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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 September 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 November 12, 2002, the
following class and number of shares were outstanding:
Common Stock, no par value 8,084,887
- -------------------------- ----------------------------
Class Number of shares outstanding
INDEX
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION PAGE NO.
- ------ --------------------- --------
Item 1. Financial Statements (unaudited)
Consolidated Statements of Condition
September 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income
Three months ended September 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Income
Nine months ended September 30, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows
Nine months ended September 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 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 31
Item 4. Controls and Procedures 33
PART 2 OTHER INFORMATION
- ------ -----------------
Item 1. Legal Proceedings 34
Item 2. Changes in Securities and Use of Proceeds 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
CERTIFICATIONS 36
Index to Exhibits 38
2
Item 1. Financial Statements
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
September 30, December 31,
- --------------------------------------------------------------------------------------------------------
(in thousands, except share data) 2002 2001
- --------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 28,916 $ 27,771
Federal funds sold 104,275 38,960
- -------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 133,191 66,731
- -------------------------------------------------------------------------------------------------------
Interest bearing deposits with banks 1,972 2,320
Securities available for sale 802,665 746,483
Investment securities (market value of $56,691 in 2002 and
$64,887 in 2001) 54,174 65,753
Loans 1,143,921 1,007,973
Less: Allowance for loan losses (16,165) (13,542)
- -------------------------------------------------------------------------------------------------------
Loans, net 1,127,756 994,431
Bank premises and equipment, net 11,790 10,910
Other real estate 1,248 2,329
Other assets 50,499 54,432
- -------------------------------------------------------------------------------------------------------
Total Assets $2,183,295 $1,943,389
- -------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 122,022 $ 114,405
Interest bearing 1,140,045 978,285
- -------------------------------------------------------------------------------------------------------
Total Deposits 1,262,067 1,092,690
- -------------------------------------------------------------------------------------------------------
Borrowed funds
Securities sold under agreements to repurchase 10,000 10,000
Federal Home Loan Bank advances 746,002 695,008
Obligation for Employee Stock Ownership Plan (ESOP) 500 800
Other 1,261 1,305
- -------------------------------------------------------------------------------------------------------
Total Borrowed Funds 757,763 707,113
- -------------------------------------------------------------------------------------------------------
Company-obligated Mandatorily Redeemable Trust Preferred
Securities of Subsidiary Trust holding solely junior
Subordinated Debentures of the Company 32,500 32,500
Other liabilities 20,839 17,841
- -------------------------------------------------------------------------------------------------------
Total Liabilities $2,073,169 $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 8,255,891 shares in 2002 and 8,214,568 shares in 2001 54,922 54,334
Surplus 2,205 2,205
Undivided profits 48,238 40,175
Treasury stock, at cost: 172,000 shares (3,030) (3,030)
Unallocated ESOP shares (500) (800)
Accumulated other comprehensive income 8,291 361
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 110,126 93,245
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,183,295 $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
September 30,
- -----------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 19,294 $ 17,708
Interest on deposits with banks 14 59
Interest on securities available for sale 10,521 10,138
Interest on investment securities:
Taxable 120 1,014
Exempt from Federal income tax 590 516
Interest on Federal funds sold 296 860
- -----------------------------------------------------------------------------------------------------------------
Total Interest Income 30,835 30,295
- -----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings account deposits 2,759 2,413
Interest on certificates of deposit of $100,000 or more 1,233 1,831
Interest on other time deposits 4,538 7,116
Interest on borrowed funds 9,414 9,253
Interest on trust preferred securities 775 775
- -----------------------------------------------------------------------------------------------------------------
Total Interest Expense 18,719 21,388
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income 12,116 8,907
Less provision for loan losses 1,300 825
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 10,816 8,082
- -----------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges on deposit accounts 573 492
Securities gains, net 896 1,011
Bank owned life insurance 417 449
Other non-interest income 326 311
- -----------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 2,212 2,263
- -----------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,529 3,746
Occupancy expense, net 888 711
Equipment expense 590 466
Other non-interest expense 1,854 2,100
- -----------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 7,861 7,023
- -----------------------------------------------------------------------------------------------------------------
Income before income tax expense 5,167 3,322
Income tax expense 1,473 831
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 3,694 $ 2,491
- -----------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 0.46 $ 0.33
Diluted $ 0.44 $ 0.32
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 8,047 7,648
Diluted 8,325 7,703
- -----------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Nine Months Ended
September 30,
- -----------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 55,205 $ 52,651
Interest on deposits with banks 44 147
Interest on securities available for sale 31,043 29,795
Interest on investment securities:
Taxable 631 3,243
Exempt from Federal income tax 1,751 1,449
Interest on Federal funds sold 951 2,368
- -----------------------------------------------------------------------------------------------------------------
Total Interest Income 89,625 89,653
- -----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings account deposits 8,486 7,328
Interest on certificates of deposit of $100,000 or more 3,943 5,958
Interest on other time deposits 13,469 21,126
Interest on borrowed funds 27,050 26,172
Interest on trust preferred securities 2,325 2,177
- -----------------------------------------------------------------------------------------------------------------
Total Interest Expense 55,273 62,761
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income 34,352 26,892
Less provision for loan losses 2,925 2,400
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 31,427 24,492
- -----------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges on deposit accounts 1,641 1,372
Securities gains, net 2,522 2,139
Bank owned life insurance 1,260 1,331
Other non-interest income 1,009 901
- -----------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 6,432 5,743
- -----------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 13,117 11,031
Occupancy expense, net 2,568 2,032
Equipment expense 1,735 1,475
Other non-interest expense 5,566 5,432
- -----------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 22,986 19,970
- -----------------------------------------------------------------------------------------------------------------
Income before income tax expense 14,873 10,265
Income tax expense 4,152 2,646
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 10,721 $ 7,619
- -----------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 1.34 $ 1.02
Diluted $ 1.30 $ 1.01
- -----------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 8,028 7,473
Diluted 8,218 7,542
- -----------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 10,721 $ 7,619
Adjustments:
Provision for loan losses 2,925 2,400
Depreciation 1,376 1,153
ESOP fair value adjustment 72 16
Amortization and accretion 1,830 259
Gains on sales of securities available for sale (2,522) (2,139)
Loss on sale of other real estate -- 37
Writedown of other real estate 230 563
Increase in other assets (143) (5,156)
Increase in other liabilities 2,998 2,887
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 17,487 7,639
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net increase (decrease) in interest bearing deposits with banks 348 (3,194)
Purchase of securities available for sale (489,950) (648,193)
Maturities, calls and paydowns of securities available for sale 228,487 292,304
Proceeds from sales of securities available for sale 218,028 247,490
Proceeds from maturities and paydowns of investment
securities 16,005 26,739
Purchase of investment securities (4,474) (14,822)
Net increase in loans (136,266) (110,556)
Expenditures for bank premises and equipment (2,256) (2,311)
Proceeds from sale of other real estate 866 210
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (169,212) (212,333)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in non-interest bearing demand,
money market, and savings deposits 120,521 65,398
Net increase in certificates of deposit 48,856 52,911
Net increase in borrowed funds 50,650 132,236
Proceeds from issuance of trust preferred securities -- 6,000
Proceeds from issuance of common stock 516 7,445
Decrease in unallocated ESOP shares 300 300
Dividends paid (2,658) (2,457)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 218,185 261,833
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 66,460 57,139
Cash and cash equivalents as of beginning of period 66,731 73,114
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of End of Period $ 133,191 $ 130,253
- -----------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest 55,551 61,197
Income taxes 4,689 2,923
- -----------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Non-cash Investing and Financing
Activities:
Transfers from loans to other real estate, net of charge offs 16 1,466
- -----------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements.
6
Yardville National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 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 nine months ended
September 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 including
without limitation, The Yardville National Bank (the "Bank"), Yardville Capital
Trust ("Trust I"), Yardville Capital Trust II ("Trust II") and Yardville Capital
Trust III ("Trust III") and the Bank's 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
2. Earnings Per Share
Weighted average shares for the basic net income per share calculation for the
three months ended September 30, 2002 and 2001 were 8,047,000 and 7,648,000,
respectively. For the diluted net income per share computation, potential common
stock equivalents of 278,000 and 55,000 are included for the three months ended
September 30, 2002 and 2001, respectively.
Weighted average shares for the basic net income per share calculation for the
nine months ended September 30, 2002 and 2001 were 8,028,000 and 7,473,000,
respectively. For the diluted net income per share computation, potential common
stock equivalents of 190,000 and 69,000 are included for the nine months ended
September 30, 2002 and 2001, respectively.
8
3. Comprehensive Income
Below is a summary of comprehensive income for the three and nine months ended
September 30, 2002 and 2001.
Comprehensive Income Three Months Ended September 30,
- -------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------
Net Income $ 3,694 $ 2,491
- -------------------------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain for the period,
net of tax 3,882 951
Less reclassification of realized net gain on sale of
securities available for sale, net of tax 591 667
- -------------------------------------------------------------------------------------------------------
Holding gain arising during the period,
net of tax and reclassification 3,291 284
- -------------------------------------------------------------------------------------------------------
Total comprehensive income $ 6,985 $ 2,775
=======================================================================================================
Comprehensive Income Nine Months Ended September 30,
- -------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------
Net Income $ 10,721 $ 7,619
- -------------------------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized gain for the period,
net of tax 9,595 9,466
Less reclassification of realized net gain on sale of
securities available for sale, net of tax 1,665 1,412
- -------------------------------------------------------------------------------------------------------
Holding gain arising during the period,
net of tax and reclassification 7,930 8,054
- -------------------------------------------------------------------------------------------------------
Total comprehensive income $ 18,651 $ 15,673
=======================================================================================================
4. Recent Accounting Pronouncements
In October, 2002, the Financial Accounting Standards Board (FASB) issued
Statement No. 147, Acquisitions of Certain Financial Institutions- an amendment
to FASB Statements No. 72 and 144 and FASB Interpretation No. 9. This Statement
removes acquisitions of financial institutions from the scope of both Statement
72 and Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. The provisions of Statement No. 147 that
relate to the application of the purchase method of accounting apply to all
acquisitions of financial institutions, except transactions between two or more
mutual enterprises.
Statement No. 147 clarifies that a branch acquisition that meets the definition
of a business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The provisions of Statement No. 147
are effective October 1, 2002. This Statement will not have any impact on the
consolidated financial statements.
9
5. Relationships and Transactions with Directors and Officers
Certain directors and officers of the Company and their associates are or have
in the past been customers of, and have transactions with, the Bank. All deposit
accounts, loans, and commitments comprising such transactions were made in the
ordinary course of business of the Bank on substantially the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with other customers of the Bank. In the opinion of management of
the Company and the Bank, these loans did not involve more than normal risks of
collectibility or present other unfavorable features.
The following table summarizes activity with respect to such loans:
- -------------------------------------------------------------------------------
For the year
For the nine months ended
(in thousands) ended 9/30/02 12/31/01
- -------------------------------------------------------------------------------
Balance as of beginning of period $ 37,409 $ 14,671
Additions 29,663 29,255
Reductions 22,946 6,517
- -------------------------------------------------------------------------------
Balance as of end of the period $ 44,126 $ 37,409
- -------------------------------------------------------------------------------
None of these loans were past due or on nonaccrual status as of September 30,
2002 or December 31, 2001.
In addition, the Company 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. No new
material relationships or transactions were commenced, and no material changes
were made to existing relationships or transactions, during the quarter ended
September 30, 2002.
10
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,
legal, regulatory and Nasdaq compliance and financial and other goals. These
forward-looking statements are subject to risks, uncertainties and assumptions,
including, among other things: the results of our efforts to implement our
retail strategy; adverse changes in our loan portfolio and the resulting credit
risk-related losses and expenses; interest rate fluctuations and other economic
conditions; continued levels of our loan quality and origination volume; our
ability to attract core deposits; continued relationships with major customers;
competition in product offerings and product pricing; adverse changes in the
economy that could increase credit-related losses and expenses; the market price
of our common stock; potential liabilities and compliance with laws, regulatory
and Nasdaq requirements; and other risks and uncertainties detailed from time to
time in our filings with the SEC. We are under no duty to update any of the
forward-looking statements after the date of this filing to conform such
statements to actual results.
Financial Condition
Assets
Total consolidated assets at September 30, 2002 were $2.18 billion, an increase
of $239.9 million or 12.3% compared to $1.94 billion at December 31, 2001. The
growth in YNB's asset base during the first nine months of 2002 was primarily
reflected in increases in loans, Federal funds sold and securities available for
sale. The growth in loans was principally reflected in commercial real estate
and business loans.
Federal funds sold
At September 30, 2002, Federal funds sold totaled $104.3 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
September 30, 2002 was primarily due to deposit growth. Certificates of deposit
(CDs) and Premier money market accounts were competitively priced which
stimulated deposit growth in the Hunterdon County, New Jersey market, which YNB
has targeted for strategic expansion, as well as throughout our branch network.
The resulting increased level of Federal funds sold in the first nine months of
2002 enhanced YNB's liquidity profile and assisted in providing funding for
earning asset growth.
11
Securities
The following tables present the amortized cost and market value of YNB's
securities portfolios as of September 30, 2002 and December 31, 2001.
Securities Available For Sale September 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 $ 174,975 $ 177,512 $ 113,862 $ 113,861
Mortgage-backed securities 525,122 535,898 521,988 523,179
Corporate obligations 50,146 49,394 72,946 72,311
All other securities 39,861 39,861 37,132 37,132
- -------------------------------------------------------------------------------------------------------------
Total $ 790,104 $ 802,665 $ 745,928 $ 746,483
=============================================================================================================
Investment Securities September 30, 2002 December 31, 2001
- -------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ -- $ -- $ 13,000 $ 13,066
Obligations of state and
political subdivisions 50,178 52,582 48,694 47,729
Mortgage-backed securities 3,996 4,109 4,059 4,092
- -------------------------------------------------------------------------------------------------------------
Total $ 54,174 $ 56,691 $ 65,753 $ 64,887
=============================================================================================================
Securities represented 39.2% of total assets at September 30, 2002 and 41.8% at
December 31, 2001. Total securities increased $44.6 million or 5.5% to $856.8
million at September 30, 2002 compared to $812.2 million at year-end 2001. The
available for sale portfolio represented 93.7% of the total securities holdings
of YNB at September 30, 2002, compared to 91.9% at December 31, 2001.
At September 30, 2002, securities available for sale (AFS) had a net unrealized
gain, net of tax effect, of $8.3 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 volatility 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 third quarter resulted in an increase
in the net unrealized gain in our AFS portfolio at September 30, 2002 compared
to the balance at year-end 2001.
12
Securities available for sale increased $56.2 million or 7.5% to $802.7 million
at September 30, 2002 as compared to $746.5 million as of December 31, 2001. The
increase in securities available for sale was primarily the result of a $63.7
million increase in U.S. agency bonds and a net $12.7 million increase in
mortgage-backed securities, partially offset by a net $22.9 million decrease in
corporate obligations primarily due to the sale of a $25.0 million investment in
a money market mutual fund. In the first nine 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 and to reduce longer-term
interest rate risk. The proceeds from the sales were used to purchase other
mortgage-related securities with less extension risk, shorter term U.S. agency
callable bonds and floating rate trust preferred securities. The repositioning
of the AFS portfolio 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.
Investment securities, classified as held to maturity, decreased $11.6 million
to $54.2 million at September 30, 2002 from $65.8 million at December 31, 2001.
The decrease was due primarily to calls on U.S. agency bonds, partially offset
by an increase in tax-free municipal bonds.
We manage a portion of our AFS portfolio with the primary objective of enhancing
return on average equity and earnings per share. We refer to this as our
Investment Growth Strategy. At September 30, 2002, these Investment Growth
Strategy securities decreased $65.4 million from the year-end 2001 level to
$307.4 million. Management utilizes asset liability simulation models to analyze
risk and reward relationships in different interest rate environments 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 currently been capped at $380.0 million. Management believes the
Investment Growth Strategy, as a percentage of total assets, will decline over
time as the asset base continues to grow.
Loans
The loan portfolio represents YNB's largest earning asset class and is the
primary source of interest income. Total loans increased $135.9 million or 13.5%
to $1.14 billion at September 30, 2002 from $1.01 billion at December 31, 2001.
By establishing its niche as a strong commercial lender and expanding
geographically, YNB has continued to experience ongoing growth. YNB's loan
portfolio represented 52.4% of total assets at September 30, 2002 compared to
51.9% at December 31, 2001. YNB's lending emphasis continues to be on commercial
real estate loans and commercial and industrial loans. Strong competition from
both bank and non-bank competitors, in addition to borrowers' concerns over the
economy, real estate prices and interest rates could affect future loan growth.
The majority of YNB's lending 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 on the following page lists loan growth by type for the
nine months ended September 30, 2002.
13
Loan Portfolio Composition
- ---------------------------------------------------------------------------------------------------------
(in thousands) 09/30/02 12/31/01 Change % Change
- ---------------------------------------------------------------------------------------------------------
Commercial real estate
Owner occupied $ 167,511 $ 143,767 $ 23,744 16.52%
Investor occupied 295,008 255,471 39,537 15.48
Construction and development 112,622 99,978 12,644 12.65
- ---------------------------------------------------------------------------------------------------------
575,141 499,216 75,925 15.21
Residential
Multi-family 43,252 33,970 9,282 27.32
1- 4 family 116,392 107,840 8,552 7.93
- ---------------------------------------------------------------------------------------------------------
159,644 141,810 17,834 12.58
Commercial and industrial
Term 118,923 117,005 1,918 1.64
Lines of credit 193,495 164,075 29,420 17.93
Demand 549 1,055 (506) (47.96)
- ---------------------------------------------------------------------------------------------------------
312,967 282,135 30,832 10.93
Consumer
Home equity 68,343 58,084 10,259 17.66
Installment 22,141 19,266 2,875 14.92
Other 5,685 7,462 (1,777) (23.81)
- ---------------------------------------------------------------------------------------------------------
96,169 84,812 11,357 13.39
=========================================================================================================
Total loans $1,143,921 $1,007,973 $ 135,948 13.49%
=========================================================================================================
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 $75.9
million in the first nine months of 2002 with the greatest growth in investor
occupied loans. Growth in commercial real estate loans accounted for 55.8% of
the total loan growth year to date.
Residential loans include multi-family and 1-4 family loans. This portion of the
portfolio totaled $159.6 million at September 30, 2002, up $17.8 million or
12.6% from year-end 2001. Residential 1-4 family loans totaled $116.4 million at
September 30, 2002 and represented 72.9% of total residential mortgage loans.
YNB's 1-4 family loans are secured by first liens on the underlying real
property. YNB is a participating seller/servicer with the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC) and generally underwrites its single-family residential mortgage loans
to conform to the standards required by these agencies. Multi-family loans,
which represented $43.3 million, or 27.1%, 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. Continued decreases in
mortgage interest rates increased refinance activity and accounted for the
growth experienced in residential loans in the nine months ended September 30,
2002.
14
Commercial and industrial loans are typically loans made to small and mid-sized
businesses for a wide variety of needs including working capital loans, which
are used to finance inventory, receivables, and other working capital needs of
commercial borrowers. Commercial and industrial loans consist of term loans,
lines of credit and demand loans. Commercial and industrial loans increased
$30.8 million or 10.9% to $313.0 million at September 30, 2002 from $282.1
million at December 31, 2001. The principal reason for the increase was a $29.4
million increase in business lines of credit outstanding.
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 $11.4 million or 13.4% to $96.2 million at September 30, 2002 from
$84.8 million at December 31, 2001. The growth was primarily reflected in
increased home equity loans and lines. Management believes that comparatively
lower interest rates accounted for the increased activity in the home equity
portfolio in the nine months ended September 30, 2002. YNB's expansion of its
retail network is expected to generate opportunities to increase the size of the
consumer loan portfolio.
In its quarterly report on Form 10-Q for the period ending June 30, 2002, YNB
reported extensions of credit to related entities of a non-management director,
which were presumed, under applicable regulations, to be controlled by the
director and in excess of applicable lending limits. In the third quarter, this
director, working in conjunction with YNB management, transferred or reduced his
ownership and or management interest in a number of these entities. As a result
of these actions, management believes, as of the date of this report that the
extensions of credit to this director and his related interests are now within
the applicable regulatory limits. YNB has disclosed this matter to the Office of
the Comptroller of the Currency ("OCC") and continues to update the OCC on any
changes. All loans to related entities of this director were current and
performing as of September 30, 2002 and as of the date of this report. Based
upon YNB's review of this matter, and the actions taken to date, management
believes that this matter will not have any material impact on the results of
operations or the financial condition of YNB.
Deposit liabilities
The following table provides information concerning YNB's deposit base at
September 30, 2002 and December 31, 2001.
Deposits
- ----------------------------------------------------------------------------------------------------------
(in thousands) 9/30/02 12/31/01 Change % Change
- ----------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits $ 122,022 $ 114,405 $ 7,617 6.7%
Interest bearing demand deposits 117,958 105,354 12,604 12.0
Money market deposits 299,346 203,872 95,474 46.8
Savings deposits 82,000 77,168 4,832 6.3
Certificates of deposit of $100,000
and over 145,437 137,684 7,753 5.6
Other time deposits 495,304 454,207 41,097 9.1
- ----------------------------------------------------------------------------------------------------------
Total $1,262,067 $1,092,690 $ 169,377 15.5%
==========================================================================================================
15
YNB's deposit base is the principal source of funds supporting interest-earning
assets. Total deposits increased $169.4 million or 15.5% to $1.26 billion at
September 30, 2002 compared to $1.09 billion at December 31, 2001. The growth in
YNB's deposit base in the first nine months of 2002 was primarily driven by the
growth in money market deposits and other time deposits. In this lower interest
rate environment, YNB's depositors have shown a preference for our competitively
priced Premier money market deposit accounts.
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 $48.9 million or 8.3% to $640.7 million at September 30,
2002 from $591.9 million at December 31, 2001. The increase resulted from higher
balances of CDs originated within our branch network, partially offset by a
modest decrease in CDs generated through the nationwide computer-based service.
At September 30, 2002, YNB had approximately $106.2 million in CDs obtained
through this service, compared to approximately $107.0 million at December 31,
2001. The growth in CDs generated through the branch network resulted primarily
from the active marketing of longer-term (2 to 3 years) CDs as part of the
promotion associated with the opening of the two newest branches in Hunterdon
County, New Jersey earlier in the year. CDs continue to be an important source
of funding for YNB in 2002, representing 50.8% of the total deposits at
September 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 increase 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 $7.6 million or 6.7% to $122.0
million at September 30, 2002 compared to $114.4 million at December 31, 2001.
On an average basis, non-interest bearing demand deposits totaled $115.0 million
for the first nine months of 2002 compared to $102.1 million for the same period
in 2001. The increase in demand deposits is primarily attributable to the growth
in new and existing business relationships.
Interest bearing demand deposits increased $12.6 million or 12.0% to $118.0
million at September 30, 2002 from $105.4 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 $95.5 million or 46.8% to $299.3 million at
September 30, 2002 from $203.9 million at December 31, 2001. The increase in
money market balances resulted from new depositors as well as existing
depositors moving CD proceeds into YNB's Premier money market accounts.
Management believes this reflects our depositors' preference to invest their
funds in more liquid money market accounts in anticipation of higher interest
rates in the future. Savings deposits increased $4.8 million or 6.3% to $82.0
million at September 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 core deposits, excluding certificates of deposit, core deposits have
historically not been adequate to meet loan demand and are not expected to do so
in the future. YNB's ability to generate lower cost core deposits could affect
net interest income levels and our net interest margin.
16
Management believes the implementation of our retail strategy, which includes
expanding YNB's branch network, enhancing our brand image and upgrading our
technology infrastructure, will play an important role in reducing YNB's cost of
funds by attracting lower-cost and interest-free deposits. The recently opened
Hunterdon, New Jersey regional headquarters and the 8 Main Street branch in
Flemington, New Jersey should help YNB attract lower cost core deposits in the
Hunterdon County, New Jersey market. In addition, YNB opened its first branch in
Middlesex County, New Jersey in November 2002. YNB currently has business
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 as
well as attract new customers. YNB has also filed an application for its first
branch in Somerset County, New Jersey. If approved by Federal regulators, the
branch will be located in Somerville. Somerset County is located directly east
of Hunterdon County. Management continues to evaluate new branch locations in
its existing markets as well as new markets.
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 Federal Home Loan Bank (FHLB) advances and securities sold
under agreements to repurchase. Borrowed funds totaled $757.8 million at
September 30, 2002, an increase of $50.7 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 in a rising interest rate environment.
YNB had FHLB advances outstanding of $746.0 million at September 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
security purchases as well as other earning asset growth. At September 30, 2002,
callable advances totaled $629.0 million or 84.3% 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. As of September 30, 2002, YNB had $447.0 million in
outstanding callable advances with call dates in 2002. Management anticipates
that, at the current interest rate level, there will be no FHLB advances called
in 2002. In 2002, management strategically 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 resulted
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
commercial banks totaling $25.0 million for daily funding needs.
17
Company - obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust holding solely junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On March 28, 2001 the Holding Company, through Trust III, completed the sale of
$6.0 million of 10.18% Trust Preferred Securities in a private placement.
On June 23, 2000, the Holding Company, through Trust II, completed the sale of
$15.0 million of 9.50% Trust Preferred Securities to a nonaffiliated financial
institution.
On October 16, 1997, the Holding Company, through Trust I, completed the sale of
$11.5 million of 9.25% Trust Preferred Securities to the public. These
securities are currently redeemable in whole or in part prior to maturity.
As part of its capital plan, the majority of the net proceeds raised through
trust preferred securities offerings were contributed to the Bank to support
future asset growth.
As of September 30, 2002, all $32.5 million in Trust Preferred Securities
outstanding qualify as Tier 1 capital.
Equity Capital
Stockholders' equity at September 30, 2002 totaled $110.1 million, an increase
of approximately $16.9 million or 18.1%, compared to $93.2 million at December
31, 2001. This increase resulted from the following factors:
(i) YNB earned net income of $10.7 million and paid cash dividends of $2.7
million for the nine months ended September 30, 2002.
(ii) The net unrealized gain on securities available for sale was $8.3 million
at September 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
$7.9 million increase in stockholders' equity.
(iii) Proceeds of $516,000 from the exercise of stock options by directors and
officers and a $72,000 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 $300,000, to $500,000 at
September 30, 2002 from $800,000 at December 31, 2001.
18
The table below presents the actual capital amounts and ratios of the Holding
Company and the Bank:
Amount Ratios
- ---------------------------------------------------------------------------------------------------
(amounts in thousands) 09/30/02 12/31/01 09/30/02 12/31/01
- ---------------------------------------------------------------------------------------------------
Risk-based capital:
Tier 1:
Holding Company $ 134,330 $ 123,838 9.7% 10.0%
Bank 129,188 120,621 9.4 9.8
- ---------------------------------------------------------------------------------------------------
Total:
Holding Company 150,495 138,919 10.9 11.3
Bank 145,353 134,163 10.6 10.9
- ---------------------------------------------------------------------------------------------------
Tier 1 leverage:
Holding Company 134,330 123,838 6.5 6.9
Bank $ 129,188 $ 120,621 6.0% 6.8%
- ---------------------------------------------------------------------------------------------------
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 September 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.
Consistent with this goal, in September 2002, we filed a registration statement
with the Securities and Exchange Commission in connection with a proposed public
offering of 1,500,000 shares of our common stock, plus an additional 225,000
shares of our common stock to cover over-allotments, if any. The proposed
offering will be made only by means of a prospectus that will be available at a
future date from Legg Mason Wood Walker, Incorporated and Sandler O'Neill &
Partners, L.P., the underwriters that will manage the proposed offering.
Although we anticipate that the proposed offering will be completed by the end
of the year, there can be no assurances that we will complete it in the time
period currently contemplated or at all.
Our 401(k) savings plan has, since August 1998, included an option for our
employees to invest a portion of their plan accounts in a fund (the "YNB Stock
Fund") that has acquired shares of our common stock in the open market. In
connection with the addition of the YNB Stock Fund to the plan, we 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 recently being advised of those
requirements, we promptly completed the registration and distributed the
required information to our plan participants. The Board of Directors of YNB has
approved the discontinuance of the YNB Stock Fund, and the sale of our common
stock owned by the YNB Stock Fund to the YNB employee stock ownership plan in
the near future. As of October 31, 2002, there was a total of approximately $5.2
million invested in the 401(k) savings plan, of which approximately $738,000 was
in the YNB Stock Fund (which owned approximately 41,847 shares of our common
stock as of such date). While it is possible that we may have liability based on
the requirements applicable to the 401(k) savings plan, we do not believe that
any such liabilities or claims, if asserted, would have a material adverse
effect on our financial condition or results of operations. That conclusion is
based in part on our expectation that the sale of our common stock by the YNB
Stock Fund will occur in the near future and at a price at or near the current
market price of our common stock. If the sale is completed at a price
significantly lower than the current market price of our common stock, it is
possible that such liabilities or claims, if asserted, could have a material
adverse effect on our financial condition or results of operations. There can be
no assurances that we will be able to complete the sale of shares by the 401(k)
savings plan in the time period or in the price range currently contemplated.
19
We also maintain a dividend reinvestment and stock purchase plan (the "YNB
DRIP"). In 1997, in connection with adding a 3% discount to dividend
reinvestments through the YNB DRIP, we inadvertently did not register with the
Securities and Exchange Commission our common stock purchased through 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,
we promptly suspended operation of the YNB DRIP. We expect in the near future to
complete the registration of the shares of common stock purchased (and to be
purchased) through the YNB DRIP. In addition, our Board of Directors has
approved an offer to be made in the near future 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 or 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 November 13, 2002,
the market price of our common stock was $18.54 per share. We do not believe
that participants will be likely to accept the rescission offer if the market
price of our 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 our common stock). In the event
some participants do accept the rescission offer, we believe, based upon the
current market price of the common stock, that the aggregate amount of
rescission payments would not have a material adverse effect on our financial
condition or results of operations. If, however, a greater than expected number
of participants accept the rescission offer or the rescission offer is completed
at a time when the market price of our common stock is significantly lower than
the current market price of our common stock, the aggregate amount of rescission
payments could have a material adverse effect on our financial condition or
results of operations. There can be no assurances that we will be able to
complete the rescission offer in the time period currently contemplated.
20
In addition, we maintain a stock option plan providing for grants of options to
our non-employee directors. The number of shares available for the grant of
options under this plan was increased on three occasions by our Board of
Directors. Each of these increases was inadvertently implemented without
obtaining shareholder approval as required by Nasdaq. Upon recently being
advised of this shareholder approval requirement, we have canceled the increases
in the number of shares available under the plan, and options to purchase an
aggregate of 118,668 shares, which were granted without shareholder approval,
have been recently rescinded and terminated. In addition, options for which
shareholder approval had not been obtained, but which were already exercised,
have been recently rescinded in exchange for a return of the exercise price
(aggregating approximately $123,000). We brought this matter to the attention of
the Nasdaq staff and discussed the steps we have taken. Based upon those
discussions and informal guidance received by the Nasdaq staff, we believe that
our inadvertent failure to obtain shareholder approval of the option increases
will not affect the listing of our common stock on Nasdaq and will not have a
material adverse effect on our financial condition or results of operations.
21
Credit Quality
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type as of September 30, 2002 and December 31, 2001.
Nonperforming Assets
- ------------------------------------------------------------------
(in thousands) 09/30/02 12/31/01
- ------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $ 1,931 $ 888
Residential 1,677 1,133
Commercial and industrial 1,579 1,494
Consumer 56 98
- ------------------------------------------------------------------
Total 5,243 3,613
- ------------------------------------------------------------------
Restructured loans 729 770
- ------------------------------------------------------------------
Loans 90 days or more past due:
Residential 491 514
Consumer 155 228
- ------------------------------------------------------------------
Total 646 742
- ------------------------------------------------------------------
Total nonperforming loans 6,618 5,125
- ------------------------------------------------------------------
Other real estate 1,248 2,329
- ------------------------------------------------------------------
Total nonperforming assets $ 7,866 $ 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 244.26% 264.23%
==================================================================
Nonperforming assets, which consist of nonperforming loans and other real
estate, totaled $7.9 million at September 30, 2002, a $412,000 or 5.5% increase
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 0.36% at September 30, 2002 compared
to 0.38% at December 31, 2001. The modest decrease in this ratio resulted from
an increase in total assets partially offset by the modest increase in
nonperforming assets.
At September 30, 2002, nonperforming loans, which are loans 90 days or more past
due, restructured loans and nonaccrual loans, totaled $6.6 million, a $1.5
million or 29.1% 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 loans and loans 90 days or more past due.
Nonaccrual loans increased primarily due to increases in nonaccrual commercial
real estate and residential loans. The increase in nonaccrual commercial real
estate loans is primarily due to one loan relationship totaling approximately
$824,000.
Other real estate totaled $1.2 million at September 30, 2002 reflecting a $1.1
million decrease from the $2.3 million in other real estate at December 31,
2001. The decline in other real estate resulted primarily from the sale of one
property, as well as principal 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 continued 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.
22
Allowance for Loan Losses
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 consist of loans rated as either "minimal,
modest, better than average, average and acceptable." Loans with acceptable risk
were reserved at a range of 0.5% to 1.60% at September 30, 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 September 30,
2002. Loans with a risk rating of 9 were considered to be a loss and reserved at
100% at September 30, 2002. In setting the reserve percentage for each risk
rating, management uses computer software 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 estates values, interest rates and level of business activity.
Residential mortgage loans and consumer loans are assigned individual reserve
percentages of between 0.25% for the lowest risk to 0.75% for higher risk loans.
The allowance for loan losses totaled $16.2 million at September 30, 2002, an
increase of $2.7 million from the $13.5 million at year-end 2001. The provision
for loan losses for the first nine months of 2002 was $2.9 million compared to
$2.4 million for the same period of 2001. Gross charge-offs were $368,000 for
the first nine months of 2002 compared to $1.5 million for the same period in
2001. Gross recoveries were $66,000 for the first nine months of 2002 compared
to $371,000 for the same period in 2001. Annualized net charge-offs as a
percentage of average loans were 0.04% for the first nine months of 2002
compared to 0.18% for the same period in 2001. This compares to net charge-offs
as a percentage of average loans 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 nine months of 2002 is not a reliable
indicator of YNB's future net charge-offs. The increased size of the reserve
resulted primarily from three factors. First, YNB continued to experience loan
growth with total loans increasing $135.9 million in the first nine months of
2002. A second factor was the increased level of nonperforming loans, which
increased $1.5 million from year-end 2001. A third factor involved a weakening
of the credit quality of the portfolio as measured by the amount of lending
relationships that had risk rating downgrades in 2002. Management believes, that
most of these downgrades reflect the impact of a slowing economy on the level of
business activity and believes that this trend will continue in the short term.
Management does not anticipate that these downgrades will result in a
significant increase in nonperforming loans.
Management maintains the allowance for loan losses at a level determined in
accordance with the above-described process. 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 September 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 244.26%
at September 30, 2002 compared to 264.23% at December 31, 2001.
23
The following table describes the allocation of the allowance for loan losses
among various categories of loans as of the dates indicated based upon the risk
analysis performed in evaluating the adequacy of the allowance for loan losses.
An unallocated allowance is distributed proportionately among each loan
category. This unallocated portion of the allowance for loan loss is important
to maintain the overall allowance at a level that is adequate to absorb
potential credit losses inherent in the total loan portfolio not detectable or
discernible through the specified analysis described above. The allocation is
made for analytical purposes 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. The allocation of the allowance for
loan losses to the various loan types remained relatively unchanged from
September 30, 2002 compared to December 31, 2001. The primary factor which
influenced the modest changes was the continued loan growth experienced in 2002.
- ---------------------------------------------------------------------------------------------------------------
As of September 30, 2002 As of December 31, 2001
---------------------------------------------- -----------------------------------------
Percent Percent of Percent Percent of
Reserve of loans to Reserve of loans to
(in thousands) Amount Allowance Total loans Amount Allowance Total loans
- ---------------------------------------------------------------------------------------------------------------
Commercial real
estate $ 8,071 49.9% 50.3% $ 6,843 50.5% 49.5%
Residential 1,271 7.9 14.0 1,106 8.2 14.1
Commercial and
industrial 6,161 38.1 27.3 4,974 36.7 28.0
Consumer 662 4.1 8.4 619 4.6 8.4
- ---------------------------------------------------------------------------------------------------------------
Total $ 16,165 100.0% 100.0% $ 13,542 100.0% 100.0%
- ---------------------------------------------------------------------------------------------------------------
Results of Operations
Net Income
YNB reported net income of $10.7 million for the nine months ended September 30,
2002, an increase of $3.1 million or 40.7% compared to $7.6 million for the same
period in 2001. The increase in net income for the first nine months of 2002
compared to the same period in 2001 was primarily attributable to higher net
interest income, partially offset by an increase in non-interest expenses. Basic
earnings per share for the nine months ended September 30, 2002 increased 31.4%
to $1.34 compared to $1.02 for the same period in 2001. Diluted earnings per
share for the nine months ended September 30, 2002 increased 28.7% to $1.30
compared to $1.01 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 common shares outstanding resulting primarily from the private stock
offering completed in August 2001.
On a quarterly basis, net income for the third quarter of 2002 was $3.7 million,
which represents an increase of $1.2 million or 48.3% compared to the net income
for the third quarter of 2001. The primary reason for the increase in net income
in the quarter was higher net interest income, partially offset by the increased
provision for loan losses and non-interest expense. Basic earnings per share for
the quarter ended September 30, 2002 increased 39.4% to $0.46 compared to $0.33
for the same period in 2001. Diluted earnings per share increased 37.5% to $0.44
for the third 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 average common shares outstanding.
24
Net Interest Income
YNB's net interest income for the first nine months of 2002 was $34.4 million,
an increase of $7.5 million or 27.7% from the same period in 2001. The increase
was principally because of the decline in interest expense. 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, time deposits that
repriced in the first nine months of 2002 now reflect the full decline in
interest rates already experienced by much of YNB's earning asset base in 2001.
For the first nine months of 2002, interest income decreased by $28,000 compared
to the same period in 2001, while interest expense decreased by $7.5 million
compared to the same period in 2001. The most significant factor in the
improvement in net interest income was the reduction in the cost of other time
deposits which declined 212 basis points to 4.10% for the first nine months of
2002 compared to 6.22% for the same period in 2001. Overall, the cost of
interest bearing deposits declined 197 basis points to 3.24% for the first nine
months of 2002 when compared to 5.21% for the same period in 2001.
The net interest margin is calculated as net interest income divided by average
interest earning assets. For the first nine months of 2002 the net interest
margin (tax equivalent basis) was 2.37%, a 17 basis point or 7.7% increase
compared to 2.20% for the same period in 2001. The increase in the margin was
due primarily to the reduction in cost of interest bearing liabilities. The cost
of average interest bearing liabilities declined 27 basis points more than the
yield on average interest earning assets. Further improvement to the net
interest margin for the remainder of 2002 is dependent on maintaining loan
yields, investment opportunities and the continued decline of our cost of funds.
However, if short-term rates, including the prime rate of interest, were to
decline from the September 30, 2002 levels, it would limit the continued
improvement in the net interest margin and on a short term basis the net
interest margin could be negatively impacted. On November 6, 2002, the Federal
Reserve Board lowered the targeted Federal funds rate by 50 basis points.
On a quarterly basis, net interest income was $12.1 million, an increase of $3.2
million or 36.0% when compared to the third quarter of 2001. The net interest
margin (tax equivalent basis), for the three months ended September 30, 2002 was
2.39% a 33 basis point or 16.0% increase from the same period in 2001. The
increase in the net interest margin was due to the cost of average interest
bearing liabilities decreasing 129 basis points to 3.93% for the quarter
compared to 5.22% for the same period in 2001. Over this same time period, the
yield on average earning assets decreased only 87 basis points to 5.93% for the
quarter compared to 6.80% for the same period in 2001. The combination of these
factors accounted for the improvement in the net interest margin for the
quarterly comparative period.
The net interest margin for the nine and three months comparative periods in
2002 and 2001 was also impacted by the Investment Growth Strategy. The targeted
spread on this strategy is 75 basis points after tax. Because of the targeted
spread on this strategy, there is a negative impact to the overall net interest
margin.
25
Interest Income
For the first nine months of 2002, total interest income was $89.63 million, a
decrease of $28,000 when compared to interest income of $89.65 million for the
same period in 2001. This minimal 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, principally offset by
the higher average balances of loans.
Interest and fees on loans for the nine months ended September 30, 2002
increased $2.6 million or 4.9% to $55.2 million from $52.7 million for the same
period in 2001. Average loans increased $192.8 million or 22.3% while the yield
on loans decreased 116 basis points to 6.97% for the nine months ended September
30, 2002 from 8.13% for the same period in 2001. The lower loan yield reflected
the entire impact of the reduction of short-term interest rates from 2001 in the
first nine months of 2002 when compared to the same period in 2001.
Interest on securities declined $1.1 million or 3.1% to $33.4 million for the
nine months ended September 30, 2002 compared to $34.5 million for the same
period in 2001. Average securities for the nine months ended September 30, 2002
increased $119.5 million or 16.3% to $852.0 million when compared to the $732.5
million for the same period in 2001. Over the same period, the yield on the
securities portfolio decreased 105 basis points to 5.23% from 6.28%. 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 primarily due to management's
strategy of reducing the portfolio duration in order to better position YNB for
the possibility of a rising rate environment and the current low level of
interest rates.
For the third quarter of 2002, total interest income was $30.8 million, an
increase of $540,000 or 1.8% when compared to the $30.3 million for the third
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 third quarter of 2002 was
5.93%, an 87 basis point decline from the 6.80% 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 third quarter of 2002 compared to the same period in
2001 and due to the previously mentioned strategy of reducing investment
portfolio duration.
Interest Expense
Total interest expense decreased $7.5 million or 11.9% to $55.3 million for the
first nine months of 2002, compared to $62.8 million for the same period in
2001. The decrease in interest expense for the comparable time periods resulted
primarily from lower rates paid on all interest bearing deposits and, to a
lesser extent, on borrowed funds, partially offset by higher overall average
balances on these interest-bearing liabilities. Average interest bearing
liabilities were $1.83 billion for the nine months ended September 30, 2002
reflecting an increase of $285.7 million or 18.5% when compared to the average
balance of $1.54 billion for the same period in 2001. The average rate paid on
interest bearing liabilities for the nine months ended September 30, 2002
decreased 140 basis points to 4.03% from 5.43% for the same period of 2002.
26
Interest expense on savings, money markets and interest bearing demand deposits
increased $1.2 million or 15.8% to $8.5 million for the first nine months of
2002 when compared to $7.3 million for the same period in 2001. The primary
cause for this increase was the increase in the average balance of these
accounts of $180.3 million or 60.0%, to $481.0 million for the nine months ended
September 30, 2002 from $300.7 million for the same period in 2001. The majority
of the growth has been in Premier money market balances. Aggressive marketing
campaigns in 2002, resulted in attracting new depositors as well as YNB's
depositors reinvesting proceeds from maturing CDs into YNB's competitively
priced Premier money market account. The cost of funds in this category
decreased 90 basis points to 2.35% for the nine months ended September 30, 2002
compared to 3.25% for the same period in 2001. The primary cause for the decline
in the cost of these deposits was 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 $7.6 million to $13.5 million for the
nine months ended September 30, 2002 from $21.1 million for the same period in
2001. This decrease was caused by a decline of 212 basis points in the cost of
average other time deposits to 4.10% from 6.22% for the comparative period in
addition to a $14.6 million reduction in the average balance of other time
deposits outstanding to $438.0 million for the nine months ended September 30,
2002, when compared to the average outstanding balance of $452.6 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 the remainder of
2002 but at a slower rate as a higher percentage of our other time deposits have
already priced lower and are at or near current market levels.
Interest on CDs of $100,000 or more decreased $2.0 million or 33.8% to $3.9
million for the nine months ended September 30, 2002 from $5.9 million for the
same period in 2001. The decrease was caused by the decline in the average rate
paid of 271 basis points to 3.56% for the first nine months of 2002 from 6.27%
for the same period in 2001, partially offset by the increase in average CD
balances of $20.9 million for the nine months ended September 30, 2002. Through
the branch network and computer-based service utilized by YNB, the volume of CDs
of $100,000 or more increased during the first nine months of 2002, which
enhanced liquidity and provided funding for asset growth. The sharp decline in
the cost of CDs of $100,000 or more reflects the downward repricing of these
deposits in the first nine months of 2002 as compared to the same time period in
2001.
Interest expense on borrowed funds increased $878,000 or 3.4% to $27.1 million
for the first nine months of 2002 when compared to $26.2 million for the same
period in 2001. The increased interest expense was the result of a $97.1 million
or 15.4% increase in the average balance outstanding in the first nine months of
2002 to $727.6 million when compared to $630.5 million for the same period in
2001. The average rate paid on borrowed funds decreased 57 basis points for the
nine months ended September 30, 2002 to 4.96% from 5.53% for the same period
last year. The decline in the rate on borrowed funds resulted primarily from a
change in the borrowing mix implemented in 2001 and maintained in 2002 and
strategic repositioning of FHLB advances. The majority of new borrowings in 2001
were floating rate FHLB advances tied to the three month London Interbank Offer
Rate, an interest rate sensitive index. In addition, the retirement of $50.0
million in callable advances and their replacement with lower cost floating rate
borrowings also contributed to the lower rate on borrowed funds in 2002. 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 if rates decline. In 2002, YNB
has shifted its borrowing strategy away from floating rate borrowings and into
longer-term callable borrowings. While this strategy resulted in a higher cost
of borrowed funds in the current period, management believes these actions will
reduce the overall risk exposure of YNB to rising interest rates.
27
For the third quarter of 2002, total interest expense decreased $2.7 million or
12.5% when compared to the $21.4 million for the same period in 2001. The
overall cost of interest bearing liabilities decreased 129 basis points to 3.93%
for the third quarter of 2002 compared to 5.22% for the third quarter of 2001.
The reasons for this decrease in interest expense are substantially the same as
for the nine-month period as discussed previously.
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 has not generally been possible, as asset growth rates have
historically exceeded the growth rate in core deposits. To attract lower cost
deposits to fund asset growth, YNB 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 products, along with the
implementation of our retail strategy, should result in lower cost core deposits
providing a higher percentage of the new funding than has been experienced
historically.
Provision for Loan Losses
The provision for loan losses for the nine months ended September 30, 2002 was
$2.9 million, an increase of $525,000 from the $2.4 million for the same period
in 2001. While net charge-offs have declined, the level of nonperforming loans
has increased to $6.6 million at September 30, 2002 from $5.5 million at
September 30, 2001. The provision level also reflected continued ongoing loan
growth with loans increasing $135.9 million in 2002 compared to $107.9 million
for the same period in 2001. These factors combined with increased credit risk
in the loan portfolio, as discussed in greater detail in the allowance for loan
loss section of this filing, resulted in a higher provision for loan losses in
the first nine months of 2002 compared to the same period in 2001.
For the three months ended September 30, 2002 the provision for loan losses was
$1.3 million, a $475,000 increase from $825,000 for the third quarter of 2001.
The primary cause for the increased provision was a $120,000 increase in net
charge-offs and stronger loan growth in the third quarter of 2002 of $70.9
million compared to $43.4 million for the third quarter of 2001.
Non-interest Income
Total non-interest income for the first nine months of 2002 was $6.4 million, an
increase of $689,000 or 12.0% over non-interest income of $5.7 million for the
same period in 2001. The increase was due primarily to higher net securities
gains and increased service charges on deposit accounts.
28
Service charges on deposit accounts increased $269,000 or 19.6% to $1.64 million
for the nine months ended September 30, 2002 compared to $1.37 million for the
same period in 2001. Service charge income has primarily increased in the first
nine months of 2002 due to increased income from overdraft fees and growth in
the core deposit base. Management believes that, as YNB's efforts are successful
in increasing lower cost checking accounts, service charge income will continue
to increase in future periods.
Net gains on the sale of securities totaled $2.5 million in the first nine
months of 2002 compared to $2.1 million in net gains on the 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 $1.26 million for the first nine
months of 2002 compared to $1.33 million for the same period in 2001. The modest
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. Bank owned life insurance
assets are single premium policies. After the initial purchase, there are no
additional premiums to be paid on those policies.
Other non-interest income increased $108,000 or 12.0% to $1.0 million for the
first nine months ended September 30, 2002 from $901,000 for the same period in
2001. Other non-interest income includes a variety of fee-based services. These
include Second Check 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 September 30, 2002, total non-interest income
decreased $51,000 to $2.21 million compared to $2.26 million for the same period
in 2001. The key reason for this decrease was an $115,000 decrease in net
securities gains for the three months ended September 30, 2002 compared to the
third quarter of 2001.
Non-interest income represented 6.7% of YNB's total revenues in the first nine
months of 2002 compared to 6.0% for the same period in 2001. The improvement in
this ratio was due to greater gains on sale of securities and increased service
charge income. As part of YNB's longer-term strategic goal to increase
non-interest income, our subsidiary, YNB Financial Services, Inc. has generated
modest investment and insurance fee income in 2002. YNB Financial Services, Inc.
through a third party provider offers ancillary products, including brokerage
services, which help to solidify relationships while modestly enhancing
non-interest income.
29
Non-interest Expense
Total non-interest expense increased $3.0 million or 15.1% to $23.0 million for
the first nine months of 2002 compared to $20.0 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 equipment expense. Total
non-interest expenses, on an annualized basis, as a percentage of average assets
were 1.49% for the first nine months of 2002 compared to 1.52% for the same
period of 2001. The improvement in this ratio is due to 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 nine months of 2002 was
56.36% compared to 61.19% 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 $2.1 million or 18.9% to $13.1 million
for the first nine months of 2002 compared to $11.0 million for the same period
in 2001. Salaries and employee benefits expense accounted for 57.1% and 55.2% of
total non-interest expenses for the first nine months of 2002 and 2001,
respectively. Full time equivalent employees increased to 313 at September 30,
2002 compared to 284 at September 30, 2001. Salary expense increased $1.5
million or 18.3% reflecting increased staffing levels throughout YNB as the
organization continued to grow and also reflects routine annual salary increases
for existing staff. Benefit expense increased $600,000 or 21.0% primarily due to
higher costs associated with the increased number of employees at YNB as well as
increased costs associated with medical insurance premiums and increased ESOP
expense. As we continue to implement our retail expansion strategy, we would
expect salary and benefit expenses to continue to increase.
Occupancy expense for the first nine months of 2002 was $2.57 million, an
increase of $536,000 or 26.4% compared to $2.03 million for the same period in
2001. Total rent expense on leased properties increased $436,000 and was the
primary reason for the increase in occupancy expense. The rent expense increase
resulted primarily from the costs associated with YNB's new operations center
and the Hunterdon, New Jersey regional headquarters as well as the costs
associated with the full impact on occupancy costs of new branches opened during
2001.
Equipment expense increased $260,000 or 17.6% to $1.74 million for the first
nine months of 2002 from $1.48 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.
Other non-interest expenses increased $134,000 or 2.5% to $5.57 million for the
first nine months of 2002 compared to $5.43 million for the same period in 2001.
The major factor for the increase in this expense category was a $113,000
increase in other real estate expenses to $797,000 for the nine months ended
September 30, 2002 compared to $684,000 for the same period in 2001. The
increase in other real estate expenses was due to realized losses on sales,
write downs and expenses associated with other real estate properties.
30
For the three months ended September 30, 2002, total non-interest expense
increased $838,000 or 11.9% to $7.8 million from $7.0 million for the same
period in 2001. The primary factor for this increase was a $783,000 or 20.9%
increase in salaries and employee benefits expense to $4.5 million for the three
months ended September 30, 2002 when compared to $3.7 million for the same
period in 2001. Additional factors for the increase in non-interest expense were
a $177,000 increase in occupancy expense and a $124,000 increase in equipment
expense. These increases related to the continued expansion of YNB's branch
network, new operations center and the related technology investments. Partially
offsetting these increases was a $246,000 decline in other non-interest expenses
to $1.9 million for the three months ended September 30, 2002 compared to $2.1
million for the same period in 2001. The primary factor for this decline was a
$419,000 decline in other real estate expenses.
Income Tax Expense
The effective income tax rate for the nine months ended September 30, 2002 was
27.9% compared to 25.8 % for the same period in 2001. The increase in the tax
rate resulted from the growth in overall income exceeding the growth in tax-free
income and increased New Jersey State taxes. Total income tax expense for the
nine months ended September 30, 2002 was $4.2 million, an increase of $1.5
million from $2.7 million for the same period in 2001. The growth in income tax
expense was primarily due to increased pre-tax income from the comparable
periods in 2001.
The effective tax rate for the three months ended September 30, 3002, was 28.5%
compared to 25.0% for the same period in 2001. Total income tax expense for the
three months ended September 30, 2002 was $1.5 million, an increase of $642,000
from the $831,000 for the same period in 2001. The reasons for the increase were
identical as for the nine-month period as discussed above.
In July 2002, the New Jersey Business Tax Reform Act was passed. This act
creates an alternative minimum assessment for companies that operate in New
Jersey. The tax was retroactive to January 1, 2002. The alternative minimum
assessment 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.
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 please
refer to the Company's 2001 Annual Report to Stockholders and Annual Report on
Form 10-K for the year ended December 31, 2001.
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. As a natural hedge against a lower interest rate
environment, management has also instituted interest rate floors on floating
rate commercial loans throughout 2002. At September 30, 2002, $263.0 million in
floating rate commercial loans had interest rate floors. This action is expected
to mitigate the impact to net interest income should rates decline further from
their September 30, 2002 levels. On November 6, 2002, the Federal Reserve Board
lowered the targeted Federal fund rate by 50 basis points. Currently, management
believes that this rate reduction will not have a material impact on the
interest rate risk position of YNB as measured by the simulation analysis.
31
YNB manages interest rate risk by identifying and quantifying interest rate risk
exposures using simulation analysis, economic value at risk models and simpler
gap analysis. At September 30, 2002, the cumulative one-year gap was a positive
$181.3 million or 8.3% 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 sensitivity 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
September 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 9/30/02 12/31/01
- ------------------------------------------------------------------------------
+200 7.3 0.4
- -150 -4.7 -4.6
The shorter duration of YNB's assets and the longer duration of YNB's
liabilities have shifted the risk profile of YNB since December 31, 2001. 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 remained unchanged. 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 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 September 30, 2002 and December 31,
2001. Due to the low level of interest rates at both dates, not all interest
rates could be shocked down 200 basis points.
32
The actions taken to reposition YNB for rising rates have also changed the
longer term interest rate risk position as measured by EVE. Since December 31,
2001, YNB's longer-term exposure to rising rates, as measured by the percentage
change in EVE, has decreased significantly. At the same time, with rates near
historic lows the risk to lower rates as a percentage of EVE has increased.
Management believes that as of September 30, 2002, YNB is better positioned in
the long term for rising rates and the increased level of risk to lower rates,
given the already low level of interest rates, is an acceptable tradeoff. On
November 6, 2002 the Federal Reserve Board lowered the targeted Federal fund
rate by 50 basis points. Currently, management believes that this decline will
not materially change the longer term interest rate risk profile of YNB as
measured by EVE.
Changes in interest rate in basis Percentage Change EVE
points (Rate Shock) 9/30/02 12/31/01
- -------------------------------------------------------------------------
+200 -6 -45
- -200 -27 -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.
Item 4. Controls and Procedures
(A) YNB's management, including the Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and
operation of the company's disclosure controls and procedures within 90
days of the filing of this quarterly report, and based, on their
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective.
(B) There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation.
33
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
Not Applicable.
Item 5: Other Information
Not Applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification by Patrick M. Ryan, President and CEO
99.2 Certification by Stephen F. Carman, Treasurer
(b) Reports on Form 8-K.
On October 22, 2002, the Company filed an 8-K report, which included a copy
of the Company's third quarter 2002 earnings press release.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YARDVILLE NATIONAL BANCORP
--------------------------
(Registrant)
Date: November 14, 2002 By: /s/ Stephen F. Carman
- ----------------------- -------------------------
Stephen F. Carman
Treasurer
35
CERTIFICATION
I, Patrick M. Ryan, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Yardville National
Bancorp;
2. Based on my knowledge, this quarterly 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 quarterly/annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the 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
quarterly/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 quarterly/annual report (the "Evaluation Date"); and
c. presented in this quarterly/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 officer 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 function):
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 officer and I have indicated in this
quarterly/annual report whether or not 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: November 14 2002 By: /s/ Patrick M. Ryan
- ---------------------- -----------------------
Name: Patrick M. Ryan
Title: President and Chief Executive Officer
36
CERTIFICATION
I, Stephen F. Carman, Treasurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Yardville National
Bancorp;
2. Based on my knowledge, this quarterly 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 quarterly/annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the 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
quarterly/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 quarterly/annual report (the "Evaluation Date"); and
c. presented in this quarterly/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 officer 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 function):
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 officer and I have indicated in this
quarterly/annual report whether or not 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: November 14, 2002 By: /s/ Stephen F. Carman
- ------------------------ -------------------------
Name: Stephen F. Carman
Title: Treasurer
37
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ------------------------------------------------------------------------------
99.1 Certification by Patrick M. Ryan, President and CEO 36
99.2 Certification by Stephen F. Carman, Treasurer 37
38