7.5 million level at December 31, 2001. Nonperforming assets over the past
five years have averaged approximately $7.9 million. Total nonperforming assets
as a percentage of total assets were 0.35% at June 30, 2002 compared to 0.38% at
December 31, 2001. The modest decrease in this ratio resulted from a small
decrease in nonperforming assets and an increase in total assets.
At June 30, 2002, nonperforming loans, which are loans 90 days or more past due,
restructured loans and nonaccrual loans, totaled $6.1 million, a $969,000 or
18.9% increase from $5.1 million at December 31, 2001. The increase in
nonperforming loans resulted from an increase in nonaccrual loans partially
offset by decreases in restructured and loans 90 days or more past due.
Nonaccrual loans increased primarily due to increases in nonaccrual commercial
real estate and residential loans.
18
Other real estate totaled $1.3 million at June 30, 2002 reflecting a $1.0
million decrease from the $2.3 million in other real estate at December 31,
2001. The decline in other real estate was primarily caused by the sale of one
property and write-downs on two other properties. YNB continues to aggressively
work to reduce the level of other real estate owned. Other real estate
properties have been written down to the lower of cost or fair value less
disposition expenses.
Management's primary objective with respect to YNB's lending activities is to
maintain a high credit quality loan portfolio regardless of the economic
climate. The slow down in the economy could cause nonperforming asset levels to
increase from the current or historical levels, which would have a negative
impact on earnings.
Allowance for Loan Losses
The allowance for loan losses totaled $15.1 million at June 30, 2002, an
increase of $1.6 million from the $13.5 million at year-end 2001. The provision
for loan losses for the first six months of 2002 was $1.63 million compared to
$1.58 million for the same period of 2001. The provision for loan losses for the
second quarter of 2002 was $1.1 million compared to $650,000 for the second
quarter of 2001. For the second quarter of 2002, the provision for loan losses
was comparatively higher due to a $637,000 increase in nonperforming loans.
Gross charge-offs were $108,000 for the first six months of 2002 compared to
$1.4 million for the same period in 2001. Gross recoveries were $39,000 for the
first six months of 2002 compared to $310,000 for the same period in 2001.
Annualized net charge-offs as a percentage of average loans were 0.01% for the
first six months of 2002 compared to 0.25% for the same period in 2001. This
compares to net charge-offs as a percentage of average loans ratio of 0.15% for
the year ended December 31, 2001. Management believes based on historical
experience that net charge-offs as a percentage of average loans for the first
six months of 2002 is not a reliable indicator of YNB's future net charge-offs.
Management maintains the allowance for loan losses at a level determined in
accordance with management's documented allowance adequacy methodology. It is
management's assessment, based on its estimates, that the allowance is
appropriate in relation to the credit risk exposure levels. One measure of the
adequacy of the allowance for loan losses is the ratio of allowance for loan
losses to total loans. This ratio was 1.41% at June 30, 2002 compared to 1.34%
at December 31, 2001. Another measure of the adequacy of the allowance for loan
losses is the ratio of the allowance for loan losses to total nonperforming
loans. This ratio was 247.75% at June 30, 2002 compared to 264.23% at December
31, 2001.
Results of Operations
Net Income
YNB reported net income of $7.0 million for the six months ended June 30, 2002,
an increase of $1.9 million or 37.0% compared to $5.1 million for the same
period in 2001. The increase in net income for the first six months of 2002
compared to the same period in 2001 is primarily attributable to higher net
interest income and increased non-interest income partially offset by an
increase in non-interest expense. Basic earnings per share for the six months
19
ended June 30, 2002 increased $0.19 or 27.5% to $0.88 compared to $0.69 for the
same period in 2001. Diluted earnings per share for the six months ended June
30, 2002 increased $0.17 or 24.6% to $0.86 compared to $0.69 for the same period
in 2001. The increase in earnings per share was due to higher net income
partially offset by the higher average number of shares outstanding resulting
primarily from last year's private placement of common equity.
On a quarterly basis, net income for the second quarter of 2002 was $3.5
million, which represents an increase of $1.1 million or 47.1% compared to the
net income for the same period in 2001. The primary reason for the increase in
net income in the quarter was higher net interest and non-interest income
partially offset by increased non-interest expense. On a per share basis, basic
earnings per share for the second quarter of 2002 was $0.44, an increase of
$0.11 or 33.3% when compared to the same period in 2001. Diluted earnings per
share increased $0.11 or 34.4% to $0.43 for the second quarter of 2002 compared
to $0.32 for the same period in 2001. The increase in earnings per share was due
to the higher level of net income partially offset by the increased number of
shares outstanding.
Net Interest Income
YNB's net interest income for the first six months of 2002 was $22.2 million, an
increase of $4.3 million or 23.6% from the same period in 2001 principally
because interest expense declined at a quicker rate than interest income. Other
time deposits, due to their longer maturity structure, reprice more slowly than
YNB's earning asset base. Since these deposits only reprice at the maturity
date, the other time deposits that repriced in the first half of 2002 are now
reflecting the full decline in interest rates already experienced by YNB's
earning asset base in 2001. For the first six months of 2002, interest income
decreased by $568,000 compared to the same period in 2001 while interest expense
decreased by $4.8 million compared to the same period in 2001. The most
important factor in the improvement in net interest income was the reduction in
the cost of other time deposits which declined 239 basis points to 4.00% for the
first six months of 2002 compared to 6.39% for the same period in 2001. Overall,
the cost of interest bearing deposits declined 205 basis points to 3.34% for the
first six months of 2002 when compared to the 5.39% for the same period in 2001.
The net interest margin (tax equivalent basis), which is net interest income
divided by average interest earning assets, for the first six months of 2002 was
2.35%, a 7 basis point or 3.1% increase compared to 2.28% for the same period in
2001. The increase in the margin was due to slightly higher growth in interest
earning assets compared to interest bearing liabilities combined with total
interest bearing liability costs declining 19 basis points more than the yield
on earning assets. The net interest margin also showed improvement when compared
to the prior quarter. The net interest margin stabilized in the fourth quarter
of 2001 at 2.07% and improved to 2.30% for the first quarter of 2002. Management
anticipates, based on the current rate environment, that the net interest margin
will continue to improve during 2002 principally based on the continuing
repricing of time deposits at lower rates.
20
On a quarterly basis, net interest income was $11.6 million, an increase of $3.1
million or 36.3% when compared to the second quarter of 2001. The net interest
margin (tax equivalent basis), for the three months ended June 30, 2002 was
2.41% a 31 basis point or 14.8% increase from the same period in 2001. The
increase in the net interest margin was due to the cost of interest bearing
liabilities decreasing 144 basis points to 4.03% for the quarter compared to
5.47% for the same period in 2001. Over this same time period, the yield on
earning assets decreased 103 basis points to 6.05% for the quarter compared to
7.08% for the same period in 2001.
The net interest margin for the six and three months comparative periods in 2002
and 2001 was negatively impacted by the Investment Growth Strategy. The
securities in the Investment Growth Strategy at June 30, 2002 were approximately
$362.7 million compared to $372.8 million at December 31, 2001. The targeted
spread on this strategy is 75 basis points after tax. Because of the relatively
low targeted spread on this strategy, there is a negative impact to the net
interest margin and typically return on average assets. Conversely, the strategy
is designed to increase both return on average stockholders' equity and earnings
per share, the primary goals of the strategy, which were achieved for the three
and six months ended June 30, 2002.
Interest Income
For the first six months of 2002, total interest income was $58.8 million, a
decrease of $568,000 or 1.0% when compared to interest income of $59.4 million
for the same period in 2001. This decrease was primarily due to lower loan and
investment yields as a result of the aggressive lowering of short-term interest
rates (475 basis points in 2001) by the Federal Reserve, partially offset by
higher average balances of loans and securities. Average loans increased $189.1
million or 22.4% while the yield on loans decreased 133 basis points to 6.95%
for the six months ended June 30, 2002 from 8.28% for the same period in 2001.
The lower loan yield reflected the lower overall interest rate environment in
the first six months of 2002 when compared to the same period in 2001. Interest
and fees on loans for the six months ended June 30, 2002 increased $968,000 or
2.8% to $35.9 million from $34.9 million for the same period in 2001. Average
securities for the six months ended June 30, 2002 increased $111.6 million or
15.7% to $823.4 million when compared to the $711.8 million for the same period
in 2001. Over the same period, the yield on the securities portfolio decreased
102 basis points to 5.39% from 6.41%. Interest on securities declined $625,000
or 2.7% to $22.2 million for the six months ended June 30, 2002 compared to
$22.8 million for the same period in 2001. The decline in interest income
resulted from the overall lower yield on the securities portfolios partially
offset by the higher average balance of securities. The lower yield on the
securities portfolios is due, in part, to management's strategy of reducing the
portfolio duration in order to better position YNB for the possibility of a
rising rate environment.
For the second quarter of 2002, total interest income was $29.9 million, an
increase of $404,000 or 1.4% when compared to the $29.5 million for the second
quarter of 2001. The increase in interest income was due to higher average
balances of loans and securities, partially offset by lower yields on both asset
types. The overall yield on earning assets for the second quarter of 2002 was
6.05% a 103 basis point decline from the 7.08% for the same period in 2001. The
decrease in the yield on earning assets was primarily due to the lower interest
rate environment in the second quarter of 2002 compared to the same period in
2001 and the shorter duration of the investment portfolio.
21
Interest Expense
Total interest expense decreased $4.8 million or 11.6% to $36.6 million for the
first six months of 2002 compared to $41.4 million for the same period in 2001.
The decrease in interest expense for the comparable time periods resulted
primarily from lower rates paid on time deposits and borrowed funds partially
offset by higher overall average balances on these interest-bearing liabilities.
Average interest bearing liabilities were $1.8 billion for the six months ended
June 30, 2002 reflecting an increase of $295.1 million or 19.8% when compared to
the average balance of $1.5 billion for the same period in 2001. The average
rate paid on interest bearing liabilities for the six months ended June 30, 2002
decreased 145 basis points to 4.09% from 5.54% for the same period of 2002.
Interest expense on savings, money markets and interest bearing demand accounts
increased $812,000 or 16.5% to $5.7 million for the first six months of 2002
when compared to $4.9 million for the same period in 2001. The primary cause for
this increase was the increase in the average balance of these accounts of
$153.0 million or 52.5%, to $444.5 million for the six months ended June 30,
2002 from $291.5 million for the same period in 2001. The majority of the growth
has been in Premier money market balances. This growth in average balances
resulted from a combination of new accounts and YNB's depositors reinvesting
proceeds from maturing CDs into YNB's competitively priced Premier money market
account. The cost of all funds in this category decreased 79 basis points to
2.58% for the six months ended June 30, 2002 compared to 3.37% for the same
period in 2001. The primary cause for the decline in cost of these deposit types
has been the overall decline in interest rates. Management has focused on
generating core deposit balances in the accounts described above as the
preferred source to fund earning asset growth. Money market accounts, for
example, are historically less expensive than CDs and present more opportunities
to cross sell other bank products and services.
Interest on other time deposits decreased $5.1 million to $8.9 million for the
six months ended June 30, 2002 from $14.0 million for the same period in 2001.
This decrease was caused by a decline of 239 basis points in the cost of other
time deposits to 4.00% from 6.39% for the periods. Partially offsetting the
reduced interest cost was a modest increase of $7.9 million in the average
outstanding balance to $446.5 million for the six months ended June 30, 2002,
when compared to the average balance of $438.6 million for the same period in
2001. Management anticipates, based on the pricing characteristics of YNB's
other time deposits and current market rates, that the cost of other time
deposits will continue to decline throughout 2002 but at a slower rate.
Interest on CDs of $100,000 and over decreased $1.4 million or 34.3% to $2.7
million for the six months ended June 30, 2002 from $4.1 million for the same
period in 2001. The decrease was caused by the decline in the average rate paid
of 299 basis points to 3.62% for the first six months of 2002 from 6.61% for the
same period in 2001 partially offset by the increase in the average outstanding
balance of $24.7 million or 19.8% to $150.0 million for the comparative period.
Through the computer based service utilized by YNB CDs of $100,000 and over were
increased during the first six months of 2002 to enhance liquidity and fund
asset growth at lower costs compared to those associated with the generation of
in-market CDs. The sharp decline in the cost of CDs of $100,000 and over
reflects the repricing of these deposits lower in the first half of 2002 as
compared to the same time period in 2001.
22
Interest expense on borrowed funds increased $717,000 or 4.2% to $17.6 million
for the first six months of 2002 when compared to $16.9 million for the same
period in 2001. The increased expense was caused by a $106.7 million or 17.6%
increase in the average balance outstanding in the first six months of 2002 to
$714.5 million when compared to the $607.8 million for the same period in 2001.
The rate paid on borrowed funds decreased 63 basis points for the six months
ended June 30, 2002 to 4.94% from the 5.57% for the same period last year. The
decline in the rate on borrowed funds resulted from a change in the borrowing
mix implemented in 2001. The majority of new borrowings in 2001 were floating
rate FHLB advances tied to three month LIBOR. As rates continued to fall in 2001
these borrowings repriced lower. In addition, the retirement of $50.0 million in
callable advances and their replacement into lower cost floating rate borrowings
also contributed to the lower rate on borrowed funds. Since a significant
portion of the callable borrowed funds are at rates above the current rates
offered on similar borrowings, management anticipates there will be limited
calls in the near future. In addition, YNB may not prepay these borrowings
without a prepayment penalty. This means that there are limited opportunities to
reprice these borrowings lower as rates decline. In 2002, YNB has shifted its
borrowing strategy away from floating rate borrowings and into longer-term
callable borrowings. While this strategy may result in a higher cost of borrowed
funds in the current period, it reduces the overall risk exposure of YNB to
rising interest rates.
For the second quarter of 2002, total interest expense decreased $2.7 million or
12.8% when compared to the $21.0 million for the same period in 2001. The
overall cost of interest bearing liabilities decreased 144 basis points to 4.03%
for the second quarter of 2002 compared to 5.47% for the second quarter of 2001.
The reasons for this decrease in interest expense are the same as for the six
month period as discussed above.
While YNB seeks to fund asset growth with lower cost core deposits such as
savings, money market, interest bearing checking and non-interest bearing demand
deposits, this is not generally possible, as asset growth rates have
historically exceeded the growth rate in core deposits. To attract lower cost
deposits to fund asset growth, management has continued to aggressively market
several lower cost products including Premier money market accounts and a free
checking product. Management anticipates that over time, these new products,
along with additional branches in new markets, should result in lower cost core
deposits providing a higher percentage of the new funding than has been
experienced recently. This anticipated improvement in the deposit mix is
expected to help reduce the reliance on higher cost CDs.
Provision for Loan Losses
The provision for loan losses for the six months ended June 30, 2002 was $1.6
million and at approximately the same level recorded for the first six months of
2001. While net charge-offs declined from the same period last year, the
provision level reflected continued ongoing loan growth, and an increase in
nonaccrual loans from the prior quarter and 2001 year end levels. Management
believes that the allowance for loan losses is appropriate in relation to the
credit risk exposure levels.
23
For the three months ended June 30, 2002 the provision for loan losses was $1.1
million a $425,000 increase from the $650,000 in provision for the same period
in 2001. The primary cause for the increased provision were the same as for the
six month period as discussed above.
Non-interest Income
Total non-interest income for the first six months of 2002 was $4.2 million, an
increase of $740,000 or 21.3% over non-interest income of $3.5 million for the
same period in 2001. The increase was due principally to higher net securities
gains and increased service charges on deposit accounts.
Service charges on deposit accounts increased $188,000 or 21.4% to $1.1 million
for the six months ended June 30, 2002 compared to $880,000 for the same period
in 2001. Service charge income has primarily increased in the first six months
of 2002 due to increased income from overdraft fees and growth in the core
deposit base. Management believes that, as YNB focuses its efforts on increasing
lower cost checking accounts, service charge income will continue to increase.
Net gains on sale of securities totaled $1.6 million in the first six months of
2002 compared to $1.1 million in net gains on sale of securities for the same
period in 2001. The gains resulted primarily as a result of the sale of fixed
rate 30-year mortgage backed securities, fixed rate trust preferred securities
and other securities with longer duration or extension risk. These securities
were sold to achieve the asset/liability objective of reducing longer-term
interest rate risk in an increasing interest rate environment.
Earnings on bank owned life insurance were $843,000 for the first six months of
2002 compared to $882,000 for the same period in 2001. The decline in income was
due to lower yields on floating rate bank owned life insurance assets. The
income earned on these assets is used to offset the benefit costs of deferred
compensation programs.
Other non-interest income increased $93,000 or 15.8% to $683,000 for the first
six months ended June 30, 2002 from $590,000 for the same period in 2001. Other
non-interest income includes a variety of fee-based services. These include
Second Check(R) fees, check fees and automated teller machine fees on
non-customers. As YNB's customer base has broadened, the income from these
services has increased.
For the three months ended June 30, 2002 total non-interest income increased
$404,000 or 21.1% to $2.3 million from $1.9 million for the same period in 2001.
The key factor accounting for this improvement was a $300,000 increase in net
gains on sale of securities.
Non-interest income represented 6.7% of YNB's total revenue in the first six
months of 2002 compared to 5.5% for the same period in 2001. The improvement in
this ratio was due to greater gains on sale of securities and increased service
24
charge income. As part of YNB's longer-term strategic goal to increase
non-interest income, our subsidiary, YNB Financial Services, Inc. has generated
modest investment and insurance fee income. YNB Financial Services, Inc. through
a third party provider offers ancillary products, including brokerage services,
which help to solidify existing banking relationships while modestly enhancing
non-interest income.
Non-interest Expense
Total non-interest expense increased $2.2 million or 16.8% to $15.1 million for
the first six months of 2002 compared to $12.9 million for the same period in
2001. The increase in non-interest expense was primarily due to increases in
salaries and employee benefits, occupancy and other non-interest expense. Total
non-interest expenses, on an annualized basis, as a percentage of average assets
were 1.50% for the first six months of 2002 compared to 1.53% for the same
period of 2001. The improvement in this ratio is due to the strong asset growth
partially offset by the increase in non-interest expenses experienced by YNB as
described below. YNB's efficiency ratio for the first six months of 2002 was
57.17% compared to 60.32% for the same period in 2001. The efficiency ratio is
computed by dividing total operating expenses by net interest income and other
income. An increase in the efficiency ratio indicates that more resources are
being utilized to generate the same or greater volume of income while a decrease
would indicate a more efficient allocation of resources. The improvement in the
efficiency ratio was due to both increased net interest and non-interest income
partially offset by higher non-interest expense.
Salaries and employee benefits increased $1.3 million or 17.9% to $8.6 million
for the first six months of 2002 compared to $7.3 million for the same period in
2001. Salaries and employee benefits expense accounted for 56.8% and 56.3% of
total non-interest expenses for the first six months of 2002 and 2001,
respectively. Full time equivalent employees increased to 310 at June 30, 2002
compared to 270 at June 30, 2001. Salary expense increased $957,000 or 17.5%
reflecting increased staffing levels throughout YNB as the organization
continues to grow and normal salary increases. Benefit expense increased
$343,000 or 19.2% primarily due to higher costs associated with the increased
number of employees at YNB as well as increased costs associated with medical
insurance premiums.
Occupancy expense for the first six months of 2002 was $1.7 million, an increase
of $359,000 or 27.2% compared to $1.3 million for the same period in 2001. Total
rent expense on leased properties increased $300,000 and was the primary reason
for the increase in occupancy expense. The rent expense increase resulted
primarily from the costs associated with YNB's new operations center and, to a
lesser extent, the Hunterdon, New Jersey regional headquarters as well as
occupancy costs associated with new branches opened after the first six months
of 2001.
Equipment expense increased $136,000 or 13.5% to $1.1 million for the first six
months of 2002 from $1.0 million for the same period in 2001. The increase in
equipment costs reflects the continuing efforts of YNB to maintain and upgrade
technology and systems in order to provide quality products and service.
25
Other non-interest expenses increased $380,000 or 11.4% to $3.7 million for the
first six months of 2002. This compares to $3.3 million for the same period in
2001. The major factor for the increase in this expense category was a $520,000
increase in other real estate expense to $653,000 for the six months ended June
30, 2002 compared to $133,000 for the same period in 2001. The increased other
real estate expenses relates to realized and unrealized losses on other real
estate properties as well as costs associated with these properties.
For the three months ended June 30, 2002 total non-interest expense increased
$1.4 million or 21.1% to $7.9 million from $6.5 million for the same period in
2001. The primary factor for this increase was a $648,000 or 17.5% increase in
salary and benefit expense to $4.3 million for the three months ended June 30,
2002 when compared to the $3.7 million for the same period in 2001. A second
factor was a $420,000 increase in other non-interest expense to $2.1 million for
the three months ended June 30, 2002 from $1.7 million for the same period in
2001. The primary cause for the increase in other non-interest expense was a
$536,000 increase in other real estate expense to $618,000 for the three months
ended June 30, 2002 compared to $82,000 for the same period in 2001. YNB also
had modest increases in occupancy and equipment expense and a modest decline in
other non-interest expense.
Income Tax Expense
The effective income tax rate for the six months ended June 30, 2002 was 27.6%
compared to 26.1% for the same period in 2001. The increase in the tax rate and
increased tax expense resulted from the growth in overall income exceeding the
growth in tax-free income. Total income tax expense for the six months ended
June 30, 2002 was $2.7 million, an increase of $864,000 from $1.8 million for
the same period in 2001.
The effective tax rate for the three months ended June 30, 3002 was 28.0%
compared to 25.5% for the same period in 2001. Total income tax expense for the
three months ended June 30, 2002 was $1.4 million, an increase of $550,000 from
the $823,000 for the same period in 2001. The reasons for the increase are the
same as for the six month period as discussed above.
On July 2, 2002 the state legislature passed the New Jersey Business Tax Reform
Act. This act created an alternative minimum assessment for companies that
operate in New Jersey. Although the tax is retroactive to the beginning of 2002,
since it was not enacted until the third quarter of 2002, there is no impact on
income tax expense for the three and six months ended June 30, 2002. A
preliminary analysis of the tax impact on YNB indicates an additional tax
liability of approximately $300,000 for the first six months of 2002. The tax is
retroactive to January 1, 2002 and the tax for the first six months of 2002 will
be reflected in YNB's third quarter results.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in YNB's market risk from December 31, 2001
except as discussed below. For information regarding YNB's market risk refer to
the Company's 2001 Annual Report to Stockholders and Annual Report on Form 10-K
for the year ended December 31, 2001.
26
Management has followed a strategy of positioning YNB for the possibility of
rising rates. This has involved shortening the duration of the investment
portfolio, offering attractive rates on longer-term CDs and borrowing callable
advances with long lockout periods. While these actions have had a negative
impact on the level of improvement in the net interest margin, the benefit is
reflected in improved simulation and economic value of equity results in a plus
200 basis points environment.
YNB manages interest rate risk by identifying and quantifying interest rate risk
exposures using simulation analysis, economic value risk models and simpler gap
analysis. At June 30, 2002 the cumulative one year gap was a negative $22.4
million or 1.1% of total assets compared to a negative $223.8 million or 11.5%
of total assets at December 31, 2001.
Simulation analysis involves dynamically modeling YNB's interest income and
interest expense over a specified time period under various interest rate
scenarios and balance sheet structures. YNB uses simulation analysis primarily
to measure the sensitivity of net interest income over 12 and 24-month time
horizons. In YNB's base case sensitivy scenario, the model estimates the
variance in net interest income with a change in interest rates of plus and
minus 200 basis points over a 12-month period. Management utilized a minus 150
basis points scenario due to the low interest rate environment that existed at
June 30, 2002 and December 31, 2001. The plus and minus base case scenario is
measured within a policy limit of -7%.
Changes in interest rate in basis Percentage Change in Net Interest Income
points over 12 months 6/30/02 12/31/01
- --------------------------------------------------------------------------------
+200 +3.7 0.4
- -150 -3.7 -4.6
The larger asset structure and longer liability structure continue to present a
balanced interest rate risk profile over the next 12 to 24 months at June 30,
2002. YNB's net interest income will benefit most from a flat to modestly higher
interest rate environment over the next twelve months. At the same time, the
exposure to falling rates has been reduced. The simulation models rely on
assumptions concerning among other things, the reaction of non-maturity deposit
products and the impact of embedded options in borrowed fund positions. In the
event that asset and liability behavior is different from the assumptions in the
simulation model, the outcome could be significantly different. Management
attempts to reduce the uncertainty by using market data, research analysis and
business judgment in developing the assumptions that support the model.
YNB measures longer-term interest rate risk through the Economic Value of Equity
("EVE") model. This model involves projecting future cash flows from YNB's
current assets and liabilities over a long time horizon, discounting those cash
flows at an appropriate interest rates, and than aggregating the discounted cash
flows. YNB's EVE is the estimated net present value of these discounted cash
flows. The variance in the economic value of equity is measured as a percentage
of the present value of equity. YNB uses the sensitivity of EVE principally to
measure the exposure of equity to changes in interest rates over a relatively
long time horizon. The following table lists YNB percentage change in EVE in a
plus or minus 200 basis point rate shock at June 30, 2002 and December 31, 2001.
Due to the low level of interest rates at both dates, not all interest rates
could be shocked 200 basis points.
Changes in interest rate in basis Percentage Change EVE
points (Rate Shock) 6/30/02 12/31/01
- -------------------------------------------------------------------------------
+200 -31 -45
- -200 -17 -1
Certain shortcomings are inherent in the methodology used in the previously
discussed interest rate risk measurements. Modeling changes in EVE analysis
require the making of certain assumptions, which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. Accordingly, although the EVE model provides an indication of YNB's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of change in
market interest rates on YNB's net interest income and will differ from actual
results.
27
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable.
Item 2: Changes in Securities and Use of Proceeds
Not Applicable.
Item 3: Defaults Upon Senior Securities
Not Applicable.
Item 4: Submission of Matters to a Vote of Securities Holders
The annual stockholders meeting of Yardville National Bancorp was held Tuesday,
April 30, 2002.
The following nominees were elected as directors:
Votes for Votes withheld
C. West Ayres 5,773,830 124,232
Jay G. Destribats, Chairman of the Board 5,658,839 239,223
Gilbert W. Lugossy 5,774,267 124,795
Christopher S. Vernon 5,775,623 122,439
The following directors's term continued beyond the annual stockholders meeting:
Elbert G. Basolis, Jr. Lorraine Buklad
Anthony M. Giampetro Sidney L. Hofing
James J. Kelly** Louis R. Matlack
Patrick M. Ryan Martin Tuchman
F. Kevin Tylus
There were no other matters voted upon at the annual stockholders meeting.
**On June 2, 2002 Director James J. Kelly passed away. The Restated Certificate
of Incorporation and By-Laws of the Company provide that the number of directors
shall not be less than five or more than twenty-five and permits the exact
number to be determined from time to time by the Board of Directors. At its June
meeting, the Board of Directors reduced the number of directors that constitutes
the entire Board of Directors to twelve, rather than filling the vacancy.
Item 5: Other Information
Not Applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.21 Employment contract between Registrant and Stephen R. Walker
99.1 Certification by Patrick M. Ryan, President and CEO
99.2 Certification by Stephen F. Carman, Treasurer
(b) Reports on Form 8-K.
None
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YARDVILLE NATIONAL BANCORP
--------------------------------
(Registrant)
Date: August 14, 2002 By: /s/ Stephen F. Carman
------------------ --------------------------------
Stephen F. Carman
Treasurer
29
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ----------------------------------------------------------------------------------------
10.21 Employment contract between Registrant and Stephen R. Walker
99.1 Certification by Patrick M. Ryan, President and CEO
99.2 Certification by Stephen F. Carman, Treasurer