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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2002.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from _________ to _________.
Commission File No.: 0-26086
Yardville National Bancorp
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(Exact name of registrant as specified in its charter)
New Jersey 22-2670267
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2465 Kuser Road, Hamilton, New Jersey 08690
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 585-5100
------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of voting Common Stock held by non-affiliates
(computed by using the closing sales price on the last business day of the
registrant's most recently completed second fiscal quarter (June 28, 2002)) was
$102,354,911. An aggregate of 10,398,705 shares of Common Shares were
outstanding as of March 28, 2003.
Documents Incorporated By Reference
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders of Yardville National Bancorp to be held June 5, 2003 are
incorporated by reference into Part III of this Form 10-K.
ii
FORM 10-K
INDEX
EDGAR PAGE
PART I
Item 1. Business............................................................................................6
Item 2. Properties.........................................................................................17
Item 3 Legal Proceedings..................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders................................................17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters.............................17
Item 6. Selected Financial Data............................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................49
Item 8. Financial Statements and Supplementary Data........................................................49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............49
PART III
Item 10. Directors and Executive Officers of the Registrant.................................................50
Item 11. Executive Compensation.............................................................................50
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................50
Item 13. Certain Relationships and Related Transactions.....................................................50
Item 14. Controls and Procedures............................................................................50
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................50
Signatures.........................................................................................51
Certifications.....................................................................................52
Index to Financial Statements.....................................................................F-1
Index to Exhibits.................................................................................E-1
iii
Statements contained in this Annual Report on Form 10-K regarding future events
or performance are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Our actual results could be
quite different from those expressed or implied by the forward-looking
statements. Factors that could affect our results are discussed more fully under
the Section entitled, "Risk Factors," in Item 1 and elsewhere in this Annual
Report. Although forward-looking statements help to provide complete information
about us, readers should keep in mind that forward-looking statements may not be
reliable. Readers are cautioned not to place undue reliance on the
forward-looking statements.
PART I
Item 1. Business
General
Yardville National Bancorp, referred to as "we" or the "Company," is a
registered financial holding company headquartered in Mercer County, New Jersey
with total assets of $2.2 billion, total deposits of $1.3 billion and total
stockholders' equity of $145.9 million at December 31, 2002. We conduct a
general commercial and retail banking business through our principal operating
subsidiary, The Yardville National Bank, referred to as the "Bank," which
commenced operations as a commercial bank in 1925. We provide a broad range of
lending, deposit and other financial products and services with an emphasis on
commercial real estate and commercial and industrial lending to small to
mid-sized businesses and individuals. Our existing and target markets are
located in the corridor between New York City and Philadelphia. We currently
operate 19 full-service branches, including 13 branches in our primary market of
Mercer County. As part of our expansion strategy, in the past three years, we
have opened three branches in Hunterdon County, New Jersey, one branch in
Burlington County, New Jersey and one branch in Middlesex County, New Jersey. In
addition, we have received regulatory approval to open our first branch in
Somerset County, New Jersey.
Due to consolidation among financial institutions, we continue to see
opportunities to grow our asset base both in our existing markets and by
expanding into contiguous markets in New Jersey and Pennsylvania. We believe
these regions have customers with banking needs that can no longer be adequately
served by smaller local institutions but who still desire the personalized
service that larger institutions typically do not offer. We believe that the key
differentiating factors between us and our larger competitors are our philosophy
of relationship banking and our in-market expertise, while our ability to enter
into larger loan relationships enables us to effectively compete against smaller
institutions.
Our principal and executive offices are located at 2465 Kuser Road, Hamilton,
New Jersey 08690. Our telephone number is (609) 585-5100.
Retail Strategy
Our goals are to further develop the earnings power and increase the value of
our franchise. In order to achieve these goals, we plan to reduce our cost of
funds and increase our non-interest income by attracting lower cost transaction
and other core deposit accounts. Specifically, we continue to implement our
retail strategy by expanding our branch network, enhancing our brand image and
upgrading our technology infrastructure. However, we can make no assurances that
we will achieve these goals.
Subsidiaries
The Company directly owns the Bank and four additional subsidiaries, Yardville
Capital Trust, Yardville Capital Trust II, Yardville Capital Trust III and
Yardville Capital Trust IV. The Company is also the indirect owner, through the
Bank, of eight subsidiaries. The assets, liabilities and results of operations
of the subsidiaries of the Company and the Bank are consolidated with the
Company for financial reporting purposes.
Competition
The Bank's primary market area in Central New Jersey is highly competitive for
financial services and the Bank faces significant competition both in making
loans and in attracting deposits. The Bank is subject to competition in all
aspects of its business from other financial institutions such as commercial
banks, savings banks, savings and loan associations, credit unions, insurance
companies and finance and mortgage companies. Within the direct market area of
the Bank, there are a significant number of offices of competing financial
institutions. The Bank competes in its market area with a number of larger
commercial banks which have substantially greater resources, higher lending
limits, larger branch systems and which provide a broader array of banking
services. Liberalized branching and acquisition laws have lowered barriers to
entry into the banking business, increased competition and increased both
competition for and opportunities to acquire other financial institutions.
Savings banks, savings and loan associations and credit unions also actively
compete for deposits and for various types of loans. In its lending business,
the Bank is subject to competition from consumer finance companies and mortgage
companies, which are subject to fewer regulatory restrictions than banks, and
can often offer lower loan rates than banks. Financial institutions are
intensely competitive in the interest rates they offer on deposits. In addition,
the Bank faces competition for deposits from non-bank institutions such as
brokerage firms, insurance companies and investment companies who offer the
opportunity to invest in such instruments as short-term money market funds,
corporate and government securities funds, mutual funds and annuities.
Supervision and Regulation
General
Bank holding companies and banks are subject to extensive supervision and
regulation under both Federal and state laws. The regulation and supervision of
the Company and the Bank are designed primarily for the protection of consumers,
depositors and the FDIC, and not the Company or its stockholders. Enforcement
actions for failure to comply with applicable requirements may include the
imposition of a conservator or receiver, cease-and-desist orders, written
agreements, the termination of insurance on deposits, the imposition of civil
money penalties and removal and prohibition orders. In addition, private parties
may assert claims against the Company or the Bank. If any enforcement action is
taken by a banking regulator or if the Company or the Bank is subject to private
litigation, the value of an equity investment in the Company could be
substantially reduced or eliminated.
Bank Holding Company Act
The Company is registered as a bank holding company and is subject to regulation
and supervision by the Board of Governors of the Federal Reserve System (the
"FRB") under the Bank Holding Company Act of 1956, as amended.
The Bank Holding Company Act requires a "bank holding company" such as the
Company to secure the prior approval of the FRB before it owns or controls,
directly or indirectly, more than five percent (5%) of the voting shares or
substantially all of the assets of any bank or bank holding company, or merges
or consolidates with another bank holding company.
In addition, bank holding companies are restricted in the types of activities in
which they may engage, directly or indirectly through subsidiaries, and prior
approval of the FRB may be required before engaging in certain activities. The
Company has elected to be a "financial holding company" under the Bank Holding
Company Act, and as such may engage generally in activities determined by the
FRB to be "financial in nature," including insurance and securities activities.
In order to maintain its status as a financial holding company, the Company and
the Bank must be well capitalized and well managed, as determined by the FRB and
the Office of the Comptroller of the Currency, referred to as the "OCC." In
addition, as a condition to engaging in a new financial activity, the Bank must
have a satisfactory rating under the Community Reinvestment Act ("CRA"). For
bank holding companies that are not financial holding companies, the permissible
activities are limited to those previously determined by the FRB to be so
"closely related to banking" as to be a "proper incident thereto." The Company
is not currently engaged in any activity that would not be permissible if it
ceased to be a financial holding company.
2
FRB regulations require a bank holding company to serve as a source of financial
and managerial strength to its subsidiary banks. The FRB has, in some cases,
entered orders for bank holding companies to take affirmative action to
strengthen the finances or management of subsidiary banks.
Supervision and Regulation of the Bank
The operations of the Bank are subject to Federal and state statutes and
regulations applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System and to banks whose deposits are
insured by the Federal Deposit Insurance Corporation, referred to as the "FDIC."
The primary supervisory authority of the Bank is the OCC (also its primary
Federal regulator), which regularly examines the Bank. The OCC has the authority
to prevent a national bank from engaging in an unsafe or unsound practice in
conducting its business.
Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business, the investments a bank may make, the reserves
against deposits a bank must maintain, loans a bank makes and collateral it
takes, the activities of a bank with respect to mergers and consolidations and
the establishment of branches.
In addition to specific regulatory restrictions and requirements imposed by
Federal and state banking laws and regulations, the OCC possesses broad power to
prohibit institutions regulated by it (such as the Bank) from engaging in any
activity that it determines would be an unsafe and unsound banking practice.
The Bank, as a member of the Federal Reserve System, is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or its subsidiaries, on investments in the stock or
other securities of the bank holding company or its subsidiaries, and on taking
such stock or securities as collateral for loans. The Federal Reserve Act and
FRB regulations also place certain limitations and reporting requirements on
extensions of credit by the Bank to principal stockholders of its parent holding
company, among others, and to related interests of such principal stockholders.
Such legislation and regulations may affect the terms upon which any person
becoming a principal stockholder of a holding company may obtain credit from
banks with which the subsidiary bank maintains a correspondent relationship.
Under CRA, the record of a bank holding company and its subsidiary banks must be
considered by the appropriate Federal banking agencies in reviewing and
approving or disapproving a variety of regulatory applications including
approval of a branch or other deposit facility, office relocation, a merger and
certain acquisitions of bank shares. Regulators are required to assess the
record of the Company and the Bank to determine if they are meeting the credit
needs of the community (including low and moderate neighborhoods) they serve.
Regulators make publicly available an evaluation of banks' records in meeting
credit needs in their communities, including a descriptive rating and a
statement describing the basis for the rating.
Capital Rules
Under risk-based capital requirements for bank holding companies, the Company is
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance-sheet activities, such as standby letters of
credit) of eight percent. At least half of the total capital is to be composed
of common equity, retained earnings and qualifying perpetual preferred stock,
less goodwill, referred to as "tier 1 capital". The remainder may consist of
subordinated debt, nonqualifying preferred stock and a limited amount of the
loan loss allowance, referred to as "tier 2 capital." At December 31, 2002, the
Company's tier 1 capital and total capital ratios were 11.8 percent and 13.0
percent, respectively.
3
In addition, the Federal Reserve Board has established minimum leverage ratio
requirements for bank holding companies. Pursuant to these requirements, bank
holding companies that meet certain specified criteria, including having the
highest regulatory rating, must maintain a minimum leverage ratio of tier 1
capital to adjusted average assets, referred to as the "leverage ratio," equal
to three percent. Other bank holding companies that fail to meet such criteria
will generally be required to maintain a leverage ratio of four to five percent.
The Company's leverage ratio at December 31, 2002, was 8.2 percent. The
requirements also provide that bank holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. Furthermore, the requirements indicate that the
Federal Reserve Board will continue to consider a "tangible tier 1 leverage
ratio" (deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve Board has not advised the Company of any specific
minimum tangible tier 1 leverage ratio applicable to it.
The Bank is subject to similar capital requirements adopted by the OCC. The OCC
has not advised the Bank of any specific minimum leverage ratios applicable to
it. The capital ratios of the Bank are set forth below under the discussion of
"Prompt Corrective Action."
Prompt Corrective Action
In addition to the required minimum capital levels described above, federal law
establishes a system of "prompt corrective actions" which Federal banking
agencies are required to take, and certain actions which they have discretion to
take, based upon the capital category into which a federally regulated
depository institution falls. Regulations set forth detailed procedures and
criteria for implementing prompt corrective action in the case of any
institution which is not adequately capitalized. Under the rules, an institution
will be deemed to be "adequately capitalized" or better if it exceeds the
minimum Federal regulatory capital requirements. However, it will be deemed
"undercapitalized" if it fails to meet the minimum capital requirements,
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0 percent, a Tier 1 risk-based capital ratio that is less than
3.0 percent, or a leverage ratio that is less than 3.0 percent, and "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is equal to or less than 2.0 percent.
The following table sets forth the minimum capital ratios that a bank must
satisfy in order to be considered adequately capitalized or well capitalized
under the prompt corrective action regulations, and the Bank's capital ratios at
December 31, 2002:
Adequately Well Bank ratios at
Capitalized Capitalized December 31, 2002
----------- ----------- -----------------
Total Risk-Based Capital Ratio........ 8.00% 10.00% 12.6%
Tier 1 Risk-Based Capital Ratio....... 4.00% 6.00% 11.4%
Leverage Ratio........................ 4.00% 5.00% 7.9%
The prompt corrective action rules require an undercapitalized institution to
file a written capital restoration plan, along with a performance guaranty by
its holding company or a third party. In addition, an undercapitalized
institution becomes subject to certain automatic restrictions including a
prohibition on payment of dividends, a limitation on asset growth and expansion,
in certain cases, a limitation on the payment of bonuses or raises to senior
executive officers, and a prohibition on the payment of certain "management
fees" to any "controlling person". Institutions that are classified as
undercapitalized are also subject to certain additional supervisory actions,
including increased reporting burdens and regulatory monitoring, a limitation on
the institution's ability to make acquisitions, open new branch offices, or
engage in new lines of business, obligations to raise additional capital,
restrictions on transactions with affiliates, and restrictions on interest rates
paid by the institution on deposits. In certain cases, bank regulatory agencies
may require replacement of senior executive officers or directors, or sale of
the institution to a willing purchaser. If an institution is deemed to be
"critically undercapitalized" and continues in that category for four quarters,
the statute requires, with certain narrowly limited exceptions, that the
institution be placed in receivership.
4
Deposit Insurance Assessments
Deposits of the Bank are insured by the FDIC through the Bank Insurance Fund
("BIF"). Deposits of certain savings associations are insured by the FDIC
through the Savings Association Insurance Fund ("SAIF"). The FDIC has adopted
deposit insurance regulations under which insured institutions are assigned to
one of the following three capital groups based on their capital levels:
"well-capitalized," "adequately capitalized" and "undercapitalized." Banks in
each of these three groups are further classified into three subgroups based
upon the level of supervisory concern with respect to each bank. The resulting
matrix creates nine assessment risk classifications to which are assigned
deposit insurance premiums ranging from 0.00% for the best capitalized,
healthiest institutions, to 0.27% for undercapitalized institutions with
substantial supervisory concerns. The FDIC sets deposit insurance assessment
rates on a semiannual basis, and is required to set assessments to the extent
necessary to maintain the ratio of reserves to insured deposits at 1.25%.
Factors such as significant bank failures and increases in insured deposits
could result in the reserve ratio falling below 1.25% and resultant increases in
the assessments set by the FDIC.
In addition, the Bank is subject to quarterly assessments relating to interest
payments on Financing Corporation (FICO) bonds issued in connection with the
resolution of the thrift industry crisis. The FICO assessment rate is adjusted
quarterly to reflect changes in the assessment bases of the BIF and SAIF.
Limitations on Payment of Dividends
Under applicable New Jersey law, the Company is not permitted to pay dividends
on its capital stock if, following the payment of the dividend, (1) it would be
unable to pay its debts as they become due in the usual course of business or
(2) its total assets would be less than its total liabilities. Further, it is
the policy of the FRB that bank holding companies should pay dividends only out
of current earnings.
Since it has no significant independent sources of income, the ability of the
Company to pay dividends is dependent on its ability to receive dividends from
the Bank. Under national banking laws, the Bank must obtain the approval of the
OCC before declaring any dividend which, together with all other dividends
declared by the national bank in the same calendar year will exceed the total of
the bank's net profits of that year combined with its retained net profits of
the preceding 2 years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. Net profits are to be calculated without
adding back any provision for the bank's allowance for loan and lease losses.
Furthermore, the Bank, as an FDIC-insured institution, may not pay dividends or
make capital distributions that would cause the institution to fail to meet
minimum capital requirements. These restrictions would not prevent the Bank from
paying dividends from current earnings to the Company at this time.
In addition, as a bank whose deposits are insured by the FDIC, the Bank may not
pay dividends or distribute any of its capital assets while it remains in
default of any assessment due to the FDIC. The Bank is not in default under any
of its obligations to the FDIC.
Federal regulators also have authority to prohibit banks and bank holding
companies from paying a dividend if they deem such payment to be an unsafe or
unsound practice.
Recent Banking Legislation
In the wake of the tragic events, of September 11th, on October 26, 2001, the
President signed the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism ("USA PATRIOT") Act of 2001.
The USA PATRIOT Act authorizes the Secretary of the Treasury, in consultation
with the heads of other government agencies, to adopt special measures
applicable to financial institutions. Among its provisions, the USA PATRIOT Act
requires each financial institution to (1) establish an anti-money laundering
program, (2) establish due diligence policies, procedures and controls that are
reasonably designed to detect and report instances of money laundering in United
States private bank accounts and correspondent accounts maintained for
non-United States persons or their representatives, and (3) avoid establishing,
maintaining, administering or managing correspondent accounts in the United
States for, or on behalf of, a foreign bank that does not have a physical
presence in any country. In addition, the USA PATRIOT Act expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to request
for information from federal banking agencies within 120 hours.
5
The USA PATRIOT Act also amended the Bank Holding Company Act and the Bank
Merger Act to require Federal banking regulators to consider the effectiveness
of a financial institution's anti-money laundering activities when reviewing an
application under those Acts.
Other Laws and Regulations
The Company and the Bank are subject to a variety of laws and regulations which
are not limited to banking organizations. In lending to commercial and consumer
borrowers, and in owning and operating its own property, the Bank is subject to
regulations and potential liabilities under state and Federal environmental
laws.
Legislation and Regulatory Changes
Legislation and regulations may be enacted which increase the cost of doing
business, limit or expand permissible activities, or affect the competitive
balance between banks and other financial services providers. Proposals to
change the laws and regulations governing the operations and taxation of banks,
bank holding companies, and other financial institutions are frequently made in
Congress and before various bank regulatory agencies. No prediction can be made
as to the likelihood of any major changes or the impact such changes might have
on the Company and the Bank.
Effect of Government Monetary Policies
The earnings of the Company are and will be affected by domestic economic
conditions and the monetary and fiscal policies of the United States government
and its agencies. The FRB has had, and will likely continue to have, an
important impact on the operating results of commercial banks through its power
to implement national monetary policy in order, among other things, to curb
inflation or combat a recession. The FRB has a major effect upon the levels of
bank loans, investments and deposits through its open market operations in
United States government securities and through its regulation of, among other
things, the discount rate on borrowings of member banks and the reserve
requirements against member banks' deposits. It is not possible to predict the
nature and impact of future changes in monetary and fiscal policies.
Employees
At December 31, 2002, the Company employed 316 full-time employees and 28
part-time employees.
Statistical Disclosure
The Company's statistical disclosure information, required of bank holding
companies, is contained in "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations," which is set forth in Item 7 of
this report.
6
Availability of SEC Reports
The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed by the
Company with the SEC are available, without charge, via a link to "Investor
News" from the Company's Internet web site, "http://www.ynbonline.com" as soon
as reasonably practicable after such materials are filed with the SEC. The
Company's Internet web site and the information contained in or connected with
that web site are not intended to be incorporated by reference into this report.
Risk Factors
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Annual
Report on Form 10-K and other materials filed by the Company with the Securities
and Exchange Commission (as well as information included in oral statements or
other written statements made or to be made by the Company) contain statements
that are forward-looking. These may include statements that relate to, among
other things, profitability, liquidity, loan loss reserve adequacy, plans for
growth, interest rate sensitivity, market risk, regulatory compliance, and
financial and other goals. Although the Company believes that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, it can give no assurance that its expectations will be achieved. As
forward-looking statements, these statements involve risks, uncertainties and
other factors that could cause actual results to differ materially from the
expected results and, accordingly, such results may differ from those expressed
in any forward-looking statements made by, or on behalf of, the Company. Factors
that could cause actual results to differ materially from management's current
expectations include, 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;
- adverse changes in the market price of our common stock;
- compliance with laws, regulatory requirements and Nasdaq standards;
- other factors, including those matters discussed in additional
detail below; and
- other risks and uncertainties detailed from time to time in our
filings with the SEC.
The Company assumes no obligation to update or supplement forward-looking
statements that become untrue because of subsequent events.
The following is a discussion of certain significant risk factors that could
potentially negatively impact our financial condition and results of operations.
We may not be able to continue to grow our business, which may adversely impact
our results of operations.
During the last five years, our total assets have grown substantially from
$757.7 million at December 31, 1998 to $2.2 billion at December 31, 2002. Our
business strategy calls for continued expansion, but we do not anticipate growth
to continue at this rate. Our ability to continue to grow depends, in part, upon
our ability to open new branch locations, successfully attract deposits to
existing and new branches and identify favorable loan and investment
opportunities. In the event that we do not continue to grow, our results of
operations could be adversely impacted.
7
We may not be able to manage our growth, which may adversely impact our
financial results.
As part of our expansion strategy, we plan to open new branches in our existing
and target markets. However, we may be unable to identify attractive locations
on terms favorable to us or to hire qualified management to operate the new
branches, and the organizational and overhead costs may be greater than we
anticipated. In addition, we may not be able to obtain the regulatory approvals
necessary to open new branches. The new branches may take longer than expected
to reach profitability, and we cannot assure you they will become profitable.
The additional costs of starting new branches may adversely impact our financial
results.
Our ability to manage growth successfully will depend on whether we can continue
to fund this growth while maintaining cost controls and asset quality, as well
as on factors beyond our control, such as national and regional economic
conditions and interest rate trends. If we are not able to control costs and
maintain asset quality, such growth could adversely impact our earnings and
financial condition.
We may not be able to successfully integrate future acquisitions, which may
adversely affect our business.
We intend to consider future strategic acquisitions, some of which could be
material to us and which may include companies that are substantially equivalent
or larger in size compared to us. We continually explore and conduct discussions
with third parties regarding possible acquisitions. As of the date of this
report, we have not entered into any definitive agreement and we do not have any
definitive plans relating to any specific acquisitions.
We will have to integrate any acquisitions into our business. The difficulties
of combining the operations, technologies and personnel of companies we acquire
include coordinating and integrating geographically separated organizations and
integrating personnel with diverse business backgrounds. We may not be able to
effectively manage or integrate the acquired companies. Further, we may not be
successful in implementing appropriate operational, financial and management
systems and controls to achieve the benefits expected to result from these
acquisitions. Our efforts to integrate these businesses could be affected by a
number of factors beyond our control, such as regulatory developments, general
economic conditions and increased competition. In addition, the process of
integrating these businesses could cause an interruption of, or loss of momentum
in, the activities of our existing business and the loss of key personnel and
customers. The diversion of management's attention and any delays or
difficulties encountered in connection with the transition and integration of
these businesses could negatively impact our business and results of operations
if any of the above adverse effects were to occur. Further, the benefits that we
anticipate from these acquisitions may not be obtained.
Loss of our key personnel or an inability to hire and retain qualified personnel
could adversely affect our business.
Our future operating results are substantially dependent on the continued
service of Patrick M. Ryan, our President and Chief Executive Officer, Jay G.
Destribats, our Chairman of the Board, and other key personnel. The loss of the
services of Mr. Ryan would have a negative impact on our business because of his
lending expertise and years of industry experience. In addition, the loss of the
services of Mr. Ryan or Mr. Destribats could have a negative impact on our
business because of their business development skills and community involvement.
Our success also depends on the experience of our branch managers and our
lending officers and on their relationships with the communities they serve. The
loss of these or other key persons could negatively impact our banking
operations. Although we have employment agreements with Mr. Ryan, Mr. Destribats
and our other key personnel, our employees may voluntarily terminate their
employment at any time. We cannot assure you that we will be able to retain our
key personnel or attract the qualified personnel necessary for the management of
our business.
8
Our exposure to credit risk, because we focus on commercial lending, could
adversely affect our earnings and financial condition.
There are certain risks inherent in making loans. These risks include interest
rate changes over the time period in which loans may be repaid, risks resulting
from changes in the economy, risks inherent in dealing with borrowers and, in
the case of a loan backed by collateral, risks resulting from uncertainties
about the future value of the collateral.
Commercial loans are generally viewed as having a higher credit risk than
residential real estate or consumer loans because they usually involve larger
loan balances to a single borrower and are more susceptible to a risk of default
during an economic downturn. Commercial and industrial loans and commercial real
estate loans, which comprise our commercial loan portfolio, were 79.1% of our
total loan portfolio at December 31, 2002. Construction loans, which are
included as part of our commercial real estate loans, were 10.1% of our total
loan portfolio at December 31, 2002. Construction financing typically involves a
higher degree of credit risk than commercial mortgage lending. Risk of loss on a
construction loan depends largely on the accuracy of the initial estimate of the
property's value at completion of construction compared to the estimated cost
(including interest) of construction. If the estimated property value proves to
be inaccurate, the loan may be undersecured.
Because our loan portfolio contains a significant number of commercial real
estate loans and commercial and industrial loans with relatively large balances,
the deterioration of one or a few of these loans may cause a significant
increase in nonperforming loans. An increase in nonperforming loans could cause
an increase in the provision for loan losses and an increase in loan
charge offs, which could adversely impact our results of operations and
financial condition.
The allowance for loan losses at December 31, 2002, totaled $16.8 million, or
1.41% of total loans, covering 268.1% of total non performing loans. This
compares to the allowance for loan losses at December 31, 2001, of $13.5
million, or 1.34% of total loans, covering 264.2% of total non performing loans.
The increase in the allowance for loan losses to total loans in 2002 is
primarily attributable to growth in the loan portfolio. As our loan portfolio
increases, and in particular our commercial real estate loan and commercial and
industrial loan portfolios continue to grow, we would expect further increases
in our provision for loan losses and corresponding increases in our allowance
for loan losses.
If our allowance for loan losses is not sufficient to cover actual loan losses,
our earnings would decrease.
In an attempt to mitigate any loan losses which we may incur, we maintain an
allowance for loan losses based on, among other things, national and regional
economic conditions and historical loss experience and delinquency trends among
loan types. However, we cannot predict loan losses with certainty and we cannot
assure you that charge offs in future periods will not exceed the allowance for
loan losses. In addition, regulatory agencies, as an integral part of their
examination process, review our allowance for loan losses and may require
additions to the allowance based on their judgment about information available
to them at the time of their examination. Factors that require an increase in
our allowance for loan losses could reduce our earnings.
Changes in interest rates may adversely affect our earnings and financial
condition.
Our net income depends primarily upon our net interest income. Net interest
income is the difference between interest income earned on loans, investments
and other interest-earning assets and the interest expense incurred on deposits
and borrowed funds.
Different types of assets and liabilities may react differently, and at
different times, to changes in market interest rates. We expect that we will
periodically experience "gaps" in the interest rate sensitivities of our assets
and liabilities. That means either our interest-bearing liabilities will be more
sensitive to changes in market interest rates than our interest-earning assets,
or vice versa. When interest-bearing liabilities mature or reprice more quickly
than interest-earning assets, an increase in market rates of interest could
reduce our net interest income. Likewise, when interest-earning assets mature or
reprice more quickly than interest-bearing liabilities, falling interest rates
could reduce our net interest income. We are unable to predict changes in market
interest rates, which are affected by many factors beyond our control, including
inflation, recession, unemployment, money supply, domestic and international
events and changes in the United States and other financial markets.
9
We use an Investment Growth Strategy to increase net interest income by
purchasing securities with borrowed funds. Although this Investment Growth
Strategy has minimal credit risk, it does increase our overall interest rate
risk. We attempt to manage risk from changes in market interest rates, in part,
by controlling the mix of interest rate sensitive assets and interest rate
sensitive liabilities. However, interest rate risk management techniques are not
exact. A rapid increase or decrease in interest rates could adversely affect our
results of operations and financial performance.
Adverse economic and business conditions in our market area may have an adverse
effect on our earnings.
Substantially all of our business is with customers located within Mercer County
and contiguous counties. Generally, we make loans to small to mid-sized
businesses most of whose success depends on the regional economy. These
businesses generally have fewer financial resources in terms of capital or
borrowing capacity than larger entities. Adverse economic and business
conditions in our market area could reduce our growth rate, affect our borrowers
ability to repay their loans and, consequently, adversely affect our financial
condition and performance. Further, we place substantial reliance on real estate
as collateral for our loan portfolio. A sharp downturn in real estate values in
our market area could leave many of our loans undersecured. If we are required
to liquidate the collateral to satisfy the debt securing a loan during a period
of reduced real estate values, our earnings could be adversely affected.
Competition from other financial institutions in originating loans and
attracting deposits may adversely affect our profitability.
We face substantial competition in originating loans. This competition comes
principally from other banks, savings institutions, mortgage banking companies
and other lenders. Many of our competitors enjoy advantages, including greater
financial resources and higher lending limits, a wider geographic presence, more
accessible branch office locations, the ability to offer a wider array of
services or more favorable pricing alternatives, as well as lower origination
and operating costs. This competition could reduce our net income by decreasing
the number and size of loans that we originate and the interest rates we may
charge on these loans.
In attracting deposits, we face substantial competition from other insured
depository institutions such as banks, savings institutions and credit unions,
as well as institutions offering uninsured investment alternatives, including
money market funds. Many of our competitors enjoy advantages, including greater
financial resources, more aggressive marketing campaigns and better brand
recognition and more branch locations. These competitors may offer higher
interest rates than we do, which could decrease the deposits that we attract or
require us to increase our rates to retain existing deposits or attract new
deposits. Increased deposit competition could adversely affect our ability to
generate the funds necessary for lending operations which would increase our
cost of funds.
We also compete with non-bank providers of financial services, such as brokerage
firms, consumer finance companies, insurance companies and governmental
organizations which may offer more favorable terms. Some of our non-bank
competitors are not subject to the same extensive regulations that govern our
operations. As a result, such non-bank competitors may have advantages over us
in providing certain products and services. This competition may reduce or limit
our margins on banking services, reduce our market share and adversely affect
our earnings and financial condition.
10
We continually encounter technological change, and we may have fewer resources
than many of our competitors to continue to invest in technological
improvements, which could reduce our ability to effectively compete.
The financial services industry is undergoing rapid technological changes with
frequent introduction of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend, in part, upon our ability to address the needs of our
customers by using technology to provide products and services to enhance
customer convenience, as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to
invest in technological improvements. We cannot assure you that we will be able
to effectively implement new technology-driven products and services, which
could reduce our ability to effectively compete.
Our hardware and software systems are vulnerable to damage that could harm our
business.
We rely upon our existing information systems for operating and monitoring all
major aspects of our business, including deposit and loan information, as well
as various internal management functions. These systems and our operations are
vulnerable to damage or interruption from natural disasters, power loss, network
failure, improper operation by our employees, security breaches, computer
viruses or intentional attacks by third parties. Any disruption in the operation
of our information systems could adversely impact our operations, which may
affect our results of operations and financial condition.
Government regulation significantly affects our business.
The banking industry is extensively regulated. Banking regulations are intended
primarily to protect depositors, consumers and the Federal deposit insurance
funds, not stockholders. We are subject to regulation and supervision by the
Board of Governors of the Federal Reserve System. The Yardville National Bank is
subject to regulation and supervision by the Office of the Comptroller of the
Currency. Regulatory requirements affect our lending practices, capital
structure, investment practices, dividend policy and growth. The bank regulatory
agencies possess broad authority to prevent or remedy unsafe or unsound
practices or violations of law. We are subject to various regulatory capital
requirements, which involve both quantitative measures of our assets and
liabilities and qualitative judgments by regulators regarding risks and other
factors. Failure to meet minimum capital requirements or comply with other
regulations could result in actions by regulators that could adversely affect
our ability to pay dividends or otherwise adversely impact operations. In
addition, changes in laws, regulations and regulatory practices affecting the
banking industry may limit the manner in which we may conduct our business. Such
changes may adversely affect us, including our ability to offer new products and
services, obtain financing, attract deposits, make loans and achieve
satisfactory spreads and impose additional costs on us. As a public company, we
are also subject to the corporate governance standards set forth in the recently
enacted Sarbanes-Oxley Act of 2002, as well as any rules or regulations
promulgated by the SEC or The Nasdaq Stock Market, Inc.
In addition to laws and regulations affecting our banking business, compliance
with other laws, regulatory requirements and Nasdaq standards imposes
administrative costs and burdens on us. We have not been in full compliance with
certain of these laws, regulatory requirements and Nasdaq standards in the past.
Upon learning of our non-compliance, we promptly commenced steps to address
these issues and expect to complete these steps in the near future. These issues
involved SEC registration and information distribution requirements for our
employees' savings plan and shareholder dividend reinvestment and stock purchase
plan and Nasdaq shareholder approval requirements for certain non-employee
director stock options. We believe the stock option issue will not have an
impact on the listing of our common stock on Nasdaq. While it is possible that
we may have liability based on these legal, regulatory and Nasdaq requirements,
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. If
the market price of our common stock declines significantly before we can
complete certain of the steps necessary to address these issues, we may have
liabilities or claims, if asserted, that could have a material adverse effect on
our financial condition and results of operations.
11
Item 2. Properties
As of March 31, 2003 the Company and the Bank were conducting their business
through 19 banking branches and an operations center. The Bank has received
permission from the OCC to open a branch in Somerset County, New Jersey. This
branch is expected to open in the second quarter of 2003.
The executive offices for the Company and the Bank are located at 2465 Kuser
Road, Hamilton, New Jersey (also the location of one of our bank branches). The
Bank leases the offices at this location pursuant to a lease that commenced in
October 1999, has an initial term of 14 years ending in 2013, and is renewable
for two additional five-year periods thereafter. The monthly rental payments
under the lease are $54,750 during the first five years of the lease.
Thereafter, the monthly rental will be adjusted every five years in accordance
with a formula based on the Consumer Price Index, provided that the monthly
rental payment for any lease period may not vary by more than 3% from the
monthly rental payment in the immediately preceding lease period. The Bank has
the option to purchase the property at any time after the fifth year of the
lease at a purchase price equal to the fair market value of the property at the
time the option is exercised.
Of the 19 banking branches, five of the buildings and the land on which they are
located are owned and 14 buildings and the land on which they are located are
leased. The operations center and the land on which it is located is leased. The
branch expected to be opened in the second quarter of 2003 in Somerset County is
expected to be a leased facility.
Item 3. Legal Proceedings
The Company and the Bank are party, in the ordinary course of business, to
litigation involving collection matters, contract claims and other miscellaneous
causes of action arising from their business. Management does not consider that
any such proceedings depart from usual routine litigation, and in its judgment,
the Company's consolidated financial position or results of operations will not
be affected materially by the final outcome of any pending legal proceedings.
Item 4. Submission of Matters To A Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2002.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters
Market Information
The common stock is traded in The Nasdaq Stock Market, Inc.'s National Market
under the symbol YANB. The following table shows the high and low closing sales
prices of the common stock in the The Nasdaq Stock Market, Inc.'s National
Market during 2001 and 2002.
Year Ended December 31, 2001: High Low
- ----------------------------- ---- ---
First Quarter......................... $14.25 $12.06
Second Quarter........................ 14.45 13.56
Third Quarter......................... 14.10 11.00
Fourth Quarter........................ 12.80 10.96
Year Ended December 31, 2002:
- -----------------------------
First Quarter......................... $13.45 $12.25
Second Quarter........................ 19.94 12.89
Third Quarter......................... 21.20 16.05
Fourth Quarter........................ 19.05 16.35
12
Holders
As of December 31, 2002, the Company had approximately 677 holders of record of
the common stock.
Dividends
In 2001, the Company paid four quarterly cash dividends on the common stock in
the aggregate amount of $3.3 million. In 2002, the Company paid four quarterly
cash dividends on the common stock in the aggregate amount of $3.5 million.
Dividends paid per share in 2002 totaled $0.44. Cash dividends are generally
paid quarterly or four times a year. In the first quarter of 2003, the Company
paid a cash dividend in the amount of $.115 per share on the common stock.
Because substantially all of the funds available for the payment of cash
dividends are derived from the Bank, future cash dividends will depend primarily
upon the Bank's earnings, financial condition, need for funds, and government
policies and regulations applicable to both the Bank and the Company. As of
December 31, 2002, the net profits of the Bank available for distribution to the
Company as dividends without regulatory approval were approximately $14.3
million. The Company expects to pay quarterly cash dividends for the remaining
three quarters in 2003 to holders of common stock, subject to the conditions
described above.
Item 6. Selected Financial Data
The following table sets forth certain historical financial data with respect to
Yardville National Bancorp and subsidiaries on a consolidated basis. This table
should be read in conjunction with the consolidated financial statements and
related notes thereto included in this Annual Report. All share and per share
data have been restated to reflect the 2.5% stock dividend declared in March
1998.
At or for the year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME
(in thousands)
Interest income $ 120,145 $ 118,948 $ 100,389 $ 69,719 $ 50,923
Interest expense 73,662 82,813 62,654 39,645 28,392
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 46,483 36,135 37,735 30,074 22,531
Provision for loan losses 4,375 3,925 3,700 3,175 1,975
Securities gains (losses), net 3,084 3,182 46 (301) 151
Other non-interest income 5,220 4,855 3,380 3,066 2,851
Non-interest expense 31,044 29,052 22,861 18,457 15,337
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense $ 19,368 $ 11,195 $ 14,600 $ 11,207 $ 8,221
Income tax expense 5,364 2,642 4,259 3,187 2,639
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 14,004 $ 8,553 $ 10,341 $ 8,020 $ 5,582
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
(in thousands, except per share data)
Assets $2,231,458 $1,943,389 $1,619,312 $1,123,598 $ 757,666
Loans 1,195,143 1,007,973 818,289 646,737 491,649
Securities 875,355 812,236 675,638 417,465 221,688
Deposits 1,272,286 1,092,690 950,318 743,807 519,643
Borrowed funds 757,711 707,113 545,223 298,689 177,888
Stockholders' equity 145,939 93,245 78,237 58,825 40,756
Allowance for loan losses 16,821 13,542 10,934 8,965 6,768
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net income - basic $ 1.72 $ 1.13 $ 1.47 $ 1.33 $ 1.11
Net income - diluted 1.68 1.11 1.47 1.33 1.10
Cash dividends 0.44 0.44 0.40 0.34 0.29
Stockholders' equity (book value) 14.08 11.68 10.64 8.88 8.20
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Average shares outstanding - basic 8,124 7,601 7,022 6,015 5,017
Average shares outstanding - diluted 8,319 7,678 7,039 6,041 5,059
====================================================================================================================================
At or for the year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average assets 0.67% 0.48% 0.79% 0.83% 0.82%
Return on average stockholders' equity 13.45 9.86 15.64 15.34 13.96
Net interest margin (tax equivalent basis) 2.36 2.17 3.07 3.33 3.55
Efficiency ratio 56.66 65.77 55.54 56.20 60.07
Total loans to total assets 53.56 51.87 50.53 57.56 64.89
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL RATIOS
Average stockholders' equity to average assets 4.97% 4.85% 5.05% 5.39% 5.84%
Dividend payout ratio 25.32 39.06 27.46 25.40 25.96
Tier I leverage ratio 8.16 6.92 8.13 7.90 7.68
Tier I capital as a percent of risk-weighted assets 11.84 10.03 10.56 10.26 9.91
Total capital as a percent of risk-weighted assets 13.00 11.25 11.65 11.46 11.17
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS
Allowance for loan losses to total loans 1.41% 1.34% 1.34% 1.39% 1.38%
Net loan charge offs to average total loans 0.10 0.15 0.24 0.17 0.18
Nonperforming loans to total loans 0.52 0.51 0.86 0.48 0.79
Nonperforming assets to total loans
and other real estate owned 0.61 0.74 1.11 0.87 1.78
Nonperforming assets to total assets 0.33 0.38 0.56 0.50 1.17
Allowance for loan losses to nonperforming assets 229.73 181.67 120.50 158.31 76.65
Allowance for loan losses to nonperforming loans 268.11 264.23 155.47 291.26 174.75
====================================================================================================================================
FORWARD-LOOKING STATEMENTS
This Annual Report contains express and implied statements relating to our
future financial condition, results of operations, plans, objectives,
performance, and business, which are considered forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These may include statements that relate to, among other things, profitability,
liquidity, loan loss reserve adequacy, plans for growth, interest rate
sensitivity, market risk, regulatory compliance, and financial and other goals.
Although we believe that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, we can give no assurance that
our expectations will be achieved. Actual results may differ materially from
those expected or implied as a result of certain risks and uncertainties,
including, but not limited to, 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, adverse changes
in the market price of our common stock, compliance with laws, regulatory
requirements and Nasdaq standards, and other risks and uncertainties detailed
from time to time in our filings with the SEC.
The Company assumes no obligation to update or supplement forward-looking
statements that become untrue because of subsequent events.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
This discussion should be read in conjunction with the consolidated financial
statements, notes and tables included elsewhere in this report. Throughout this
report the terms "YNB," "company," "we," "us," "our," and "corporation" refer to
Yardville National Bancorp, our wholly owned banking subsidiary The Yardville
National Bank (the "Bank") and other wholly owned subsidiaries as a consolidated
entity. The purpose of this discussion and analysis is to assist in the
understanding and the evaluation of the financial condition, changes in
financial condition and results of our operations.
2002 OVERVIEW
The rebound of our profitability in 2002 was primarily due to the significant
increase in our net interest income. The reduction in our cost of liabilities,
and continued strong loan and deposit growth in 2002 resulted in a 63.7%
increase in net income.
Loans and deposits grew 18.6% and 16.4%, respectively, this past year. Our
strong philosophy of relationship banking has contributed to the growth in YNB's
asset base, which totaled $2.2 billion at December 31, 2002.
Our goals are to further develop the earnings power of YNB's branches and
increase the value of our franchise. In 2002, we continued our retail expansion,
opening three new branches in the demographically strong markets of Hunterdon
and Middlesex Counties in New Jersey. We also expect to open our first branch in
attractive Somerset County, New Jersey in 2003.
To support the strong growth experienced and continued growth plans, we
raised additional equity capital in the last quarter of 2002. A common stock
offering, completed in December, raised net new capital of $34.3 million and
will support our ongoing expansion.
SUMMARY OF FINANCIAL RESULTS
YNB earned net income of $14.0 million or $1.68 per diluted share for the year
ended December 31, 2002, compared to $8.6 million or $1.11 for the year ended
December 31, 2001. This represents an increase of 63.7% and 51.4%, respectively,
in 2002. We posted net income of $10.3 million or $1.47 per diluted share in
2000. The improvement in net income of $5.4 million in 2002 was driven by an
increase of $10.3 million in net interest income. The improvement in net
interest income was primarily the result of the reduction in our cost of funds
and continued strong commercial loan growth.
YNB's cost of liabilities declined $9.1 million in 2002 from 2001.
Certificates of deposit (CDs), which represented 54.2% of our total deposit base
at December 31, 2001, repriced 224 basis points lower during 2002 reducing the
cost of those funds from 5.95% in 2001 to 3.71% in 2002. Total loans outstanding
increased 18.6% reaching a record level of $1.2 billion at December 31, 2002.
Interest and fees on loans increased $5.0 million from $70.4 million in 2001 to
$75.4 million in 2002. Overall loan quality remained strong as nonperforming
assets to total assets decreased to 0.33% in 2002.
Earnings per share, on a diluted basis, increased for the same reasons
previously discussed. Due principally to the higher average shares outstanding
related to the full impact of the private equity placement completed in August
2001 the percentage increase in diluted earnings per share in 2002 was less than
net income.
The key profitability ratios of Return on Average Assets (ROA) and Return on
Average Stockholders' Equity (ROE) rebounded in 2002 as well. Our ROA increased
to 0.67% from 0.48% in 2001 while ROE increased to 13.45% in 2002 from 9.86% in
2001. We expect that the implementation of our retail strategy, described in
this Annual Report, which is designed to further lower our cost of funds and
build non-interest income, should begin to move our ROA higher in the future.
Conversely, the issuance of 2.3 million common shares from our public common
stock offering in late 2002 will have a negative impact on our ROE and earnings
per share measurements in 2003. As the new capital is put to work over time, we
expect ROE to return to levels experienced previously. Our higher level of net
interest income also had a positive impact on YNB's efficiency ratio, which
declined to 56.66% in 2002 from 65.77% in 2001.
NET INTEREST INCOME
Net interest income is the largest and most significant component of our
operating income. Net interest income is the difference between income on
interest earning assets and expense on interest bearing liabilities. This
component represented 93.5% of YNB's revenues in 2002. Net interest income
depends upon the relative amount and mix of interest earning assets and interest
bearing liabilities, and the interest rate earned or paid on them. Net interest
income is also impacted by changes in interest rates and the shape of market
yield curves. Our goal is to optimize net interest income performance in varying
interest rate environments.
The following tables set forth our consolidated average balances of assets
and liabilities and the related yields and costs for the years ended December
31, 2002, 2001, 2000, 1999 and 1998. Average yields for each year are derived by
dividing income by the average balance of the related assets and average costs
are derived by dividing expense by the average balance of the related
liabilities. The yields and costs include fees, costs, premiums and discounts,
which are considered adjustments to interest rates.
AVERAGE BALANCES, YIELDS AND COSTS
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(in thousands) Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Deposits with other banks $ 2,887 $ 60 2.08% $ 3,816 $ 171 4.48%
Federal funds sold 71,415 1,157 1.62 74,624 2,765 3.71
Securities 865,070 43,533 5.03 747,172 45,604 6.10
Loans (1) 1,085,306 75,395 6.95 891,957 70,408 7.89
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $2,024,678 $ 120,145 5.93% $1,717,569 $ 118,948 6.93%
- ------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EARNING ASSETS:
Cash and due from banks $ 22,965 $ 21,026
Allowance for loan losses (14,771) (11,583)
Premises and equipment, net 11,363 10,081
Other assets 51,198 52,288
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest earning assets 70,755 71,812
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $2,095,433 $1,789,381
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets,
and interest bearing demand $ 469,985 $ 11,228 2.39% $ 318,595 $ 9,931 3.12%
Certificates of deposit of
$100,000 or more 148,119 5,184 3.50 129,340 7,581 5.86
Other time deposits 469,858 17,747 3.78 453,747 27,085 5.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 1,087,962 34,159 3.14 901,682 44,597 4.95
Borrowed funds 735,201 36,403 4.95 644,690 35,264 5.47
Trust preferred securities 32,500 3,100 9.54 31,048 2,952 9.51
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $1,855,663 $ 73,662 3.97% $1,577,420 $ 82,813 5.25%
- ------------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST BEARING LIABILITIES:
Demand deposits $ 118,154 $ 104,577
Other liabilities 17,493 20,617
Stockholders' equity 104,123 86,767
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest bearing
liabilities and stockholders' equity $ 239,770 $ 211,961
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,095,433 $1,789,381
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate spread (2) 1.96% 1.68%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and margin (3) $ 46,483 2.30% $ 36,135 2.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income and margin
(tax equivalent basis) (4) $ 47,728 2.36% $ 37,197 2.17%
====================================================================================================================================
(1) Loan origination fees are considered an adjustment to interest income. For
the purpose of calculating loan yields, average loan balances include
nonaccrual loans with no related interest income.
(2) The interest rate spread is the difference between the average yield on
interest earning assets and the average rate paid on interest bearing
liabilities.
(3) The net interest margin is equal to net interest income divided by average
interest earning assets.
(4) In order to present pre-tax income and resultant yields on tax exempt
investments and loans on a basis comparable to those on taxable investments
and loans, a tax equivalent adjustment is made to interest income. The tax
equivalent adjustment has been computed using a Federal income tax rate of
34% and has the effect of increasing interest income by $1,245,000,
$1,062,000, $921,000, $712,000, and $419,000 for the years ended December
31, 2002, 2001, 2000, 1999, and 1998, respectively.
AVERAGE BALANCES, YIELDS AND COSTS (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1,322 $ 82 6.20% $ 734 $ 45 6.13% $ 3,365 $ 175 5.20%
37,961 2,454 6.46 17,932 904 5.04 6,180 333 5.39
494,439 33,435 6.76 341,135 21,216 6.22 198,890 12,197 6.13
723,570 64,418 8.90 564,552 47,554 8.42 438,050 38,218 8.72
- ------------------------------------------------------------------------------------------------------------------------------------
$1,257,292 $ 100,389 7.98% $ 924,353 $ 69,719 7.54% $ 646,485 $ 50,923 7.88%
- ------------------------------------------------------------------------------------------------------------------------------------
$ 18,307 $ 16,208 $ 15,398
(9,798) (7,638) (6,102)
9,303 7,493 5,786
32,944 29,109 22,599
- ------------------------------------------------------------------------------------------------------------------------------------
50,756 45,172 37,681
- ------------------------------------------------------------------------------------------------------------------------------------
$1,308,048 $ 969,525 $ 684,166
- ------------------------------------------------------------------------------------------------------------------------------------
$ 233,012 $ 7,937 3.41% $ 185,504 $ 4,887 2.63% $ 165,534 $ 5,034 3.04%
106,851 6,918 6.47 51,290 2,643 5.15 25,550 1,386 5.42
408,414 24,772 6.07 320,809 17,528 5.46 211,790 12,152 5.74
- ------------------------------------------------------------------------------------------------------------------------------------
748,277 39,627 5.30 557,603 25,058 4.49 402,874 18,572 4.61
367,021 21,219 5.78 256,957 13,523 5.26 158,106 8,756 5.54
19,333 1,808 9.35 11,500 1,064 9.25 11,500 1,064 9.25
- ------------------------------------------------------------------------------------------------------------------------------------
$1,134,631 $ 62,654 5.52% $ 826,060 $ 39,645 4.80% $ 572,480 $ 28,392 4.96%
- ------------------------------------------------------------------------------------------------------------------------------------
$ 96,024 $ 81,843 $ 66,857
11,284 9,351 4,857
66,109 52,271 39,972
- ------------------------------------------------------------------------------------------------------------------------------------
$ 173,417 $ 143,465 $ 111,686
- ------------------------------------------------------------------------------------------------------------------------------------
$1,308,048 $ 969,525 $ 684,166
- ------------------------------------------------------------------------------------------------------------------------------------
2.46% 2.74% 2.92%
- ------------------------------------------------------------------------------------------------------------------------------------
$ 37,735 3.00% $ 30,074 3.25% $ 22,531 3.49%
- ------------------------------------------------------------------------------------------------------------------------------------
$ 38,656 3.07% $ 30,786 3.33% $ 22,950 3.55%
====================================================================================================================================
Changes in net interest income and margin result from the interaction between
the volume and composition of interest earning assets, interest bearing
liabilities, related yields, and associated funding costs. The following table
demonstrates the impact on net interest income of changes in the volume of
interest earning assets and interest bearing liabilities and changes in interest
rates earned and paid.
- ------------------------------------------------------------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS
2002 vs. 2001 2001 vs. 2000
Increase (Decrease) Increase (Decrease)
Due to changes in: Due to changes in:
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Deposits with other banks $ (35) $ (76) $ (111) $ 117 $ (28) $ 89
Federal funds sold (114) (1,494) (1,608) 1,665 (1,354) 311
Securities 6,591 (8,662) (2,071) 15,600 (3,431) 12,169
Loans (1) 14,040 (9,053) 4,987 13,852 (7,862) 5,990
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 20,482 (19,285) 1,197 31,234 (12,675) 18,559
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets, and interest
bearing demand 3,986 (2,689) 1,297 2,738 (744) 1,994
Certificates of deposit of
$100,000 or more 982 (3,379) (2,397) 1,358 (695) 663
Other time deposits 930 (10,268) (9,338) 2,725 (412) 2,313
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 5,898 (16,336) (10,438) 6,821 (1,851) 4,970
Borrowed funds 4,677 (3,538) 1,139 15,240 (1,195) 14,045
Trust preferred securities 139 9 148 1,113 31 1,144
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 10,714 (19,865) (9,151) 23,174 (3,015) 20,159
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 9,768 $ 580 $ 10,348 $ 8,060 $ (9,660) $ (1,600)
====================================================================================================================================
(1) Loan origination fees are considered adjustments to interest income.
Net interest income totaled $46.5 million in 2002, an increase of $10.4
million or 28.6% from net interest income of $36.1 million in 2001. The prior
year's decrease was 4.2% from 2000's net interest income of $37.7 million. The
principal factor contributing to the increase in net interest income in 2002 was
a decrease in interest expense of $9.1 million resulting from a lower cost of
128 basis points on interest bearing liabilities, and to a lesser extent, the
change in composition of our deposit base and the increased volumes of loans and
securities.
In 2002, the interest rate spread increased 28 basis points and the net
interest margin on a tax equivalent basis increased 19 basis points to 2.36%.
In 2001, the net interest spread declined 78 basis points and the net interest
margin declined 90 basis points to 2.17% from 3.07% in 2000.
Interest income for the year ended December 31, 2002 increased to $120.1
million, compared to $118.9 million for the year ended December 31, 2001 and
$100.4 million for the year ended December 31, 2000. Average interest earning
assets increased by $307.1 million or 17.9% to $2.0 billion for 2002 compared to
average interest earning assets of $1.7 billion and $1.3 billion in 2001 and
2000, respectively.
Due to the aggressive lowering of short-term interest rates in 2001 (Prime
rate declined 475 basis points) by the Federal Reserve and the low interest rate
environment that continued through 2002, the yield on interest earning assets
declined 100 basis points to 5.93% by year-end as compared to 2001. Led by
commercial loans, our average loan portfolio grew by 21.7% to $1.1 billion, with
loan yields averaging 6.95% in 2002 or 94 basis points lower than 2001. YNB's
floating rate commercial loans tied to the prime rate totaled approximately 46%
of the entire commercial portfolio at December 31, 2002. The average prime rate
decreased from 6.91% in 2001 to 4.68% in 2002 contributing to the decline in our
loan portfolio yield. Interest income on loans increased 7.1% due to the growth
shown above.
Although our average securities portfolio increased $117.9 million in 2002,
the decline in yield of 107 basis points caused interest income on securities to
decrease $2.1 million. During 2002, we implemented a strategy to reduce the
investment portfolio duration to better position our balance sheet for rising
interest rates. This action, while improving our longer-term interest rate risk
position (for further information see "Market Risk"), negatively impacted net
interest income and our net interest margin in 2002.
Interest expense was $73.7 million for 2002, a decrease of $9.1 million, or
11.1% from $82.8 million a year ago. Interest expense totaled $62.7 million in
2000. The decrease in interest expense in 2002 resulted primarily from lower
rates on all interest bearing deposits, and to a lesser extent, on borrowed
funds. Lower interest expense was partially offset by higher average balances on
all interest bearing liabilities. In December 2001, we retired $50.0 million in
Federal Home Loan Bank (FHLB) advances early. This transaction was designed to
reduce longer-term interest rate risk by repositioning a portion of our borrowed
funds portfolio, and also resulted in positive improvement to net interest
income and the net interest margin in 2002. Interest expense on these funds
declined approximately $1.2 million in 2002. Average interest bearing
liabilities rose $278.2 million or 17.6% to $1.9 billion for 2002 compared to
average interest bearing liabilities of $1.6 billion and $1.1 billion in 2001
and 2000, respectively. The average cost of total interest bearing liabilities
decreased 128 basis points to 3.97% in 2002 from 5.25% in 2001 and 5.52% in
2000.
Net interest income was $36.1 million in 2001, a decrease of 4.2% from the
$37.7 million reported in 2000. The principal factor contributing to the
decrease in net interest income in 2001 was an increase in interest expense of
$20.2 million resulting from increased borrowed funds and time deposit volumes.
In addition, the average rate paid on interest bearing liabilities did not
decline in proportion to yields on interest earning assets in the lower interest
rate environment of 2001 compared to 2000. This was partially offset by
increased volumes of loans and securities and the related interest income.
Other factors, such as the Investment Growth Strategy, the level of
nonaccrual loans, and the balance of non-interest bearing demand deposits have
impacted our net interest income and net interest margin.
We manage a portion of our investment portfolio with the primary objective of
enhancing return on average stockholders' equity and earnings per share. We
refer to this as our Investment Growth Strategy. The income from this strategy
has helped to offset the costs from the growth of our infrastructure and
enhanced total net interest income. In connection with this strategy, we utilize
asset liability simulation models to analyze risk and reward relationships in
different interest rate environments, based on the composition of investments in
the portfolio and our overall interest rate risk position. While this strategy
has minimal credit risk, it does increase our overall interest rate risk. The
amount of securities managed in the Investment Growth Strategy totaled $230.1
million at December 31, 2002, or 10.3% of our assets, and we have currently
capped the strategy at $380.0 million. The net interest margin was negatively
impacted by the Investment Growth Strategy by approximately 30 basis points in
2002, 35 basis points in 2001, and 52 basis points in 2000.
Effective credit management has resulted in relatively low levels of
nonaccrual loans. Nonaccrual loans totaled $5.1 million in 2002, an increase of
$1.5 million from the $3.6 million reported in 2001. Had such nonaccrual loans
been paid based upon original contract terms, we would have recognized
additional interest income of approximately $240,000 in 2002, $163,000 in 2001,
and $640,000 in 2000. Moreover, YNB's net interest margin would have been 0.01%
higher in 2002 and 2001, and 0.06% higher in 2000.
The targeting of small- to mid-size businesses and individuals who value
long-term relationships and personal service has led to success in acquiring
core business and personal checking accounts. Average non-interest bearing
demand deposits increased 13.0% to $118.2 million in 2002 from $104.6 million in
2001. Throughout the comparative periods, increases in average non-interest
bearing demand deposits have made a positive contribution to net interest income
and the net interest margin.
We are continuing our efforts to improve our net interest margin in 2003. The
low interest rate environment and higher than anticipated prepayment speeds on
mortgage-backed securities in the last quarter of 2002 negatively impacted the
investment portfolio yield by 50 basis points, which accounted for the slight
margin compression in the fourth quarter compared to the prior quarters in 2002.
We have implemented several strategies during 2002 and into 2003 designed to
increase net interest income and our net interest margin. Interest rate floors
were instituted on approximately 77% of our floating rate commercial loans in
2002, which should protect net interest income should rates continue to fall.
The investment portfolio has been repositioned to generate higher levels of net
interest income in what, we believe, will be a gradually increasing interest
rate environment in the second half of 2003. The greatest opportunity, however,
to enhance net interest income will be the successful implementation of our
retail strategy. The expansion of our branch network in new and existing
markets, the enhancement of our brand image and marketing of our products and
services is expected to reduce YNB's cost of funds and raise our net interest
margin over time.
NON-INTEREST INCOME
In 2002, non-interest income primarily consisted of service charges on deposit
accounts, net securities gains, earnings on Bank Owned Life Insurance (BOLI) and
other service fees. Non-interest income totaled $8.3 million in 2002 compared to
$8.0 million the prior year, an increase of $267,000 or 3.3%. The primary reason
for the improvement was service charges on deposit accounts, which increased
$346,000. Non-interest income in 2001 increased by $4.6 million, or 134.6% from
2000's total of $3.4 million. The increase for that period was due to higher
securities gains and an increase in earnings on BOLI.
The major components of non-interest income are presented in the following
table.
Year Ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Service charges
on deposit accounts $ 2,203 $ 1,857 $ 1,551
Securities gains, net 3,084 3,182 46
Earnings on Bank Owned
Life Insurance 1,678 1,784 822
Other service fees 1,145 990 822
Investment
and insurance fees 35 29 --
Gains on sales of
mortgages, net 8 14 10
Other non-interest income 151 181 175
- ----------------------------------------------------------------------
Total $ 8,304 $ 8,037 $ 3,426
======================================================================
Service charges on deposit accounts represent the largest single source of
core non-interest income. Service charges on deposit accounts increased to $2.2
million in 2002 compared to $1.9 million in 2001 and $1.6 million in 2000. The
increases were due principally to increased income from overdraft fees and to
additional branch locations generating a larger base of transaction accounts and
the related fee income. We have continued targeted marketing campaigns on lower
cost or interest free demand deposit accounts designed to lower our cost of
funds and generate additional service charge or fee income.
Net gains on the sale of securities totaled $3.1 million in 2002 compared to
net securities gains of $3.2 million and $46,000, respectively, in 2001 and
2000. In 2002, net gains resulted primarily from the sale of fixed rate 30-year
mortgage-backed securities, 30-year fixed rate trust preferred securities and
other securities with longer duration or extension risk. This strategy
restricted the improvement in our net interest margin during 2002 to achieve the
asset and liability objective of reducing longer-term interest rate risk in a
rising interest rate environment.
Earnings on BOLI totaled $1.7 million in 2002, a decrease of $105,000 or 5.9%
compared to $1.8 million in 2001. The modest decline in income was primarily due
to lower yields on the floating rate portion of BOLI assets we own. Income from
BOLI totaled $822,000 in 2000. In December 2002, we purchased an additional $7.5
million of BOLI assets, bringing our total investment in BOLI assets to
approximately $40.8 million. The purchase of BOLI assets in 2002 had little
impact on our liquidity position. As was the case with all of our BOLI asset
purchases, after the initial purchase there are no additional premiums paid on
these policies. BOLI assets offset the cost of deferred compensation plans and
reduce our overall effective tax rate.
We also generate non-interest income from a variety of fee-based services.
These include Second Check(R) fees, Automated Teller Machine (ATM) fees on
non-customers, cash management and other customer related service fees. Fee
schedules are reviewed annually to reflect our current costs and competitive
factors. Other service fees increased 15.7% to $1.1 million in 2002 from
$990,000 in 2001. Other service fees totaled $822,000 in 2000.
Other non-interest income is primarily composed of income derived from
mortgage servicing and safe deposit box rentals. Other non-interest income
totaled $151,000 in 2002, a decrease of $30,000 or 16.6% when compared to
$181,000 in 2001. Other non-interest income totaled $175,000 in 2000.
Non-interest income represented only 6.5% of our total revenues in 2002. As
part of our longer-term strategic objective of increasing non-interest income,
we have introduced several initiatives over the last few years and will continue
to do so. Started in 2001, YNB Financial Services, Inc. generated $35,000 in
investment and insurance fees in 2002 by offering a comprehensive array of
financial planning, investment, and insurance products to individual and
business customers through third party providers. In 2002, we introduced
enhanced Internet banking services, that include electronic bill payment.
Looking forward in 2003, we will be offering enhanced cash management services.
We anticipate these services, requested by our customers, will provide
additional non-interest income or increased non-interest bearing balances, which
would be expected to generate additional net interest income.
NON-INTEREST EXPENSE
Non-interest expense consists of salaries and employee benefits, occupancy,
equipment and all other operating expenses we incur. Non-interest expense
totaled $31.0 million in 2002, an increase of $2.0 million or 6.9%, compared to
$29.0 million in 2001. Non-interest expense in 2001 increased 27.1% from $22.9
million in 2000. The largest increases in non-interest expense in 2002 compared
to 2001 were primarily in salaries and employee benefits and occupancy expense.
In 2002, we early adopted Statement of Financial Accounting Standards Board
(FASB) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." This statement eliminated the
treatment of the early retirement of debt expense as an extraordinary item.
Consequently, the early retirement of debt expense of $2.2 million has been
reclassified as a non-interest expense for 2001. The increase in non-interest
expense was partially offset by the absence of early retirement of debt expense
in 2002.
The following table presents the major components of non-interest expense for
the years indicated.
Year ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Salaries and
employee benefits $ 17,890 $ 14,923 $ 11,632
Occupancy expense, net 3,507 2,817 2,404
Equipment expense 2,423 2,021 1,892
Marketing 1,104 957 1,144
Stationery and supplies 823 633 628
Communication and
postage 809 694 601
Outside services
and processing 595 400 269
Audit and
examination fees 570 501 396
Other real estate expenses 418 831 893
Attorneys' fees 258 238 257
Insurance (other) 205 152 156
FDIC insurance premium 200 180 161
Amortization of trust
preferred expenses 190 210 176
Early retirement
of debt expense -- 2,217 --
Other 2,052 2,278 2,252
- ----------------------------------------------------------------------
Total $ 31,044 $ 29,052 $ 22,861
======================================================================
Salaries and employee benefits, which represent the largest portion of
non-interest expense, increased $3.0 million or 19.9% to $17.9 million for the
year ended December 31, 2002 compared to $14.9 million for the same period in
2001. These expenses increased $3.3 million or 28.3% over 2000. The opening of
two branches and our northern regional headquarters office during 2002
contributed to the increase in salaries and employee benefits. Also, executive
management was
strengthened, and experienced retail, lending and administrative personnel were
hired as part of our strategic plan. Full time equivalent employees increased to
330 at December 31, 2002 from 293 at December 31, 2001. From these staffing
increases and in addition to annual merit increases, salaries rose approximately
$2.2 million or 19.8%. Employee benefit expense totaled $4.3 million, an
increase of $726,000, or 20.3% from 2001. Increases in benefits costs are
primarily related to higher health benefit costs on a broader employee base,
various payroll taxes, and our Employee Stock Ownership Plan (ESOP).
Salaries and employee benefits were $14.9 million in 2001, an increase of
28.3% from $11.6 million in 2000. The increase was primarily due to the addition
of new branch staffing, administrative staff and lending professionals. Rising
health benefit expenses, payroll taxes, and costs associated with executive
deferred compensation plans also contributed to the increase for the comparable
periods.
Salaries and employee benefits, as a percent of average assets, were 0.9% in
2002, 0.8% in 2001, and 0.9% in 2000, respectively.
Net occupancy expense increased $690,000 or 24.5% to $3.5 million in 2002
from $2.8 million in 2001. Total rent expense on leased properties increased
$546,000 and was the primary reason for the increase in occupancy expense in
2002. The increase in rent expense and other facility related expenses was due
to several factors. Occupancy expense in 2002 reflected a full year's rent
expense for our operations center relocated in the last quarter of 2001 and our
Bordentown branch opened in 2001. In addition, we opened two new branches in
Hunterdon County, including one in our regional headquarters, and our first
branch in Middlesex County in 2002.
The increase in occupancy expense in 2001 compared to 2000 was due primarily
to higher rent expense from new branches in Flemington, Lawrence and Bordentown
and normal rent increases on other leased branch properties, as well as the
relocation of our operations center into a new leased facility.
Occupancy expense as a percentage of average assets remained constant at 0.2%
in 2002, 2001, and 2000.
Equipment expense increased $402,000 or 19.9% to $2.4 million in 2002 from
$2.0 million in 2001. The increase in equipment expense was primarily due to
higher depreciation expense, costs related to equipment maintenance, and the
upgrade of technology to increase processing capacity, efficiency and service
levels. Expenses associated with our ATM machines also increased 21.7% in 2002.
The increase in equipment expenses in 2001 compared to 2000 was due to the same
factors. Investment in technology and equipment has allowed us to improve
service response time at our branches and further develop business and consumer
products and services.
Our expense base is reflective of a growing institution. Expenses such as
communication and postage, stationery and supplies have grown as the number of
facilities, phone lines and new accounts have increased. In 2003, we are
projecting additional expenses associated with the continuing implementation of
our retail strategy.
Marketing expenses increased by $147,000 or 15.4% in 2002 to $1.1 million,
compared to $957,000 in 2001. Marketing expenses were $1.1 million in 2000. We
continue focused marketing campaigns with the goal of attracting lower cost
deposits. We also continued our support of community activities in 2002.
Projected marketing expenses for 2003 are expected to increase as we further
develop our brand image and market our products and services in both new and
existing markets.
Other real estate (ORE) expenses decreased $413,000 to $418,000 in 2002 when
compared to 2001. More efficient management and the lower level of ORE
properties held in 2002 resulted in less expenses. ORE expenses for 2001
decreased $62,000 to $831,000 from $893,000 in 2000.
Other expenses include various professional fees, loan-related expenses and
other operating expenses. Other expenses totaled $2.1 million in 2002 compared
to $2.3 million in 2001 and 2000. The decrease in other expenses was primarily
due to cost containment programs initiated during the year.
Our ratio of non-interest expense to average assets decreased to 1.5% for
2002 compared to 1.6% in 2001 and 1.7% for 2000.
We continuously assess the efficiency of our operations, seeking ways to best
serve our customers while reducing operating costs. An important industry
productivity measure is the efficiency ratio. The efficiency ratio is calculated
by dividing total operating expenses by net interest income and other income. An
increase in the efficiency ratio can indicate that more resources are being
utilized to generate the same volume of income while a decrease would indicate a
more efficient use of resources. YNB's efficiency ratio decreased in 2002 to
56.66% compared to 65.77% in 2001, and 55.54% in 2000. The efficiency ratio
improved in 2002 as our net interest income increased. Excluding net securities
gains and the early retirement of debt expense, our efficiency ratio was 60.04%,
65.47% and 55.60% for 2002, 2001, and 2000, respectively. Further improvements
to the efficiency ratio depend on increases in net interest income, the level of
non-interest income and growth in non-interest expenses.
INCOME TAXES
The provision for income taxes, which is comprised of Federal and state income
taxes, was $5.4 million in 2002 compared to $2.6 million in 2001 and $4.3
million in 2000. For 2001, the income tax expense and effective tax rate reflect
the reclassification of early retirement of debt expense. The increase in tax
expense in 2002 resulted from higher taxable income and increased New Jersey
state taxes, partially offset by higher levels of tax-exempt income. In July
2002, the New Jersey Business Tax Reform Act was passed. This Act created an
alternative minimum assessment for companies that operate in New Jersey. The tax
was retroactive to January 1, 2002. The alternative minimum tax may be used to
offset future tax liabilities, and as such, a deferred tax asset of
approximately $400,000 was established for the excess of this tax over the
regular New Jersey corporate business tax. The provisions for income taxes for
2002, 2001, and 2000 were at effective tax rates of 27.7%, 23.6%, and 29.2%,
respectively.
FINANCIAL
CONDITION
YEARS ENDED DECEMBER 31, 2002 AND 2001
TOTAL ASSETS
YNB's assets were $2.2 billion at year-end 2002 versus $1.9 billion the previous
year, an increase of $288.1 million, or 14.8%. The growth in our asset base
throughout 2002 was primarily due to an increase in loans and securities.
Average loans and securities grew 21.7% and 15.8%, respectively, in 2002. YNB's
strength as a business-focused, relationship-oriented independent community bank
was reflected in our financial results in 2002.
Headquartered in Mercer County for 78 years and having established commercial
loans as the foundation for our growth, we are now focusing our efforts in
expanding our retail network in the demographically attractive markets of
Hunterdon, Somerset and Middlesex Counties in New Jersey. We believe that the
strength of our markets, relationship banking philosophy and experienced
management team, combined with industry consolidation, provide us with continued
opportunities to expand market share and attain the goal of enhancing our
franchise value.
Average interest earning assets in 2002 were $2.0 billion, a 17.9% increase
from $1.7 billion in 2001. The growth in average interest earning assets was
principally funded by the increase in average interest bearing deposits, and, to
a lesser extent, borrowed funds. Further supporting average interest earning
asset growth was a 20.0% increase in average stockholders' equity. YNB's ratio
of average interest earning assets to average assets increased slightly to 96.6%
in 2002, compared to 96.0% in 2001.
SECURITIES
YNB's securities portfolio totaled $875.4 million or 39.2% of assets at December
31, 2002 versus $812.2 million, or 41.8% of assets at December 31, 2001. This
represents a $63.2 million or 7.8% increase from 2001. In addition to providing
a reliable income stream, effective investment portfolio management has provided
a stable secondary liquidity source, a tool for managing interest rate risk and
a method of reducing our overall effective tax rate. We also manage a portion of
our investment portfolio, in our Investment Growth Strategy, with the primary
goals of enhancing return on average stockholders' equity and earnings per
share. On an average basis, the securities portfolio represented 42.7% of
average interest earning assets for the year ended December 31, 2002, compared
to 43.5% of average interest earning assets for the year ended December 31,
2001.
Securities included in the Investment Growth Strategy totaled approximately
$230.1 million at December 31, 2002, compared to approximately $372.8 million at
December 31, 2001. This represents a decrease of 38.3% in 2002. This strategy is
comprised primarily of fixed rate agency mortgage-backed securities. We
determined in mid-2002, based on the limited market opportunities in a lower
interest rate environment, not to replace cash flows from our Investment Growth
Strategy. We believe the Investment Growth Strategy, as a percentage of our
total assets, will continue to decline over time as our asset base continues to
grow.
The available for sale (AFS) securities portfolio increased $74.2 million to
$820.7 million at December 31, 2002 from $746.5 million at December 31, 2001.
The available for sale portfolio principally consists of U.S. agency
mortgage-backed securities and government agency bonds, both callable and
non-callable. A continuing lower interest rate environment, in addition to
strategies implemented to reduce longer-term interest rate risk exposure in a
rising rate environment, resulted in a change in the composition of the AFS
portfolio in 2002. During 2002, we sold 30-year fixed rate mortgage-backed and
trust preferred securities, and other securities with longer duration or
extension risk to reduce the average duration of the securities portfolio and
more effectively manage longer-term interest rate risk in a rising rate
environment. Shorter-duration securities and floating rate trust preferred
securities were purchased with the sale proceeds. The repositioning of the AFS
portfolio is expected to provide more consistent cash flows to invest in
securities in what we project to be a higher interest rate environment over the
next eighteen months.
Fixed rate U.S. agency securities and fixed rate U.S. agency Collateralized
Mortgage Obligations (CMOs) increased $133.2 million and $88.3 million,
respectively in 2002, accounting primarily for the net increase in the AFS
portfolio. Shorter duration U.S. agency CMOs and short-term agency callable
bonds were purchased to meet the asset and liability objectives of managing
longer-term interest rate risk and enhancing liquidity. These securities were
also purchased to reduce higher Federal funds sold balances as the average yield
for all of 2002 was only 1.62%. Conversely, fixed rate U.S. agency
mortgage-backed securities decreased $150.1 million in 2002, indicative of sales
activity and higher than projected prepayment speeds.
The yield on the available for sale portfolio decreased 118 basis points to
4.50% in 2002. In the fourth quarter alone, our investment portfolio, which is
made up of AFS securities representing 94% of the total, dropped in yield by
approximately 50 basis points, principally due to higher prepayment speeds which
negatively impacted the yield on mortgage-backed securities. We also continue to
invest in two money market funds. The average investment in money market funds
during 2002 was $36.5 million. The yields on these funds exceeded the yield on
Federal funds sold by approximately 10 to 15 basis points in 2002.
Activity in the AFS portfolio is undertaken primarily to manage liquidity and
interest rate risk and to take advantage of market conditions that create more
attractive returns. AFS securities are reported at fair value, with unrealized
gains and losses, net of tax, included as a separate component of stockholders'
equity.
Volatility in the bond market continued throughout 2002 with the yield curve
fluctuating often. Indicative of this volatility was the change in the market
value of the AFS portfolio. To achieve previously stated asset and liability
objectives, we took advantage of the volatile yield curve to reposition
securities throughout 2002, which resulted in net securities gains of $3.1
million. At December 31, 2002, securities available for sale had net unrealized
gains of $11.1 million compared to net unrealized gains of $555,000 at December
31, 2001. The net unrealized gain, net of tax effect, was $7.4 million at
December 31, 2002 compared to a net unrealized gain of $361,000 at December 31,
2001, and is reported in "Accumulated other comprehensive income" in
stockholders' equity.
Trading securities are purchased specifically for short-term appreciation
with the intent of selling in the near future. Minimal net gains of $24,000 were
realized on trading securities for 2002. There were no trading securities
outstanding at December 31, 2002.
Investment securities classified as held to maturity totaled $54.7 million at
December 31, 2002 compared to $65.8 million at December 31, 2001. Securities in
this category, for which there is the intent and the ability to hold to
maturity, are carried at amortized historical cost. This portfolio is comprised
of state and municipal and agency mortgage-backed securities. The decline in the
held to maturity portfolio was due to the call of $13.0 million in callable
agency securities. Partially offsetting this decline was net growth of $1.6
million in the municipal bond portfolio. The municipal bond portfolio grew to
$50.3 million at December 31, 2002 from $48.7 million at December 31, 2001.
Municipal bonds were purchased to reduce our effective tax rate and enhance the
tax equivalent yield of the portfolio. Based on our anticipated levels of
taxable income, we expect in 2003 to increase the size of our municipal bond
portfolio. At December 31, 2002, investment securities had unrealized gains of
$2.0 million compared to net unrealized losses of $867,000 at December 31, 2001.
The yield on this portfolio increased 6 basis points to 7.01% in 2002 as
compared to 6.95% in 2001.
The following tables present the amortized cost and market values of YNB's
securities portfolios as of December 31, 2002, 2001, and 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
(in thousands) Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of other
U.S. government agencies $ 245,973 $ 248,901 $ 113,862 $ 113,861 $ 173,608 $ 172,374
Mortgage-backed securities 468,745 478,357 521,988 523,179 338,377 336,798
Corporate obligations 55,087 53,696 72,946 72,311 26,713 27,091
Federal Reserve Bank Stock 2,411 2,411 2,381 2,381 2,036 2,036
Federal Home Loan Bank Stock 37,300 37,300 34,751 34,751 26,639 26,639
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 809,516 $ 820,665 $ 745,928 $ 746,483 $ 567,373 $ 564,938
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
(in thousands) Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of other
U.S. government agencies $ -- $ -- $ 13,000 $ 13,066 $ 68,185 $ 66,439
Obligations of state and
political subdivisions 50,308 52,212 48,694 47,729 38,660 38,336
Mortgage-backed securities 4,382 4,498 4,059 4,092 3,855 3,785
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 54,690 $ 56,710 $ 65,753 $ 64,887 $ 110,700 $ 108,560
====================================================================================================================================
The expected maturities and average weighted yields for YNB's securities
portfolios as of December 31, 2002 are shown below. Yields for tax-exempt
securities are presented on a fully taxable equivalent basis assuming a 34% tax
rate.
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITY MATURITIES AND AVERAGE WEIGHTED YIELDS
SECURITIES AVAILABLE FOR SALE
December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
(in thousands) one year five years ten years ten years Total
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations
of other U.S. government agencies $ 24,348 $ 193,184 $ 31,369 $ -- $ 248,901
Mortgage-backed securities -- -- 49,573 428,784 478,357
Corporate obligations 1,287 4,861 1,000 46,548 53,696
Federal Reserve Bank Stock -- -- -- 2,411 2,411
Federal Home Loan Bank Stock -- -- -- 37,300 37,300
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 25,635 $ 198,045 $ 81,942 $ 515,043 $ 820,665
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average yield, computed
on a tax equivalent basis 3.28% 3.77% 4.82% 4.79% 4.50%
====================================================================================================================================
INVESTMENT SECURITIES
December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
(in thousands) one year five years ten years ten years Total
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of state and
political subdivisions $ 750 $ 3,588 $ 7,366 $ 38,604 $ 50,308
Mortgage-backed securities -- -- 1,174 3,208 4,382
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 750 $ 3,588 $ 8,540 $ 41,812 $ 54,690
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average yield, computed
on a tax equivalent basis 6.99% 7.46% 6.77% 7.03% 7.01%
====================================================================================================================================
Expected maturities will differ from stated maturities because issuers may
have the right to call their obligations with or without call or prepayment
penalties. Mortgage-backed securities experience principal cash flows based on
the activity on the underlying mortgages.
Investments in mortgage-backed securities involve prepayment and interest
rate risk. We attempt to minimize these risks by diversifying the coupons and
final maturity dates of the mortgage-backed securities, buying seasoned
securities with consistent and predictable prepayment histories, average lives
and yields. At December 31, 2002, YNB had mortgage-backed securities totaling
$482.7 million, of which $454.3 million were fixed rate. At December 31, 2001,
YNB had mortgage-backed securities totaling $527.2 million, of which $507.6
million were fixed rate. Certain of these securities can be purchased at
premiums or discounts. The risk of fixed-rate mortgage-backed securities is
similar to fixed-rate loans. In rising interest rate environments, the rate of
prepayment on fixed-rate mortgage-backed securities tends to decrease because of
lower prepayments on the underlying mortgages, and conversely, as interest rates
fall, prepayments on such securities tend to rise. The yield and average lives
of these securities will change based on prepayment speeds and how the premium
or discount must be amortized or accreted. Significantly lower interest rates
and higher than projected prepayment speeds led to lower than projected yields
and $264.1 million in principal cash flows from mortgage-backed securities in
2002, compared to $188.3 million in 2001.
Included in mortgage-backed securities are U.S. agency CMOs, which totaled
approximately $219.5 million at December 31, 2002, compared to $126.2 million at
December 31, 2001. A CMO is a mortgage-backed security created by prioritizing
the cash flows from the underlying mortgage pool in order to meet different
objectives. All CMOs at December 31, 2002 were held in the available for sale
portfolio.
LOANS
We continue to emphasize commercial real estate and commercial and industrial
lending to small to mid-sized businesses and individuals. From December 31, 1998
to December 31, 2002, we increased our total loans from $491.6 million to $1.2
billion for a 24.9% compound annual growth rate during that period. We have
achieved these results by stressing quality growth, product and industry
diversification, while maintaining strong underwriting standards in a
competitive environment.
Loans historically have been the primary component of our earning assets. By
expanding geographically into new markets, we have continued to experience
robust credit demand. Our larger capital base has resulted in a higher legal
lending limit and attracted larger loan relationships and increased business
from existing customers.
During 2002, total loans increased $187.2 million or 18.6%, reaching $1.2
billion at December 31, 2002 from $1.0 billion at December 31, 2001.
The following table sets forth YNB's loan portfolio composition at the dates
indicated.
- ------------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial real estate
Owner occupied $ 164,450 13.8% $ 143,767 14.3% $ 135,234 16.5% $ 118,068 18.3% $ 85,856 17.5%
Investor occupied 321,583 26.9 255,471 25.3 198,184 24.2 173,645 26.8 109,316 22.2
Construction
and development 121,295 10.1 99,978 9.9 93,432 11.4 48,535 7.5 36,150 7.4
Residential
1-4 family 116,829 9.8 107,840 10.7 92,876 11.4 74,639 11.5 63,632 12.9
Multi-family 34,012 2.8 33,970 3.4 27,800 3.4 18,678 2.9 14,858 3.0
Commercial and
industrial
Term 129,513 10.8 117,005 11.6 116,995 14.3 63,066 9.7 49,714 10.1
Lines of Credit 207,562 17.4 164,075 16.3 72,217 8.8 77,152 11.9 62,156 12.6
Demand 972 0.1 1,055 0.1 1,389 0.2 959 0.2 741 0.2
Consumer
Home Equity 70,579 5.9 58,084 5.8 50,809 6.2 45,469 7.0 45,396 9.2
Installment 19,078 1.6 19,266 1.9 22,428 2.7 20,375 3.2 18,093 3.7
Other 9,270 0.8 7,462 0.7 6,925 0.9 6,151 1.0 5,737 1.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,195,143 100.0% $1,007,973 100.0% $ 818,289 100.0% $ 646,737 100.0% $ 491,649 100.0%
====================================================================================================================================
Investor occupied and commercial and industrial lines of credit were the two
loan types with the highest loan growth, increasing $66.1 million and $43.5
million, respectively. YNB's loan portfolio represented 53.6% of total assets at
December 31, 2002 versus 51.9% at year-end 2001.
At December 31, 2002, commercial real estate and commercial and industrial
loans represented 79.1% of our total loans. In underwriting these loans, we
first evaluate the cash flow capability of the borrower to repay the loan as
well as the borrower's business experience. In addition, a majority of
commercial loans are also secured by real estate and business assets, and
supported by the personal guarantees of the principals. We also diligently
monitor the composition and quality of the overall commercial loan portfolio
including significant credit concentrations by borrower or industry.
Commercial real estate loans increased by $108.1 million, or 21.7% in 2002 to
$607.3 million from $499.2 million at December 31, 2001. Commercial real estate
loans consist of owner occupied, investor occupied, and construction and
development loans. Commercial real estate loans generally have a final maturity
of five to fifteen years. Construction and development loans include residential
and commercial projects. Loans are typically made to experienced residential or
commercial construction developers. Residential construction loans include
single family, multi-family, and condominium projects. Commercial construction
loans include office and professional development, retail development and other
commercial related projects. Generally, construction loan terms run between one
and two years and are interest only, adjustable rate loans indexed to the prime
rate. Our lending policies generally require an 80% or lower loan-to-value ratio
for commercial real estate mortgages. Collateral values are established based
upon independently prepared appraisals. Growth in commercial real estate loans
accounted for 57.8% of the total loan growth in 2002 compared to 38.2% in 2001.
Residential loans are comprised of 1-4 family and multi-family loans. This
segment of the portfolio totaled $150.8 million at December 31, 2002, up $9.0
million, or 6.4% from the prior year total of $141.8 million. The low interest
rate environment stimulated ongoing refinancing activity and growth in this
portfolio during 2002. Residential 1-4 family loans represented $116.8 million,
or 77.5% of the total. Our residential mortgage loans are secured by first liens
on the underlying real property. We are a participating
seller/servicer with the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC) and we generally underwrite our
single-family residential mortgage loans to conform with standards required by
these agencies. Multi-family loans, which represented $34.0 million of the
total, primarily consist of loans secured by apartment complexes.
Commercial and industrial loans include term loans, lines of credit, and
demand loans. Commercial and industrial loans increased $55.9 million, or 19.8%,
at December 31, 2002 to $338.0 million from $282.1 million at December 31, 2001.
Higher balances on business lines of credit from both new and existing
relationships primarily accounted for the increase in commercial and industrial
loans. These loans accounted for 29.9% of the total loan growth in 2002.
Commercial and industrial loans are typically loans made to small- to
middle-market businesses and consist of working capital loans, which are used to
finance inventory, receivables, and other working capital needs of commercial
borrowers. In addition, term loans are provided for equipment needs. As shown in
the table below, we have maintained diversification of risk within industry
classification concentrations with the goal of limiting the risk of loss from
any single unexpected event or trend.
COMMERCIAL AND INDUSTRIAL LOANS
(dollars in thousands)
December 31, 2002
- -------------------------------------------------------------------
Percent Number
Industry Classification Balance of balance of loans
- -------------------------------------------------------------------
Services $ 88,449 26.2% 259
Retail trade 30,859 9.1 100
Real estate-related 52,250 15.5 176
Manufacturing 18,325 5.4 74
Construction 73,373 21.7 99
Wholesale trade 13,204 3.9 52
Individuals 33,946 10.0 109
Transportation and
public utilities 5,801 1.7 33
Other 21,840 6.5 57
- -------------------------------------------------------------------
Total $338,047 100.0% 959
===================================================================
Consumer loans increased 16.6% to $98.9 million at December 31, 2002 compared
to $84.8 million at December 31, 2001. Consumer loans include fixed rate home
equity loans, floating rate home equity lines, indirect auto loans and other
types of installment loans. Home equity loans and lines represented 71.3% of
total consumer loans. In 2002, we believe that comparatively lower interest
rates and increased marketing accounted for the increased activity in the home
equity portfolio. The expansion of our retail network is expected to generate
additional opportunities to increase the size of our consumer loan portfolio.
Substantially all of our business is with customers located within Mercer
County and contiguous counties. Changes in the region's economic environment and
real estate market conditions could affect our borrowers' ability to repay their
loans, which could result in an adverse impact to our financial condition,
performance and loan growth. Competition and future consolidation in our
markets could also impact future loan growth.
TOTAL LOAN PORTFOLIO
- --------------------
(In millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
$492 $647 $818 $1,008 $1,195
We enter into a variety of financial instruments with off-balance sheet risk
in the normal course of business. These financial instruments include
commitments to extend credit and letters of credit, both of which involve, to
varying degrees, elements of risk in excess of the amount reflected in the
consolidated financial statements.
Credit risk for letters of credit is managed by limiting the total amount of
arrangements outstanding and by applying normal credit policies to all
activities with credit risk. Collateral is obtained based on management's credit
assessment of the customer.
The contract amounts of off-balance sheet financial instruments as of
December 31, 2002 and 2001 for commitments to extend credit were $243.1 million
and $191.8 million, respectively, and for letters of credit were $17.8 million
and $13.4 million, respectively.
Commitments to extend credit and letters of credit may expire without being
drawn upon, and therefore, the total commitment amounts do not necessarily
represent future cash flow requirements.
The following table provides information concerning the maturity and interest
rate sensitivity of YNB's commercial and industrial and commercial real estate
- -- construction and development loan portfolios at December 31, 2002.
- ----------------------------------------------------------------------------------------------------
After one After
Within but within five
(in thousands) one year five years years Total
- ----------------------------------------------------------------------------------------------------
Maturities:
Commercial and industrial $ 174,932 $ 140,752 $ 22,363 $ 338,047
Commercial real estate -
construction and development 75,985 45,093 217 121,295
- ----------------------------------------------------------------------------------------------------
Total $ 250,917 $ 185,845 $ 22,580 $ 459,342
- ----------------------------------------------------------------------------------------------------
Type:
Floating rate loans $ 232,744 $ 104,293 $ 9,156 $ 346,193
Fixed rate loans 18,173 81,552 13,424 113,149
- ----------------------------------------------------------------------------------------------------
Total $ 250,917 $ 185,845 $ 22,580 $ 459,342
====================================================================================================
ASSET QUALITY
We have successfully grown our loan portfolio while at the same time maintaining
high asset quality standards. Our significant lending experience, collateral
based approach to lending, and the effective development and management of our
commercial lending relationships have resulted in low levels of nonperforming
assets and net charge offs.
Nonperforming assets decreased $132,000 to $7.3 million at December 31, 2002
compared to $7.4 million at December 31, 2001. For the five-years ended December
31, 2002, YNB's nonperforming assets have averaged less than $8 million. Credit
quality has remained strong during periods of robust loan growth. Nonperforming
assets represented 0.33% of total assets at December 31, 2002 and 0.38% at
December 31, 2001. The improvement in this ratio was due to both the growth in
YNB's asset base and the reduction in nonperforming assets. Nonperforming assets
as a percentage of total loans and other real estate were 0.61% at December 31,
2002, compared to 0.74% at December 31, 2001. Indicative of our collateral-based
approach to lending, the ratio of net loan charge offs as a percent of average
total loans was 0.10% for the year ended December 31, 2002 and, based on
year-end ratios, has averaged 0.17% for the five year period ended December 31,
2002.
Nonperforming assets consist of nonperforming loans and other real estate
owned. Nonperforming loans are composed of loans on a nonaccrual basis, loans
which are contractually past due 90 days or more as to interest or principal
payments but have not been classified as nonaccrual and loans whose terms have
been restructured to provide a reduction or deferral of interest or principal
because of a deterioration in the financial position of the borrower.
Our policy regarding nonaccrual loans varies by loan type. Generally,
commercial loans are placed on nonaccrual when they are 90 days past due, unless
these loans are well secured and in the process of collection or, regardless of
the past due status of the loan, when management determines that the complete
recovery of principal or interest is in doubt. Consumer loans are generally
charged off after they become 120 days past due. Residential mortgage loans are
not generally placed on nonaccrual unless the value of the real estate has
deteriorated to the point that a potential loss of principal or interest exists.
Subsequent payments are credited to income only if collection of principal is
not in doubt. If principal and interest payments are brought contractually
current, and future collectibility is reasonably assured, loans are returned to
accrual status.
Restructured loans remain on nonaccrual until collectibility improves and a
satisfactory payment history is established, generally six consecutive monthly
payments.
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type for the years indicated.
- -------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
December 31,
- -------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $ 2,395 $ 888 $ 2,075 $ 733 $ 1,035
Residential 1,526 1,133 2,423 740 175
Commercial and industrial 1,143 1,494 851 441 594
Consumer 55 98 453 275 242
- -------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 5,119 3,613 5,802 2,189 2,046
- -------------------------------------------------------------------------------------------------------------------
Restructured loans 711 770 532 540 634
- -------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due:
Residential 323 514 526 206 771
Commercial and industrial -- -- -- 47 --
Consumer 121 228 173 96 422
- -------------------------------------------------------------------------------------------------------------------
Total loans 90 days or more past due 444 742 699 349 1,193
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 6,274 5,125 7,033 3,078 3,873
Other real estate 1,048 2,329 2,041 2,585 4,957
- -------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 7,322 $ 7,454 $ 9,074 $ 5,663 $ 8,830
===================================================================================================================
Nonperforming loans totaled $6.27 million at December 31, 2002, an increase
of $1.14 million from the $5.13 million amount reported at December 31, 2001.
The increase in nonperforming loans resulted from an increase in nonaccrual
loans.
Nonaccrual loans were $5.1 million, or 0.43% of total loans, at December 31,
2002 an increase of $1.5 million from the December 31, 2001 total of $3.6
million. Commercial real estate loans accounted principally for the increase in
nonaccrual loans. Commercial loans represent approximately 70% of total
nonaccrual loans.
There was one restructured commercial loan totaling $711,000 at December 31,
2002 compared to $770,000 at December 31, 2001. Based upon the recent payment
history, this loan returned to accruing status in January 2003.
At December 31, 2002, loans that were 90 days or more past due but still
accruing interest represented $444,000, or 0.04% of total loans, compared to
$742,000, or 0.07% of total loans at December 31, 2001. Six residential mortgage
loans accounted for 73% of total loans 90 days or more past due. Management's
decision to accrue interest on these loans is based on the level of collateral
and the status of collection efforts.
Other real estate (ORE) totaled $1.0 million at December 31, 2002, down from
$2.3 million at December 31, 2001. The decrease in ORE for 2002 was principally
due to the sale of one property. ORE is reported at the lower of cost or fair
value at the time of acquisition and at the lower of fair value, less estimated
costs to sell, or cost thereafter.
We believe that our historical low level of nonperforming assets in relation
to an increasing loan portfolio is reflective of our credit culture, which
includes strict underwriting standards, active loan review, and strong credit
policies. Our objective is to maintain a high credit quality loan portfolio
regardless of the economic climate. The continuing weakness of the economy,
however, could cause nonperforming asset levels to increase from their current
or historical levels, which would have a negative impact on our earnings.
NONPERFORMING ASSETS AS A PERCENTAGE OF TOTAL ASSETS
- ----------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
1.17% 0.50% 0.56% 0.38% 0.33%
ALLOWANCE FOR LOAN LOSSES
We have identified the allowance for loan losses to be a critical accounting
policy. We utilize a system to rate substantially all of our loans based on
their respective risk. Our emphasis on commercial real estate and commercial and
industrial loans has provided higher earnings. These loans, however, entail
greater risk than residential mortgage and consumer loans. The primary emphasis
in our risk rating system is on commercial real estate and commercial and
industrial loans.
Risk is measured by use of a matrix, which is customized to measure the risk
of each loan type. Risk ratings of 1 to 5 are considered to be acceptable risk
and consist of loans rated as either "minimal, modest, better than average,
average and acceptable." Loans with acceptable risk were reserved at a range of
0.35% to 1.50% at December 31, 2002. Risk ratings of between 6 and 8 are
considered higher than acceptable risk and consist of loans rated as "special
mention, substandard and doubtful." Due to the higher level of risk, these loans
were reserved at a range of 3.75% to 50% at December 31, 2002. Loans with a risk
rating of 9 were considered to be a loss and reserved at 100% at December 31,
2002. Residential mortgage and consumer loans are assigned individual reserve
percentages of between 0.25% for the lowest risk to 0.75% for higher risk loans.
In setting the reserve percentage for each risk rating, we utilize a computer
software program to perform migration analysis to determine historical loan loss
experience. In addition, we use our judgment concerning the anticipated impact
on credit risk of economic conditions, real estate values, interest rates and
level of business activity. Allocations to the allowance for loan losses, both
specific and general, are determined after this review.
We provide for possible loan losses by a charge to current operations to
maintain the allowance for loan losses at an adequate level according to our
documented allowance adequacy methodology. The provision for loan losses for
2002 was $4.4 million, compared to $3.9 million and $3.7 million for 2001 and
2000, respectively. The increase in the provision for loan losses in 2002 was
principally due to three factors. First, we continued to experience strong loan
growth, principally commercial, in 2002. Second was the modest increase of $1.1
million in nonperforming loans. A third factor was the weakening of credit
quality of certain borrowers as reflected by risk rating downgrades in 2002. We
believe that most of these downgrades reflected the impact of a slowing economy
on the level of business activity. If these trends continue in 2003, there may
be an increase in nonperforming loans.
Our gross charge offs in 2002 totaled $1.2 million, compared with $1.7
million in 2001 and $1.9 million in 2000. Losses on loans and loans which are
determined to be uncollectible are charged against the allowance and subsequent
recoveries, if any, are credited to it. Our gross recoveries totaled $92,000 in
2002, compared to $382,000 in 2001 and $136,000 in 2000.
- ------------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
At or for the year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance balance, beginning of year $ 13,542 $ 10,934 $ 8,965 $ 6,768 $ 5,570
Charge offs:
Commercial real estate (78) (696) (356) (233) (453)
Residential (168) -- (288) -- --
Commercial and industrial (719) (591) (896) (278) (94)
Consumer (223) (412) (327) (574) (296)
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge offs (1,188) (1,699) (1,867) (1,085) (843)
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial real estate 1 -- -- 20 4
Commercial and industrial 11 31 -- -- 3
Consumer 80 351 136 87 59
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 92 382 136 107 66
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge offs (1,096) (1,317) (1,731) (978) (777)
Provision charged to operations 4,375 3,925 3,700 3,175 1,975
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance balance, end of year $ 16,821 $ 13,542 $ 10,934 $ 8,965 $ 6,768
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, end of year $1,195,143 $1,007,973 $ 818,289 $ 646,737 $ 491,649
Average loans outstanding $1,085,306 $ 891,957 $ 723,570 $ 564,552 $ 438,050
Allowance for loan losses to total loans 1.41% 1.34% 1.34% 1.39% 1.38%
Net charge offs to average loans outstanding 0.10 0.15 0.24 0.17 0.18
Nonperforming loans to total loans 0.52 0.51 0.86 0.48 0.79
Nonperforming assets to total assets 0.33 0.38 0.56 0.50 1.17
Nonperforming assets to total loans and other
real estate owned 0.61 0.74 1.11 0.87 1.78
Allowance for loan losses to nonperforming assets 229.73 181.67 120.50 158.31 76.65
Allowance for loan losses to nonperforming loans 268.11% 264.23% 155.47% 291.26% 174.75%
====================================================================================================================================
At December 31, 2002, the allowance for loan losses totaled $16.8 million, an
increase of $3.3 million or 24.2% from $13.5 million at December 31, 2001, which
compares to $10.9 million at December 31, 2000. The increase of the allowance
reflected the extensive analysis previously discussed. It is our assessment,
based on our judgment and analysis, that the allowance is appropriate in
relation to the credit risk at December 31, 2002. The ratio of the allowance for
loan losses to total loans was 1.41%, 1.34%, and 1.34%, at December 31, 2002,
2001, and 2000, respectively. Another measure of the adequacy of the allowance
for loan losses is the ratio of the allowance to total nonperforming loans. At
December 31, 2002 this ratio was 268.11% versus 264.23% at December 31, 2001.
Extending credit to businesses and consumers exposes us to credit risk. We
manage credit risk in the loan portfolio through adherence to strict
underwriting standards, guidelines and limitations. Various approval levels,
based on the amount of the loan and other credit considerations, have also been
established.
We recognize that despite our best efforts to minimize risk, losses will
occur. In times of economic slowdown, either within our markets or nationally,
the risk inherent in YNB's loan portfolio will increase. The timing and amount
of loan losses that may occur is dependent upon several factors, most notably
current and expected general, regional and local economic conditions and the
specific financial condition of our borrowers. Although we use the best
information available, the level of the allowance for loan losses remains an
estimate which is subject to significant judgment and short-term changes.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The following table describes the allocation for loan losses among various
categories of loans and certain other information as of the dates indicated. An
unallocated allowance is distributed proportionately among each loan category.
This unallocated portion of the loan loss allowance is important to maintain the
overall allowance at a level that is adequate to absorb potential credit losses
inherent in the total loan portfolio. The allocation is made for analytical
purposes only and is not necessarily indicative of the categories in which
future loan losses may occur. The total allowance is available to absorb losses
from any segment of loans.
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to Reserve Percent of Loans to
(in thousands) Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial real estate $ 8,189 48.7% 50.8% $ 6,843 50.5% 49.5% $ 6,303 57.6% 52.1%
Residential 1,063 6.3 12.6 1,106 8.2 14.1 1,118 10.2 14.8
Commercial and industrial 6,886 40.9 28.3 4,974 36.7 28.0 2,739 25.1 23.3
Consumer 683 4.1 8.3 619 4.6 8.4 774 7.1 9.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total $16,821 100.0% 100.0% $13,542 100.0% 100.0% $10,934 100.0% 100.0%
====================================================================================================================================
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to
(in thousands) Amount Allowance Total Loans Amount Allowance Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial real estate $ 5,229 58.3% 52.6% $ 3,594 53.1% 47.1%
Residential 840 9.4 14.4 598 8.8 15.9
Commercial and industrial 2,303 25.7 21.8 1,994 29.5 22.9
Consumer 593 6.6 11.2 582 8.6 14.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 8,965 100.0% 100.0% $ 6,768 100.0% 100.0%
====================================================================================================================================
DEPOSITS
Deposits represent our primary funding source supporting earning asset growth.
YNB's deposit base consists of non-interest and interest bearing demand
deposits, savings and money market accounts, and time deposits. In 2002, we
continued to implement our retail strategy. Our goal is to further develop the
earnings power and increase the value of our retail franchise. To achieve these
goals, we plan to further reduce our cost of funds and increase our non-interest
income by attracting lower cost transaction and other core deposit accounts.
In 2002, we continued our geographic expansion into the demographically
attractive markets of Hunterdon and Middlesex Counties with a planned entry into
Somerset County by mid-2003. Through marketing of our expanded deposit product
offerings, we expect to attract core deposits in our primary Mercer County
market in addition to targeted markets such as Hunterdon, Somerset and Middlesex
Counties.
Total deposits grew to $1.3 billion at December 31, 2002 compared to $1.1
billion at year-end 2001, an increase of 16.4%. The successful opening of
branches in new markets and increased marketing resulted in growth across all
deposit types. The growth in our deposit base in 2002 was primarily in money
market deposits, and, to a lesser extent, other time deposits. Average total
deposits for 2002 totaled $1.2 billion compared to $1.0 billion for 2001, an
increase of 19.9%. The average rate paid on YNB's deposits during 2002 was
2.83%, a 160 basis point decrease from the 4.43% average rate for 2001. As
anticipated, our cost of funds dropped dramatically as higher costing time
deposits repriced lower in 2002.
Due to the lower interest rate environment in 2002 and a strong liquidity
position supported by cash flows from the investment portfolio we have
aggressively lowered rates on time deposits. Our depositors' preference in 2002
was our competitively priced Premier Money Market account. The result has been a
lower cost of funds and change of composition in our deposit base. Time deposits
were almost 60% of total deposits at the end of 2000 and have declined to 49.3%
of our deposit base at December 31, 2002. Growth in money markets accounted for
almost 62% of the total increase in deposits in 2002. Deposit growth experienced
in 2001 was also led primarily by money markets.
The following table provides information concerning average balances and
rates of deposits for the years indicated:
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSIT BALANCES AND RATES
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
% of % of % of
(in thousands) Balance Rate Total Balance Rate Total Balance Rate Total
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
demand deposits $ 118,154 --% 9.8% $ 104,577 --% 10.4% $ 96,024 --% 11.4%
Interest bearing
demand deposits 113,261 2.38 9.4 88,765 2.70 8.8 67,443 2.60 8.0
Money market deposits 276,506 2.75 22.9 154,901 4.02 15.4 89,232 4.85 10.6
Savings deposits 80,218 1.16 6.7 74,929 1.75 7.4 76,337 2.43 9.0
Certificates of deposit
of $100,000 or more 148,119 3.50 12.3 129,340 5.86 12.9 106,581 6.47 12.7
Other time deposits 469,858 3.78 38.9 453,747 5.97 45.1 408,414 6.07 48.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,206,116 2.83% 100.0% $1,006,259 4.43% 100.0% $844,301 4.69% 100.0%
====================================================================================================================================
In addition to marketing CDs through our branch network, we also market them
through a computer-based service, which allows us to place our CDs nationally.
During 2002, we continued our strategy of reducing these generally higher
costing CDs generated through this service. These CDs, which totaled $107.0
million at December 31, 2001, declined to $96.8 million at year-end 2002. The
average maturity of these CDs is approximately eleven months. This funding
source has represented a dependable source of secondary liquidity during times
of increased loan demand. We will continue our efforts to reduce our reliance on
this generally higher cost of funds through the successful implementation of our
retail strategy.
The average balance of non-interest bearing demand deposits was $118.2
million during 2002, an increase of $13.6 million, or 13.0% from $104.6 million
during 2001. Non-interest bearing demand deposits represent a stable,
interest-free source of funds. The increase in demand deposits is primarily from
the growth in new and existing business relationships. The increase in business
and personal checking accounts has contributed positively to net interest
income.
Average interest bearing demand, money market and savings deposits increased
27.6%, 78.5%, and 7.1%, respectively, from 2001 to 2002. Our primary deposit
gathering strategy emphasizes growth in non-interest bearing demand deposits and
other low cost core deposits, such as interest bearing demand and money market
accounts. In 2002, we marketed our core deposit accounts to both business and
personal depositors. Money market deposits experienced the highest average
growth, increasing by $121.6 million. The average cost of these deposits
decreased from 4.02% in 2001 to 2.75% in 2002 due to the lower interest rate
environment.
Total average time deposits, which consist of certificates of deposit of
$100,000 or more and other time deposits, which include individual retirement
accounts, increased 6.0% or $34.9 million to $618.0 million from $583.1 million
in 2001. The average months to maturity on the entire CD portfolio at December
31, 2002 was approximately twelve months. As we expected, the cost of average
time deposits decreased modestly in 2001, due to the repricing characteristics
of these deposits. As these time deposits matured in 2002, the cost of these
deposits significantly decreased due to the lower interest rate environment and
the aggressive lowering of CD or time deposit rates. The average cost of time
deposits declined 224 basis points in 2002 to 3.71% from 5.95% in 2001. As we
move into 2003, time deposit costs should continue to drop.
The following table details amounts and maturities for certificates of deposit
of $100,000 or more for the years indicated:
December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------
Maturity range:
Within three months $ 46,683 $ 60,878
After three months
but within six months 22,015 28,096
After six months
but within twelve months 36,466 44,017
After twelve months 40,027 4,693
- ----------------------------------------------------------------------
Total $ 145,191 $ 137,684
======================================================================
TOTAL DEPOSITS AT YEAR END
- --------------------------
(In millions)
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
$520 $744 $950 $1,093 $1,272
Certificates of deposit of $100,000 or more totaled $145.2 million, or 11.4%
of deposits, at December 31, 2002 compared to $137.7 million, or 12.6% of
deposits at December 31, 2001.
We believe the successful implementation of our retail strategy, which
includes the expansion of our branch network, enhancing our brand image, and
upgrading our technology infrastructure, will be the critical factors in
attracting lower cost deposits and reducing our overall cost of funds. By
creating and expanding relationships in our established and new markets, we
believe we can expand our net interest margin. Competition in our markets, our
ability to fund our loan growth with lower costing core deposits, and the
depositors' desire to achieve the highest return possible on their money when
interest rates eventually move higher, could affect net interest income levels
and our net interest margin.
BORROWED FUNDS
We utilize borrowed funds for our earning asset growth not supported by deposit
generation and for asset and liability, and liquidity management purposes.
Borrowed funds consist primarily of FHLB advances and, to a much lesser extent,
securities sold under agreements to repurchase.
Borrowed funds totaled $757.7 million at December 31, 2002, an increase of
$50.6 million or 7.2% when compared to $707.1 million at December 31, 2001. The
increase in borrowed funds was due to the addition of FHLB advances. At December
31, 2002, borrowed funds represented 34.0% of our assets compared to 36.4% at
year-end 2001.
FHLB advances totaled $746.0 million at December 31, 2002 compared to $695.0
million at December 31, 2001. The $51.0 million increase in advances in 2002 was
attributable to the purchase of callable advances with extended lockout periods
to reduce interest rate risk exposure in a rising rate environment. Our FHLB
advance portfolio includes callable advances that have terms of two to ten years
and are callable after periods ranging from three months to five years. Callable
borrowings totaled $629.0 million at December 31, 2002, of which $487.0 million
have call dates in 2003. Generally, when rates rise, some or all of these
advances could be called and would then be replaced with higher costing
borrowings. Conversely, when interest rates fall, advances will not be called
and the duration would extend. Based on an analysis at year-end 2002, an
increase of 400 basis points in interest rates in 2003 would not trigger
significant calls.
Since 1994, we have been a member of the FHLB of New York and have utilized
advances for funding earning asset growth, enhancing liquidity, managing
interest rate risk and, to a lesser extent, funding for the Investment Growth
Strategy. FHLB advances require no deposit insurance premiums and operational
overhead costs are considerably less than those associated with deposits.
In December 2001, $50.0 million in FHLB advances were retired early, which
resulted in a pre-tax loss of $2.2 million. The purpose of this transaction was
to strategically reposition a portion of our borrowed funds portfolio to meet
asset and liquidity objectives designed to reduce longer-term interest rate
risk. Interest expense reduction on these liabilities totaled $1.2 million in
2002.
In April 2001, management curtailed the use of 10-year callable advances for
purposes of the Investment Growth Strategy. Much of the longer-term interest
rate risk in our balance sheet is embedded in the FHLB callable advances. With
the decreasing level of the Investment Growth Strategy, FHLB advances are not
expected to be used for that purpose in 2003.
Borrowed funds also include $400,000 related to our Employee Stock Ownership
Plan (ESOP). Initiated in 1999, the ESOP purchased 155,340 shares of YNB's
common stock with a loan from a nonaffiliated financial institution.
Borrowed funds averaged $735.2 million in 2002, an increase of $90.5 million
from the $644.7 million average reported in 2001. The average cost of borrowed
funds decreased 52 basis points during the year to 4.95% compared with 5.47% in
2001. The retirement of callable FHLB advances in late 2001 and repositioning
into floating rate LIBOR based advances primarily accounted for the decrease in
the cost of borrowed funds in 2002.
It is our goal in 2003 to reduce our level of FHLB borrowings. There are
$56.0 million in advances maturing in 2003. Based on our current liquidity
projections our intent is to pay off these advances as they become due. Within
approved policy guidelines, we will, however, continue to use borrowed funds as
an alternative funding source or to meet desired business, asset and liability,
and liquidity objectives.
ASSET AND LIABILITY MANAGEMENT
The objective of asset and liability management is the prudent control of
liquidity risk, market risk and the appropriate use of capital, while maximizing
profitability. Our asset/liability and investment committees provide oversight
to the interest rate risk management process and recommend policy guidelines
regarding exposure to interest rates for approval by the Board of Directors.
Adherence to these policies is monitored on an ongoing basis and decisions
related to the management of interest rate exposure due to changes in balance
sheet composition and/or market interest rates are made when appropriate and
agreed to by these committees and approved by the Board of Directors.
LIQUIDITY
Liquidity represents the ability to maintain adequate cash flows to satisfy all
of our present and anticipated financial obligations and commitments. Liquidity
management refers to YNB's ability to support asset growth while satisfying the
borrowing needs and deposit withdrawal requirements of our customers. In
addition to maintaining liquid assets, factors such as our capital position,
profitability, asset quality and availability of funding affect our ability to
meet liquidity needs.
Traditional sources of liquidity include deposit growth, asset maturities and
asset prepayments. Our focus on increasing core deposits to strengthen liquidity
is ongoing. In addition, we may use borrowed funds to further support and
enhance liquidity. Liquidity can also be generated by the acquisition of funds
through liability management. As previously discussed, we strategically utilize
a nationwide computer-based service to generate CDs to bolster liquidity and
fund loan growth as well. Asset prepayments include proceeds from principal on
loans and mortgage-backed securities (MBS). While maturities and scheduled
amortization of loans and MBS are generally a predictable source of funds,
deposit flows and investment prepayments are greatly influenced by interest
rates and competition. Brokered CD facilities are also available as another
source of liquidity. As part of liquidity management, we also have a contingency
funding plan in place. Our contingency funding plan is structured to manage
potential liquidity concerns due to changes in interest rates, credit markets or
other external risks.
Liquidity was again actively managed in 2002, as strong earning asset growth
continued. We maintain a portion of our assets in a diversified portfolio of
marketable securities, including U.S. Government agency and mortgage-backed
instruments, from which funds could be promptly generated. Total unpledged
securities were approximately $310.0 million at December 31, 2002 and $246.8
million at December 31, 2001. We have built the unpledged security position by
purchasing short-term high quality securities with comparatively modest market
value risk. A higher level of Federal funds sold may be experienced from time to
time instead of building the unpledged security position. This may be due to
projected loan growth or investment opportunities in the marketplace.
Liquidity can be further analyzed by utilizing our Consolidated Statements of
Cash Flows. During 2002, net cash provided by financing activities was $261.8
million. This was primarily due to net increases in non-interest bearing demand,
money market, and savings deposits of $144.7 million and borrowed funds of $50.6
million. Net cash used by investing activities was $250.4 million, consisting
primarily of $679.3 million in purchases of securities available for sale and a
$188.3 million net increase in loans, partially offset by maturities, calls,
paydowns, and proceeds from sales of securities available for sale of $617.0
million. Net cash provided by operating activities was $23.0 million. Overall,
cash and cash equivalents increased $34.4 million at year-end 2002 compared to
year-end 2001.
We are eligible to borrow additional funds from the FHLB subject to its stock
level and collateral requirements, and individual advance proposals based on
FHLB credit standards. FHLB advances are collateralized by securities as well as
residential and commercial mortgage loans. We also have the ability to borrow at
the Federal Reserve discount window. We also maintain unsecured Federal funds
lines totaling $25 million with four correspondent banks for daily funding
needs.
Active liquidity management remains a strategic focus, due to the strong
asset growth we have experienced over the last several years. We continue to
develop additional funding sources to ensure our ability to continue to grow
while maintaining sufficient liquidity. Our entry into new markets and branch
expansion in our primary market, Mercer County, should help to build our deposit
base and further enhance our liquidity profile.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
Market risk arises principally from interest rate risk inherent in lending,
investment, deposit and borrowing activities. We seek to manage our asset and
liability portfolios to help reduce any adverse impact on net interest income
caused by fluctuating interest rates. Interest rate risk due to a sudden and
significant change in interest rates may adversely impact our earnings to the
extent that the interest rates of assets and liabilities do not change at the
same speed, to the same extent or on the same basis. Accordingly, we actively
analyze and manage our interest rate exposures.
The primary goal of our interest rate risk management is to control exposure
to interest rate risk inherent in the balance sheet, determine the level of risk
appropriate given our strategic objectives and manage the risk consistent with
the Board of Directors' approved limits and guidelines. These limits and
guidelines reflect our tolerance for interest rate risk over both short- and
long-term time horizons. Our asset and liability and investment committees meet
monthly to discuss pertinent asset and liability issues. On a quarterly basis,
management provides a detailed review of our interest rate risk position to the
Board of Directors.
Our interest rate risk, and the related risk to net interest income, is
derived from the difference in the maturity and repricing characteristics
between assets and liabilities. In 2002, time deposits, which represented over
50% of YNB's deposit base at December 31, 2001, repriced significantly lower
throughout the year based on the aggressive lowering of short-term rates by the
Federal Reserve in 2001 and the maturity characteristics of time deposits. The
liability sensitive position of the balance sheet in the first half of 2002
resulted in increased net interest income levels.
We control interest rate risk by identifying and quantifying interest rate
risk exposures using simulation and economic value risk models, as well as a
simpler gap analysis described below. We currently do not participate in hedging
programs, interest rate swaps or other activities involving the use of
off-balance sheet derivative financial instruments, but may do so in the future
to mitigate interest rate risk.
One measure of interest rate risk is the gap ratio, which is defined as the
difference between the dollar volume of interest earning assets and interest
bearing liabilities maturing or repricing within a specified period of time as a
percentage of total assets. A positive gap results when the volume of interest
rate-sensitive assets exceeds that of interest rate-sensitive liabilities within
comparable time periods. A negative gap results when the volume of interest
rate-sensitive liabilities exceeds that of interest rate-sensitive assets within
comparable time periods.
The following table sets forth certain information at December 31, 2002
relating to YNB's assets and liabilities by scheduled repricing for adjustable
assets and liabilities, or by contractual maturity for fixed-rate assets and
liabilities.
- ------------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS AND LIABILITIES
December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Six More than More than More than More than
Under months one year two years five years ten years
six through through through through and not
(in thousands) months one year two years five years ten years repricing Total
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ -- $ -- $ -- $ -- $ -- $ 28,608 $ 28,608
Federal funds sold and
interest bearing deposits 74,986 -- -- -- -- -- 74,986
Available for sale securities 254,357 140,575 183,891 131,987 33,409 76,446 820,665
Investment securities 971 997 1,682 4,341 7,361 39,338 54,690
Loans 306,140 124,550 157,339 380,615 161,247 65,252 1,195,143
Other assets, net -- 15,911 -- -- -- 41,455 57,366
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 636,454 $ 282,033 $ 342,912 $ 516,943 $ 202,017 $ 251,099 $2,231,458
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Non-interest
bearing demand $ -- $ -- $ -- $ -- $ -- $ 126,183 $ 126,183
Savings and interest
bearing demand 37,001 -- 15,600 152,215 -- -- 204,816
Money markets 190,804 -- -- 123,725 -- -- 314,529
Certificates of deposit
of $100,000 or more 68,698 36,466 23,169 16,858 -- -- 145,191
Other time deposits 158,518 104,203 141,478 77,368 -- -- 481,567
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 455,021 $ 140,669 $ 180,247 $ 370,166 $ -- $ 126,183 $1,272,286
Borrowed funds 144,311 -- 400 22,500 590,500 -- 757,711
Trust preferred securities 11,500 -- -- -- -- 21,000 32,500
Other liabilities -- -- -- -- -- 23,022 23,022
Stockholders' equity -- -- -- -- -- 145,939 145,939
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 610,832 $ 140,669 $ 180,647 $ 392,666 $ 590,500 $ 316,144 $2,231,458
- ------------------------------------------------------------------------------------------------------------------------------------
Gap 25,622 141,364 162,265 124,277 (388,483) (65,045)
Cumulative gap 25,622 166,986 329,251 453,528 65,045 --
Cumulative gap to total assets 1.1% 7.5% 14.8% 20.3% 2.9% --
====================================================================================================================================
As indicated in the table on the preceding page, our one-year gap position at
December 31, 2002 was a positive 7.5%. Generally, a financial institution with a
positive gap position will most likely experience an increase in net interest
income during periods of rising rates and decreases in net interest income
during periods of falling interest rates.
Included in the analysis of our gap position are certain savings deposits,
money markets and interest checking accounts, which are less sensitive to
fluctuations in interest rates than other interest-bearing sources of funds. In
determining the sensitivity of such deposits, we review the recent movement
(last 12 months) of deposit rates relative to market rates. Historically, we
have used regression analysis to determine deposit sensitivity, but due to the
sudden and significant drop in the last two years, recent patterns are
considered a more accurate tool.
The negative gap in the one-year timeframe turned positive in the third
quarter of 2002. The change in our gap position resulted from a combination of a
longer liability structure and at the same time a shorter asset structure.
Liability durations were primarily driven longer by two-year term CDs resulting
from deposit promotions in new markets and the purchase of FHLB advances with
five-year lockout periods. On the asset side, the acceleration in actual and
expected prepayment speeds in addition to securities sales shortened asset
durations. The one-year cumulative gap position policy guideline is measured as
a percentage of assets within a +10/-25% range. At December 31, 2002, the gap
position was within the policy guideline. While gap analysis represents a useful
asset/liability management tool, it may not necessarily indicate the effect of
interest rate movements on our net interest income due to discretionary
repricing of some assets and liabilities, balance sheet options, and other
competitive pressures.
Simulation analysis involves dynamically modeling our interest income and
expenses over specified time periods under various interest rate scenarios and
balance sheet structures. We use simulation analysis primarily to measure the
sensitivity of net interest income over 12- and 24-month time horizons, based on
assumptions approved by the asset and liability committee and ratified by the
Board of Directors. In YNB's base case sensitivity scenario using a static
balance sheet, the model measures the variance from a flat or unchanging rate
environment in net interest income with a change in interest rates of plus and
minus 200 basis points over a 12-month period and a continuation of rates at
that level for the second year. We utilized a minus 100 basis point scenario due
to the low interest rate environment that existed at year-end. The plus and
minus base case scenario is measured within a policy guideline of -7% change in
net interest income in year one and -14% change in year two. To measure the
change in interest rates, the following table reflects the estimated exposure of
YNB's net interest income in the base case scenario measured for a two-year
period beginning January 1, 2003, based on the December 31, 2002 balance sheet:
Percentage Change in
Net Interest Income
-------------------
Change in Market Interest Rates 2003 2004
- -----------------------------------------------------------------------------
+200 basis points 5.6 3.4
Flat -- --
- -100 basis points (2.7) (2.3)
=============================================================================
The actions we have taken during 2002 have resulted in a more balanced
interest rate risk position over the next 12 and 24-month period. From an asset
perspective, we have taken actions to protect net interest income in the policy
simulation or base case scenario. Interest rate floors have been instituted on
the majority of our floating rate commercial loan assets. Should interest rates
move lower, income from these earning assets will not decline below the floor.
The repositioning of our investment portfolio, previously discussed, will
provide additional income in a rising interest rate environment. YNB's net
interest income will benefit most from a gradually higher interest rate
environment in 2003. Our simulation results indicate that, if interest rates
increase 2%, net interest income will improve by approximately 5.6% in 2003. If
interest rates decrease 1%, net interest income decreases by approximately 2.7%
in 2003. We also measure, through simulation analysis, the impact to net
interest income based on projected balance sheet growth scenarios in addition to
rate ramps greater than 2% over 12 and 24-month periods.
There are several factors that management evaluates when constructing
short-term and longer-term interest rate risk models. There is uncertainty
regarding the maturity, repricing and runoff characteristics of some of our
assets and liabilities. Money market deposits, for example, have no contractual
maturity, meaning customers have the ability to add or withdraw funds from these
deposit accounts freely. These deposits may fluctuate unexpectedly due to
changes in market rates or even competitive factors. Accordingly, rates on money
market deposits may have to be increased more or reduced less than expected.
Given the uncertainties of deposit composition or repricing characteristics, the
interest rate sensitivity of bank deposits cannot be calculated precisely. This
uncertainty also reflects options embedded in financial instruments, which
include mortgage-backed securities, callable bonds and FHLB advances. To deal
with the many uncertainties when constructing either short or longer-term
interest rate risk measurements, management has developed a number of
assumptions. Depending on the product or behavior in question, each assumption
will reflect some combination of market data, research analysis and business
judgment. Assumptions are reviewed periodically with changes made when
appropriate.
We also measure longer-term interest rate risk through the Economic Value of
Equity ("EVE") model. This model involves projecting future cash flows from
YNB's current assets and liabilities over a longer time horizon, discounting
those cash flows at appropriate interest rates, and then aggregating the
discounted cash flows. Our EVE is the estimated net present value of these
discounted cash flows. The variance in the economic value of equity is measured
as a percentage of the present value of equity. The sensitivity of EVE to
changes in the level of interest rates is a measure of the sensitivity of
long-term earnings to changes in interest rates. We use the sensitivity of EVE
principally to measure the exposure of equity to changes in interest rates over
a relatively long time horizon. The following table lists YNB's percentage
change in EVE in a plus or minus 200 basis point rate shock at December 31, 2002
and 2001. Due to the low interest rate environment in 2002 and 2001, not all
interest rates could be shocked 200 basis points. Based on the underlying
assumptions used:
Percentage Change
in EVE
Change in Market Interest Rates -----------------
(Rate Shock) 2002 2001
- -------------------------------------------------------------------------
+200 basis points -11 -45
- -100 basis points -18 -1
=========================================================================
Our longer-term interest rate risk profile has improved in 2002 and now
reflects a more balanced position in the event of an immediate increase or
decrease in interest rates. The addition of new capital in late 2002 had a
positive impact to the measurements. Certain shortcomings are inherent in the
methodology used in the previously discussed interest rate risk measurements.
Modeling changes in the simulation and EVE analysis require the making of
certain assumptions, which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. Accordingly,
although these models provide an indication of our interest rate risk exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of change in market interest rates on
YNB's net interest income and will differ from actual results.
We believe that more likely scenarios include gradual changes in interest
rate levels. We continue to monitor our gap and rate shock analyses to detect
changes to our exposure to fluctuating interest rates. We have the ability to
shorten or lengthen maturities on assets, sell securities, enter into derivative
financial instruments, or seek funding sources with different repricing
characteristics in order to change our asset and liability structure for the
purpose of mitigating the effect of interest rate risk.
STOCKHOLDERS' EQUITY AND CAPITAL RESOURCES
The management of capital in a regulated environment requires a balance between
earning the highest return for stockholders while maintaining sufficient capital
levels for proper risk management, satisfying regulatory requirements, and for
future expansion. Our proactive capital management is designed to assure that we
are always well capitalized as defined by regulatory authorities and have the
necessary capital for our expansion plans.
On December 13, 2002, we completed the sale of 2.3 million shares of our
common stock in an underwritten common stock offering. The common stock was sold
at a price of $16.25 per share and generated gross proceeds of $37.4 million.
Net proceeds after underwriting and other offering expenses were $34.3 million,
of which $33.0 million was contributed to the Bank to support asset growth.
Stockholders' equity at December 31, 2002 totaled $145.9 million compared to
$93.2 million at December 31, 2001. This represents an increase of $52.7 million
or 56.5%. This increase resulted from earnings of $14.0 million, net proceeds of
$34.3 million from the public common stock offering, proceeds of $602,000 from
exercised stock options, a positive adjustment to equity of $7.0 million related
to the improvement in market value of securities available for sale, proceeds of
$400,000 from allocated ESOP shares, and an increase of $110,000 associated with
the fair market value adjustment related to the allocation of shares from the
ESOP, offset by cash dividend payments of $3.5 million and treasury shares
acquired at an aggregate price of $124,000.
On August 22, 2001, we completed the private placement of 596,654 shares of
common stock. The shares were sold to a limited number of accredited investors
at an aggregate purchase price of approximately $7.8 million and net proceeds of
$7.4 million.
We have an Employee Stock Ownership Plan (ESOP) that permits eligible
employees to share in the growth of YNB through stock ownership. Initiated in
1999, we initially sold 155,340 shares to the ESOP for $2 million. The ESOP
financed the stock purchase with a nonaffiliated financial institution. The
financing is for a term of five years with an interest rate of 7.00% with a
maturity date of December 31, 2003. The full balance of the loan will be repaid
in equal installments over the term of the loan. The shares purchased by the
ESOP were used as collateral for the loan. The balance of unallocated ESOP
shares at December 31, 2002 was $400,000. The annual expenses associated with
the ESOP were $483,000 in 2002, $439,000 in 2001 and $376,000 in 2000. These
expenses include compensation expense, debt service on the loan and any
adjustment required due to changes in the fair value of the shares at time of
allocation. The reason for the increase in cost was primarily the result of
adjustments related to the change in the fair value of our common stock.
We have not complied with certain regulatory requirements and Nasdaq
standards. These issues involved Securities and Exchange Commission registration
and information distribution requirements for our employees' savings plan and
shareholder dividend reinvestment and stock purchase plan and Nasdaq shareholder
approval requirements for certain non-employee director stock options. Upon
learning of our non-compliance, we promptly commenced steps to address these
issues and expect to complete these steps in the near future. For a discussion
of these matters, see "Notes to Consolidated Financial Statements - Notes 10
and 11."
Dividends declared on common stock totaled $0.44 per share for 2002 and for
2001. The dividend payout ratio was 25.3% for 2002, compared to 39.1% at
year-end 2001. The decrease in the dividend payout ratio is a reflection of our
net income growth in 2002.
YNB's common stock trades on the Nasdaq National Market under the symbol
YANB. The quarterly market price ranges and dividends declared per common share
for the last two years are shown below.
Cash
Dividend
2002 Quarter High Low Declared
- -------------------------------------------------------
First $ 13.45 $ 12.25 $ 0.11
Second 19.94 12.89 0.11
Third 21.20 16.05 0.11
Fourth 19.05 16.35 0.11
- -------------------------------------------------------
Total $ 0.44
=======================================================
2001 Quarter
- -------------------------------------------------------
First $ 14.25 $ 12.06 $ 0.11
Second 14.45 13.56 0.11
Third 14.10 11.00 0.11
Fourth 12.80 10.96 0.11
- -------------------------------------------------------
Total $ 0.44
=======================================================
We are subject to minimum risk-based and leverage capital guidelines under
Federal banking regulations. These banking regulations relate a company's
regulatory capital to the risk profile of its total assets and off-balance sheet
items, and provide the basis for evaluating capital adequacy. Regulatory capital
adequacy is measured using three ratios: Tier I leverage, Tier I risk-based, and
total risk-based capital. These guidelines require minimum risk-based capital
ratios of 4% and 8% of risk-weighted assets for Tier I and total risk-based
capital measurements. Total regulatory capital is comprised of all of the
components of Tier I capital plus qualifying subordinated debt instruments and
the reserve for loan losses, subject to certain limits. In addition, the current
minimum regulatory guideline for the Tier I leverage ratio is 4%.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five capital level designations ranging from "well capitalized" to
"critically undercapitalized." A bank is considered "well capitalized" if it has
minimum Tier I and total risk-based capital ratios of 6% and 10%, respectively,
and a minimum Tier I leverage ratio of 5%. At December 31, 2002, our capital
ratios exceeded the above ratios required by regulatory definition to be
considered well capitalized. The table below summarizes YNB's capital ratios for
the years indicated:
December 31,
- -----------------------------------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------
Tier I leverage 8.2% 6.9% 8.1%
Tier I risk-based 11.8% 10.0% 10.6%
Total risk-based 13.0% 11.3% 11.6%
=======================================================================
On March 28, 2001, Yardville Capital Trust III ("Trust III"), a statutory
business trust and a wholly owned subsidiary of Yardville National Bancorp,
issued $6.0 million of 10.18% Trust Preferred Securities in a private placement
and $190,000 of 10.18% Common Securities to Yardville National Bancorp. Proceeds
from the issuance of the Trust Preferred Securities were immediately used by
Trust III to purchase $6.2 million of 10.18% Subordinated Debentures maturing
June 8, 2031 from Yardville National Bancorp. Trust III exists for the sole
purpose of issuing Trust Preferred Securities and investing the proceeds in
Subordinated Debentures of Yardville National Bancorp. These Subordinated
Debentures constitute the sole assets of Trust III. These Subordinated
Debentures are redeemable in whole or part prior to maturity after June 8, 2011.
Trust III is obligated to distribute all proceeds of a redemption, whether
voluntary or upon maturity, to holders of the Trust Preferred Securities.
Yardville National Bancorp's obligation with respect to the Trust Preferred
Securities and the Subordinated Debentures, when taken together, provide a full
and unconditional guarantee on a subordinated basis by Yardville National
Bancorp of the obligations of Trust III to pay amounts when due on the Trust
Preferred Securities.
Of the total proceeds raised by the private trust preferred securities and
equity offerings in 2001, approximately $11.5 million was contributed to the
Bank to support future asset growth.
In 1997, Yardville Capital Trust (the Trust) issued $11.5 million of 9.25%
Trust Preferred Securities and $356,000 of 9.25% Common Securities to Yardville
National Bancorp. Proceeds were used by the Trust to purchase $11.9 million of
9.25% Subordinated Debentures maturing November 1, 2027. Those debentures became
redeemable in whole or in part prior to maturity after November 1, 2002. We
intend to redeem these securities on March 31, 2003 with a portion of the
proceeds of a new trust preferred offering. (See "Notes to Consolidated
Financial Statements - Footnote 8)
On February 19, 2003, Yardville Capital Trust IV (Trust IV), a statutory
business trust, and a wholly owned subsidiary of Yardville National Bancorp,
issued $15.0 million of floating rate Trust Preferred Securities in a private
placement transaction and $464,000 of floating rate Common Securities to
Yardville National Bancorp. The floating rate is based on three month LIBOR plus
340 basis points. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by Trust IV to purchase $15.0 million of floating rate
Subordinated Debentures maturing March 1, 2033 from Yardville National Bancorp.
Trust IV exists for the sole purpose of issuing Trust Preferred Securities and
investing the proceeds in Subordinated Debentures of Yardville National Bancorp.
These Subordinated Debentures constitute the sole assets of Trust IV. These
Subordinated Debentures are redeemable in whole or part prior to maturity after
March 1, 2008. Trust IV is obligated to distribute all proceeds of a redemption,
whether voluntary or upon maturity, to holders of the Trust Preferred
Securities. Yardville National Bancorp's obligation with respect to the Trust
Preferred Securities and the Subordinated Debentures, when taken together,
provides a full and unconditional guarantee on a subordinated basis by Yardville
National Bancorp of the obligations of Trust IV to pay amounts when due on the
Trust Preferred Securities.
RECENT ACCOUNTING PRONOUNCEMENTS
In December, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The
additional disclosure requirements of SFAS No. 148 are effective for fiscal
years ended after December 15, 2002. The Company has adopted the expanded
disclosure provisions of this statement effective December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN. 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others." The Interpretation requires that
the Bank recognize the fair value of guarantee and indemnification arrangements
issued or modified by the Bank after December 31, 2002, if these arrangements
are within the scope of that Interpretation. In addition, under previously
existing generally accepted accounting principles, the Bank continues to monitor
the conditions that are subject to the guarantees and indemnifications to
identify whether it is probable that a loss has occurred, and would recognize
any such losses under the guarantees and indemnifications when those losses are
estimable. Management does not anticipate that the initial adoption of FIN 45
will have a significant impact on the Bank's financial statements.
CRITICAL ACCOUNTING POLICIES
The disclosures included in this Annual Report are based on our audited
consolidated financial statements. These statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an ongoing basis, we evaluate the estimates used,
including the adequacy of allowances for loan losses. We believe our policies
with respect to the determination of the allowance for loan losses involve a
high degree of complexity and require us to make difficult and subjective
judgments which often require assumptions or estimates about highly uncertain
matters. Estimates are based upon historical experience, current economic
conditions and other factors that we consider reasonable under the
circumstances. These estimates result in judgments regarding the carrying values
of assets and liabilities where these values are not readily available from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Our significant accounting policies are described in
the "Notes to Consolidated Financial Statements" under "Summary of Significant
Accounting Policies."
Unaudited quarterly results are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) December 31 September 30 June 30 March 31
- -------------------------------------------------------------------------------------------------------------------
2002
Interest income $30,520 $30,835 $29,898 $28,892
Interest expense 18,389 18,719 18,310 18,244
- -------------------------------------------------------------------------------------------------------------------
Net interest income 12,131 12,116 11,588 10,648
Provision for loan losses 1,450 1,300 1,075 550
Non-interest income 1,872 2,212 2,318 1,902
Non-interest expense 8,058 7,861 7,926 7,199
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense 4,495 5,167 4,905 4,801
Income tax expense 1,212 1,473 1,373 1,306
- -------------------------------------------------------------------------------------------------------------------
Net income $ 3,283 $ 3,694 $ 3,532 $ 3,495
===================================================================================================================
Earnings per share - basic $ 0.39 $ 0.46 $ 0.44 $ 0.44
Earnings per share - diluted 0.38 0.44 0.43 0.43
===================================================================================================================
2001
Interest income $29,295 $30,295 $29,494 $29,864
Interest expense 20,052 21,388 20,991 20,382
- -------------------------------------------------------------------------------------------------------------------
Net interest income 9,243 8,907 8,503 9,482
Provision for loan losses 1,525 825 650 925
Non-interest income 2,294 2,263 1,914 1,566
Non-interest expense 9,082 7,023 6,543 6,404
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense 930 3,322 3,224 3,719
Income tax (benefit) expense (4) 831 823 992
- -------------------------------------------------------------------------------------------------------------------
Net income $ 934 $ 2,491 $ 2,401 $ 2,727
===================================================================================================================
Earnings per share - basic $ 0.12 $ 0.33 $ 0.33 $ 0.37
Earnings per share - diluted 0.12 0.32 0.32 0.37
===================================================================================================================
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information with respect to this Item is contained in "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations," which is set forth in Item 7 of this report.
Item 8. Financial Statements and Supplementary Data
The information with respect to this Item is contained in our financial
statements included in Item 15 of this report and the quarterly financial data
included in Item 7 of this report.
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure
None.
13
PART III
Item 10. Directors and Executive Officers of the Company
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with its
Annual Meeting of Stockholders to be held June 5, 2003.
Item 11. Executive Compensation
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with its
Annual Meeting of Stockholders to be held June 5, 2003. The information
contained in the Company's definitive proxy statement under the captions
"Organization and Compensation Committee Report," "Performance Graph" and "Audit
Committee Report" shall not be deemed to be incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with its
Annual Meeting of Stockholders to be held June 5, 2003.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with its
Annual Meeting of Stockholders to be held June 5, 2003.
Item 14. Controls and Procedures
The Company's management, including the Chief Executive Officer and Principal
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 Principal Financial Officer have concluded that these disclosure
controls and procedures are effective.
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.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports On Form 8-K
Exhibits and Financial Statement Schedules
Financial Statements
For a list of the Financial statements filed herewith, see the Index to
Financial Statements on page F-1. No schedules are included with the financial
statements because the required information is inapplicable or is presented in
the financial statements or notes thereto.
Exhibits
The exhibits filed or incorporated by reference as a part of this report are
listed in the Index to Exhibits which appears at page E-1.
Reports on Form 8-K
Current Report on Form 8-K for the announcement of earnings for the third
quarter ended September 30, 2002 filed on October 21, 2002, as amended by Form
8-K/A filed with the SEC on February 13, 2003.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 26, 2003.
YARDVILLE NATIONAL BANCORP
By: /s/ Patrick M. Ryan
--------------------------------------
Patrick M. Ryan, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Jay G. Destribats Chairman of the Board March 26, 2003
- ------------------------------ and Director
Jay G. Destribats
/s/ Patrick M. Ryan Director, President March 26, 2003
- ------------------------------ and Chief Executive Officer
Patrick M. Ryan
/s/ Stephen F. Carman Vice President, Treasurer, March 26, 2003
- ------------------------------ Principal Financial Officer and
Stephen F. Carman Principal Accounting Officer
/s/ Elbert G. Basolis, Jr. Director March 26, 2003
- ------------------------------
Elbert G. Basolis, Jr.
/s/ Lorraine Buklad Director March 26, 2003
- ------------------------------
Lorraine Buklad
/s/ Anthony M. Giampetro Director March 26, 2003
- ------------------------------
Anthony M. Giampetro
/s/ Sidney L. Hofing Director March 26, 2003
- ------------------------------
Sidney L. Hofing
/s/ Gilbert W. Lugossy Director March 26, 2003
- ------------------------------
Gilbert W. Lugossy
/s/ Louis R. Matlack Director March 26, 2003
- ------------------------------
Louis R. Matlack
/s/ Martin Tuchman Director March 26, 2003
- ------------------------------
Martin Tuchman
/s/ F. Kevin Tylus Director March 26, 2003
- ------------------------------
F. Kevin Tylus
/s/ Christopher S. Vernon Director March 26, 2003
- ------------------------------
Christopher S. Vernon
15
CERTIFICATION
I, Patrick M. Ryan, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Yardville National
Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ Patrick M. Ryan
--------------- ----------------------------------------
Name: Patrick M. Ryan
Title: President and Chief Executive Officer
16
CERTIFICATION
I, Stephen F. Carman, Vice President and Treasurer, certify that:
1. I have reviewed this annual report on Form 10-K of Yardville National
Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ Stephen F. Carman
--------------- ------------------------------------
Name: Stephen F. Carman
Title: Vice President and Treasurer
17
INDEX TO FINANCIAL STATEMENTS
Description Page
- ----------- ----
Consolidated Statements of Condition at December 31, 2002
and 2001 F-2
Consolidated Statements of Income for each of the years
ended December 31, 2002, 2001 and 2000 F-3
Consolidated Statements of Changes in Stockholders' Equity
for each of the years ended December 2002, 2001 and
2000 F-4
Consolidated Statements of Cash Flows for each of the years
ended December 31, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6
Independent Auditors' Report F-27
F-1
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED
Statements of Condition
December 31,
- -----------------------------------------------------------------------------------------------------
(in thousands, except share data) 2002 2001
- -----------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 28,608 $ 27,771
Federal funds sold 72,485 38,960
- -----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 101,093 66,731
- -----------------------------------------------------------------------------------------------------
Interest bearing deposits with banks 2,501 2,320
Securities available for sale 820,665 746,483
Investment securities (market value of $56,710 in 2002
and $64,887 in 2001) 54,690 65,753
Loans 1,195,143 1,007,973
Less: Allowance for loan losses (16,821) (13,542)
- -----------------------------------------------------------------------------------------------------
Loans, net 1,178,322 994,431
Bank premises and equipment, net 12,208 10,910
Other real estate 1,048 2,329
Bank Owned Life Insurance 40,850 31,764
Other assets 20,081 22,668
- -----------------------------------------------------------------------------------------------------
Total Assets $2,231,458 $1,943,389
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits
Non-interest bearing $ 126,183 $ 114,405
Interest bearing 1,146,103 978,285
- -----------------------------------------------------------------------------------------------------
Total Deposits 1,272,286 1,092,690
- -----------------------------------------------------------------------------------------------------
Borrowed funds
Securities sold under agreements to repurchase 10,000 10,000
Federal Home Loan Bank advances 746,000 695,008
Obligation for Employee Stock Ownership Plan (ESOP) 400 800
Other 1,311 1,305
- -----------------------------------------------------------------------------------------------------
Total Borrowed Funds 757,711 707,113
- -----------------------------------------------------------------------------------------------------
Company - obligated Mandatorily Redeemable Trust
Preferred Securities of Subsidiary Trust holding solely
junior Subordinated Debentures of the Company 32,500 32,500
Other liabilities 23,022 17,841
- -----------------------------------------------------------------------------------------------------
Total Liabilities $2,085,519 $1,850,144
- -----------------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities
Stockholders' equity
Preferred stock: no par value
Authorized 1,000,000 shares, none issued
Common stock: no par value
Authorized 12,000,000 shares
Issued 10,576,157 shares in 2002
and 8,214,568 shares in 2001 89,297 54,334
Surplus 2,205 2,205
Undivided profits 50,633 40,175
Treasury stock, at cost: 180,248 shares in 2002
and 172,000 shares in 2001 (3,154) (3,030)
Unallocated ESOP shares (400) (800)
Accumulated other comprehensive income 7,358 361
- -----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 145,939 93,245
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $2,231,458 $1,943,389
=====================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-2
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED
Statements of Income
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans $ 75,395 $ 70,408 $ 64,418
Interest on deposits with banks 60 171 82
Interest on securities available for sale 40,498 39,866 27,146
Interest on investment securities:
Taxable 690 3,722 4,647
Exempt from Federal income tax 2,345 2,016 1,642
Interest on Federal funds sold 1,157 2,765 2,454
- -------------------------------------------------------------------------------------------------------------------
Total Interest Income 120,145 118,948 100,389
- -------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on savings account deposits 11,228 9,931 7,937
Interest on certificates of deposit of $100,000 or more 5,184 7,581 6,918
Interest on other time deposits 17,747 27,085 24,772
Interest on borrowed funds 36,403 35,264 21,219
Interest on trust preferred securities 3,100 2,952 1,808
- -------------------------------------------------------------------------------------------------------------------
Total Interest Expense 73,662 82,813 62,654
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income 46,483 36,135 37,735
Less provision for loan losses 4,375 3,925 3,700
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision For Loan Losses 42,108 32,210 34,035
- -------------------------------------------------------------------------------------------------------------------
Non-Interest Income:
Service charges on deposit accounts 2,203 1,857 1,551
Securities gains, net 3,084 3,182 46
Income on Bank Owned Life Insurance 1,678 1,784 822
Other non-interest income 1,339 1,214 1,007
- -------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 8,304 8,037 3,426
- -------------------------------------------------------------------------------------------------------------------
Non-Interest Expense:
Salaries and employee benefits 17,890 14,923 11,632
Occupancy expense, net 3,507 2,817 2,404
Equipment expense 2,423 2,021 1,892
Early retirement of debt expense -- 2,217 --
Other non-interest expense 7,224 7,074 6,933
- -------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 31,044 29,052 22,861
- -------------------------------------------------------------------------------------------------------------------
Income before income tax expense 19,368 11,195 14,600
Income tax expense 5,364 2,642 4,259
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 14,004 $ 8,553 $ 10,341
- -------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Basic $ 1.72 $ 1.13 $ 1.47
Diluted $ 1.68 $ 1.11 $ 1.47
===================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-3
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED
Statements of Changes in Stockholders' Equity
Year Ended December 31, 2002, 2001 and 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Unallocated other
Common Common Undivided Treasury ESOP comprehensive
(in thousands, except share amounts) shares stock Surplus profits stock shares (loss) income Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1999 6,745,794 $ 40,052 $ 2,205 $ 27,462 $ (3,030) $ (1,600) $(6,264)$ 58,825
Net income 10,341 10,341
Unrealized gain - securities available
for sale, net of tax of $2,536 4,712 4,712
Less reclassification of realized
net gain on sale of securities
available for sale, net of tax of $16 (30) (30)
--------
Total comprehensive income 15,023
--------
Cash dividends (2,840) (2,840)
ESOP fair value adjustment (75) (75)
Common stock issued:
Exercise of stock options 14,420 69 69
Common shares issued 685,000 6,835 6,835
ESOP shares allocated 400 400
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2000 7,445,214 $ 46,881 $ 2,205 $ 34,963 $ (3,030) $ (1,200) $(1,582)$ 78,237
Net income 8,553 8,553
Unrealized gain - securities available
for sale, net of tax of $2,129 4,043 4,043
Less reclassification of realized
net gain on sale of securities
available for sale, net of tax of $1,082 (2,100) (2,100)
--------
Total comprehensive income 10,496
--------
Cash dividends (3,341) (3,341)
ESOP fair value adjustment 8 8
Common stock issued:
Exercise of stock options 700 6 6
Common shares issued 596,654 7,439 7,439
ESOP shares allocated 400 400
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2001 8,042,568 $ 54,334 $ 2,205 $ 40,175 $ (3,030) $ (800) $ 361 $ 93,245
Net income 14,004 14,004
Unrealized gain - securities available
for sale, net of tax of $4,646 9,032 9,032
Less reclassification of realized
net gain on sale of securities
available for sale, net of tax of $1,049 (2,035) (2,035)
--------
Total comprehensive income 21,001
--------
Cash dividends (3,546) (3,546)
ESOP fair value adjustment 110 110
Common stock issued:
Exercise of stock options 61,589 602 602
Common shares issued 2,300,000 34,251 34,251
ESOP shares allocated 400 400
Treasury shares acquired (8,248) (124) (124)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2002 10,395,909 $ 89,297 $ 2,205 $ 50,633 $ (3,154) $ (400) $ 7,358 $145,939
====================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-4
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED
Statements of Cash Flows
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 14,004 $ 8,553 $ 10,341
Adjustments:
Provision for loan losses 4,375 3,925 3,700
Depreciation 1,894 1,608 1,521
ESOP fair value adjustment 110 8 (75)
Amortization and accretion 2,909 1,040 146
Gain on sales of securities available for sale (3,084) (3,182) (46)
Writedown of other real estate 232 569 599
Loss on sale of other real estate -- 38 25
Increase in other assets (2,598) (4,344) (8,862)
Increase (decrease) in other liabilities 5,181 (1,993) 8,257
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 23,023 6,222 15,606
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest bearing deposits with banks (181) (1,729) 364
Purchase of securities available for sale (679,333) (864,841) (363,424)
Maturities, calls and paydowns of securities available for sale 379,487 360,152 65,692
Proceeds from sales of securities available for sale 237,492 328,301 49,240
Proceeds from maturities and paydowns of investment securities 15,755 63,352 5,263
Purchase of investment securities (5,751) (18,429) (7,841)
Purchase of Bank Owned Life Insurance (7,500) -- (15,000)
Net increase in loans (188,282) (192,469) (173,989)
Expenditures for bank premises and equipment (3,190) (3,090) (1,549)
Proceeds from sale of other real estate 1,065 572 626
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (250,438) (328,181) (440,618)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in non-interest bearing demand, money market,
and savings deposits 144,721 118,904 92,760
Net increase in certificates of deposit 34,875 23,478 113,751
Net increase in borrowed funds 50,598 162,690 246,534
Proceeds from issuance of trust preferred securities -- 6,000 15,000
Proceeds from issuance of common stock 34,853 7,445 6,904
Decrease in unallocated ESOP shares 400 400 400
Treasury shares acquired (124) -- --
Dividends paid (3,546) (3,341) (2,840)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 261,777 315,576 472,509
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 34,362 (6,383) 47,497
Cash and cash equivalents as of beginning of year 66,731 73,114 25,617
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of End of Year $ 101,093 $ 66,731 $ 73,114
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 75,204 $ 85,140 $ 56,700
Income taxes 1,097 3,745 6,922
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to other real estate,
net of charge offs $ 16 $ 1,466 $ 706
====================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
F-5
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
NOTES TO CONSOLIDATED
Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Yardville National Bancorp is a registered financial holding company which
conducts a general commercial and retail banking business through its principal
operating subsidiary, The Yardville National Bank (the Bank). The Bank provides
a broad range of lending, deposit and other financial products and services with
an emphasis on commercial real estate and commercial and industrial lending to
small- to mid-sized businesses and individuals. Our existing and target markets
are located in the corridor between New York City and Philadelphia. We operate
19 full-service branches, including 13 branches in our primary market of Mercer
County, New Jersey. We have expanded our franchise into demographically
attractive markets. In the past three years, we have opened three branches in
Hunterdon County, New Jersey, one branch in Burlington County, New Jersey, and
one branch in Middlesex County, New Jersey. The Bank is subject to competition
from other financial institutions and non-bank providers of financial services.
The Bank is also subject to the regulations of certain Federal agencies and
undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the balance sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
A. Consolidation. The consolidated financial statements include the accounts of
Yardville National Bancorp and its subsidiaries, Yardville Capital Trust,
Yardville Capital Trust II, Yardville Capital Trust III, and the Bank and the
Bank's wholly owned subsidiaries (collectively, the Corporation). All
significant inter-company balances and transactions have been eliminated in
consolidation.
B. Cash and Cash Equivalents. For purposes of the consolidated statements of
cash flows, cash and cash equivalents include cash on hand, amounts due from
banks, and Federal funds sold. Generally, Federal funds are purchased or sold
for one day periods.
C. Securities. The Corporation's securities portfolio is classified into three
separate portfolios: available for sale, held to maturity and trading.
Securities classified as available for sale may be used by the Corporation as
funding and liquidity sources and can be used to manage the Corporation's
interest rate sensitivity position. These securities are carried at their
estimated market value with their unrealized gains and losses carried, net of
income tax, as adjustments to stockholders' equity. If the market value loss is
determined to be other than temporary, the security is written down to its
market value with the loss recognized in the Income Statement. All securities
are evaluated quarterly to determine whether any unrealized losses are other
than temporary. Amortization of premium or accretion of discount are recognized
as adjustments to interest income, on a level yield basis. Gains and losses on
disposition are included in earnings using the specific identification method.
Investment securities are composed of securities that the Corporation has the
positive intent and ability to hold to maturity. These securities are stated at
cost, adjusted for amortization of premium or accretion of discount. The premium
or discount adjustments are recognized as adjustments to interest income, on a
level yield basis. Unrealized losses due to fluctuations in market value are
recognized as investment security losses when a decline in value is assessed as
being other than temporary.
Trading securities are purchased specifically for short-term appreciation
with the intent of selling in the near future. Trading securities are carried at
fair value with realized and unrealized gains and losses reported in
non-interest income.
D. Loans. Interest on loans is recognized based upon the principal amount
outstanding. Loans are stated at face value, less unearned income and net
deferred fees. A loan is considered past due when a payment has not been
received in accordance with the contractual terms. Generally, commercial loans
are placed on a nonaccrual status when they are 90 days past due unless they are
well secured and in the process of collection or, regardless of the past due
status of the loan, when management determines that the complete recovery of
principal and interest is in doubt. Commercial loans are generally charged off
after an analysis is completed which indicates that collection of the full
principal balance is in doubt. Consumer loans are generally charged off after
they become 120 days past due. Mortgage loans are not generally placed on a
nonaccrual status unless the value of the real estate has deteriorated to the
point that a potential loss of principal or interest exists. Subsequent payments
are credited to income only if collection of principal is not in doubt. If
principal and interest payments are brought contractually current and future
collectibility is reasonably assured, loans are returned to accrual status.
F-6
Mortgage loans are generally charged off when the value of the underlying
collateral does not cover the outstanding principal balance. Loan origination
and commitment fees less certain costs are deferred and the net amount amortized
as an adjustment to the related loan's yield. Loans held for sale are recorded
at the lower of aggregate cost or market.
E. Allowance for Loan Losses. The provision for loan losses charged to operating
expense is determined by management and is based upon a periodic review of the
loan portfolio, past experience, the economy, and other factors that may affect
a borrower's ability to repay the loan. This provision is based on management's
estimates and actual losses may vary from these estimates. These estimates are
reviewed and adjustments, as they become necessary, are reported in the periods
in which they become known. Management believes that the allowance for loan
losses is adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions, particularly in New Jersey. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses and the
valuation of other real estate. Such agencies may require the Corporation to
recognize additions to the allowance or adjustments to the carrying value of
other real estate based on their judgments about information available to them
at the time of their examination.
Management utilizes a system to rate substantially all of its loans based on
their respective risk. Consumer and residential mortgage loans are evaluated as
a group with only those loans that are delinquent evaluated separately. The
primary emphasis of the risk rating system is on commercial and industrial loans
and commercial real estate loans. Risk is measured by use of a matrix, which is
customized to measure the risk of each loan type. Risk ratings of 1 to 5 are
considered to be acceptable risk and are reserved at a range of 0.35% to 1.50%.
Risk ratings of between 6 and 8 are considered higher than acceptable risk and
are reserved at a range of 3.75% to 50% depending on the rating. Loans with a
risk rating of 9 are considered losses and reserved at 100%. In setting the
reserve percentage for each risk rating, management uses a computer software
program to perform migration analysis to determine historic loan loss
experience. In addition, management relies on its judgment concerning the
anticipated impact on credit risk of economic conditions, real estate values,
interest rates and level of business activity.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a loan to be impaired
when it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate or fair value of the collateral. Losses on impaired loans are
included in the allowance for loan losses through provisions charged to income.
F. Bank Premises and Equipment. Bank premises and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation. Depreciation is
computed on straight-line and accelerated methods over the estimated useful
lives of the assets ranging from three years to forty years depending on the
asset or lease. Charges for maintenance and repairs are expensed as they are
incurred.
G. Other Real Estate (ORE) - ORE comprises real properties acquired through
foreclosure or deed in lieu of foreclosure in partial or total satisfaction of
problem loans. The properties are recorded at the lower of cost or fair value
less estimated disposal costs at the date acquired. When a property is acquired,
the excess of the loan balance over the fair value is charged to the allowance
for loan losses. Any subsequent writedowns that may be required to the carrying
value of the property are included in other non-interest expense. Gains realized
from the sale of other real estate are included in other non-interest income,
while losses are included in non-interest expense.
H. Income Taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in the tax rates is recognized
in income in the period of the enactment date.
F-7
I. Stock Based Compensation.
The Corporation applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for stock options in the
consolidated financial statements. The following table illustrates the effect on
net income and earnings per share if the Corporation had applied the fair value
recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
- --------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Net income as reported:
As reported $ 14,004 $ 8,553 $ 10,341
Deduct: Total stock-based
employee compensation expense
determined under fair value based
methods for all awards,
net of related tax effects 331 158 1,859
- --------------------------------------------------------------------------------
Pro forma net income $ 13,673 $ 8,395 $ 8,482
- --------------------------------------------------------------------------------
Earnings per share:
Basic:
As reported $ 1.72 $ 1.13 $ 1.47
Pro forma 1.68 1.10 1.21
Diluted:
As reported $ 1.68 $ 1.11 $ 1.47
Pro forma 1.64 1.09 1.21
================================================================================
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002, 2001, and 2000, respectively: (1) an
expected annual dividend rate of $0.46, $0.44, and $0.44 (2) risk free rate of
2.7%, 4.3%, and 5.0% (3) expected life of approximately five years in 2002,
2001, and 2000 (4) expected volatility of 36% in 2002, 38% in 2001 and 40% in
2000.
F-8
J. Earnings Per Share. Basic net income per common share is calculated by
dividing net income, less the dividends on preferred stock, if any, by the
weighted average common shares outstanding during the period.
Diluted net income per common share is computed similarly to basic net income
per common share except the denominator is increased to include the additional
common shares that would have been outstanding if all potentially dilutive
common shares, principally stock options, were issued during the reporting
period.
Weighted average shares for the basic net income per share computation for
the years ended December 31, 2002, 2001, and 2000 were 8,124,000, 7,601,000, and
7,022,000, respectively. For the diluted net income per share computation,
common stock equivalents of 195,000, 77,000, and 17,000 are included for the
years ended December 31, 2002, 2001, and 2000, respectively. Common stock
equivalents that were antidilutive were 410,000, 654,000, and 1,019,522 in 2002,
2001, and 2000, respectively.
K. Comprehensive Income. Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes items recorded
directly to equity, such as unrealized gains and losses on securities available
for sale, net of tax. Comprehensive income is presented in the Consolidated
Statements of Changes in Stockholders' Equity.
L. Reclassification. Certain reclassifications have been made in the
consolidated financial statements for 2001 and 2000 to conform to the
classification presented in 2002.
2. CASH AND DUE FROM BANKS
The Corporation maintains various deposits with other banks. As of December 31,
2002 and 2001, the Corporation maintained sufficient cash on hand to satisfy
Federal regulatory requirements.
3. SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
other U.S. government
agencies $ 245,973 $ 2,928 $ -- $ 248,901 $ 113,862 $ 914 $ (915) $ 113,861
Mortgage-backed securities 468,745 10,157 (545) 478,357 521,988 3,204 (2,013) 523,179
Corporate obligations 55,087 417 (1,808) 53,696 72,946 779 (1,414) 72,311
Federal Reserve Bank Stock 2,411 -- -- 2,411 2,381 -- -- 2,381
Federal Home Loan Bank Stock 37,300 -- -- 37,300 34,751 -- -- 34,751
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 809,516 $ 13,502 $ (2,353) $ 820,665 $ 745,928 $ 4,897 (4,342) $ 746,483
====================================================================================================================================
The amortized cost and estimated market value of investment securities are as
follows:
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
(in thousands) Cost Gains Losses Value Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
Obligations of other U.S.
government agencies $ -- $ -- $ -- $ -- $ 13,000 $ 67 $ (1) $ 13,066
Obligations of state and
political subdivisions 50,308 1,938 (34) 52,212 48,694 367 (1,332) 47,729
Mortgage-backed securities 4,382 121 (5) 4,498 4,059 48 (15) 4,092
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 54,690 $ 2,059 $ (39) $ 56,710 $ 65,753 $ 482 (1,348) $ 64,887
====================================================================================================================================
F-9
The amortized cost and estimated market value of securities available for sale
and investment securities as of December 31, 2002 by contractual maturity are
shown below. The contractual maturity of Federal Reserve Bank and Federal Home
Loan Bank stock is shown as due after 10 years. Expected maturities will differ
from contractual maturities because issuers may have the right to call their
obligations with or without call or prepayment penalties.
SECURITIES AVAILABLE FOR SALE
Estimated
Amortized Market
(in thousands) Cost Value
- ----------------------------------------------------------------------
Due in 1 year or less $ 25,294 $ 25,635
Due after 1 year
through 5 years 195,789 198,045
Due after 5 years
through 10 years 31,997 32,369
Due after 10 years 87,691 86,259
- ----------------------------------------------------------------------
Subtotal 340,771 342,308
Mortgage-backed securities 468,745 478,357
- ----------------------------------------------------------------------
Total $809,516 $820,665
======================================================================
INVESTMENT SECURITIES
Estimated
Amortized Market
(in thousands) Cost Value
- ----------------------------------------------------------------------
Due in 1 year or less $ 750 $ 753
Due after 1 year
through 5 years 3,588 3,823
Due after 5 years
through 10 years 7,366 7,775
Due after 10 years 38,604 39,861
- ----------------------------------------------------------------------
Subtotal 50,308 52,212
Mortgage-backed securities 4,382 4,498
- ----------------------------------------------------------------------
Total $ 54,690 $ 56,710
======================================================================
Proceeds from sale of securities available for sale during 2002, 2001, and
2000 were $237.5 million, $328.3 million, and $49.2 million, respectively. Gross
gains of $3,383,000, $3,575,000, and $162,000 were realized on those sales in
2002, 2001, and 2000, respectively. Gross losses of $299,000, $393,000, and
$116,000 were realized on those sales in 2002, 2001 and 2000, respectively.
Securities with a carrying value of approximately $566.7 million as of
December 31, 2002 were pledged to secure borrowed funds, public deposits and for
other purposes as required or permitted by law. As of December 31, 2002, Federal
Home Loan Bank (FHLB) stock with a carrying value of $37.3 million was held by
the Corporation as required by the FHLB.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table shows comparative year-end detail of the loan portfolio and
includes unamortized deferred fees of $834,000 and $464,000 at December 31, 2002
and 2001, respectively:
December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------
Commercial real estate $ 607,328 $ 499,216
Residential 150,841 141,810
Commercial and industrial 338,047 282,135
Consumer 98,927 84,812
- ----------------------------------------------------------------------
Total loans $1,195,143 $1,007,973
======================================================================
Residential mortgage loans held for sale amounted to $1.0 million and $1.4
million as of December 31, 2002 and 2001, respectively. These loans are
accounted for at the lower of aggregate cost or market value and are included in
the table above.
The Corporation originates and sells mortgage loans to FHLMC and FNMA.
Generally, servicing on such loans is retained by the Corporation. As of
December 31, 2002 and 2001, loans serviced for FNMA and FHLMC were $20.4 million
and $29.4 million, respectively.
The Corporation has extended credit in the ordinary course of business to
directors, officers, and their associates on substantially the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with other customers of the Corporation.
F-10
The following table summarizes activity with respect to such loans:
Year Ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------
Balance as of beginning of year $ 37,409 $ 14,671
Additions 29,724 29,255
Reductions 24,137 6,517
- ----------------------------------------------------------------------
Balance as of end of year $ 42,996 $ 37,409
======================================================================
None of these loans were past due or on nonaccrual status as of December 31,
2002 and 2001.
The majority of the Corporation's business is with customers located within
Mercer County, New Jersey and contiguous counties. Accordingly, the ultimate
collectibility of the loan portfolio and the recovery of the carrying amount of
real estate are subject to changes in the region's economic environment and real
estate market. A portion of the total portfolio is secured by real estate. The
principal areas of exposure are construction and development loans, which are
primarily commercial and residential projects, and commercial mortgage loans.
Commercial mortgage loans are completed projects and are generally
owner-occupied or tenanted investment projects, creating cash flow.
F-11
Changes in the allowance for loan losses are as follows:
Year Ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Balance as of beginning
of year $13,542 $10,934 $ 8,965
Loans charged off (1,188) (1,699) (1,867)
Recoveries of loans
charged off 92 382 136
- ----------------------------------------------------------------------
Net charge offs (1,096) (1,317) (1,731)
Provision charged
to operations 4,375 3,925 3,700
- ----------------------------------------------------------------------
Balance as of
end of year $16,821 $13,542 $10,934
======================================================================
The detail of loans charged off is as follows:
Year Ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Commercial real estate $ (78) $ (696) $ (356)
Residential (168) -- (288)
Commercial and industrial (719) (591) (896)
Consumer (223) (412) (327)
- ----------------------------------------------------------------------
Total $(1,188) $(1,699) $(1,867)
======================================================================
Nonperforming assets include nonperforming loans and other real estate. The
nonperforming loan category includes loans on which accrual of interest has been
discontinued (nonaccrual); loans 90 days past due or more on which interest is
still accruing; and restructured loans. Nonperforming loans as a percentage of
total loans were 0.52% as of December 31, 2002 and 0.51% as of December 31,
2001.
A summary of nonperforming assets follows:
December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------
Nonaccrual loans:
Commercial real estate $2,395 $ 888
Residential 1,526 1,133
Commercial and industrial 1,143 1,494
Consumer 55 98
- ----------------------------------------------------------------------
Total nonaccrual loans $5,119 $3,613
- ----------------------------------------------------------------------
Restructured loans $ 711 $ 770
- ----------------------------------------------------------------------
Loans past due 90 days or more:
Residential $ 323 $ 514
Consumer 121 228
- ----------------------------------------------------------------------
Total loans past due 90 days
or more 444 742
- ----------------------------------------------------------------------
Total nonperforming loans 6,274 5,125
Other real estate 1,048 2,329
- ----------------------------------------------------------------------
Total nonperforming assets $7,322 $7,454
======================================================================
The Corporation has defined the population of impaired loans to be all
nonaccrual commercial loans. Impaired loans are individually assessed to
determine whether the loan's carrying value is in excess of the fair value of
the collateral or the present value of the loan's expected cash flows. Smaller
balance homogeneous loans that are collectively evaluated for impairment,
including residential mortgage and consumer loans, are specifically excluded
from the impaired loan portfolio.
The recorded investment in loans receivable for which an impairment has been
recognized as of December 31, 2002 and 2001 was $4.2 million and $3.2 million,
respectively. The related allowance for loan losses on these loans as of
December 31, 2002 and 2001 was $1.0 million and $848,000, respectively. The
average recorded investment in impaired loans during 2002 and 2001 was $3.8
million and $3.2 million, respectively. There was no interest income recognized
on impaired loans in 2002, 2001 and 2000. There are no commitments to lend
additional funds to debtors whose loans are nonperforming.
Additional income before income taxes amounting to approximately $240,000 in
2002, $163,000 in 2001 and $640,000 in 2000 would have been recognized if
interest on all loans had been recorded based upon original contract terms.
F-12
5. BANK PREMISES AND EQUIPMENT, NET
The following table represents comparative information for premises and
equipment:
December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------
Land and improvements $ 510 $ 854
Buildings and improvements 7,910 7,507
Furniture and equipment 15,035 11,586
Construction in process 1,364 1,680
- ----------------------------------------------------------------------
Total 24,819 21,627
Less accumulated depreciation 12,611 10,717
- ----------------------------------------------------------------------
Bank premises
and equipment, net $12,208 $10,910
======================================================================
6. DEPOSITS
Total deposits consist of the following:
December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------
Non-interest bearing
demand deposits $ 126,183 $ 114,405
Interest bearing
demand deposits 122,015 105,354
Money market deposits 314,529 203,872
Savings deposits 82,801 77,168
Certificates of deposit
of $100,000 and over 145,191 137,684
Other time deposits 481,567 454,207
- ----------------------------------------------------------------------
Total $1,272,286 $1,092,690
======================================================================
F-13
A summary of certificates of deposit by maturity is as follows:
December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------
Within one year $367,885 $542,966
One to two years 164,647 34,545
Two to three years 36,547 6,551
Three to four years 9,496 4,605
Four to five years 48,183 3,224
- ----------------------------------------------------------------------
Total $626,758 $591,891
- ----------------------------------------------------------------------
7. BORROWED FUNDS
Borrowed funds include securities sold under agreements to repurchase, FHLB
advances, and obligation for ESOP. Other borrowed funds consist of Federal funds
purchased and Treasury tax and loan deposits.
The following table presents comparative data related to borrowed funds of
the Corporation as of and for the years ended December 31, 2002, 2001, and 2000.
December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Securities sold
under agreements
to repurchase $ 10,000 $ 10,000 $ 10,000
FHLB advances 746,000 695,008 532,768
Obligation for ESOP 400 800 1,200
Other 1,311 1,305 1,255
- ----------------------------------------------------------------------
Total $757,711 $707,113 $545,223
- ----------------------------------------------------------------------
Maximum amount
outstanding at
any month end $757,711 $707,113 $545,223
Average interest rate
on year-end balance 4.85% 4.97% 5.79%
Average amount
outstanding
during the year $735,201 $644,690 $367,021
Average interest rate
for the year 4.95% 5.47% 5.78%
======================================================================
There are $10.0 million in securities sold under agreements to repurchase
with an expected maturity over 90 days as of December 31, 2002. The outstanding
amount is a callable repurchase agreement with a maturity of ten years and a
call date of one year. Due to the call provision, the expected maturity could
differ from the contractual maturity.
The FHLB advances as of December 31, 2002, mature as follows:
- ----------------------------------------------------------------------
(in thousands) 2002
- ----------------------------------------------------------------------
Within one year $ 56,000
Over one to two years 87,000
Over four to five years 10,000
Over five years 593,000
- ----------------------------------------------------------------------
Total $746,000
======================================================================
The outstanding amount includes $629.0 million in callable advances with two
to ten year maturities and call dates of three months to five years. Due to the
call provisions, expected maturities could differ from contractual maturities.
In December 2001, the Corporation retired $50.0 million in convertible FHLB
advances early. The $50.0 million consisted of ten year original maturity
borrowings with lockout dates ranging from three months to two years. The
borrowings had an average rate of 4.38% and an average maturity of 8.8 years. As
a result of the transaction, the Corporation recognized a loss on the early
retirement of the debt of $2.2 million ($1.5 million net of tax benefit of
$753,000). The retirement was funded through short term floating rate FHLB
advances. The transaction was undertaken to improve the interest rate risk
profile of the Corporation. In 2002, the Corporation adopted Financial
Accounting Standards Board (FASB) No. 145 "Rescission of FASB Statement No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." This
statement eliminated the extraordinary item treatment of the early retirement of
debt on the transaction conducted in December of 2001. As a result, the
Consolidated Statement of Income for 2001 has been reclassified to reflect the
loss on this transaction as early retirement of debt expense in non-interest
expense.
F-14
Interest expense on borrowed funds is comprised of the following:
Year Ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Securities sold under
agreements to
repurchase $ 624 $ 624 $ 1,281
FHLB advances 35,722 34,535 19,785
Obligation for ESOP 44 72 100
Other 13 33 53
- ----------------------------------------------------------------------
Total $36,403 $35,264 $21,219
======================================================================
8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY
(TRUST PREFERRED SECURITIES)
On March 28, 2001, Yardville Capital Trust III (Trust III), a statutory business
trust, and a wholly owned subsidiary of Yardville National Bancorp, issued $6.0
million of 10.18% Trust Preferred Securities in a private placement transaction
and $190,000 of 10.18% Common Securities to Yardville National Bancorp. Proceeds
from the issuance of the Trust Preferred Securities were immediately used by
Trust III to purchase $6.2 million of 10.18% Subordinated Debentures maturing
June 8, 2031 from Yardville National Bancorp. Trust III exists for the sole
purpose of issuing Trust Preferred Securities and investing the proceeds into
Subordinated Debentures of Yardville National Bancorp. These Subordinated
Debentures constitute the sole assets of Trust III. These Subordinated
Debentures are redeemable in whole or part prior to maturity after June 8, 2011.
Trust III is obligated to distribute all proceeds of a redemption, whether
voluntary or upon maturity, to holders of the Trust
F-15
Preferred Securities. Yardville National Bancorp's obligation with respect to
the Trust Preferred Securities and the Subordinated Debentures, when taken
together, provides a full and unconditional guarantee on a subordinated basis by
Yardville National Bancorp of the obligations of Trust III to pay amounts when
due on the Trust Preferred Securities.
On June 23, 2000, Yardville Capital Trust II (Trust II), a statutory business
trust and a wholly owned subsidiary of Yardville National Bancorp, issued $15.0
million of 9.50% Trust Preferred Securities in a private placement transaction
and $464,000 of 9.50% Common Securities to Yardville National Bancorp. Proceeds
from the issuance of the Trust Preferred Securities were immediately used by
Trust II to purchase $15.5 million of 9.50% Subordinated Debentures maturing
June 22, 2030 from Yardville National Bancorp. Trust II exists for the sole
purpose of issuing Trust Preferred Securities and investing the proceeds into
Subordinated Debentures of Yardville National Bancorp. These Subordinated
Debentures constitute the sole assets of Trust II. These Subordinated Debentures
are redeemable in whole or part prior to maturity after June 23, 2010. Trust II
is obligated to distribute all proceeds of a redemption, whether voluntary or
upon maturity, to holders of the Trust Preferred Securities. Yardville National
Bancorp's obligation with respect to the Trust Preferred Securities and the
Subordinated Debentures, when taken together, provides a full and unconditional
guarantee on a subordinated basis by Yardville National Bancorp of the
obligations of Trust II to pay amounts when due on the Trust Preferred
Securities.
In 1997, Yardville Capital Trust (the Trust) issued $11.5 million of 9.25%
Trust Preferred Securities and $356,000 of 9.25% Common Securities to Yardville
National Bancorp. Proceeds were used by the Trust to purchase $11.9 million of
9.25% Subordinated Debentures maturing November 1, 2027. Those debentures are
redeemable in whole or in part prior to maturity after November 1, 2002.
On February 19, 2003, Yardville Capital Trust IV (Trust IV), a statutory
business trust and a wholly owned subsidiary of Yardville National Bancorp,
issued $15.0 million of floating rate Trust Preferred Securities in a private
placement transaction and $464,000 of floating rate Common Securities to
Yardville National Bancorp. The floating rate is based on three month LIBOR plus
340 basis points. Proceeds from the issuance of the Trust Preferred Securities
were immediately used by Trust IV to purchase $15.0 million of floating rate
Subordinated Debentures maturing March 1, 2033 from Yardville National Bancorp.
Trust IV exists for the sole purpose of issuing Trust Preferred Securities and
investing the proceeds into Subordinated Debentures of Yardville National
Bancorp. These Subordinated Debentures constitute the sole assets of Trust IV.
These Subordinated Debentures are redeemable in whole or part prior to maturity
after March 1, 2008. Trust IV is obligated to distribute all proceeds of a
redemption, whether voluntary or upon maturity, to holders of the Trust
Preferred Securities. Yardville National Bancorp's obligation with respect to
the Trust Preferred Securities and the Subordinated Debentures, when taken
together, provides a full and unconditional guarantee on a subordinated basis by
Yardville National Bancorp of the obligations of Trust IV to pay amounts when
due on the Trust Preferred Securities.
On February 20, 2003, the Corporation announced the redemption of the $11.5
million of 9.25% Subordinated Debentures due November 1, 2027 and the 9.25%
Common Securities. The redemption date is March 31, 2003 at the price of 100% of
principal amount plus accrued and unpaid distributions.
9. INCOME TAXES
Income taxes reflected in the consolidated financial statements for 2002, 2001,
and 2000 are as follows:
Year Ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Federal:
Current $6,357 $3,587 $5,330
Deferred (1,120) (1,025) (1,179)
State:
Current 669 80 108
Deferred (542) -- --
- ----------------------------------------------------------------------
Total tax expense $5,364 $2,642 $4,259
======================================================================
F-16
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws. Temporary differences which give rise to a
significant portion of deferred tax assets and liabilities for 2002 and 2001 are
as follows:
December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------
Deferred tax assets:
Allowance for
loan losses $ 6,718 $ 5,409
Writedown of basis
of ORE properties 61 149
Deferred income 11 14
Nonaccrual loans 3 --
Net state operating
loss carryforwards 397 46
Depreciation 91 --
Deferred compensation 1,403 1,022
- ----------------------------------------------------------------------
Total deferred tax assets $ 8,684 $ 6,640
- ----------------------------------------------------------------------
Valuation allowance (78) (78)
- ----------------------------------------------------------------------
Deferred tax liabilities:
Accumulated other
comprehensive income (3,791) (194)
Deferred income (1,414) (1,065)
Unamortized discount
accretion (97) (77)
Depreciation -- 40
Other -- (27)
- ----------------------------------------------------------------------
Total deferred tax liabilities $(5,302) $(1,323)
- ----------------------------------------------------------------------
Net deferred tax assets $ 3,304 $ 5,239
======================================================================
F-17
The Corporation has established the valuation allowance against certain
temporary differences. The Corporation is not aware of any factors which would
generate significant differences between taxable income and pre-tax accounting
income in future years, except for the effects of the reversal of current or
future net deductible temporary differences. Management believes, based upon
current information, that it is more likely than not that there will be
sufficient taxable income through carryback to prior years to realize the net
deferred tax asset. However, there can be no assurance regarding the level of
earnings in the future.
A reconciliation of the tax expense computed by multiplying pre-tax
accounting income by the statutory Federal income tax rate of 34% is as follows:
Year Ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Income tax expense
at statutory rate $6,585 $3,806 $4,964
State income taxes, net
of Federal benefit 84 53 71
Changes in taxes
resulting from:
Tax exempt interest (822) (701) (591)
Tax exempt income (571) (606) (279)
Non-deductible
expenses 88 90 94
- ----------------------------------------------------------------------
Total $5,364 $2,642 $4,259
======================================================================
10. BENEFIT PLANS
Retirement Savings Plan. The Corporation has a 401(k) plan which covers
substantially all employees with one or more years of service. The plan permits
all eligible employees to make basic contributions to the plan up to 12% of base
compensation. Under the plan, the Corporation provided a matching contribution
of 50% in 2002, 2001 and 2000 up to 6% of base compensation. Employer
contributions to the plan amounted to $209,000 in 2002, $178,000 in 2001, and
$151,000 in 2000.
Postretirement Benefits. The Corporation provides additional postretirement
benefits, namely life and health insurance, to retired employees over the age of
62 who have completed 15 years of service. The plan calls for retirees to
contribute a portion of the cost of providing these benefits in relation to
years of service.
The cost of retiree health and life insurance benefits is recognized over the
employees' period of service. There were $128,000 in periodic postretirement
benefit costs under FASB Statement No. 106 in 2002, $84,000 in 2001 and none for
2000. The actuarial present value of benefit obligations was $967,000 in 2002
and $839,000 in 2001.
Stock Option Plans. The Corporation maintains stock option plans for both
officers and directors. In March 1988, the stockholders approved the 1988 plan
for key employees (Employee Plan). The Employee Plan allowed for the granting of
up to 328,000 shares of the Corporation's common stock at an option price no
less than the market value of the stock on the date such options are granted. As
of February 28, 1998, no incentive stock options may be granted under the
Employee Plan.
In April 1997, the stockholders approved the 1997 stock option plan for key
employees (The 1997 Plan). The 1997 Plan allows for the granting of 1,070,000
shares of the Corporation's common stock at an option price to be no less than
the market value of the stock on the date such options are granted. Options
typically have a ten-year term and vest ratably over a five-year period. At
December 31, 2002, there were 208,688 shares available for grant under The 1997
Plan.
In April 1994, the Board of Directors approved a non-qualified stock option
plan for non-employee directors (Director Plan). The Director Plan allowed for
the granting of 228,820 shares of the Corporation's common stock at an option
price to be no less than the market value of the stock on the date such options
are granted. As of November 1, 2002, options to purchase an aggregate of 125,980
shares of our common stock were outstanding under the plan (at exercise prices
ranging from $10.94 to $17.20 per share, with vesting over a period of four
years and terms of ten years). In addition, an aggregate of 8,248 shares had
been acquired upon exercise of vested options by two directors. On three
occasions (once in 1998, once in 2000 and once in 2002), the number of shares
available for the grant of options under this plan was increased by the Board of
Directors. Each of these increases was inadvertently implemented without
obtaining shareholder approval required under applicable rules of the Nasdaq
Stock Market. Upon being advised of this shareholder approval requirement, the
Corporation cancelled the increases in the number of shares available under the
plan, and the non-employee directors holding options granted without shareholder
approval have rescinded and terminated such options. These terminations were
completed in November 2002. In addition, the Corporation and the two directors
that had exercised vested options agreed to rescind the exercise by taking back
shares that had been acquired upon exercise of such options in exchange for a
return of the exercise price (aggregating approximately $124,000) to the
applicable holder. These terminations were completed in November 2002. These
transactions did not have a material adverse effect on the Corporation's
financial condition or results of operations. At December 31, 2002, there were
no shares available for grant under the Director Plan.
F-18
The table below lists information on stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Number of Weighted
Range of Number Remaining Average Shares Average
Exercise Of Shares Contractual Exercise Exercisable Exercise
Prices Outstanding Life in Years Price at Period End Price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 3.90 - $ 5.85 6,490 0.42 $ 3.90 6,490 $ 3.90
9.875 - 14.81 469,876 7.93 11.19 169,764 11.16
16.00 - 20.12 390,888 5.70 17.29 273,185 17.20
- ------------------------------------------------------------------------------------------------------------------------------------
$ 3.90 - $20.12 867,254 7.56 $13.88 449,439 $14.73
====================================================================================================================================
The tables below list the activity in our stock option plans for each of the
years in the three-year period ended December 31, 2002.
Weighted Average Weighted Average
Director Plan Shares Exercise Price 1988 and 1997 Plans Shares Exercise Price
- ------------------------------------------------------------ ----------------------------------------------------------------
Balance, Balance,
December 31, 1999 73,800 $16.37 December 31, 1999 420,719 $15.64
- ------------------------------------------------------------ ----------------------------------------------------------------
Shares: Shares:
Granted 82,500 10.95 Granted 429,560 10.95
Exercised 2,680 8.77 Exercised 11,740 3.90
Expired 3,280 10.27 Expired 2,192 13.68
- ------------------------------------------------------------ ----------------------------------------------------------------
Balance, Balance,
December 31, 2000 150,340 $13.66 December 31, 2000 836,347 $13.39
- ------------------------------------------------------------ ----------------------------------------------------------------
Shares: Shares:
Exercised 600 10.49 Granted 39,200 12.74
Expired 1,640 10.06 Exercised 100 3.90
- ------------------------------------------------------------ Expired 6,100 16.44
Balance, ----------------------------------------------------------------
December 31, 2001 148,100 $13.67 Balance,
- ------------------------------------------------------------ December 31, 2001 869,347 $13.34
Shares: ----------------------------------------------------------------
Granted 7,500 12.52 Shares:
Exercised 8,248 14.92 Granted 56,000 17.45
Expired 28,684 12.94 Exercised 53,341 8.97
Terminated 118,668 13.74 Expired 4,752 12.32
- ------------------------------------------------------------ ----------------------------------------------------------------
Balance, Balance,
December 31, 2002 -- $ 0.00 December 31, 2002 867,254 $13.88
- ------------------------------------------------------------ ----------------------------------------------------------------
Shares exercisable as of Shares exercisable as of
December 31, 2002 -- $ 0.00 December 31, 2002 449,439 $14.73
============================================================ ================================================================
F-19
Benefit Plans. The Corporation has a salary continuation plan for key executives
and a director deferred compensation plan for its board members. The plans
provide for yearly retirement benefits to be paid over a specified period. In
addition, there is an officer group term life insurance plan for divisional
officers. The present value of the benefits accrued under these plans as of
December 31, 2002 and 2001 is approximately $2.4 million and $1.7 million,
respectively, and is included in other liabilities in the accompanying
consolidated statements of condition. Compensation expense of approximately
$744,000, $780,000, and $140,000 is included in the accompanying consolidated
statements of income for the years ended December 31, 2002, 2001, and 2000,
respectively.
In connection with the benefit plans, the Corporation has purchased life
insurance policies on the lives of the executives, directors, and divisional
officers. The Corporation is the owner and beneficiary of the policies. The cash
surrender values of the policies are approximately $40.9 million and $31.8
million as of December 31, 2002 and 2001, respectively.
11. COMMON STOCK
On November 14, 2002, the Corporation repurchased 8,248 shares of the
Corporation's common stock for approximately $124,000 from two directors
relating to the termination of the 1994 stock option plan. See Note 10 - Benefit
Plans.
In 1999, the Bank established an Employee Stock Ownership Plan and related
trust (ESOP) for eligible employees. The ESOP is a tax-qualified plan subject to
the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Employees with twelve months of employment with the Bank and who have worked at
least 1,000 hours are eligible to participate. The ESOP borrowed $2 million from
an unaffiliated financial institution and purchased 155,340 shares of common
shares, no par value, of the Corporation. Shares purchased by the ESOP are held
in a suspense account pending allocation among participants as the loan is
repaid. Compensation expense is recognized based on the fair value of the stock
when it is committed to be released.
Compensation expense amounted to $445,000, $367,000 and $275,000 for the
years ended December 31, 2002, 2001, and 2000, respectively. The fair value of
unearned shares at December 31, 2002 is $536,000. The number of shares allocated
as of December 31, 2002 was 124,272.
Unallocated shares are deducted from common shares outstanding for earnings
per share purposes with shares which are committed to be released during the
year added back into weighted average shares outstanding.
On June 23, 2000, the Corporation completed the private placement of 68,500
units, each unit consisting of 10 shares of common stock and 1 common stock
purchase warrant. The warrants have an expiration date of June 23, 2010 and a
purchase price of $12.00 per share. The units were sold to a limited number of
accredited investors and generated gross proceeds of $6.9 million. Net proceeds
after offering costs were $6.8 million. Nearly all the net proceeds were
contributed to the Bank to support future asset growth.
On August 22, 2001, the Corporation completed the private placement of
596,654 shares of common stock for an aggregate purchase price of $7.8 million.
Net proceeds after offering costs were $7.4 million. Of the net proceeds, $6.0
million was contributed to the Bank to support future asset growth.
On December 18, 2002, the Corporation completed the sale of 2,300,000 shares
of its common stock in an underwritten public offering. The common stock was
offered at a price of $16.25 per share and generated gross proceeds of $37.4
million. Net proceeds after the underwriting discount and other offering costs
were $34.3 million. Of the net proceeds, $33.0 million was contributed to the
Bank to support future asset growth.
The Bank's 401(k) savings plan has, since August 1998, included an option for
the bank employees to invest a portion of their plan accounts in a fund (YNB
Stock Fund) that has acquired shares of the Corporation's common stock in the
open market. In connection with the addition to the plan of the YNB Stock Fund,
the Corporation inadvertently did not register with the Securities and Exchange
Commission the 401(k) savings plan interests or the shares of common stock
acquired by the YNB Stock Fund and may not have distributed certain information
to plan participants on a timely basis as required by securities laws. After
being advised of those requirements, the Corporation promptly completed the
registration and distributed the required information to plan participants. The
Board of Directors has approved the discontinuance of the YNB Stock Fund, which
will involve the sale of the shares of the Corporation's common stock owned by
the YNB Stock Fund and application of the proceeds of such sale to other
investment choices within the 401(k) savings plan at the direction of the
participants. It is anticipated that such sale will occur in the near future and
the shares of common stock in the YNB Stock Fund will be purchased by the YNB
Employee Stock Ownership Plan. As of October 31, 2002 (the most recent date for
which data was available), there was a total of approximately $5.2 million held
in investments by participants in the 401(k) savings plan, of which
approximately $738,000 was invested in the YNB Stock Fund (which owned
approximately 41,847 shares of common stock as of such date). While it is
possible that the Corporation may have liability based on the requirements
applicable to the 401(k) savings plan, the Corporation does not believe that any
such liabilities or claims, if asserted, would have a material adverse effect on
the financial condition or results of operations based on our year-end stock
price. That conclusion is based in part on the expectation that the sale of
shares of the Corporation's common stock in the YNB Stock Fund will occur in the
near future and at a price at or near the year-end market price of our common
stock. There can be no assurances that the Corporation will be able to complete
the sale of shares by the 401(k) plan in the time period or at the prices
currently contemplated.
The Corporation also maintained a dividend reinvestment and stock purchase
plan (YNB DRIP) pursuant to which shareholders may elect to have their cash
dividends used to purchase shares of the Corporation's common stock and may make
additional purchases (up to monthly limits) of shares of the Corporation's
common stock through the YNB DRIP. In addition, employees of the Corporation are
permitted to purchase shares
F-20
through the YNB DRIP through payroll withholding (subject to monthly limits),
and such employees need not otherwise be shareholders or participate in the
dividend reinvestment feature of the YNB DRIP. All purchases of shares were
handled by an independent administrator and were purchased in open market
transactions at prevailing market prices. Shares acquired through the YNB DRIP
are held by an independent custodian until a participant directs that they be
distributed. The Corporation covered the administrative costs of the YNB DRIP
and all brokerage costs relating to purchases and sales of shares in the YNB
DRIP. In connection with the dividend reinvestment feature only, in 1997 the
Corporation modified the YNB DRIP to permit participating shareholders to
acquire the shares in the YNB DRIP at a 3% discount to the market price on the
date of purchase. This discount is not provided for other direct purchases by
shareholders or employees in the YNB DRIP. In connection with the addition of
the 3% discount to the dividend reinvestment feature of the YNB DRIP, the
Corporation inadvertently did not register with the Securities and Exchange
Commission the shares of common stock acquired by the YNB DRIP and may not have
distributed certain information to plan participants as required by securities
laws. After recently being advised of those requirements, the Corporation
promptly temporarily suspended operation of the YNB DRIP and has remitted to
plan participants cash funds equal to all amounts not yet used to acquire shares
of common stock. The Corporation is currently preparing to register the shares
of common stock acquired (and to be acquired) by the YNB DRIP, and expect the
registration to be completed in the near future. In addition, the Board of
Directors has approved an offer to be made to all YNB DRIP participants to
rescind their purchases of common stock through the YNB DRIP since December 1,
1997. Approximately 125,993 shares of common stock (as adjusted for stock splits
and stock dividends) have been acquired through the YNB DRIP since December 1,
1997, at prices ranging from $8.88 to $19.93 per share. As of December 31, 2002,
the market price of the Corporation's common stock was $17.24 per share. It is
anticipated that the rescission offer will commence in the near future (subject
to completion of required filings with the Securities and Exchange Commission).
It is management's belief that participants will not be likely to accept the
rescission offer if the market price of the common stock is then close to or
higher than the rescission price (an amount equal to the original purchase price
of the shares, plus interest at a statutory rate since the date of purchase and
less any amounts received by the participant with respect to such shares,
including subsequent cash dividends whether or not they were reinvested in
shares of common stock). In the event some participants do accept the rescission
offer, it is management's belief, based upon the year-end market price of the
common stock, that the aggregate amount of rescission payments would not have a
material adverse effect on the Corporation's financial condition or results of
operations. There can be no assurances that the Corporation will be able to
complete the rescission offer in the time period currently contemplated.
12. OTHER NON-INTEREST EXPENSE
Other non-interest expense included the following:
Year Ended December 31,
- ----------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ----------------------------------------------------------------------
Marketing $1,104 $ 957 $1,144
Stationery and supplies 823 633 628
Communication and postage 809 694 601
Outside services and
processing 595 400 269
Audit and examination fees 570 501 396
ORE expenses 418 831 893
Attorneys' fees 258 238 257
Insurance (other) 205 152 156
FDIC insurance premium 200 180 161
Amortization of trust preferred
expenses 190 210 176
Other 2,052 2,278 2,252
- ----------------------------------------------------------------------
Total $7,224 $7,074 $6,933
======================================================================
13. RELATED PARTY TRANSACTIONS
The Corporation has had and expects in the future to have other transactions in
the ordinary course of business with many of its directors, senior officers and
other affiliates (and their associates) on substantially the same terms as those
prevailing for comparable transactions with others. For a discussion of credit
transactions, see Note 4 - Loans and Allowance for Loan Losses. Listed below is
a summary of material relationships or transactions with the Corporation's
directors, senior officers and other affiliates.
In October 1999, upon expiration of the initial five year term, the Bank
renewed its lease for a five year period for its Trenton, New Jersey branch
office, which is owned by The Lalor Urban Renewal Limited Partnership. The Lalor
Corporation, which is the general partner of the limited partnership is owned by
Sidney L. Hofing, a director of the Corporation and the Bank. Under the lease,
the Bank is obligated to pay approximately $2,600 per month, excluding utilities
and maintenance expenses.
In July 2000, the Bank signed a ten year lease with 4 five year renewal
options for its Lawrence, New Jersey branch office. The property is owned by
Union Properties LLC. Sidney L. Hofing, a director of the Corporation and the
Bank, has an ownership interest in Union Properties LLC. Under the terms of the
lease, the Bank is obligated to pay approximately $7,300 per month, excluding
utilities and maintenance expense.
In May 2001, the Bank signed a ten year lease with 3 five year renewal
options for its Bordentown, New Jersey branch office. The Bank acquired the
property from the bankruptcy estate of a borrower and sold the property to BYN
LLC a limited liability company of which Mr. Hofing, a director of the
Corporation and the Bank is a member. The purchase price was $529,237. Under the
terms of the lease, the Bank is obligated to pay approximately $7,000 per month,
excluding utilities and maintenance expenses.
F-21
In October 2001, the Bank signed a fifteen year lease with 3 five year
renewal terms for its Hunterdon County Regional Headquarters. The property is
owned by FYNB, LLC. Sidney Hofing, a director of the Corporation and the Bank
had an ownership interest in FYNB, LLC, but several members of Mr. Hofing's
family including his spouse continue to have an ownership interest. Under the
terms of the lease, the Bank is obligated to pay approximately $17,500 per
month, excluding utilities and maintenance expenses.
Except as described in Note 4 - Loans and Allowance for Loan Losses, there
were no new material relationships or transactions with Directors, senior
officers or their affiliates established in 2002.
Subsequent to year-end 2002, on February 24, 2003, the Bank entered into a
contract of sale on its former operations center to Christopher S. Vernon, a
director of the Corporation and the Bank. The purchase price is $650,000 and the
Bank will record a gain on the sale of the property at closing. The transaction
should close in the second quarter of 2003. The sale is contingent on Mr. Vernon
and the Bank finalizing a lease on basement space in that building for a term of
less than one year.
14. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation enters into a variety of financial instruments with off-balance
sheet risk in the normal course of business. These financial instruments include
commitments to extend credit and letters of credit, both of which involve, to
varying degrees, elements of risk in excess of the amount recognized in the
consolidated financial statements.
Credit risk, the risk that a counterparty of a particular financial
instrument will fail to perform, is the contract amount of the commitments to
extend credit and letters of credit. The credit risk associated with these
financial instruments is essentially the same as that involved in extending
loans to customers. Credit risk is managed by limiting the total amount of
arrangements outstanding and by applying normal credit policies to all
activities with credit risk. Collateral is obtained based on management's credit
assessment of the customer.
The contract amounts of off-balance sheet financial instruments as of
December 31, 2002 and 2001 for commitments to extend credit were $243.1 million
and $191.8 million, respectively. For letters of credit, the contract amounts
were $17.8 million and $13.4 million, respectively.
As part of its normal course of business, the Corporation issues standby
letters of credit as part of an overall lending relationship. These standby
letters of credit are primarily related to performance guarantees on real estate
development. At December 31, 2002, the amount of standby letters of credit
outstanding and the maximum liability of the Corporation was $16.6 million. The
Corporation typically obtains collateral to secure standby letters of credit. At
December 31, 2002, total collateral securing standby letters of credit was $14.1
million and is available to offset potential losses.
Commitments to extend credit and letters of credit may expire without being
drawn upon, and therefore, the total commitment amounts do not necessarily
represent future cash flow requirements.
The Corporation maintains lines of credit with four of its correspondent
banks. There were $25.0 million in lines of credit available as of December 31,
2002. Subject to collateral requirements, the Corporation also maintains lines
of credit with the FHLB and three brokerage firms. There were approximately
$300.0 million in lines available at December 31, 2002.
The Corporation leases various banking offices, its corporate headquarters
and operations center. Total lease rental expense was $1.9 million, $1.3
million, and $1.0 million for the years ended December 31, 2002, 2001, and 2000,
respectively. Minimum rentals under the terms of the leases are approximately
$2.1 million per year in 2003 through 2007.
The Corporation and the Bank are party, in the ordinary course of business,
to litigation involving collection matters, contract claims and other
miscellaneous causes of action arising from their business. Management does not
consider that any such proceedings depart from usual routine litigation, and in
its judgment, the Corporation's consolidated financial position or results of
operations will not be affected materially by the final outcome of any pending
legal proceedings.
15. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets (as defined in the regulations). Management believes,
as of December 31, 2002, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 2002, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
Permission from the Comptroller of the Currency is required if the total of
dividends declared in a calendar year exceeds the total of the Bank's net
profits, as defined by the Comptroller, for that year, combined with its
retained net profits of the two preceding years. The retained net profits of the
Bank available for dividends are approximately $14.3 million as of December 31,
2002.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC
Improvement Act") primarily addresses additional sources of funding for the Bank
Insurance Fund, which insures the deposits of commercial banks and saving banks.
It also imposes a number of mandatory supervisory measures on savings
associations and banks.
F-22
The following table presents the Corporation's and Bank's actual capital amounts
and ratios:
- ---------------------------------------------------------------------------------------------------------------------------
REGULATORY CAPITAL
Per Regulatory Guidelines
- ---------------------------------------------------------------------------------------------------------------------------
Actual Minimum "Well Capitalized"
- ---------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002:
Corporation
Total capital (to risk-weighted assets) $187,897 13.0% $115,626 8.0% $144,533 10.0%
Tier I capital (to risk-weighted assets) 171,076 11.8 57,813 4.0 86,720 6.0
Tier I capital (to average assets) 171,076 8.2 83,817 4.0 104,772 5.0
Bank
Total capital (to risk-weighted assets) $181,251 12.6% $115,515 8.0% $144,393 10.0%
Tier I capital (to risk-weighted assets) 164,430 11.4 57,757 4.0 86,636 6.0
Tier I capital (to average assets) 164,430 7.9 83,493 4.0 104,367 5.0
As of December 31, 2001:
Corporation
Total capital (to risk-weighted assets) $138,919 11.3% $ 98,752 8.0% $123,441 10.0%
Tier I capital (to risk-weighted assets) 123,838 10.0 49,376 4.0 74,064 6.0
Tier I capital (to average assets) 123,838 6.9 71,575 4.0 89,469 5.0
Bank
Total capital (to risk-weighted assets) $134,163 10.9% $ 98,476 8.0% $123,095 10.0%
Tier I capital (to risk-weighted assets) 120,621 9.8 49,238 4.0 73,857 6.0
Tier I capital (to average assets) 120,621 6.8 71,309 4.0 89,136 5.0
===========================================================================================================================
The FDIC Improvement Act requires financial institutions to take certain
actions relating to their internal operations, including: providing annual
reports on financial condition and management to the appropriate Federal banking
regulators, having an annual independent audit of financial statements performed
by an independent public accountant and establishing an independent audit
committee composed solely of outside directors. The FDIC Improvement Act also
imposes certain operational and managerial standards on financial institutions
relating to internal controls, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits.
Bank holding companies and banks are subject to extensive supervision and
regulation under both Federal and state laws. The regulation and supervision is
designed primarily for the protection of consumers, depositors and the FDIC, and
not the Corporation or its stockholders. Enforcement actions for failure to
comply with applicable requirements may include the imposition of a conservator
or receiver, cease-and-desist orders and written agreements, the termination of
insurance on deposits, the imposition of civil money penalties and removal and
prohibition orders. In addition, private parties may assert claims. If any
enforcement action is taken by a banking regulator or private claims are
asserted, the value of an equity investment in the Corporation could be
subtantially reduced or eliminated.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value estimates, methods and assumptions were used to measure
the fair value of each class of financial instruments for which it is practical
to estimate that value:
Cash and Cash Equivalents. For such short-term investments, the carrying amount
was considered to be a reasonable estimate of fair value.
Interest Bearing Deposits with Banks. For interest bearing deposits with banks,
the carrying amount was considered to be a reasonable estimate of fair value.
Securities and Mortgage-backed Securities. The fair value of investments and
mortgage-backed securities is based on bid prices published in financial
newspapers or bid quotations received from securities dealers.
Loans. Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial and industrial,
commercial real estate, residential mortgage and other consumer. Each loan
category is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.
The fair value of performing loans, except residential mortgage loans, is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The estimate of maturity is based on the
Corporation's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of current
economic and lending conditions. For performing residential mortgage loans, fair
value is estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources adjusted to
reflect differences in servicing and credit costs.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
F-23
Deposit Liabilities. The fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, interest bearing demand deposits, money
market, and savings deposits, is considered to be equal to the amount payable on
demand. The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowed Funds. For securities sold under agreements to repurchase and FHLB
advances, fair value was based on rates currently available to the Corporation
for agreements with similar terms and remaining maturities. For convertible
securities sold under agreements to repurchase and FHLB advances, option
adjusted spread pricing (OAS) was obtained from sources believed to be reliable.
For other borrowed funds, the carrying amount was considered to be a reasonable
estimate of fair values.
The estimated fair values of the Corporation's financial instruments are as
follows:
December 31, 2002
- ----------------------------------------------------------------------
Carrying Fair
(in thousands) Value Value
- ----------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 101,093 $ 101,093
Interest bearing
deposits with banks 2,501 2,501
Securities available
for sale 820,665 820,665
Investment securities 54,690 56,710
Loans, net 1,178,322 1,192,076
Financial Liabilities:
Deposits 1,272,286 1,285,063
Borrowed funds 757,711 847,216
Trust preferred securities 32,500 35,084
======================================================================
December 31, 2001
- ----------------------------------------------------------------------
Carrying Fair
(in thousands) Value Value
- ----------------------------------------------------------------------
Financial Assets:
Cash and cash equivalents $ 66,731 $ 66,731
Interest bearing
deposits with banks 2,320 2,320
Securities available
for sale 746,483 746,483
Investment securities 65,753 64,887
Loans, net 994,431 1,003,888
Financial Liabilities:
Deposits 1,092,690 1,099,097
Borrowed funds 707,113 748,604
Trust preferred securities 32,500 34,223
======================================================================
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, and as the fair value for
these financial instruments was not material, these disclosures are not included
above.
Limitations. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets that are not considered financial
assets include the deferred tax assets and bank premises and equipment. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in many of the estimates.
F-24
17. PARENT CORPORATION INFORMATION
The condensed financial statements of the parent company only are presented
below:
YARDVILLE NATIONAL BANCORP
(PARENT CORPORATION)
CONDENSED STATEMENTS OF CONDITION
December 31,
- -----------------------------------------------------------------------------
(in thousands) 2002 2001
- -----------------------------------------------------------------------------
Assets:
Cash $ 5,696 $ 2,224
Securities available for sale -- 105
Investment in subsidiaries 172,798 121,992
Other assets 1,630 3,418
- -----------------------------------------------------------------------------
Total Assets $180,124 $127,739
- -----------------------------------------------------------------------------
Liabilities and
Stockholders' Equity:
Other liabilities $ 275 $ 184
Obligation for ESOP 400 800
Subordinated debentures 33,510 33,510
Stockholders' equity 145,939 93,245
- -----------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $180,124 $127,739
=============================================================================
F-25
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
- ------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------
Operating Income:
Dividends from subsidiary $ 6,647 $ 6,294 $ 4,648
Interest income 2 12 14
Other income 444 472 501
- ------------------------------------------------------------------------------
Total Operating Income 7,093 6,778 5,163
- ------------------------------------------------------------------------------
Operating Expense:
Interest expense 3,143 3,024 1,909
Other expense 996 833 668
- ------------------------------------------------------------------------------
Total Operating Expense 4,139 3,857 2,577
- ------------------------------------------------------------------------------
Income before income
taxes and equity in
undistributed income
of subsidiaries 2,954 2,921 2,586
Federal income tax benefit (1,243) (1,144) (701)
- ------------------------------------------------------------------------------
Income before equity in
undistributed income
of subsidiaries 4,197 4,065 3,287
Equity in undistributed
income of subsidiaries 9,807 4,488 7,054
- ------------------------------------------------------------------------------
Net Income $14,004 $ 8,553 $10,341
==============================================================================
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- ------------------------------------------------------------------------------
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------
Cash Flows from
Operating Activities:
Net Income $ 14,004 $ 8,553 $ 10,341
Adjustments:
Decrease (increase) in
other assets 1,788 (1,606) (196)
Equity in undistributed
income of subsidiaries (9,807) (4,488) (7,054)
Increase in other liabilities 91 56 98
- ------------------------------------------------------------------------------
Net Cash Provided by
Operating Activities 6,076 2,515 3,189
- ------------------------------------------------------------------------------
Cash Flows from
Investing Activities:
Investing in subsidiaries (33,787) (10,895) (22,626)
- ------------------------------------------------------------------------------
Net Cash Used by
Investing Activities (33,787) (10,895) (22,626)
- ------------------------------------------------------------------------------
Cash Flows from
Financing Activities:
Decrease in obligation
for ESOP (400) (400) (400)
Proceeds from issuance of
subordinated debentures -- 6,190 15,464
Proceeds from shares issued 35,253 7,845 7,304
Treasury shares acquired (124) -- --
Dividends paid (3,546) (3,341) (2,840)
- ------------------------------------------------------------------------------
Net Cash Provided by
Financing Activities 31,183 10,294 19,528
- ------------------------------------------------------------------------------
Net increase in cash 3,472 1,914 91
Cash as of beginning of year 2,224 310 219
- ------------------------------------------------------------------------------
Cash as of end of year $ 5,696 $ 2,224 $ 310
==============================================================================
F-26
INDEPENDENT
Auditors' Report
THE BOARD OF DIRECTORS AND STOCKHOLDERS
YARDVILLE NATIONAL BANCORP:
We have audited the accompanying consolidated statements of condition of
Yardville National Bancorp and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Yardville
National Bancorp and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As disclosed in Note 7 to the consolidated financial statements, the
Corporation adopted Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections" effective December 31, 2002.
KPMG LLP
Short Hills, New Jersey
January 27, 2003, except for
Note 8, which is as of
February 20, 2003
F-27
INDEX TO EXHIBITS
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Company,
as corrected by the Certificate of Correction thereto
filed on July 6, 1995 and as amended by the Certificate
of Amendment thereto filed on March 6, 1998.
(A) 3.2 By-Laws of the Company
(A) 4.1 Specimen Share of Common Stock
(B) 4.2 Amended and Restated Trust Agreement dated October
16, 1997, among the Registrant, as depositor,
Wilmington Trust Company, as property trustee, and the
Administrative Trustees of Yardville Capital Trust.
(B) 4.3 Indenture dated October 16, 1997, between the
Registrant and Wilmington Trust Company, as trustee,
relating to the Registrant's 9.25% Subordinated
Debentures due 2027.
(B) 4.4 Preferred Securities Guarantee Agreement dated as
of October 16, 1997, between the Registrant and
Wilmington Trust Company, as trustee, relating to the
Preferred Securities of Yardville Capital Trust.
4.5 The Registrant will furnish to the Commission upon
request copies of the following documents relating to
the Registrant's Series A 9.50% Junior Subordinated
Deferrable Interest Debentures due June 22, 2030: (i)
Amended and Restated Declaration of Trust dated June
23, 2000, among the Registrant, The Bank of New York,
as property trustee, and the Administrative Trustees of
Yardville Capital Trust II; (ii) Indenture dated as of
June 23, 2000, between the Registrant and The Bank of
New York, as trustee, relating to the Registrant's
Series A 9.50% Junior Subordinated Deferrable Interest
Debentures due June 22, 2030; and (iii) Series A
Capital Securities Guarantee Agreement dated as of June
23, 2000, between the Registrant and The Bank of New
York, as trustee, relating to the Series A Capital
Securities of Yardville Capital Trust II.
4.6 The Registrant will furnish to the Commission upon
request copies of the following documents relating to
the Registrant's Series A 10.18% Junior Subordinated
Deferrable Interest Debentures due June 8, 2031: (i)
Amended and Restated Declaration of Trust dated March
28, 2001, among the Registrant, Wilmington Trust
Company, as property trustee, and the Administrative
Trustees of Yardville Capital Trust III; (ii) Indenture
dated as of March 28, 2001, between the Registrant and
Wilmington Trust Company, as trustee, relating to the
Registrant's Series A 10.18% Junior Subordinated
Deferrable Interest Debentures due June 8, 2031; and
(iii) Series A Capital Securities Guarantee Agreement
dated as of March 28, 2001, between the Registrant and
Wilmington Trust Company, as trustee, relating to the
Series A Capital Securities of Yardville Capital Trust
III.
E-1
INDEX TO EXHIBITS
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------------------------
4.7 The Registrant will furnish to the Commission upon
request copies of the following documents relating to
the Registrant's Floating Rate Junior Subordinated
Deferrable Interest Debentures due March 1, 2033: (i)
Amended and Restated Declaration of Trust dated
February 19, 2003, among the Registrant, Wilmington
Trust Company, as property trustee, and the
Administrative Trustees of Yardville Capital Trust IV;
(ii) Indenture dated as of February 19, 2003, between
the Registrant and Wilmington Trust Company, as
trustee, relating to the Registrant's Floating Rate
Junior Subordinated Deferrable Interest Debentures due
March 1, 2033; and (iii) Capital Securities Guarantee
Agreement dated as of February 19, 2003, between the
Registrant and Wilmington Trust Company, as trustee,
relating to the Floating Rate Capital Securities of
Yardville Capital Trust IV.
10.1 Employment Contract between Registrant and Stephen F. Carman*
10.2 Employment Contract between Registrant and Jay G. Destribats*
10.3 Employment Contract between Registrant and James F. Doran*
10.4 Employment Contract between Registrant and Frank Durand III*
10.5 Employment Contract between Registrant and Howard N. Hall*
10.6 Employment Contract between Registrant and Timothy J. Losch*
10.7 Employment Contract between Registrant and Eugene C. McCarthy*
10.8 Employment Contract between Registrant and Daniel J. O'Donnell*
10.9 Employment Contract between Registrant and Patrick M. Ryan*
10.10 Employment Contract between Registrant and John P. Samborski*
10.11 Employment Contract between Registrant and Sarah J. Strout*
10.12 Employment Contract between Registrant and Stephen R. Walker*
10.13 Supplemental Executive Retirement Plan*
10.14 Supplemental Executive Retirement Plan Summary for the Benefit of Jay G. Destribats*
10.15 Supplemental Executive Retirement Plan Summary for the Benefit of Patrick M. Ryan*
10.16 Supplemental Executive Retirement Plan Summary for the Benefit of Stephen F. Carman*
10.17 Supplemental Executive Retirement Plan Summary for the Benefit of Timothy J. Losch*
10.18 1988 Stock Option Plan*
(D) 10.19 1994 Stock Option Plan*
10.20 Directors' Deferred Compensation Plan*
(C) 10.21 1997 Stock Option Plan*
(F) 10.22 Yardville National Bank Employee Stock Ownership Plan, as amended*
(E) 10.23 Lease agreement between Crestwood Construction and the Bank dated
May 25, 1998
E-2
INDEX TO EXHIBITS
Exhibit
Number Description
- ------------------------------------------------------------------------------------------------------------------
(G) 10.24 Real property lease between the Bank and BYN, LLC for our branch located at
1041 Route 206, Bordentown, New Jersey
(G) 10.25 Real property lease between the Bank and FYNB,
LLC for our branch located in Raritan, New Jersey
(G) 10.26 Real property lease between the Bank and Union Properties, LLC for our branch located at 1575
Brunswick Avenue, Lawrence, New Jersey
(G) 10.27 Real property lease between the Bank and The Lalor Urban Renewal Limited Partnership for our branch
located in the Lalor Plaza in Trenton, New Jersey
21 List of Subsidiaries of the Registrant
23 Consent of KPMG, LLP
99.1 Certification by Patrick M. Ryan, President and CEO
99.2 Certification by Stephen F. Carman, Vice President and Treasurer
(A) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Registration
No. 33-78050)
(B) Incorporated by reference to the Registrant's Registration Statement on Form S-2 (Registration
Nos. 333-35061 and 333-35061-01)
(C) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration
No. 333-28193)
(D) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1998, as amended by Form 10-Q/A filed June 9, 1998
(E) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998
(F) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration
No. 333-71741)
(G) Incorporated by reference to the Registrant's Registration Statement on Form S-3 (Registration
No. 333-99269)
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K.
E-3