-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WHMB3SyaJM1WeQE+PrYo1t/PX0yuHcz34aXeHWHOoC+hPgUQi3jp/U10Xxuix2lq N+FHFcsOZaK8II7q4ILbMg== 0000950116-97-000636.txt : 19970401 0000950116-97-000636.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950116-97-000636 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: YARDVILLE NATIONAL BANCORP CENTRAL INDEX KEY: 0000787849 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222670267 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26086 FILM NUMBER: 97570139 BUSINESS ADDRESS: STREET 1: 4569 SOUTH BROAD STREET CITY: YARDVILLE STATE: NJ ZIP: 08620 BUSINESS PHONE: 6095812767 MAIL ADDRESS: STREET 1: 4569 SOUTH BROAD ST CITY: YARDVILLE STATE: NJ ZIP: 08620 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-26086 YARDVILLE NATIONAL BANCORP -------------------------- (Exact Name of Registrant as specified in its Charter) New Jersey 22-2670267 ---------- ---------- (State or other jurisdiction of (I.R.S. employer incorporation or organization) Identification No.) 3111 Qakerbridge Road, Trenton, New Jersey 08619 - ------------------------------------------ ----- (Address of principal executive offices) (Zip Code) (609) 585-5100 -------------- (Registrant's Telephone Number, Including Area Code) 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 Indicate by checkmark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past 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 checkmark if disclosure of delinquent filers in response 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[x] Aggregate market value of voting stock held by non-affiliates (computed by using the average of the closing bid and asked prices on march 12, 1997, in the NASDAQ National Market System: $47,345,890. Number of shares of common stock, no par value, outstanding as of march 12, 1997: 2,447,664. (Continued) DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K into Document which document is incorporated -------- ------------------------------ Annual Report to Stockholders for Fiscal year ended December 31, 1996 II Definitive proxy statement for the 1996 Annual Meeting of Stockholders to be held on April 24, 1997 III FORM 10-K INDEX PART I PAGE Item 1. Business 1 Item 2. Properties 22 Item 3. Legal Proceedings 22 Item 4. Submission of Matters to a Vote of Security Holders 22 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 23 Item 6. Selected Financial Data 24 Item 7. Management's Discussion and Analysis of Financial Condition or Plan of Operations 24 Item 8. Financial Statements and Supplementary Data 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III Item 10. Directors and Executive Officers of the Registrant 25 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management 25 Item 13. Certain Relationships and Related Transactions 25 PART IV Item 14. Exhibits and Reports on Form 8-K 25 Signatures 26 Index to Exhibits E-1 YARDVILLE NATIONAL BANCORP FORM 10-K PART I ITEM 1. BUSINESS. General Yardville National Bancorp (the "Company") is a bank holding company registered with the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956 (the "Holding Company Act"). The Company's business is the ownership and management of The Yardville National Bank, a national banking association and the Company's sole banking subsidiary (the "Bank"). The Company was incorporated under the laws of New Jersey and became the holding company of the Bank in 1985. At December 31, 1996, the Company had total assets of approximately $490,545,000, deposits of approximately $364,445,000 and stockholders' equity of approximately $35,230,000. The Bank The Bank received its charter from The Office of the Comptroller of the Currency (the "OCC") in 1924 and commenced operations as a commercial bank in 1925. The Bank currently operates nine full-service banking offices in Mercer County, New Jersey, five in Hamilton Township, two in Ewing Township, one in East Windsor Township and one in Trenton. The branch offices in Ewing Township were established in 1994 and in the third quarter of 1996, respectively. The branch office in East Windsor was established in the first quarter of 1995, and the branch office in Trenton was established in the second quarter of 1995. The bank opened its fifth branch office in Hamilton Township in the second quarter of 1996. The Bank's principal executive offices are located at 3111 Quakerbridge Road, Trenton, New Jersey. The Bank conducts a general commercial and retail banking business. The principal focus of the Bank has been to provide a full range of traditional commercial and retail banking services, including savings and time deposits, letters of credit, checking accounts and commercial, real estate and consumer loans, for individuals and small and medium size businesses in each of the local communities that it serves. 1 The Bank has one wholly-owned non-bank subsidiary, Yardville National Investment Corporation, which was incorporated in 1985. Yardville National Investment Corporation was formed to separate a portion of the Bank's investment portfolio functions and responsibilities from its regular banking operations and to increase the net yield of the investment portfolio. Supervision and Regulation Supervision and Regulation of the Company Bank holding companies, banks and their operations are extensively regulated under both Federal and state laws. Bank holding companies and banks may be subject to potential enforcement actions by the FRB, the OCC or the Federal Deposit Insurance Corporation (the "FDIC") for unsafe or unsound practices in conducting their businesses, or for violations of any law, rule or regulation, any cease-and-desist or consent order, any condition imposed in writing by the agency or any written agreement with the agency. Because the Company is a "bank holding company" under the Bank Holding Company Act, the FRB, acting through the Federal Reserve Bank of Philadelphia ("FRBP") is the primary supervisory authority for, and examines, the Company and any non-bank subsidiaries which are not subsidiaries of the Bank. Because the Bank is a national bank, the primary supervisory authority for the Bank and its subsidiaries is the OCC, which regularly examines the Bank. The FDIC and the FRB (because the Bank is a member of the Federal Reserve System) also regulate, supervise and have power to examine the Bank and its subsidiaries. Enforcement actions 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. If any enforcement action is taken by a banking regulator, the value of an equity investment in the Company could be substantially reduced or eliminated. Bank Holding Company Act 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. Subject to changes recently enacted in the Interstate Banking Act (see discussion below), it also prohibits acquisition by any bank holding company of more than five percent (5%) of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside of the state in which a current bank subsidiary is located unless such acquisition is specifically authorized by laws of the state in which such bank is located. A bank holding 2 is prohibited from engaging in or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the FRB considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. Applications under the Bank Holding Company Act and the Change in Control Act (see discussion below) are subject to review based upon the record of compliance of the applicant with the Community Reinvestment Act of 1977 ("CRA") as discussed below. The Company is required to file an annual report with the FRB and any additional information that the FRB may require pursuant to the Bank Holding Company Act. The FRB may also make examinations of the Company and any or all of its subsidiaries. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or provision of any property or services. The so-called 'anti-tie-in' provisions state generally that a bank may not condition the pricing or provision of certain products and services on a requirement that the customer provide certain products or services to the bank holding company or bank, or any other subsidiary of the bank holding company, or that the customer not obtain certain products or services from competitors, or that the customer also obtain certain other products or services from the bank, its bank holding company or any other subsidiary of the bank holding company. There is an exception to the tie-in prohibition for "traditional" banking products and services. The FRB permits bank holding companies to engage in non-banking activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. A number of activities are authorized by FRB regulation, while other activities require prior FRB approval. The types of permissible activities are subject to change by the FRB. 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. 3 Change in Bank Control Act Under the Change in Bank Control Act of 1978 ("Change in Control Act"), no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire "control" of any federally insured depository institution unless the appropriate Federal banking agency has been given 60 days' prior written notice of the proposed acquisition and within that period has not issued a notice disapproving of the proposed acquisition or has issued written notice of its intent not to disapprove the action. For this purpose, "control" is generally defined as the power, directly, or indirectly, to direct the management or policies of an institution or to vote 25% or more of any class of its voting securities. The period for the agency's disapproval may be extended by the agency. Upon receiving such notice, the Federal agency is required to provide a copy to the appropriate state regulatory agency if the institution of which control is to be acquired is state chartered, and the Federal agency is obligated to give due consideration to the views and recommendations of the state agency. Upon receiving a notice, the Federal agency is also required to conduct an investigation of each person involved in the proposed acquisition. Notice of such proposal is to be published and public comment solicited thereon. A proposal may be disapproved by the Federal agency if the proposal would have anti-competitive effects, if the proposal would jeopardize the financial stability of the institution to be acquired or prejudice the interests of its depositors, if the competence, experience or integrity of any acquiring person or proposed management personnel indicates that it would not be in the interest of depositors or the public to permit such person to control the institution, if any acquiring person fails to furnish the Federal agency with all information required by the agency, or if the Federal agency determines that the proposed transaction would result in an adverse effect on a deposit insurance fund. In addition, the Change in Control Act requires that, whenever any federally insured depository institution makes a loan or loans secured, or to be secured, by 25% or more of the outstanding voting stock of a federally insured depository institution, the president or chief executive officer of the lending bank must promptly report such fact to the appropriate Federal banking agency regulating the institution whose stock secures the loan or loans. 4 Supervision and Regulation of the Bank The operations of the Bank are subject to Federal and state statutes 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 FDIC. Bank operations are also subject to regulations of the OCC, the FRB and 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. All nationally and state-chartered banks in New Jersey are permitted to maintain branch offices in any county of the state. National bank branches may be established only after approval by the OCC. It is the general policy of the OCC to approve applications to establish and operate domestic branches, including ATM's and other automated devices that take deposits, provided that approval would not violate applicable Federal or state laws regarding the establishment of such branches. The OCC reserves the right to deny an application or grant approval subject to conditions if (1) there are significant supervisory concerns with respect to the application or affiliated organizations, (2) in accordance with CRA, the applicant's record of helping meet the credit needs of its entire community, including low and moderate income neighborhoods, consistent with safe and sound operation, is less than satisfactory, or (3) any financial or other business arrangement, direct or indirect, involving the proposed branch or device and bank "insiders" (directors, officers, employees and 10%-or-greater stockholders) involves terms and conditions more favorable to the insiders than would be available in a comparable transaction with unrelated parties. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the FDIC's prior approval is also required for any new branch applications of a bank which is ranked in any of the three "undercapitalized" categories established by FDICIA. 5 Under the Federal Deposit Insurance Act, the OCC possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe and unsound banking practice and in violation of the law. Moreover, Federal law enactments have expanded the circumstances under which officers or directors of a bank may be removed by the institution's Federal supervisory agency, restricted and further regulated lending by a bank to its executive officers, directors, principal stockholders or related interests thereof and restricted management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area, and restricts management personnel from borrowing from another institution that has a correspondent relationship with their bank. 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. 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. The FDIC also has authority under the Federal Deposit Insurance Act to prohibit an insured bank from engaging in conduct which, in the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the Bank and other factors, that the FDIC could claim that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound banking practice. 6 Under the Bank Secrecy Act ("BSA"), the Bank is required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions of which the Bank is aware in any one day that aggregate in excess of $10,000. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA or for filing a false or fraudulent report. 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. Federal banking agencies have recently denied applications more frequently based on unsatisfactory CRA performance, and news reports indicate that community groups have begun to focus more closely on CRA compliance of small institutions such as the Bank. 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. In addition, the Bank is subject to a variety of banking laws and regulations governing consumer protection (including the Truth in Lending Act ("TILA"), the Truth in Savings Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, and the Real Estate Settlement Procedures Act ("RESPA")), FDIC deposit insurance regulations, and FRB regulations governing such matters as reserve requirements for deposits, securities margin lending, collection of checks and other items and availability of deposits for withdrawal by customers, security procedures, and prohibitions of payment of interest on demand deposits. Under the Americans With Disabilities Act ("ADA"), certain bank facilities are identified as "public accommodations" and are subject to regulation to promote accessibility of their facilities for disabled persons. 7 Capital Rules Federal banking agencies have issued "risk-based capital" guidelines, which supplement other capital requirements. In addition, the OCC imposes certain "leverage" requirements on national banks such as the Bank. Banking regulators have authority to require higher minimum capital ratios for an individual bank or bank holding company in view of its circumstances. The risk-based guidelines require all banks and bank holding companies to maintain two "risk-weighted assets" ratios. The first is a minimum ratio of total capital ("Tier 1" and "Tier 2" capital) to risk-weighted assets equal to 8.00%; the second is a minimum ratio of "Tier 1" capital to risk-weighted assets equal to 4.00%. Assets are assigned to five risk categories, with higher levels of capital being required for the categories perceived as representing greater risk. In making the calculation, certain intangible assets must be deducted from the capital base. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets. The risk-based capital rules also account for interest rate risk. Institutions with interest rate risk exposure above a normal level are required to hold extra capital in proportion to that risk. A bank's exposure to declines in the economic value of its capital due to changes in interest rates is a factor that the banking agencies will consider in evaluating a bank's capital adequacy. The rule does not codify an explicit minimum capital charge for interest rate risk. The Bank currently monitors and manages its assets and liabilities for interest rate risk, and management believes that the interest rate risk rules will not materially adversely affect the Bank's operations. The OCC "leverage" ratio rules require national banks which are rated the highest by the OCC in the composite areas of capital, asset quality, management, earnings and liquidity to maintain a ratio of "Tier 1" capital to "adjusted total assets" (equal to the bank's average total assets as stated in its most recent quarterly call report filed with the OCC, minus end-of-quarter intangible assets that are deducted from Tier 1 capital) of not less than 3.00%. For banks which are not the most highly rated, the minimum "leverage" ratio will range from 4.00% to 5.00%, or higher at the discretion of the OCC, and is required to be at a level commensurate with the nature of the riskiness of the bank's condition and activities. 8 For purposes of the capital requirements, "Tier 1" or "core" capital is defined to include common stockholders equity and certain noncumulative perpetual preferred stock and related surplus. "Tier 2" or "qualifying supplementary" capital is defined to include a bank's allowance for loan and lease losses up to 1.25% of risk-weighted assets, plus certain types of preferred stock and related surplus, certain "hybrid capital instruments" and certain term subordinated debt instruments. The Bank is in compliance with each of these capital rules and as of December 31, 1996 and December 31, 1995 the required ratios and the Bank's actual ratios are as follows:
Bank Bank Capital Required 12/31/96 12/31/95 Rule Ratio Ratio Ratio ------- ----- -------- ------- Tier 1 Leverage Ratio 4.00% 7.8% 9.1% Tier 1 Risk-Based Capital 4.00% 10.2% 12.0% Total (Tiers 1 and 2) Risk-Based Capital 8.00% 11.4% 13.2%
FRB leverage ratio rules also require bank holding companies to maintain a minimum level of "primary capital" to total assets of 5.5% and a minimum level of "total capital" to assets of 6%. For this purpose, (1) "primary capital" includes, among other items, common stock, contingency and other capital reserves, and the allowance for loan and lease losses, (2) "total capital" includes, among other things, certain subordinated debt, and "total assets" is increased by the allowance for loan and lease losses. The Company is in compliance with each of these capital rules and as of December 31, 1996 and December 31, 1995 the required ratios and the Company's actual ratios are as follows: Company Company Capital Required 12/31/96 12/31/95 Rule Ratio Ratio Ratio ------- -------- -------- -------- Primary Capital 5.50% 8.2% 8.7% Total Capital 6.00% 8.1% 8.7% 9 1996 Federal Banking Legislation The Economic Growth And Regulatory Paperwork Reduction Act of 1996 (the "1996 Banking Law"), enacted as Title II of the Omnibus Consolidated Appropriations Act for Fiscal Year 1997 was signed into Law on September 30, 1996, implemented a wide range of regulatory relief provisions affecting federal insured depository institutions. Among the supervisory provisions of the 1996 Banking Law which may affect the Bank, the 1996 Banking Law included the following: per branch capital requirement for national banks were eliminated; ATM's and other remote service units were excluded from the definition of "branch" for purposes of certain branch approval requirements and geographic restrictions; the law permits well-capitalized banks rated CAMEL 1 or 2 to invest in bank premises in amounts up to 150 percent of the bank's capital and surplus with only a 30-day after-the-fact notice and establishes expedited procedures to permit certain bank holding companies to engage in permissible nonbanking activities, except for acquisitions of thrifts; exempted from the insider lending restrictions a bank's company-wide benefit or compensation plans that are widely available to employees of the bank and that do not give preference to any officer, director, or principal shareholder (or related interests) over other employees of the bank; permits the Federal banking agencies to raise the asset limit for an 18-month examination cycle from $175,000,000 to $250,000,000 for banks with a CAMEL 2 rating; permits the OCC to waive the State residency requirement for directors of national banks; eliminates the independent auditor attestation requirement for compliance with safety and soundness laws; authorizes the Federal banking agencies to permit a bank's independent audit committee to include some inside directors if the bank is unable to find competent outside directors, provided a majority of the committee is still made up of outside directors; requires FRB and the U.S. Department of Housing and Urban Development, within 6 months of enactment, to simplify and improve RESPA and TILA disclosures and provide a single format for such disclosures; makes a number of changes to RESPA's disclosure requirements; generally provides that, if a bank or a third party self-tests for compliance under the Equal Credit Opportunity Act and the Fair Housing Act, the test results will not be used against the bank if the bank identifies possible violations and is taking appropriate corrective actions, and if the bank is not using the results in its defense; sunsets the Truth-in-Savings Act's civil liability provision in five years; recapitalizes the Savings Association Insurance Fund ("SAIF") as of October 1, 1996; requires banks after December 31, 1996 to pay 20% of the interest on the bonds that funded the initial capitalization of SAIF ("FICO bonds") but banks would be required to pay a full pro-rata share of the interest obligation beginning after the earlier of December 31, 1999 or the date on which the last savings association ceases to exist; merges SAIF and the Bank Insurance Fund ("BIF") on January 1, 1999, but only if no 10 insured depository institution is a savings association on that date; requires the Department of Treasury to conduct a study by March 31, 1997 on the development of a common charter for all insured depository institutions; substantially amends the Fair Credit Reporting Act ("FCRA"); prohibits the Federal banking agencies from examining for compliance with FCRA unless there has been a complaint about a violation or the agency otherwise has knowledge of a violation; and amends the Comprehensive Environmental Response, Compensation, and Liability Act to clarify that a lender is not liable for environmental cleanups of property securing a loan unless the lender, among other things, participates in day-to-day decision making over the operations of the property or has control over environmental compliance and provides that lenders that foreclose on property may take certain post-foreclosure actions without incurring liability for environmental cleanup if the lender did not participate in management of the property prior to foreclosure and the lender seeks to dispose of the property as soon as it is commercially reasonable. Deposit Insurance Assessments Deposits of the Bank are insured by the FDIC through BIF. Deposits of certain savings associations are insured by the FDIC through SAIF. The FDIC sets deposit insurance assessment rates on a semiannual basis and will increase deposit insurance assessments whenever the ratio of reserves to insured deposits in a fund is less than 1.25. The insurance assessments paid by an institution are to be based on the probability that the fund will incur a loss with respect to the institution. The rate at which institutions pay assessments is based principally on two measures of risk. These measures involve capital and supervisory factors. For the capital measure, institutions are assigned semiannually to one of three capital groups according to their levels of supervisory capital as reported on their call reports: "well capitalized" (group 1), "adequately capitalized" (group 2) and "undercapitalized" (group 3). The capital ratio standards for classifying an institution in one of these three groups are total risk-based capital ratio (10 percent or greater for group 1, and between 8 and 10 percent for group 2), the Tier 1 risk-based capital ratio (6 percent or greater for group 1, and between 4 and 6 percent for group 2), and the leverage capital ratio (5 percent or greater for group 1, between 4 and 5 percent for group 2). Within each capital group, institutions are assigned to one of three supervisory risk subgroups--subgroup A, B, or C depending upon an assessment of the institution's perceived risk based upon the results of its most recent examination and other information available to regulators. Subgroup A will 11 consist of financially sound institutions with only a few minor weaknesses. Subgroup B will consist of institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to BIF. Subgroup C will consist of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. Thus, there are nine possible classifications to which varying assessment rates are applicable. The regulation generally prohibits institutions from disclosing their subgroup assignments or assessment risk classifications without FDIC authorization. An institution's semiannual assessment is computed primarily by multiplying its "average assessment base" (generally, total insurable domestic deposits) for the prior semiannual period by one-half the annual assessment rate applicable to that institution depending upon its category. On December 6, 1996, the FDIC continued in effect for the first six months of 1997 the downward adjustment in deposit insurance assessment rates applicable to BIF member institutions, but eliminated the statutory minimum assessment of $1,000 due to the 1996 Banking Law, which repealed that minimum. The following table sets forth the new schedule of BIF assessment rates by capital group and supervisory risk subgroup for the semi-annual assessment period beginning January 1, 1997 (with no minimum assessment amount): Capital Group Supervisory subgroup ------------- --------------------- A B C 1 0 3 17 2 3 10 24 3 10 24 27 On November 22, 1996, the Federal Financing Corporation ("FICO") adopted a regulation pursuant to the 1996 Banking Law which obligates all federally insured depository institutions to pay special assessments toward the funding of interest payments on FICO bonds, which were issued in 1989 to fund the savings and loan bailout. The special assessments, which are effective for periods commencing January 1, 1997, will be calculated on a deposit-by-deposit basis and differ depending upon whether a deposit is insured by SAIF or BIF. For the period commencing January 1, 1997, the special assessment rates are expected to be 6.4 basis points on all SAIF-assessable deposits and 20% of that rate, or approximately 1.3 basis points, on all BIF-assessable deposits---regardless of whether an institution is a "bank" or a "savings association". After December 31, 1999 (or when the last savings association ceases to exist, if earlier), all assessable 12 deposits at all institutions will be assessed at the same rates in order to pay FICO bond interest. These special assessments are in addition to the semi- annual assessments for BIF member institutions or BIF assessable deposits. Prompt Corrective Action Federal law mandates certain "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 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. 13 Limitations on Payment of Dividends; Regulatory Agreement Under national banking laws, a national 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 to the bank's allowance for loan and lease losses. These restrictions would not prevent the Bank from paying dividends from current earnings to the Company at this time. FDICIA prohibits FDIC-insured institutions from paying dividends or making capital distributions that would cause the institution to fail to meet minimum capital requirements. The FDICIA restrictions would not prevent the Bank from paying dividends from current earnings to the Company at this time. The Bank in 1991 entered into a written agreement with the OCC (the "Regulatory Agreement") to, among other things, create a Compliance Committee, implement a plan to correct any compliance deficiencies, and reduce its classified assets and to maintain the Bank's common stockholders' equity at 5% of total assets. In 1991, in connection with the Regulatory Agreement and at the recommendation of the FRBP, the Board of Directors of the Company adopted a resolution, under which the Board could not declare a dividend to the Company's stockholders except with 10 days' prior written notice to the FRBP. The Regulatory Agreement was terminated on October 18, 1993, and on December 21, 1994, the Board of Directors of the Company rescinded its resolution with the permission of the FRBP, which was granted on November 30, 1994. New Jersey Banking Laws Provisions of the New Jersey Banking Act of 1948 with supplements (the "New Jersey Banking Act") may apply to national banking associations with their principal offices in New Jersey, subject to pre-emption by applicable Federal laws. The merger of a national bank into a state bank requires approval of the New Jersey Commissioner of Banking; however, a state bank may merge into a national bank without such prior approval. The New Jersey Banking Act also purports to regulate certain aspects of bank business, including small loans and certain deposit accounts. New Jersey has opted into early interstate banking and branching. See the discussion under "Interstate Banking", below. Under New Jersey law, a corporation is not permitted to pay dividends on its capital stock if, following the payment of the dividend, (i) the corporation would be unable to pay its debts as they become due in the usual course of business or (ii) the 14 corporation's total assets would be less than its total liabilities. Determinations under clause (ii) above may be based upon (i) financial statements prepared on the basis of generally accepted accounting principles, (ii) financial statements prepared on the basis of other accounting principles that are reasonable under the circumstances, or (iii) a fair valuation of other method that is reasonable in the circumstances. Interstate Banking The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"), enacted on September 29, 1994, permits bank holding companies to acquire banks in any state one year after enactment of the legislation. State laws which require the acquiror to have been in existence for a specified minimum period of time are preserved, but only up to a maximum existence requirement of 5 years. Except for initial entry into a state, after an acquisition the acquiror may not control more than 10% of total insured deposits in the U. S. or more than 30% of insured deposits in the acquiror's home state. Stricter state deposit concentration caps apply if they are nondiscriminatory. Effective June 1, 1997, acquired banks in different states may be merged into a single bank, subject to any necessary regulatory approvals and provided the banks are adequately capitalized. Once a bank has established branches in a host state through an interstate merger transaction, it may establish and acquire additional branches anywhere in the host state where the acquiree could have branched. States may enact laws opting-out of interstate branching during periods before June 1, 1997, but if so, domestic institutions will also be prohibited from branching interstate. States may also enact laws permitting interstate merger transactions and interstate de novo branching before June 1, 1997. On April 17, 1996, New Jersey enacted legislation to opt-in with respect to earlier interstate banking and branching and the entry into New Jersey of foreign country banks. New Jersey did not authorize de novo branching into the state. In contrast to interstate acquisitions and mergers, the Interstate Banking Act permits acquisition of less than all of the branches of an insured bank only of the state's laws permit it. Unless expressly determined to be pre-empted, state laws regarding community reinvestment, consumer protection (including applicable usury ceilings), fair lending, and establishment of intrastate branches apply to local branches of interstate organizations to the same extent they apply to a branch of a domestic state bank. In evaluating applications, Federal banking agencies must consider CRA performance in each state in which an acquiring institution maintains branches, 15 as well as applicable State community reinvestment laws. Bank management anticipates that the Interstate Banking Act will increase competitive pressures in the Bank's market by permitting entry of additional competitors. 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 risks under state and Federal environmental laws. Compliance While the expense of compliance is increasing and has an adverse effect on the net income on all regulated institutions such as the Bank, management believes the Company and the Bank are in compliance with applicable laws and regulations in all material respects. Legislation and Regulatory Changes Legislation and regulations may be enacted which increase the cost of doing business, limiting or expanding permissible activities or affecting 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. 16 Competition The Bank is subject to vigorous 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 that have substantially greater resources, higher lending limits, larger branch systems and provide a wider array of banking services. Money market funds also actively compete with banks for deposits. 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 increasing competition from consumer finance companies and mortgage companies, which are not subject to the same kind of regulatory restrictions as banks. The effect of liberalized branching and acquisition laws, especially after the Financial Institutions Reform, Recovery and Enforcement Act of 1989, has been to lower barriers to entry into the banking business and increase competition for banking business, as well as to increase both competition for and opportunities to acquire other financial institutions. The Company anticipates that the Interstate Banking Act will increase competitive pressures in the Bank's market by permitting entry of additional competitors. Financial institutions compete generally on the basis of rates and service. Financial institutions are intensely competitive in the interest rates they offer, especially for time deposits. In addition, finance companies, which are not subject to the same regulation as banks, are becoming increasingly significant competitors because they can often offer lower loan rates than banks. Finally, a number of the Bank's competitors provide a wider array of services (such as trust and international services, which the Bank does not provide) and, by virtue of their greater financial resources, have higher lending limits and larger branch systems. Employees At December 31, 1996, the Company employed 160 full-time employees and 11 part-time employees. 17 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Statistical disclosure information regarding the distribution of assets, liabilities and stockholders' equity, interest rates and interest differential is included in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, which is incorporated by reference to the Company's Annual Report to Stockholders (see Part II, Item 6 below). Investment Portfolio Statistical disclosure information regarding securities is included in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, which is incorporated by reference to the Company's Annual Report to Stockholders. Additional disclosure information follows. The following table presents the amortized cost and market values of the Company's securities available for sale portfolio as of December 31, 1996, 1995 and 1994.
December 31, ------------------------------------------------------------------------------------- 1996 1995 1994 ----------------------- ------------------------ --------------------- (in thousands) Book Market Book Market Book Market Value Value Value Value Value Value ----- ------ ----- ------ ------ ------ U.S. Treasury and other federal agencies $ 31,951 $ 31,942 $ 17,795 $ 17,823 $ 6,366 $ 6,150 Mortgage-backed securities 59,441 59,182 78,725 78,874 18,358 16,755 Federal Reserve Bank stock 572 572 512 512 173 173 Federal Home Loan Bank 1,975 1,975 1,260 1,260 1,074 1,074 stock ----------- ---------- ---------- ------------ ---------- ----------- Total $ 93,939 $ 93,671 $ 98,292 $ 98,469 $ 25,971 $ 24,152 =========== ========== ========== ============ ========== ===========
All mortgage-backed securities are FHLMC, FNMA or GNMA agency named at December 31, 1996. 18 The following table presents the amortized cost and market values of the Company's investment securities portfolio as of December 31, 1996, 1995 and 1994.
December 31, ------------------------------------------------------------------------------------- 1996 1995 1994 ----------------------- ------------------------- --------------------- (in thousands) Book Market Book Market Book Market Value Value Value Value Value Value ------ ------ ----- ------ ----- ------ Obligations of state and political subdivisions $ 9,070 $ 9,108 $ 8,630 $ 8,659 $ 8,392 $ 7,777 Mortgage-backed securities 22,226 21,770 26,754 26,378 30,691 27,972 -------- ---------- -------- --------- --------- --------- Total $ 31,296 $ 30,878 $ 35,384 $ 35,037 $ 39,083 $ 35,749 ======== ========== ======== ========= ========= =========
All mortgage-backed securities are FHLMC, FNMA or GNMA agency named at December 31, 1996. Loan Portfolio Statistical disclosure information regarding the loan portfolio is included in the Management's Discussion and Analysis, which is incorporated by reference to the Company's Annual Report to Stockholders. Additional disclosure information follows. The following table provides information concerning the maturity and interest rate sensitivity of the Company's commercial, agricultural and real estate-construction loan portfolio for the year presented.
December 31, 1996 --------------------------------------------------------------------- After One After Within But Within Five (in thousands) One Year Five Years Years Total ----------- ----------- ----------- ------------ Maturities: Commercial and agricultural $ 24,634 $ 30,244 $ 8,548 $ 63,426 Real estate - construction 17,575 5,365 3,018 25,958 ----------- ------------ ------------ ----------- Total $ 42,209 $ 35,609 $ 11,566 $ 89,384 =========== =========== ============ =========== Type: Fixed rate loans $ 4,134 $ 17,990 $ 3,697 $ 25,821 Floating rate loans 38,075 17,619 7,869 63,563 ----------- ----------- ----------- ----------- Total $ 42,209 $ 35,609 $ 11,566 $ 89,384 =========== =========== =========== ===========
19 Summary of Loan Loss Experience Statistical disclosure information regarding the summary of loan loss experience is included in the Management's Discussion and Analysis, which is incorporated by reference to the Company's Annual Report to Stockholders. Additional disclosure information follows. The following tables describe the allocation for loan losses among various categories of loans and certain other information as of the dates indicated.
December 31, 1994 December 31, 1993 --------------------------------------- ----------------------------------- 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, financial and agricultural $ 1,137 39.0 % 13.5% $ 933 34.5 % 13.1 Real estate - mortgage 1,152 39.6 70.4 1,415 52.3 72.5 Real estate - construction 398 13.7 7.9 237 8.8 7.2 Consumer 141 4.8 5.6 86 3.2 5.5 Other loans 84 2.9 2.6 32 1.2 1.7 -------------------------------------- ---------------------------------- Totals $ 2,912 100.0 % 100.0% $ 2,703 100.0 % 100.0 ====================================== ==================================
December 31, 1992 --------------------------------------------- Percent of Reserve Percent of Loans to Amount Allowance Total Loans Commercial, financial and agricultural $ 1,002 34.1 % 14.1% Real estate - mortgage 1,443 49.1 75.2 Real estate - construction 204 6.9 4.0 Consumer 73 2.5 6.0 Other loans 218 7.4 0.7 ------------------------------------------- Totals $ 2,940 100.0 % 100.0% ===========================================
20 Deposits Statistical disclosure information regarding deposits is included in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, which is incorporated by reference to the Company's Annual Report to Stockholders. Return on Equity and Assets Statistical disclosure information regarding deposits is included in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, which is incorporated by reference to the Company's Annual Report to Stockholders. Short-Term Borrowings Statistical disclosure information regarding deposits is included in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, which is incorporated by reference to the Company's Annual Report to Stockholders. Additional disclosure information follows. December 31, (in thousands) 1994 - ------------------------------------------------------------- Securities sold under agreements to repurchase $ - FHLB advances - Other 1,215 ----------------------------------------------------------- Total $ 1,215 ----------------------------------------------------------- Maximum amount outstanding at any month end $ 7,264 Average interest rate on year end balance 4.50% Average amount outstanding during the year $ 2,248 Average interest rate for the year 4.23% ------------------------------------------------------------ 21 ITEM 2. PROPERTIES. The principal executive offices of the Company are located at 3111 Quakerbridge Road, Trenton, New Jersey in a building owned by the Bank and the management and staff of the Company utilize the facilities and equipment of the Bank. The Bank owns its principal executive offices, where it also has a banking office, in Yardville, New Jersey, and three additional banking offices in Hamilton Township, New Jersey. The Bank leases its banking office in Ewing Township, New Jersey. The lease provides for a term of five years ending in 1999, renewable for three 5- year periods, and a base monthly rental of $2,333.34 during the initial term. The Bank also leases its banking office in East Windsor Township, New Jersey. The lease provides for a term of five years ending in 1999, renewable for three 5-year periods, and provides for a base monthly rental of $2,457.92 during the initial term. The Bank also leases its banking office in Trenton. The lease provides for a term of five years ending in 1999, renewable for three 5-year periods, and provides for a base monthly rental of $1,875.00. The Bank also leases its banking office in Hamilton Square, New Jersey, which opened in the second quarter of 1996. The Bank assumed a 20 year lease effective April 1, 1996. The lease commenced on October 1, 1991 and ends on September 30, 2011 and is renewable for 5-year periods, and provides for a base monthly rental of $5,573.53 during the initial term. The Bank purchased a building and property in Ewing Township and opened its ninth branch in the third quarter of 1996. Yardville National Investment Corporation leases space from the Bank at the Bank's principal executive offices. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to various legal actions as of December 31, 1996, arising out of the ordinary course of business. Management of the Company does not deem any of the claims against the Company in such matters are material in relation to the Company's financial condition, results of operations or liquidity based on information currently available to the Company. 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, 1996, through the solicitation of proxies or otherwise. 22 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information The Common Stock began trading on the NASDAQ National Market on June 9, 1995. Prior to June 9, 1995 there was no active public trading market for the Common Stock, although the Common Stock was traded sporadically in the over-the-counter market. The following table shows the range of high and low closing bid prices of the Common Stock in the NASDAQ National Market commencing with the second quarter of 1995 and as reported by the National Quotation Bureau for the periods prior to the second quarter of 1995. The price quotations reflect inter-dealer quotations without adjustment for retail markup, markdown or commission, and may not represent actual transactions. Bid Price High Low Year Ended December 31, 1995: First Quarter $12 1/4 $11 3/4 Second Quarter 15 14 1/4 Third Quarter 17 1/2 17 Fourth Quarter 16 1/2 15 3/4 Year Ended December 31, 1996: First Quarter $16 1/8 $ 16 Second Quarter 16 1/4 15 7/8 Third Quarter 18 1/4 18 Fourth Quarter 19 3/4 19 1/4 Holders As of December 31, 1996, the Company had approximately 552 holders of record of the Common Stock. 23 Dividends In 1995, the Company paid cash dividends on the Common Stock in the aggregate amount of $738,000. In 1996, the Company paid cash dividends on the Common Stock in the aggregate amount of $1,083,000. In the first quarter of 1997, the Company paid a cash dividend in the amount of $.12 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, 1996, the net profits of the Bank available for distribution to the Company as dividends without regulatory approval were approximately $5,651,000. The Company expects to pay quarterly cash dividends in 1997 to holders of Common Stock, subject to the Company's financial condition. ITEMS 6, 7 AND 8 Information required by items 6, 7 and 8 is provided in the Company's 1996 Annual Report to Stockholders under the captions and on the pages indicated below, and is incorporated by reference: PAGES IN 1996 ANNUAL REPORT CAPTION IN 1996 ANNUAL REPORT TO STOCKHOLDERS TO STOCKHOLDERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-29 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30-45 INDEPENDENT AUDITORS' REPORT 46 The Company is not required to provide selected quarterly financial data in response to Item 8 and, therefore, such data has been omitted from the 1996 Annual Report to Stockholders. 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEMS 10 THROUGH 13 Information required by Items 9 through 12 is provided in 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 April 24, 1997. Such information is incorporated by reference. The information contained in the Company's definitive proxy statement under the caption "Organization and Compensation Committee Report" shall not be deemed to be incorporated by reference herein. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) 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 and are incorporated by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 1996. 25 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized on march 27, 1997. YARDVILLE NATIONAL BANCORP By: Patrick M. Ryan ---------------------------------- Patrick M. Ryan, President and Chief Executive Officer Signatures Title Jay G. Destribats - ------------------------- Chairman of the Board Jay G. Destribats and director Patrick M. Ryan - ------------------------- Director, President and Patrick M. Ryan Chief Executive Officer Stephen F. Carman - ------------------------- Treasurer, Secretary, Stephen F. Carman Principal Financial Officer and Principal Accounting Officer C. West Ayres - ------------------------- Director C. West Ayres Elbert G. Basolis, Jr. - ------------------------- Director Elbert G. Basolis, Jr. Lorraine Buklad - ------------------------- Director Lorraine Buklad Anthony M. Giampetro - ------------------------- Director Anthony M. Giampetro Sidney L. Hofing - ------------------------- Director Sidney L. Hofing James J. Kelly - ------------------------- Director James J. Kelly 26 SIGNATURES TITLE Gilbert W. Lugossy - ------------------------- Director Gilbert W. Lugossy Louis R. Matlack - ------------------------- Director Louis R. Matlack Weldon J. McDaniel, Jr. - ------------------------- Director Weldon J. McDaniel, Jr. F. Kevin Tylus - ------------------------- Director F. Kevin Yylus 27 INDEX TO EXHIBITS Exhibit Number Description PAGE * 3.1 Restated Certificate of Incorporation of the Company .......... ** 3.2 By-Laws of the Company......................................... ** 4.1 Specimen Share of Common Stock................................. ** 4.2 Form of Class A Warrant........................................ 10.1 Employment Contract Between Registrant and Patrick M. Ryan..... E-3 10.2 employment contract Between Registrant and Jay G. Destribats... e-11 *10.3 Employment Contract Between Registrant and Stephen F. Carman... *10.4 Employment Contract Between Registrant and James F. Doran...... *10.5 Employment Contract Between Registrant and Richard A. Kauffman. *10.6 Employment Contract Between Registrant and Mary C. O'Donnell... *10.7 Employment Contract Between Registrant and Frank Durand III.... 10.8 Salary Continuation Plan for the Benefit of Patrick M. Ryan.... e-18 10.9 salary continuation plan for the benefit of Jay G. Destribats.. e-23 *10.10 1988 Stock Option Plan......................................... *10.11 1994 Stock Option Plan......................................... *10.12 Directors' Deferred Compensation Plan.......................... **10.13 Lease Agreement between Jim Cramer and the Bank dated November 3, 1993....................................................... *10.14 Lease between Richardson Realty Company and the Bank dated November 18, 1994............................................. *10.15 Agreement between the Lalor Urban Renewal Limited Partnership and the BAnk dated October, 1994.............................. ***10.16 Survivor Income Plan for the Benefit of Stephen F. Carman...... ***10.17 Lease Agreement between Devon Inc. and the Bank dated as of February 9, 1996 11 Statement Re Computation of Per Share Earnings................. E-28 13.1 1996 Annual Report to Stockholders............................. E-30 **21 List of Subsidiaries of the Registrant......................... 23.1 Consent of KPMG Peat Marwick LLP .............................. E-82 27.1 Financial Data Schedules....................................... E-83 (continued) E-1 * Incorporated by reference to the Registrant's Annual Report on Rorm 10-KSB for the fiscal year ended December 31, 1994, as amended by Form 10-KSB/A filed on July 25, 1995. ** Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-78050) *** Incorporated by Reference to the Registrant's Annual Report on Form 10-KSB for the Fiscal year ended December 31, 1995. EX-10 2 EXHIBIT 10.1 1 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this 31st day of January, 1997 by and between THE YARDVILLE NATIONAL BANCORP (the "Holding Company"), a corporation organized under the laws of the State of New Jersey, and Patrick M. Ryan (the "Executive"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Executive for the period provided in this Agreement; and WHEREAS, the Executive is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, Executive shall serve as President and Chief Executive Officer of the Yardville National Bank (the "Bank") reporting to the Board of Directors of the Bank and as Chief Executive Officer of the Holding Company reporting to the Board of Directors of the Holding Company (collectively, the "Board"). During said period, Executive shall also serve as a director of the Bank and as a director of the Holding Company. Failure to re-elect Executive as President and Chief Executive Officer of the Bank or the Holding Company or failure to re-elect Executive as a member of the Board of Directors of the Bank or of the Holding Company shall constitute a Breach of this Agreement. 2. TERMS AND DUTIES (a) The period of the Executive's employment under this Agreement shall commence as of January 31, 1997 and shall continue for a period of twenty-four (24) full calendar months thereafter, unless terminated by the Bank on account of death, disability or cause (as herein defined). This Agreement is subject to approval, for continuation, by the Board of Directors of the Yardville National 2 Bancorp, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. This Agreement shall be deemed to continue for an additional twelve (12) months from each succeeding anniversary date of the Agreement, it being the intention of the parties that, unless notice is given to the contrary by either party, the Agreement shall be extended for an additional one year period so that there be a full twelve month term remaining. (b) During the period of employment, the Executive shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the President and Chief Executive Officer of a commercial bank and from time to time may be perceived by the Board. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause" means any of the following: (i) the willful commission of an act that causes or that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Executive's duties; or (iii) a continuing willful failure to perform the duties of the Executive's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Executive's employment. (b) "Change in Control: means any of the following: (i) the acquisition by any person or group acting in concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or, (ii) the approval by the Board of the sale of all or substantially all of the assets of the Bank or Holding Company; or, (iii) the approval by the Board of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (i) or (ii) above. 3 (c) "Disability" means a mental or physical illness or condition rendering the Executive incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment, the Bank shall pay to the Executive an annual salary of not less than $200,000.00 shall be paid in either bi-weekly or monthly installments as the Executive prefers. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. (b) The Executive shall be entitled to participate in or receive benefits under any retirement plan, salary continuation plan, pension plan, profit-sharing plan, stock plan, group term replacement plan, health-and-accident plan, medical coverage or any other employee benefit plan or prerequisite arrangement currently available or which may hereafter be adopted by the Bank for its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) The Executive shall be provided by the Bank with an automobile for his individual use. (d) In addition to the salary provided for under Section 4: (a) The Bank shall pay for all reasonable travel and other reasonable expenses incurred by the Executive in performing his obligations under this Agreement. (c) The Executive shall be eligible for an annual cash bonus, based upon the Bank's performance during the fiscal year. The cash bonus allowance will be set at 2% of profits, after taxes and prior to shareholder dividend payments, if earnings, in the fiscal year, exceed $3,999,999.99. 4 All cash bonuses, for the Executive, are subject to the recommendation and approval of the Director' Organization and Compensation Committee and all bonus provisions will be reviewed annually for appropriate revisions. 5. STOCK OPTIONS Incentive Stock Options will be periodically negotiated for the Executive under the terms and conditions of the shareholder approved Employee Stock Option Plan. Stock options previously granted to the Executive are reaffirmed for the contract periods of November 7, 1991 and October 28, 1992 as follows: (a) On November 7, 1991 the Bank granted to the Executive the option to purchase 5,000 shares of its common stock of the Bank Holding Company at a share price of Six dollars and Fifty cents ($6.50) per share (the fair market value of said stock as of the date of the Agreement) subject to the terms and conditions of the Holding Company's 1988 Stock Option Plan (the "Plan"). Number of Options Vesting Date 1750 November 7, 1991 1750 November 7, 1992 1500 November 7, 1993 (b) On October 28, 1992, the Bank granted to the Executive the option to purchase 5,000 shares of its common stock of the Bank Holding Company at a price of Sixteen dollars ($16.00) per share (the fair market value of said stock as of the date of the Agreement) subject to the terms and conditions of the Holding Company's 1988 Stock Option Plan (the "Plan"). Number of Options Vesting Date 5000 October 28, 1993 The rights to exercise shall be cumulative, and any option not exercised in a prior year may be exercised in a subsequent year throughout the ten year option period. 5 In connection with any proposed sale or conveyance of all or substantially all of the assets of the Bank or Holding Company or recently accomplished Change of Control of the Holding Company, the vesting schedule of all options granted hereunder to the Executive shall accelerate and 100% of all options shall immediately vest to the Executive. If and to the extent that the number of issued shares of common stock of the Holding Company shall be increased or reduced by any change in the par value, split-up, reclassification, distribution of a dividend payable in stock or the like, the number of shares proportionately adjusted. If the Holding Company is reorganized, consolidated or merged with another corporation, the Executive shall be entitled to receive options covering shares of such reorganized, consolidated or merged corportion in the same proportion and at an equivalent price and subject to the same conditions. For the purposes of the preceding sentence, the excess of the aggregate fair market value of the shares subject to the option immediately after the reorganization, consolidation or merger over the aggregate option price of such shares shall not be more than the excess of the aggregate fair market value of all shares subject to the option immediately before such reorganization, consolidation or merger over the aggregate option price of such shares, and a new option or assumption of the old option shall not give the Executive additional benefits which he did not have under the old option. 6. TERMINATION FOR CAUSE (a) The Executive shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. (b) Any unexercised stock option granted to the Executive shall become null and void effective upon the Executive's receipt of notice of termination for Cause and shall not be exercisable by the Executive at any time subsequent to such termination for Cause. (c) The Executive shall not be deemed to have been terminated for Cause unless and until there is delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the full Board at a meeting of such Board called and held for the purpose (after the Executive, 6 together with counsel, has been given the opportunity to be heard before the Board), finding the Executive guilty of conduct set forth above in the definition of "Cause" in Subsection 3(a) and specifying the particulars thereof in detail. 7. CHANGE IN CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Executive's employment is terminated by the Bank, other than for death, disability or Cause, the Executive shall be entitled to receive three (3) years' salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. (b) The Executive will have the option within six (6) months after a Change in Control (as herein defined), to elect to resign his position. If the Executive's voluntary departure is for other than death, disability or cause the Executive shall be entitled to receive three (3) years' salary at an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (c) Under the provisions of Section 7 the Executive is entitled to receive a lump sum payment of three (3) years salary at the annual salary currently being paid at the time of the event. The Holding Company's independent accountants will determine if an excess payment (as defined in Section 4999 of the Internal Revenue Code of 1954, as amended (the "Code") exists after reductions permitted pursuant to Section 28OG(b)(4) of the Code (such excess parachute payment after taking into account such reductions, if any, being hereafter referred to as the "Excess Parachute Payment"). As soon as practicable after the Excess Parachute Payment, if any, has been so determined, the Holding Company will pay to the Executive, subject to applicable withholding requirements under state or federal law (i) twenty (20%) percent of the Excess Parachute Payment, and (ii) such additional amount, if any (including Federal and State income and exercise taxes applicable thereto) as may be necessary to compensate the Executive for the payment of state and federal income and excise taxes on the aforesaid payment, as outlined in Section C. 7 8. TERMINATION UPON DISABILITY (a) In the event that the Executive experiences a Disability during the period of his employment, his salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by any concurrent disability benefit payments provided under disability insurance maintained by the Holding Company. If such Disability continues for a period of six (6) consecutive months, the Holding Company at its option may thereafter, upon written notice to the Executive or his personal representative, terminate the Executive's employment with no further notice. 9. OTHER TERMINATION BY THE HOLDING COMPANY (a) In the event the Executive's employment is terminated by the Holding Company, other than for disability, death or Cause, and in the absence of occurrence of a Change in Control, the Executive will be entitled to payment of the remaining term of this agreement, at the annual salary currently being paid with said payment to be a lump sum payment upon termination. (b) Vested stock options granted to the Executive shall be exercisable by the Executive at any time within three (3) months from the effective date of termination, but only to the extent exercisable by him on the date of such termination and in no event later than the expiration date of his option. 10. TERMINATION BY THE EXECUTIVE (a) In the event of the Executive's voluntary termination, the Executive shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. (b) Vested stock options granted to the Executive shall be exercisable by the Executive at any time within three (3) months from the effective date of termination by the Executive, but only to the extent exercisable by him on the date of such termination and in no event later than the expiration date of his options. 11. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank, as the case may be. 8 12. MODIFICATION AND WAIVER This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 13. NOTICES Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence in the case of the Executive or to its principal place of business in the case of the Bank. 14. GOVERNING LAW This Agreement and the obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 15. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January, 1997. ATTEST: YARDVILLE NATIONAL BANCORP - --------------------------- ----------------------------------------- Jay G. Destribats Chairman of the Board - --------------------------- ----------------------------------------- F. Kevin Tylus, Chairman Directors' Organization & Compensation Committee WITNESS - ---------------------------- ---------------------------------------- Patrick M. Ryan, the Executive EX-10 3 EXHIBIT 10.2 1 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this 31st day of January, 1997 by and between THE YARDVILLE NATIONAL BANCORP (the "Holding Company"), a corporation organized under the laws of the State of New Jersey, and Jay G. Destribats (the "Executive"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Executive; and WHEREAS, the Executive is willing to serve in the employ of the Bank; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, Executive shall serve as Chairman of the Board of Directors of Yardville National Bank (the "Bank") reporting to the Board of Directors of the Bank and as Chairman of the Board of Directors of the Holding Company reporting to the Board of Directors of the Holding Company (collectively, the "Board"). Failure to reelect the Executive as Chairman of the Board of the Bank or the Holding Company or failure to reelect Executive as a member of the Board of Directors of the Bank or of the Holding Company shall constitute a Breach of this Agreement. 2. TERMS AND DUTIES (a) The period of the Executive's employment under this Agreement shall commence as of January 31, 1997 and shall continue for a period of twenty-four (24) full calendar months thereafter, unless terminated by the Bank on account of death, disability or cause (as herein defined). This Agreement is subject to approval, for continuation, by the Board of Directors of the Yardville National 2 Bancorp, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. This Agreement shall be deemed to continue for an additional twelve months from each succeeding anniversary date of the Agreement, it being the intention of the parties that, unless notice is given to the contrary by either party, the Agreement shall be extended for an additional one year period so that there be a full twelve month term remaining. (b) During the period of employment, the Executive shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Chairman of the Board of Directors of a commercial bank and from time to time may be perceived by the Board. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause" means any of the following: (i) the willful commission of an act that causes or that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Executive's duties; or (iii) a continuing willful failure to perform the duties of the Executive's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Executive's employment. (b) "Change in Control: means any of the following: (i) the acquisition by any person or group acting in concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or, (ii) the approval by the Board of the sale of all or substantially all of the assets of the Bank or Holding Company; or, 3 (iii) the approval by the Board of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Executive incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment, the Bank shall pay to the Executive an annual salary of not less than $160,000.00 shall be paid in either bi-weekly or monthly installments as the Executive prefers. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. (b) The Executive shall be entitled to participate in or receive benefits under any retirement plan, salary continuation plan, pension plan, profit-sharing plan, stock plan, executive group term replacement plan, health-and-accident plan, medical coverage or any other employee benefit plan or prerequisite arrangement currently available or which may hereafter be adopted by the Bank for its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) The Executive shall be provided by the Bank with an automobile for his individual use. (d) In addition to the salary provided for under Section 4: (a) The Bank shall pay for all reasonable travel and other reasonable expenses incurred by the Executive in performing his obligations under this Agreement. 4 5. STOCK OPTIONS Incentive Stock Options will be periodically negotiated for the Executive under the terms and conditions of the shareholder approved Employee Stock Option Plan. 6. TERMINATION FOR CAUSE (a) The Executive shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. (b) Any unexercised stock option granted to the Executive shall become null and void effective upon the Executive's receipt of notice of termination for Cause and shall not be exercisable by the Executive at any time subsequent to such termination for Cause. (c) The Executive shall not be deemed to have been terminated for Cause unless and until there is delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the full Board at a meeting of such Board called and held for the purpose (after the Executive, together with counsel, has been given the opportunity to be heard before the Board), finding the Executive guilty of conduct set forth above in the definition of "Cause" in Subsection 3(a) and specifying the particulars thereof in detail. 7. CHANGE IN CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Executive's employment is terminated by the Bank, other than for death, disability or Cause, the Executive shall be entitled to receive three (3) years' salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. (b) The Executive will have the option within six (6) months after a Change in Control (as herein defined), to elect to resign his position. If the Executive's voluntary departure is for other than death, disability or cause the Executive shall be entitled to receive three (3) years' salary at an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. 5 (c) Under the provisions of Section 7 the Executive is entitled to receive a lump sum payment of three (3) years salary at the annual salary currently being paid at the time of the event. The Holding Company's independent accountants will determine if an excess payment (as defined in Section 4999 of the Internal Revenue Code of 1954, as amended (the "Code") exists after reductions permitted pursuant to Section 28OG(b)(4) of the Code (such excess parachute payment after taking into account such reductions, if any, being hereafter referred to as the "Excess Parachute Payment"). As soon as practicable after the Excess Parachute Payment, if any, has been so determined, the Holding Company will pay to the Executive, subject to applicable withholding requirements under state or federal law (i) twenty (20%) percent of the Excess Parachute Payment, and (ii) such additional amount, if any (including Federal and State income and exercise taxes applicable thereto) as may be necessary to compensate the Executive for the payment of state and federal income and excise taxes on the aforesaid payment, as outlined in Section C. 8. TERMINATION UPON DISABILITY (a) In the event that the Executive experiences a Disability during the period of his employment, his salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by any concurrent disability benefit payments provided under disability insurance maintained by the Holding Company. If such Disability continues for a period of six (6) consecutive months, the Holding Company at its option may thereafter, upon written notice to the Executive or his personal representative, terminate the Executive's employment with no further notice. 9. OTHER TERMINATION BY THE HOLDING COMPANY (a) In the event the Executive's employment is terminated by the Holding Company, other than for disability, death or Cause, and in the absence of occurrence of a Change in Control, the Executive will be entitled to payment of the remaining term of this agreement, at the annual salary currently being paid with said payment to be a lump sum payment upon termination. 6 (b) Vested stock options granted to the Executive shall be exercisable by the Executive at any time within three (3) months from the effective date of termination, but only to the extent exercisable by him on the date of such termination and in no event later than the expiration date of his option. 10. TERMINATION BY THE EXECUTIVE (a) In the event of the Executive's voluntary termination, the Executive shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. (b) Vested stock options granted to the Executive shall be exercisable by the Executive at any time within three (3) months from the effective date of termination by the Executive, but only to the extent exercisable by him on the date of such termination and in no event later than the expiration date of his options. 11. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank, as the case may be. 12. MODIFICATION AND WAIVER This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 13. NOTICES Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence in the case of the Executive or to its principal place of business in the case of the Bank. 14. GOVERNING LAW This Agreement and the obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 7 15. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January, 1997. ATTEST: YARDVILLE NATIONAL BANCORP - -------------------------- ----------------------------------- F. Kevin Tylus, Chairman Directors' Organization & Compensation Committee WITNESS - -------------------------- ------------------------------------- Jay G. Destribats Chairman of the Board EX-10 4 EXHIBIT 10.8 YARDVILLE NATIONAL BANK SALARY CONTINUATION PLAN FOR THE BENEFIT OF PATRICK M. RYAN This agreement is made and entered into effective the 28th day of October, 1994, by and between YARDVILLE NATIONAL BANK, a corporation organized and existing under the laws of the state of New Jersey hereinafter called "Company", and PATRICK M. RYAN, hereinafter called "Executive." WITNESSETH: WHEREAS, the Executive has been in the employ of the Company for four (4) years and is now serving the Company as Chief Executive Officer; and WHEREAS, the services of the Executive have been an invaluable contribution to the prior success of the Company; and WHEREAS, the Company wishes to retain the services of the Executive to insure the continued success and future growth of the Company; and WHEREAS, the Executive is willing to continue in the employ of the company provided the Company agrees to provide certain benefits in accordance with the terms and conditions hereinafter set forth: NOW THEREFORE the parties agree as follows: ARTICLE ONE Employment. The Company will employ the Executive as Chief Executive Officer or in such other positions as may be determined from time to time by the Company and at such rate of compensation as may be so determined. The Executive will devote his full energy, skill and best efforts to the affairs of the Company on a substantially full-time basis. It is contemplated that such employment will continue until the Executive's normal retirement date upon the attainment of age 65 which date is June 21, 2009. ARTICLE TWO Retirement. If the Executive shall continue in the employment of the Company until his normal retirement date he may retire on his normal retirement date. If he shall become disabled (as defined under Article Three) prior to his normal retirement date, and if such disability continues to his normal retirement date, he will be considered to have retired on his normal retirement date. In either event, commencing with the first month following his normal retirement date, the Company will pay the Executive fifty percent (50%) of his final annual salary on a monthly basis for a period of at least 180 months or for his life, if longer. If the Executive so retires, but dies before receiving 180 monthly payments, the Company shall continue to make such payments to such individual or individuals as the Executive may have designated in writing and filed with the Company until 180 payments have been made. In the absence of any effective designation by the Executive, any amounts becoming due and payable upon the death of the Executive shall be paid to his executor or administrator. ARTICLE THREE Disability. If, while employed by the Company, the Executive becomes totally disabled and his employment terminates, the Company will continue to pay the Executive for six months. Thereafter, if the Executive remains disabled, the Company will continue to pay the Executive's final salary to the Executive in equal monthly installments until the Executive attains age sixty-five (65). Any amount paid the Company pursuant to the preceding sentence will be reduced on a dollar-for-dollar basis by any payment received by the Executive under the Company's long term disability insurance policies. Upon attaining his normal retirement date, the Company will pay to the Executive an amount equal to the retirement benefit that would have been paid under the terms of this Plan had the Executive continued his employment until his retirement at his then current salary. For purposes of this Agreement, "disability" shall mean the inability of the Executive to engage in his position with the Company, as it exists at the date that this Agreement becomes effective, for a period of at least six (6) months, by reason of any medically determinable physical or mental impairment which can be expected to result in death or be of long continued and indefinite duration. ARTICLE FOUR Termination of Employment and Change of Control. (a) (1) Subject to subparagraph (2) of this paragraph (a), if the Executive terminates his employment with the Company or if the Company terminates the Executive's employment for any reason other than disability or prior to the Executive's normal retirement date, the Company will pay the Executive monthly, commencing with the first month after the Executive's normal retirement date and continuing for 180 months thereafter, an amount calculated by multiplying the amount payable at normal retirement specified in Article Two by a fraction the numerator of which is the number of full years between the date of this agreement and the date of termination of the Executive's employment and the denominator of which is the number of full years between the date of this agreement and the Executive's normal retirement date. 2 (2) If the Company terminates the Executive's employment because the Executive has committed an act which exposes the Company to economic harm or damages the reputation or good will of the Company, then any payment otherwise due to the Executive under this Agreement shall be forfeited. (b) In the event that a change in control of the Company has occurred (which shall be deemed to have occurred if a company or individual that is not currently a shareholder acquires at least forty percent [40%] of the Company), and if the Executive either resigns his position with the Company or if his employment is terminated for any reason, which termination shall be deemed to have occurred if the Executive's responsibilities are diminished or assumed by another individual, then the Executive shall he entitled to receive the amount payable at normal retirement as provided for under Article Two without reduction for the period of employment that ended prior to his normal retirement date. ARTICLE FIVE Death. If the Executive dies before his normal retirement date, (but either before or after his termination of employment), commencing with the first month following death and continuing for 180 months thereafter, the Company shall pay the Executive's named beneficiary (designated in Article Seven of this agreement and hereinafter referred to as the Beneficiary) a monthly amount equal to the amount the Company would have paid the Executive had he lived to his normal retirement date, which, in the case of death during employment or after termination resulting from disability, shall be the amount specified in Article Two and, which in the case of death after termination of employment for reasons other than disability, shall be the amount determined pursuant to Article Four. ARTICLE SIX Small amounts. In the event the amount of any monthly payments provided herein shall be less than $100.00, the Company in its sole discretion may, in lieu thereof, pay the commuted value of such payments to the person entitled to receive such payments. ARTICLE SEVEN Beneficiary. The Beneficiary of any payments to be made after the Executive's death, shall be the spouse of PATRICK M. RYAN or such other person or persons as the Executive shall designate in writing to the Company. If no beneficiary shall survive the Executive, any such payments shall be made to the Executive's estate. 3 ARTICLE EIGHT Source of payments. The Executive, the Beneficiary and any other person or persons having or claiming a right to payments hereunder or to any interest in this Agreement shall rely solely on the unsecured promise of the Company set forth herein, and nothing in this agreement shall be construed to give the Executive, the Beneficiary or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the company or in which it may have any right, title or interest now or in the future. The Executive or his Beneficiary or successor shall have the right to enforce his claim against the Company in the same manner as any unsecured creditor. ARTICLE NINE Insurance. If the Company shall elect to purchase a life insurance contract to provide the Company with funds to make payments hereunder, the Company shall at all times be the sole and complete owner and beneficiary of such contract and shall have the unrestricted right to use all amounts and exercise all options and privileges thereunder without the knowledge or consent of the Executive or the Beneficiary or any other person, it being expressly agreed that neither the Executive nor the Beneficiary nor any other person shall have any right, title or interest whatsoever in or to any such contract. If the Company purchases a life insurance contract on the life of the Executive, the Executive agrees to sign any papers that may be required for that purpose and to undergo any medical examination or tests which may be necessary. This article shall not be construed as giving the Executive or the Beneficiary any greater rights than those of any other unsecured creditor of the Company. ARTICLE TEN Amendment. This agreement may be amended at any time or from time to time by written agreement of the parties. ARTICLE ELEVEN Assignment. Neither the Executive, nor the Beneficiary, nor any other person entitled to payment hereunder shall have the power to transfer, assign, anticipate, mortgage or otherwise encumber in advance any of such payments, nor shall such payments be subject to seizure for the payment of public or private debts, judgments, alimony or separate maintenance; or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. 4 ARTICLE TWELVE Binding effect. This agreement shall be binding upon the parties, their heirs, executors, administrators, successors and assigns. The Company agrees that it will not be a party to any merger, consolidation or reorganization, unless and until its obligations hereunder shall be expressly assumed by its successor or successors. This agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Company to discharge the Executive or restrict the right of the Executive to terminate his employment. IN WITNESS WHEREOF the parties have executed this agreement as of the 28th day of October, 1994. /s/ Patrick M. Ryan - ----------------------------- ------------------------------ PATRICK M. RYAN YARDVILLE NATIONAL BANK By /s/ Jay Destribats ------------------------------ Attest /s/ Ingrid Jesibonowski ------------------------------ 5 EX-10 5 EXHIBIT 10.9 YARDVILLE NATIONAL BANK SALARY CONTINUATION PLAN FOR THE BENEFIT OF JAY DESTRIBATS This agreement is made and entered into effective the 31st day of December, 1994, by and between YARDVILLE NATIONAL BANK, a corporation organized and existing under the laws of the state of New Jersey hereinafter called "Company", and JAY DESTRIBATS, hereinafter called "Executive." WITNESSETH: WHEREAS, the Executive has been in the employ of the Company for one (1) years and is now serving the Company as Chairman of the Board; and WHEREAS, the services of the Executive have been an invaluable contribution to the prior success of the Company; and WHEREAS, the Company wishes to retain the services of the Executive to insure the continued success and future growth of the Company; and WHEREAS, the Executive is willing to continue in the employ of the Company provided the Company agrees to provide certain benefits in accordance with the terms and conditions hereinafter set forth: NOW THEREFORE the parties agree as follows: ARTICLE ONE Employment. The Company will employ the Executive as Chairman of the Board of Directors or in such other positions as may be determined from time to time by the Company and at such rate of compensation as may be so determined. The Executive will devote his full energy, skill and best efforts to the affairs of the Company on a substantially full-time basis. It is contemplated that such employment will continue until the Executive's normal retirement date upon the attainment of age 70 which date is March 27, 2005 ARTICLE TWO Retirement. If the Executive shall continue in the employment of the Company until his normal retirement date he may retire on his normal retirement date. If he shall become disabled (as defined under Article Three) prior to his normal retirement date, and if such disability continues to his normal retirement date, he will be considered to have retired on his normal retirement date. In such event, commencing with the first month following his normal retirement date, the Company will pay the Executive fifty percent (50%) of his final annual salary on a monthly basis for a period of at least 180 months or for his life, if longer. If the Executive so retires, but dies before receiving 180 monthly payments, the Company shall continue to make such payments to such individual or individuals as the Executive may have designated in writing and filed with the Company until 180 payments have been made. In the absence of any effective designation by the Executive, any amounts becoming due and payable upon the death of the Executive shall be paid to his executor or administrator. ARTICLE THREE Disability. If, while employed by the Company, the Executive becomes totally disabled and his employment terminates, the Company will continue to pay the Executive for six months. Thereafter, if the Executive remains disabled, the Company will continue to pay the Executive's final salary to the Executive in equal monthly installments until the Executive attains age seventy (70) . Any amount paid by the Company pursuant to the preceding sentence will be reduced on a dollar-for-dollar basis by any payment received by the Executive under the Company's long term disability insurance policies. Upon attaining his normal retirement date, the Company will pay to the Executive an amount equal to the retirement benefit that would have been paid under the terms of this Plan had the Executive continued his employment until his retirement at his then current salary. For purposes of this Agreement, "disability" shall mean the inability of the Executive to engage in his position with the Company, as it exists at the date that this Agreement becomes effective, for a period of at least six (6) months, by reason of any medically determinable physical or mental impairment which can be expected to result in death or be of long continued and indefinite duration. ARTICLE FOUR Termination of Employment and Change of Control. (a) (1) Subject to subparagraph (2) of this paragraph (a), if the Executive terminates his employment with the Company or if the Company terminates the Executive's employment for any reason other than disability or prior to the Executive's normal retirement date, the Company will pay the Executive monthly, commencing with the first month after the Executive's normal retirement date and continuing for 180 months thereafter, an amount calculated by multiplying the amount payable at normal retirement specified in Article Two by a fraction the numerator of which is the number of full years between the date of this agreement and the date of termination of the Executive's employment and the denominator of which is the number of full years between the date of this agreement and the Executive's normal retirement date. 2 (2) If the Company terminates the Executive's employment because the Executive has committed an act which exposes the Company to economic harm or damages the reputation or good will of the Company, then any payment otherwise due to the Executive under this Agreement shall be forfeited. (b) In the event that a change in control of the Company has occurred (which shall be deemed to have occurred if a company or individual that is not currently a shareholder acquires at least forty percent [40%] of the Company), and if the Executive either resigns his position with the Company or if his employment is terminated for any reason, which termination shall be deemed to have occurred if the Executive's responsibilities are diminished or assumed by another individual, then the Executive shall be entitled to receive the amount payable at normal retirement as provided for under Article Two without reduction for the period of employment that ended prior to his normal retirement date. ARTICLE FIVE Death. If the Executive dies before his normal retirement date, (but either before or after his termination of employment), commencing with the first month following death and continuing for 180 months thereafter, the Company shall pay the Executive's named beneficiary (designated in Article Seven of this agreement and hereinafter referred to as the Beneficiary) a monthly amount equal to the amount the Company would have paid the Executive had he lived to his normal retirement date, which, in the case of death during employment or after termination resulting from disability, shall be the amount specified in Article Two and, which in the case of death after termination of employment for reasons other than disability, shall be the amount determined pursuant to Article Five. ARTICLE SIX Small amounts. In the event the amount of any monthly payments provided herein shall be less than $100.00, the Company in its sole discretion may, in lieu thereof, pay the commuted value of such payments to the person entitled to receive such payments. ARTICLE SEVEN Beneficiary. The Beneficiary of any payments to be made after the Executive's death, shall be the spouse of JAY DESTRIBATS or such other person or persons as JAY DESTRIBATS shall designate in writing to the Company. If no beneficiary shall survive the Executive, any such payments shall be made to the Executive's estate. 3 ARTICLE EIGHT Source of payments. The Executive, the Beneficiary and any other person or persons having or claiming a right to payments hereunder or to any interest in this Agreement shall rely solely on the unsecured promise of the Company set forth herein, and nothing in this agreement shall be construed to give the Executive, the Beneficiary or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the company or in which it may have any right, title or interest now or in the future. The Executive or his Beneficiary or successor shall have the right to enforce his claim against the Company in the same manner as any Unsecured creditor. ARTICLE NINE Insurance. If the Company shall elect to purchase a life insurance contract to provide the Company with funds to make payments hereunder, the Company shall at all times be the sole and complete owner and beneficiary of such contract and shall have the unrestricted right to use all amounts and exercise all options and privileges thereunder without the knowledge or consent of the Executive or the Beneficiary or any other person, it being expressly agreed that neither the Executive nor the Beneficiary nor any other person shall have any right, title or interest whatsoever in or to any such contract. If the Company purchases a life insurance contract on the life of the Executive, the Executive agrees to sign any papers that may be required for that purpose and to undergo any medical examination or tests which may be necessary. This article shall not be construed as giving the Executive or the Beneficiary any greater rights than those of any other unsecured creditor of the Company. ARTICLE TEN Amendment. This agreement may be amended at any time or from time to time by written agreement of the parties. ARTICLE ELEVEN Assignment. Neither the Executive, nor the Beneficiary, nor any other person entitled to payment hereunder shall have the power to transfer, assign, anticipate, mortgage or otherwise encumber in advance any of such payments, nor shall such payments be subject to seizure for the payment of public or private debts, judgments, alimony or separate maintenance; or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. 4 ARTICLE TWELVE Binding effect. This agreement shall be binding upon the parties, their heirs, executors, administrators, successors and assigns. The Company agrees that it will not be a party to any merger, consolidation or reorganization, unless and until its obligations hereunder shall be expressly assumed by its successor or successors. This agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Company to discharge the Executive or restrict the right of the Executive to terminate his employment. IN WITNESS WHEREOF the parties have executed this agreement this 31st day of December, 1994. /s/ Jay Destribats /s/ Patrick M. Ryan Pres/CEO - ------------------------ ----------------------------- JAY DESTRIBATS YARDVILLE NATIONAL BANK By --------------------------- Attest /s/ --------------------------- EX-11 6 EXHIBIT 11 Exhibit 11 Yardville National Bancorp and Subsidiary Computation of Earnings Per share Years ended December 31, 1995 and 1994*
Primary Earnings Per Share -------------------------- (in thousands, except per share amounts) 1995 1994 ---------------------------------------- ---- ---- Reconciliation of net income, per consolidated statements of income to amount used in primary earnings per share computation: Net income $ 3,403 $ 2,523 Add: Interest on long-term debt and interest on investment securities, net of income tax effect, on application of assumed proceeds from exercise of options and warrants in excess of 20% limitation 120 247 -------------------- Net income, as adjusted $ 3,523 $ 2,770 Reconciliation of weighted average number of shares outstanding to amount used in primary earnings per share computation: Weighted average number of shares outstanding 1,964 1,255 Add: Equivalent shares issuable from assumed exercise of options and warrants in excess of 20% limitation 228 502 Equivalent shares issuable from assumed exercise of dilutive options - - -------------------- Weighted average number of shares outstanding, as adjusted 2,192 1,757 -------------------- Primary earnings per share $ 1.61 1.58 --------------------
* 1995 and 1994 earnings per share amounts were calculated utilizing the modified treasury stock method. The expiration of the warrants in June 1996 resulted in a change in the computation method of earnings per share to the treasury stock method in 1996. The computation of earnings per share for 1996 can be clearly determined from the material contained in the 1996 Annual Report to Stockholders filed with the 1996 10K. Exhibit 11, cont. Yardiville National Bancorp and Subsidiary Computation of Earnings Per Share Years ended December 31, 1995 and 1994
Fully Dilluted Earnings Per Share - --------------------------------- (in thousands, except per share amounts) 1995 1994 - ---------------------------------------- ---- ---- Reconciliation of net income, per consolidated statements of income to amount used in fully diluted earnings per share computation: Net income $ 3,403 $ 2,523 Add: Interest on long-term debt and interest on investment securities, net of income tax effect, on application of assumed proceeds from exercise of options and warrants in excess of 20% limitation 101 223 ------------------------ Net income, as adjusted 3,504 2,746 ------------------------ Reconciliation of weighted average number of shares outstanding to amount used in fully diluted earnings per share computation: Weighted average number of shares outstanding 1,964 1,255 Add: Equivalent shares issuable from assumed exercise of options and warrants in excess of 20% limitation 228 502 Equivalent shares issuable from assumed exercise of dilutive options - - ------------------------ Weighted average number of shares outstanding, as adjusted 2,192 1,757 ------------------------ Fully diluted earnings per share $ 1.60 $ 1.56 ------------------------
EX-13 7 EXHIBIT 13.1 YNB Yardville National Bankcorp [LOGO] 1996 Annual Report TABLE OF CONTENT - ----------------------------------------- Financial Highlights ........................................ 1 Letter to Stockholders ...................................... 2 Expansion for the Future..................................... 4 Salute to Directors Emeritus ................................ 8 Selected Historical Consolidated Financial Data ............. 9 Management's Financial Discussion and Analysis............... 11 Financial Statements......................................... 30 Notes to Consolidated Financial Statements .................. 34 Independent Auditors' Report ................................ 46 Officers .................................................... 47 Board of Directors .......................................... 48 Stockholder Information ...........................Inside Back Cover STOCKHOLDER INFORMATION ------------------------------------- Corporate Headquarters Financial Information Yardville National Bancorp Investors, security analysts 3111 Quakerbridge Road and others desiring financial Mercerville, New Jersey 08619 information should contact: (609) 585-5100 Diane H. Polyak Assistant Secretary/Assistant Annual Meeting Treasurer The Annual Meeting of Stockholders or will be held at La Villa Ristorante Stephen F. Carman 2275 Kuser Road, Hamilton, SecretarylTreasurer New Jersey 08690 Thursday, April 24, 1997 Doors open 9:00 a.m. Form 10-KSB Availability Meeting begins 10:00 a.m. Copies of Yardville National Bancorp's Forms 10-KSB Registrar and Stock Transfer Agent and 10-QSB filed with the First City Transfer Company Securities and Exchange 111 Wood Avenue South, Suite 206 Commission are available Iselin, New Jersey 08830 to stockholders upon written (908) 205-4517 request to the Company. Subsidiary Bank is a Member of the FDIC. OFFICES - -------------------- The Yardville National Bank Ewing Office P.O. Box 8487 1450 Parkside Avenue Trenton, New Jersey 08650 Ewing Township, New Jersey 08638 Yardville Office East Windsor Office 4556 South Broad Street 18 Princeton-Hightstown Road Yardville, New Jersey 08620 East Windsor, New Jersey 08520 Center City Office Trenton Office 1099 Whitehorse-Mercerville Road 410 Lalor Plaza Trenton, New Jersey 08610 Trenton, New Jersey 08611 Broad Street Park Office Nottingham Pointe Office 2025 South Broad Street 4631 Nottingham Way Trenton, New Jersey 08610 Hamilton Square, New Jersey 08690 Quakerbridge Off Ice West Trenton Office 3111 Quakerbridge Road 40 Scotch Road Mercerville, New Jersey 08619 West Trenton, New Jersey 08628 [LOGO] Yardville National Bancorp and Subsidiary FINANCIAL HIGHLIGHTS ------------------------------
- --------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1996 1995 Increase - --------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31 Net income $ 4,026 $ 3,403 18.3% Cash dividends declared per common share 0.45 0.38 18.4 - --------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA AS OF DECEMBER 31 Total assets $490,545 $403,115 21.7% Total deposits 364,445 302,972 20.3 Total loans 331,237 245,054 35.2 Stockholders' equity 35,230 31,717 11.1 - --------------------------------------------------------------------------------------------------------------- CONSOLIDATED RATIOS Return on average assets 0.90% 0.99% Return on average stockholders' equity 12.25 13.84 Total equity to total assets 7.18 7.87 Tier I capital to risk-weighted assets 10.17 11.95 Total capital to risk-weighted assets 11.43 13.20 Nonper1orming loans to total assets 1.66 0.70 Nonperforming loans to year-end loans 2.46 1.15 - ---------------------------------------------------------------------------------------------------------------
Net Income (dollars in thousands) 5,000-------------------------------------------------------------------------- 4,026 4,000-------------------------------------------------------------------------- 3,403 3,000-------------------------------------------------------------------------- 2,523 2,000----------------1,925----------------------------------------------------- 1,000-------------------------------------------------------------------------- 568 0-------------------------------------------------------------------------- 1992 1993 1994 1995 1996 Total Assets (dollars in thousands) 490,545 500,000------------------------------------------------------------------------ 400,000-----------------------------------------------403,115------------------ 300,000------------------------------------------------------------------------ 280,550 205,494 223,438 200,000------------------------------------------------------------------------ 100,000------------------------------------------------------------------------ 0------------------------------------------------------------------------ 1992 1993 1994 1995 1996 Letter to stockholders To our stockholders, employees, and friends: From an organization focused solely on Hamilton Township, YNB has broadened its market to encompass all of Mercer County. Now, as we move energetically into the future of financial services, YNB plans to bring its special kind of community banking to contiguous markets, looking to Burlington, Bucks and Middlesex counties for our future growth. Yet even as we grow and expand, one aspect remains constant: YNB's commitment to its communities and our knowledge of our market area. In this, we distinguish ourselves clearly from the large superregional and money center banks in our state, and the non-bank financial services companies with no roots in our community. We live among our customers. We understand what they want, appreciate their business, and make our decisions accordingly. YNB has positioned itself for success in the future with a winning combination of personal service, banking experience, technological support, and innovative, customer-centered product offerings. Our products are up-to-date and responsive to customer wants and desires. New offerings like Second Check, our new debit card, and the Chairman's Choice account, among others, give customers what they need. And we have added the technology to support new products and to greatly enhance customer convenience. As a result of our long-term vision, earnings have continued to climb, our horizons have widened considerably, and our future looks bright. Growth in All Dimensions In 1996, net income rose 18.3% to $4,026,000, or $1.64 per share on a fully diluted basis, compared with 1995 net income of $3,403,000, or $1.60 per share on a fully diluted basis. Our year-end assets reached $490,545,000, compared with $403,115,000 just a year ago, and we plan on continued growth as we approach the year 2000. Our earnings growth has been fueled by an active commitment to increase quality loan assets of all types. By expanding our presence in the commercial, residential mortgage, and consumer lending markets, YNB has grown our loan portfolio over the past year, with total outstandings reaching $331,237,000 at December 31, 1996. This represents an increase of 35.2% over the total of $245,054,000 at the same date of the prior year. Our portfolio is diverse and well-balanced, reflecting the healthy consumer and business sectors in the market area we serve. There will, however, be rough spots at times. Nonperforming assets totaled $8,535,000 at December 31, 1996, compared to $3,444,000 at December 31, 1995. The increase in nonperforming assets is due to two loans backed by real estate collateral which management is diligently striving to resolve. The allowance for loan losses now totals $4,957,000 or 1.50% of total loans, covering 58.1% of total nonperforming assets. On the deposit side, YNB continues to experience excellent growth. Total deposits increased 20.3% in 1996 to $364,445,000 at year end, compared with $302,972,000 at year-end 1995. This increase can be attributed to the variety of new and convenient products we offer and the expansion of our retail banking network to meet the needs of today's banking customers. For a discussion of our many new products, please see "Ongoing Expansion for the Future" beginning on page four. YNB has positioned itself for Success in the Future We are also extremely gratified to report that we were able to maintain our record of sharing growth with our stockholders in 1996. The Board voted to raise the quarterly dividend again this past year in October 1996 to $0.12 per share, for an annualized dividend of $0.45. Our share price continued to show strength and stability, and our listing on NASDAQ continues to provide additional liquidity and flexibility for current stockholders as well as opening up the market for new stockholders who want to participate in our future. YNB's capital remains strong as well. Our equity to assets ratio for the period ended December 31, 1996 was 7.18%, comfortably meeting regulatory requirements. Total risk-based capital at year-end 1996 was 11.43%, also comparing favorably with the Federally-mandated minimum ratio. YNB Expands its Horizons to Move into the Future We completed a major technology upgrade at YNB this past year, enabling us to offer an enhanced product and service line and improved customer convenience. State-of-the-art technology is essential for YNB's growth, and we have made this investment because we are convinced it will both serve customers now and produce long-term benefits for the future. But it is our commitment to high quality personal customer service that will continue to differentiate YNB from other, larger institutions. Leading YNB into the future are (l. to r.) Jay G. Destribats, Chairman of the Board; Patrick M. Ryan, President and CEO; and Stephen F. Carman, Executive Vice President and CFO. Moving YNB Forward We view our employees and managers as a most precious resource. To underscore their importance to YNB's future, we have featured them in this year's report as they go about their daily tasks in moving YNB forward. Our directors, also, play a significant role as our best link to the community. In this report, we pay tribute to three of them who have served YNB long and well: John C. Stewart, the late William J. Steiner, Jr., and the late Edward M. Hendrickson. Mr. Hendrickson became a Director Emeritus on November 26, 1996, and Messrs. Stewart and Steiner moved to Director Emeritus in March 1997. We thank all of our directors for their tireless work on the bank's behalf. Finally, we want you, our stockholders, to know how much we value your loyalty and confidence in us. As we move into new markets with our long-term vision of success as an independent community bank, we pledge you our best efforts to grow profitably, with rewards for customers and stockholders alike. Sincerely yours, Patrick M. Ryan --------------- Patrick M. Ryan President and Chief Executive Officer Jay G. Destribats Chairman of the Board Ongoing Expansion for the Future - ----------------- Banking continues to be a fast moving business. We clearly recognize that in order to serve our customers well, stay competitive, and position ourselves for ongoing expansion in the future, YNB must use our strengths - particularly our experienced staff with their high energy level - to maintain and enhance our position in the marketplace. It is by offering our customers the best of both worlds - the friendly, attentive service of a community bank accompanied by the technical sophistication and diverse product line equal to that of a major regional bank - that YNB can achieve its goals. In 1996, this is just what we've done. Responding to Customers We accelerated the technology upgrade which began in 1995 with the addition of a sophisticated computer system that has greatly improved convenience for our customers. We made our debut on the Internet in 1996, and continue to add features to our home page that make obtaining information about YNB accounts, rates, and investment opportunities quick and easy to access. Even with our advances in technology, however, we work very hard to retain the personal service and interest in each customer that YNB was built upon. Our branch managers are key to this effort. They know their customers - and they understand and respond to their specific needs. For example, we opened two new branches in 1996: on Scotch Road in West Trenton, and at Nottingham Pointe at the eastern boundary of Hamilton Township. Both areas are dynamic, growing locations for consumer and commercial business. Demonstrating the flexibility and responsiveness of a community bank, we have extended our evening hours at these and our seven other branches. All nine YNB bank offices are now open until 6 PM both Thursday and Friday. Branch managers offer Personal attention and serve Community Needs YNB also introduced new products and banking services in the past year to offer our customers a wide range of options. To serve customers who need a low minimum balance account, and to reward those who can maintain higher balances, we introduced Chairman's Choice in 1996. This interest-earning account offers customers two rates of interest. A higher rate is paid on larger balances, while interest can still be earned on lower ones. In the second half of 1996, we issued our new Second Check debit card to all YNB MAC card holders - at no annual fee. Combining the convenience of an ATM card with the flexibility of a purchase card, Second Check deducts the amount of the customer's purchase immediately from a checking account. Quick, easy, and safe, it helps consumers avoid high interest credit card debt without the -4- identification issues of check cashing. Reaction from our customers to this new offering has been extremely positive. Rounding out our innovations to increase retail customer convenience, we've introduced the YNB Money Phone this year. Customers just dial the YNB Money Phone 800 number, Consumer education is an important focus at YNB Educating Customers on Choices and using the Second Check card, can transfer funds, check balances, and hear investment rates - 7 days a week, 24 hours a day. 1996 was a year to introduce new products, and continue to offer some old favorites as well. Primary among these was YNB's Always Win CD - the most popular CD product we have ever offered. Starting out with a highly competitive rate, Always Win automatically reviews the customer's CD rate at the halfway point to maturity. If the current rate is higher than when the CD was issued, the customer's rate increases. If rates have gone down, the initial rate remains. The Always Win CD is just that - a win/win situation for all. -5- Ongoing Expansion for the Future - ----------------- Innovation is not limited to the consumer banking area by any means. Our new technology has been put to work for commercial customers, too, as we introduced YNB's Cash Command, automated clearing house services for the business customer. Cash Command helps businesses eliminate paperwork through direct deposits of payroll, consolidate cash from multiple locations to maximize available balances, and manage internal transfer of funds between various accounts - right from the customer's own office. In addition, our Gemini product allows customers to choose the additional services they want, including sweeps of excess funds, maintenance of minimum deposits, and overdraft protection. Our People Make the Difference More than anything else, it is the knowledge and experience of our business bankers, coupled with their quick response to customers, that distinguishes YNB. Our commercial lenders are intimately familiar with business conditions in our market area. They know the details of their customers' financial situations. And they are able to offer creative solutions to their business challenges. Encompassing both our commercial and consumer banking efforts is our dedication to community service. YNB is well known in our market area for both our financial support and the service of our officers on numerous community boards and organizations. Their participation in the life of our community goes far beyond that of most banks our size, and we salute and support their efforts. Another facet of our community service is education. We believe that well-informed consumers make better banking customers, and YNB's Quick response to Commercial customers sets us Apart so YNB conducts numerous seminars on credit, mortgage alternatives, and small business management, among others. Finally, in order to be able to serve all these constituencies well, YNB takes great care in the financial management of the corporation. Assets and liabilities must be carefully matched, expenditures monitored, and branches properly planned and secured. Our support staff are the less visible, but essential backbone of YNB's growth, and their skill and diligence continue to serve us well. YNB is dedicated to staying at the forefront of banking innovation. As we look to the future, we plan to keep current with industry improvements by offering enhanced PC-based products for our customers. We will also offer expanded financial services such -6- as brokerage and mutual funds so that our customers can continue to receive all the financial services they need and want from their community bank - YNB. Looking forward, we are also aware of the need to enhance our efficiency. Accordingly, we are examining the benefits of establishing a new corporate headquarters, still in Hamilton Township, to Careful financial management is essential to YNB's growth Enhancing Efficiency and Service bring all of our management team together under one roof. This will increase productivity, facilitate rapid interchange of ideas, and benefit stockholders and customers alike. We believe the niche occupied by community banks will continue to be a profitable one. Smaller banks like YNB are growing because we offer what our customers want - top flight service backed by modern technology, a complete range of products and services, and people who care about them and value their business. In the new age of community banking, YNB has been able to move ahead by adapting to changing market conditions while retaining our unique personality and business philosophy. With this strategy, we believe we will maintain our leadership position in the central New Jersey marketplace. -7- Salute to Directors Emeritus As we look to the future, it is also important to honor our past. And nowhere is our tradition of service to the community better represented than in our directors. While many of them have served YNB with distinction for numerous years, we would like to salute our three Directors Emeritus in this annual report: John C. Stewart, the late William J. Steiner, Jr., and the late Edward M. Hendrickson, together representing 79 years of service on YNB's Board of Directors. John C. Stewart, who became Director Emeritus this year, has a unique history with Yardville the bank and the community. He made his mark in Yardville when he developed the land behind Yardville School for almost 100 single family homes. He converted the old school house in the center of Yardville to apartments, and built the structure that now serves as YNB's operations center. If anyone can hold the title of "Mr. Yardville," it is John Stewart. After helping to develop the town, Mr. Stewart joined the Board of Yardville National Bank in 1966, and has served actively and faithfully ever since. He became the Board's second vice chairman in July 1990, and vice chairman in April 1993, a post he has held until this year. A well-known figure in all the bank offices, Mr. Stewart can be seen during the day and at many times on the weekends at the Yardville office, making the rounds to "be sure the bank is running well." William J. Steiner, Jr., who passed away March 9, 1997, may have had less years of seniority on our Board than Mr. Stewart, but served YNB just as enthusiastically. A longtime resident of Mercerville, Bill joined the Board in 1985, just as banking was evolving into the complex financial services business it is today. He helped guide the bank as a member of the audit, stock option, and asset/liability committees, and as chair of the bank's investment committee. A former fire commissioner of the Mercerville Fire Company as well as a retired educator and local business owner, Bill was active in many facets of our community's life. We will miss his valuable advice. Edward M. Hendrickson was almost as much of an institution as the bank itself, and we will miss his fellowship and counsel. One of the original depositors of the bank at its founding in 1925, Mr. Hendrickson saw and participated in the world of change that the bank has experienced. From watching his deposits handwritten in a journal 72 years ago to using a YNB ATM recently, Ed was there. Ed Hendrickson was an active member of the YNB Board of Directors from 1961 until his death on March 5, 1997. During his tenure on the Board, Ed participated in most of the decisions that have brought YNB to its present leadership role in the community banking world. But he was also instrumental in bringing services of another kind to the community. As a founding member of the Mercer Street Friends, Ed worked tirelessly for 40 years to assist the urban poor from the Greater Trenton area by providing a center for neighborhood children and senior citizens. His life was truly a demonstration of what one person can do to serve his fellow individuals, and we are fortunate to have his example to follow. If a financial institution can only be as strong as the hands and minds guiding it, we are extremely grateful to have had the resources of these three individuals to draw upon. We look forward to John Stewart's continued service as Director Emeritus as YNB moves briskly into the future. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table sets forth certain historical financial data with respect to Yardville National Bancorp and subsidiary on a consolidated basis. This table should be read in conjunction with Yardville National Bancorp's historical consolidated financial statements and related notes thereto. All per share data has been restated to reflect the two-for-one stock split effected in the form of a stock dividend in November 1994.
December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF INCOME (in thousands) Interest income $ 34,251 $ 27,336 $ 18,004 $ 14,055 $ 13,990 Interest expense 17,041 12,841 6,360 5,355 6,660 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 17,210 14,495 11,644 8,700 7,330 Provision for loan losses 1,640 865 305 - 50 Securities (losses) gains, net (136) (91) (124) 294 153 Gains on sales of mortgages, net 21 19 92 354 351 Other non-interest income 2,228 1,927 1,586 1,542 1,499 Non-interest expense 11,479 10,260 9,285 8,423 8,325 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income tax expense and cumulative effect of the change in accounting principle 6,204 5,225 3,608 2,467 958 Income tax expense 2,178 1,822 1,085 733 390 - ----------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of the change in accounting principle 4,026 3,403 2,523 1,734 568 Cumulative effect of the change in accounting principle - - - 191 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,026 $ 3,403 $ 2,523 $ 1,925 $ 568 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET (in thousands) Assets $490,545 $403,115 $280,550 $ 223,438 $205,494 Deposits $364,445 $302,972 $259,296 $ 206,688 $192,223 Loans, net of unearned income $331,237 $245,054 $196,910 $ 134,983 $106,993 Stockholders' equity $ 35,230 $ 31,717 $ 18,451 $ 14,208 $ 10,829 Allowance for loan losses $ 4,957 $ 3,677 $ 2,912 $ 2,703 $ 2,940 PER SHARE DATA Net income - fully diluted $ 1.64 $ 1.60* $ 1.56* $ 1.86 $ 0.61 Cash dividends $ 0.45 $ 0.38 $ 0.28 $ - $ - Stock dividends - - - - 5.00% Stockholders' equity (book value) $ 14.50 $ 13.50 $ 11.92 $ 12.42 $ 11.69 OTHER DATA Average shares outstanding 2,462,000 2,192,000 1,757,000 1,036,000 926,000
* 1995 and 1994 earnings per share amounts were calculated utilizing the modified treasury stock method, while remaining years were calculated utilizing the treasury stock method. The modified treasury stock method includes the potential dilutive effect of options and warrants not included in the treasury stock method. The expiration of warrants in June 1996 resulted in a change in the computation method of earnings per share from the modified treasury stock method in 1994 and 1995 to the treasury stock method in 1996. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (continued)
December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS Return on average assets 0.90% 0.99% 1.04% 0.92% 0.29% Return on average stockholders' equity 12.25 13.84 15.89 15.81 5.44 Net interest margin (FTE) (1) 4.10 4.49 5.16 4.51 3.99 Expense ratio (2) 2.17 2.55 3.36 3.53 3.68 Average stockholders' equity to average assets 7.33 7.14 6.57 5.79 5.24 Dividend payout ratio 26.90 21.69 15.06 - - Leverage ratio (3) 7.21 7.84 6.97 6.36 5.27 Tier 1 capital as a percent of risk-weighted assets 10.17 11.95 9.59 9.38 8.81 Total capital as a percent of risk-weighted assets 11.43 13.20 10.84 10.64 10.07 Allowance for loan losses to total loans (year end) 1.50 1.50 1.48 2.00 2.75 Net loan charge offs to average total loans 0.13 0.05 0.06 0.20 0.45 Nonperforming loans to total loans 2.46 1.15 1.05 1.83 4.32 Nonperforming assets (4) to total loans and other real estate owned (year end) 2.57 1.40 1.21 2.83 5.30 Allowance for loan losses to nonperforming assets (year end) 58.08 106.77 122.35 69.92 51.34 Allowance for loan losses to nonperforming loans (5) (year end) 60.90% 130.44% 140.95% 109.30% 63.65% - -----------------------------------------------------------------------------------------------------------------------------------
(1) Tax equivalent based on a 34% Federal tax rate for all periods presented (FTE = Federal tax equivalent basis). (2) Non-interest expense minus non-interest income before asset sales to average earning assets. (3) Leverage ratio is Tier 1 capital to year-end total assets. (4) Nonperforming assets include nonperforming loans and other real estate owned. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." (5) Nonperforming loans include nonaccrual loans, restructured loans, and loans 90 days past due or greater and still accruing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Planned strategic growth continued for Yardville National Bancorp and subsidiary (YNB) in 1996. In 1996, YNB achieved continued growth in earnings. YNB increased its branch network to nine, opening branches in Hamilton Square and West Trenton. YNB's emphasis on establishing and building relationships both in the commercial and consumer banking areas has resulted in a substantial increase in loans and deposits. Also, in 1996, YNB completed a significant upgrade in computer systems, both in the branch and back office. This system upgrade is designed to increase product diversity and to continue quality customer service. Net income amounted to $4,026,000, an 18.3% increase, compared to the record results of $3,403,000 reported in 1995. Earnings were primarily enhanced by the substantial loan growth experienced throughout the year. The loan portfolio, primarily commercial, grew 35.2% in 1996 compared to 1995. At December 31, 1996 total loans outstanding were $331,237,000 compared to $245,054,000 recorded at the end of 1995. The allowance for loan losses now totals $4,957,000 or 1.50% of total loans, covering 58.1% of total nonperforming assets. YNB's deposit base increased 20.3%, to total $364,445,000 at December 31, 1996. Certificates of deposit were competitively priced in the marketplace in 1996 to fund loan growth. Return on average assets decreased to 0.90% in 1996 from 0.99% in 1995. The 1996 return on average stockholders' equity decreased to 12.25% compared to 13.84% in 1995. The decline in these performance measures is discussed in management's results of operations and financial condition analysis that follows. RESULTS OF OPERATIONS YNB earned $4,026,000 or $1.64 per share for the year ended December 31, 1996 compared to $3,403,000 or $1.60 per share for the year ended December 31, 1995. YNB reported net income of $2,523,000 or $1.56 per share in 1994. The increase in earnings per share in 1996 is attributable to increased earnings and the expiration of warrants in June 1996 which resulted in a change in the computation method of earnings per share from the modified treasury stock method in 1995 to the treasury stock method in 1996. The increase in earnings per share from 1994 to 1995 is attributable to increased earnings. Both years are computed under the modified treasury stock method. net interest income Return on Average Assets 1.04% 1.0%------------------------------------------------.99%----------------------- .92% .90% 0.8 --------------------------------------------------------------------------- 0.6 --------------------------------------------------------------------------- 0.4 --------------------------------------------------------------------------- .29% 0.2 --------------------------------------------------------------------------- 0.0 --------------------------------------------------------------------------- 1992 1993 1994 1995 1996 Return on Average Stockholders' Equity 20%---------------------------------------------------------------------------- 15.81% 15.89% 15 ---------------------------------------------------------------------------- 13.84% 12.25% 10 ---------------------------------------------------------------------------- 5.44% 5 ---------------------------------------------------------------------------- 0 ---------------------------------------------------------------------------- 1992 1993 1994 1995 1996 FINANCIAL SUMMARY Average Balances, Rates Paid and Yields
December 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (in thousands) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS: Time deposits with other banks $ 1,992 $ 98 4.92% $ 685 $ 36 5.26% Federal funds sold 4,265 228 5.35 7,838 464 5.92 Securities 132,036 8,194 6.21 97,456 5,756 5.91 Loans, net of unearned income (1) 287,289 25,731 8.96 221,232 21,080 9.53 - ------------------------------------------------------------------------------------------------------------------- Total interest earning assets $425,582 $34,251 8.05% $327,211 $27,336 8.35% - ------------------------------------------------------------------------------------------------------------------- NON-INTEREST EARNING ASSETS: Cash and due from banks $ 11,905 $ 8,778 Allowance for loan losses (4,190) (3,265) Premises and equipment, net 5,037 4,175 Other assets 10,156 7,490 - ------------------------------------------------------------------------------------------------------------------- Total non-interest earning assets 22,908 17,178 - ------------------------------------------------------------------------------------------------------------------- Total assets $448,490 $344,389 - ------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES: Deposits: Savings and interest checking $133,450 $ 4,014 3.01% $123,029 $4,107 3.34% Certificates of deposit of $100,000 or more 18,188 922 5.07 15,521 883 5.69 Other time deposits 125,332 7,138 5.70 103,637 5,792 5.59 - ------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 276,970 12,074 4.36 242,187 10,782 4.45 Borrowed funds 87,065 4,967 5.70 33,339 2,059 6.18 - ------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 364,035 17,041 4.68 275,526 12,841 4.66 - ------------------------------------------------------------------------------------------------------------------- NON-INTEREST BEARING LIABILITIES: Demand deposits $ 49,078 $ 42,321 Other liabilities 2,507 1,950 Stockholders' equity 32,870 24,592 - ------------------------------------------------------------------------------------------------------------------- Total non-interest bearing liabilities and stockholders' equity $ 84,455 $ 68,863 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $448,490 $344,389 - ------------------------------------------------------------------------------------------------------------------- Interest rate spread (2) 3.37% 3.69% - ------------------------------------------------------------------------------------------------------------------- Net interest income and margin (3) $17,210 4.04% $14,495 4.43% - ------------------------------------------------------------------------------------------------------------------- Net interest income and margin (tax equivalent basis) (4) $17,432 4.10% $14,697 4.49% - -------------------------------------------------------------------------------------------------------------------
(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 make pre-tax income and resultant yields on tax exempt investments and loans comparable to those on taxable investments and loans, a tax equivalent adjustment is made equally to interest income and income tax expense with no effect on after tax income. The tax equivalent adjustment has been computed using a Federal income tax rate of 34% and has increased interest income by $222,000, $202,000, $194,000, $105,000, and $64,000 for the years ended December 31, 1996, 1995, 1994, 1993, and 1992, respectively.
December 31, 1994 December 31, 1993 December 31, 1992 - ------------------------------------------------------------------------------------------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------- $ 643 $ 23 3.58% $ 1,266 $ 34 2.69% $ 1,776 $ 48 2.70% 1,200 52 4.33 3,211 97 3.02 5,058 181 3.58 70,045 3,761 5.37 72,928 3,939 5.40 85,383 5,300 6.21 157,411 14,168 9.00 117,671 9,985 8.49 93,245 8,461 9.07 - ------------------------------------------------------------------------------------------------------------------- $229,299 $18,004 7.85% $195,076 $14,055 7.20% $185,462 $13,990 7.54% - ------------------------------------------------------------------------------------------------------------------- $ 8,079 $ 9,449 $ 8,089 (2,736) (2,860) (3,217) 3,857 3,812 3,746 3,207 4,699 5,050 - ------------------------------------------------------------------------------------------------------------------- 12,407 15,100 13,668 - ------------------------------------------------------------------------------------------------------------------- $241,706 $210,176 $199,130 - ------------------------------------------------------------------------------------------------------------------- $113,239 $ 3,156 2.79% $105,178 $ 2,832 2.69% $ 97,018 $ 3,350 3.45% 7,083 299 4.22 4,202 168 4.00 3,495 183 5.24 66,020 2,810 4.26 55,827 2,338 4.19 59,573 3,101 5.21 - ------------------------------------------------------------------------------------------------------------------- 186,342 6,265 3.36 165,207 5,338 3.23 160,086 6,634 4.14 2,248 95 4.23 747 17 2.28 915 26 2.84 - ------------------------------------------------------------------------------------------------------------------- 188,590 6,360 3.37 165,954 5,355 3.23 161,001 6,660 4.14 - ------------------------------------------------------------------------------------------------------------------- $ 36,634 $ 31,082 $ 26,546 605 967 1,148 15,877 12,173 10,435 - ------------------------------------------------------------------------------------------------------------------- $ 53,116 $ 44,222 $ 38,129 - ------------------------------------------------------------------------------------------------------------------- $241,706 $210,176 $199,130 - ------------------------------------------------------------------------------------------------------------------- 4.48% 3.97% 3.40% - ------------------------------------------------------------------------------------------------------------------- $11,644 5.08% $ 8,700 4.46% $ 7,330 3.95% - ------------------------------------------------------------------------------------------------------------------- $11,838 5.16% $ 8,805 4.51% $ 7,394 3.99% - -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME Net interest income, YNB's largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. Net interest income is impacted by the volume of interest earning assets and liabilities, level of rates earned on those assets, and the cost of interest bearing liabilities. Changes in nonperforming assets, together with interest lost and recovered on those assets, also impact comparisons of net interest income. The following tables set forth YNB's consolidated average balances of assets, liabilities, and stockholders' equity as well as the amount of interest income and expense on related items, and YNB's average yield/rate for the years ended December 31, 1996, 1995, 1994, 1993, and 1992. Net interest income also may be analyzed by segregating the volume and rate components of interest income and interest expense. 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. YARDVILLE NATIONAL BANCORP AND SUBSIDIARY RATE/VOLUME ANALYSIS
1996 vs. 1995 1995 vs. 1994 Increase (Decrease) Increase (Decrease) Due to changes in: Due to changes in: - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS: Time deposits with other banks $ 64 $ (2) $ 62 $ 2 $ 11 $ 13 Federal Funds sold (195) (41) (236) 386 26 412 Securities 2,133 305 2,438 1,589 406 1,995 Loans, net of unearned income (1) 5,980 (1,329) 4,651 6,039 873 6,912 - --------------------------------------------------------------------------------------------------------------------------------- Total interest income 7,982 (1,067) 6,915 8,016 1,316 9,332 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES: Deposits: Savings and interest checking 332 (425) (93) 289 662 951 Certificates of deposit of $100,000 or more 142 (103) 39 452 132 584 Other time deposits 1,234 112 1,346 1,925 1,057 2,982 - --------------------------------------------------------------------------------------------------------------------------------- Total deposits 1,708 (416) 1,292 2,666 1,851 4,517 Borrowed funds 3,076 (168) 2,908 1,901 63 1,964 - --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 4,784 (584) 4,200 4,567 1,914 6,481 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income $3,198 $ (483) $2,715 $3,449 $ (598) $2,851 - ---------------------------------------------------------------------------------------------------------------------------------
(1) Loan origination fees are considered adjustments to interest income. YNB's net interest income totaled $17,210,000 in 1996, an increase of 18.7% from the $14,495,000 reported in 1995. The prior year's increase was 24.5% from 1994's net interest income of $11,644,000. The primary factor contributing to the increase in net interest income in 1996 was an increase in interest income of $6,915,000 due to a substantial increase in loan volume, specifically commercial, offset by decreases in loan yields and increases in deposits and borrowed funds and the related interest expense. From 1995 to 1996, YNB's average loan portfolio increased by 29.9%. Loan yields averaged 8.96%, or 57 basis points lower, reflecting declining market interest rates in a very competitive market. Conversely, the yield on YNB's investment portfolio increased 30 basis points when comparing 1996 to 1995. The average investment portfolio increased from $97,456,000 in 1995 to $132,036,000 in 1996, an increase of 35.5%. Overall, the yield on earning assets decreased 30 basis points to 8.05% in 1996 from 8.35% in 1995. Interest expense was $17,041,000 for 1996, an increase of $4,200,000, or 32.7%, from $12,841,000 a year ago. The increase in interest expense for the comparable time periods was the result of a larger deposit base and greater levels of borrowed funds. Average interest bearing liabilities increased 32.1% in 1996 compared to 1995. The cost of total interest bearing liabilities rose just 2 basis points to 4.68% in 1996 from 4.66% in 1995. Deposit products, particularly time deposits, were competitively priced throughout 1996 to fund commercial loan growth. Net interest income was $14,495,000 in 1995, an increase of 24.5% from $11,644,000 in 1994. The principal factor contributing to the improvement was an increase in interest income due to a substantial increase in commercial loan volume offset by increases in deposits, borrowed funds, and the related interest expense. Average loans increased by 40.5% from 1994 to 1995. The net interest margin (tax equivalent basis) between yields on average interest earning assets and costs of average funding sources was 4.10% in 1996 versus 4.49% in 1995 and 5.16% in 1994. The decrease in the net interest margin in 1996 was principally due to two factors. In the second half of 1995 and continuing through 1996, management instituted a strategy to increase net interest income by purchasing investments using repurchase agreements. Increased competition and the subsequent decrease in loan yields also accounted, in part, for the reduction in the net interest margin. The strategy to increase net interest income by purchasing investments has specific goals. The targeted spread on this strategy is 75 basis points after tax. The primary goals of the strategy are to improve return on equity and earnings per share. Incrementally, any increase to net interest income by this strategy will improve return on equity and earnings per share. Conversely, because of the targeted spread on this strategy there will be a negative impact to the net interest margin and return on assets. For the year ended December 31, 1996 investments purchased with repurchase agreements averaged approximately $57,300,000. The positive impact to return on equity and earnings per share was approximately 1.0% and $0.15, respectively. The negative impact to the net interest margin and return on assets was approximately .45% and .03%, respectively. This strategy is proactively managed through the asset and liability simulation model analyzing risk and reward relationships in different interest rate environments based on the composition of investments in the strategy. Average interest earning assets exceeded interest bearing liabilities by $61,547,000 in 1996, $51,685,000 in 1995, and $40,709,000 in 1994. The ratio of average interest bearing liabilities to average interest earning assets increased from 84.2% in 1995 to 85.5% in 1996. Average non-interest bearing demand deposits increased 16.0% to $49,078,000 in 1996 from $42,321,000 in 1995. Throughout the comparative periods, increases in average non-interest bearing deposits contributed to the increase in net interest income. Nonaccrual loans totaled $7,083,000 at December 31, 1996, an increase of $5,516,000 from the $1,567,000 reported at December 31, 1995. In the last quarter of 1996 two loans totaling approximately $4,600,000, backed by real estate collateral, were put into nonaccrual status. Had total nonaccrual loans been paid in the manner and at the rate and time contracted at the time the loans were made, YNB would have recognized additional interest income of approximately $351,000 in 1996, $143,000 in 1995, and $183,000 in 1994. Moreover, YNB's net interest margin would have been .08% higher in 1996, .05% higher in 1995, and .08% higher in 1994. NON-INTEREST INCOME Non-interest income continues to be an important source of revenue for YNB. Through its Product Development and Management Committee, YNB is studying other non-interest income opportunities. The prudent growth in non-interest income is one of YNB's long-term strategies. The major components of non-interest income are presented in the accompanying table. Year ended December 31, ------------------------------------------------------------- (in thousands) 1996 1995 1994 ------------------------------------------------------------- Service charges on deposit accounts $1,153 $1,069 $ 932 Other service fees 438 381 370 Gains on sales of mortgages, net 21 19 92 Securities losses, net (136) (91) (124) Other non-interest income 637 477 284 ------------------------------------------------------------- Total $2,113 $1,855 $ 1,554 Non-interest income consists of service charges on deposit accounts, gains on sales of mortgages, and securities gains or losses. YNB also generates non-interest income from a variety of fee-based services. These include mortgage servicing fees, safe deposit box rentals, check fee income, and Automated Teller Machine (ATM) fees. Responding to recent legislation, on October 2, 1996, management instituted ATM fees on non-customers. These fees account primarily for the increase in other service fee income when comparing 1996 to 1995. For 1996, non-interest income totaled $2,113,000, an increase of $258,000, or 13.9%, from non-interest income of $1,855,000 for 1995. Non-interest income in 1995 increased by $301,000, or 19.4%, from 1994's reported total of $1,554,000. Service charges on deposit accounts have historically represented the largest single source of non-interest income. This continued to be the case in 1996, as such revenues totaled $1,153,000, an increase of 7.9%, compared to $1,069,000 in 1995. Service charge income totaled $932,000 in 1994. Service charge income increased in 1996 as the result of a larger account base and the fee income associated with it. This component of non-interest income represented 54.6%, 57.6%, and 60.0% of the total non-interest income in 1996, 1995, and 1994, respectively. YNB's Product Development and Management Committee reviews established and develops new deposit products and the service charges associated with them. Deposit services are repriced annually to reflect current costs and competitive factors. Gains on sales of mortgages, net, increased in 1996 to $21,000 from $19,000 in 1995. Gains on sales of mortgages, net, totaled $92,000 in 1994. Over the last two years YNB has been less active in this area. This, in part, is due to a more stable interest rate environment which translates to reduced refinancing activity. YNB recorded net securities losses of $136,000, $91,000, and $124,000 in 1996, 1995, and 1994, respectively. In 1996, proceeds from securities sold were utilized to fund higher yielding commercial loan assets. Management also sold longer term fixed rate securities purchased using repurchase agreements to reduce future interest rate risk exposure. Net securities losses realized during 1995 and 1994 were the result of management's decision to reposition funds in the portfolio to improve yield and provide funds for loan growth. CMOs were sold in 1995 to reduce outstandings in this illiquid portion of the portfolio providing funds for higher yielding loan assets. Other non-interest income is primarily composed of income derived from life insurance assets, and to a lesser extent, mortgage servicing income. Other non-interest income totaled $637,000 in 1996, an increase of $160,000, or 33.5% when compared to 1995. Other non-interest income totaled $284,000 in 1994. YNB has purchased life insurance assets in 1996 and 1995 to fund executive compensation plans and a deferred compensation plan for directors. Other non-interest income from the life insurance assets totaled $419,000, increasing $144,000, or 52.2%, when comparing 1996 to 1995. NON-INTEREST EXPENSE Non-interest expense totaled $11,479,000 in 1996, an increase of $1,219,000, or 11.9%, compared to $10,260,000 in 1995. Non-interest expense in 1995 increased 10.5% from $9,285,000 in 1994. The increase in non-interest expense, for the comparative periods, is primarily the result of increases in salaries and employee benefits and to a lesser extent, occupancy and equipment expense. Salaries and employee benefits, which represent the largest portion of non-interest expense, increased $936,000 in 1996 or 16.4% over 1995. Salaries and employee benefits in 1995 increased $665,000, or 13.2%, over 1994. The increase in 1996 expense over 1995 is the effect of additional staffing required as the result of YNB's growth and normal annual salary increases. Full time equivalent employees increased to 163 at December 31, 1996 from 147 at December 31, 1995. Staffing enhancements were made in loan and credit administration as well as in the commercial loan production area to take advantage of opportunities in new market areas. A management trainee program was also instituted in key strategic areas, such as financial services. Employee benefits also increased 23.7% for the comparable time periods. 1995's increase over 1994 was primarily the result of increased staffing associated with YNB's retail growth, hiring of experienced lending professionals, expansion of the financial services division, and normal annual salary increases. Salaries and employee benefits as a percent of average assets was 1.5% in 1996, 1.7% in 1995, and 2.1% in 1994, respectively. Net occupancy expense increased $194,000 to $920,000 in 1996 from $726,000 reported in 1995. The increase in occupancy expenses in 1996 compared to 1995 was due to increased maintenance costs, specifically snow removal, and the additional occupancy costs associated with new branch offices. The total number of bank facilities, including the operations building, is now 10. This component of non-interest expense has remained constant as a percentage of average assets at 0.2% in 1996 and 1995 and 0.3% in 1994. Equipment expenses increased $182,000, or 35.5%, to $695,000 in 1996 from $513,000 in 1995. In 1995 equipment expenses increased 10.1% from 1994. The increase in equipment expenses in 1996 was primarily attributable to the depreciation expense related to the investment in hardware and software totaling approximately $1,200,000 for YNB's in-house computer system. Conversely, computer service expenses were eliminated in the first quarter of 1996. To a lesser extent, equipment expense rose in 1996 due to equipment, furniture and fixture needs in YNB's expanding retail network and its related depreciation expense. The increase in equipment expenses in 1995 compared to 1994 was attributable to increased depreciation costs associated with new furniture and fixtures and computer equipment in YNB's branches. Other computer equipment was also purchased in 1995, throughout the bank, in preparation for the new computer system in 1996. OTHER NON-INTEREST EXPENSE Other non-interest expense was $3,235,000, $3,328,000, and $3,180,000 in 1996, 1995, and 1994, respectively. The following table sets forth the components of other non-interest expense for the years indicated: Year ended December 31, -------------------------------------------------------- (in thousands) 1996 1995 1994 -------------------------------------------------------- FDIC insurance premium $ 1 $ 290 $ 464 O.R.E. expenses 163 166 306 Stationery and supplies 388 300 229 Computer services 83 285 270 Insurance (other) 102 93 119 Marketing 522 479 415 Other 1,976 1,715 1,377 -------------------------------------------------------- Total $3,235 $3,328 $3,180 -------------------------------------------------------- FDIC premiums were basically eliminated in 1996, except for a minimum assessment payment which totaled only $1,000. FDIC insurance premiums decreased by $289,000 in 1996 to $1,000 from $290,000 in 1995. FDIC insurance premiums totaled $464,000 in 1994. On January 31, 1995, the FDIC proposed to reduce the deposit insurance assessment rates of Bank Insurance Fund ("BIF") insured institutions, effective at the date the BIF fund reaches the required level of 1.25% of BIF-insured deposits. During 1995 the fund reached the 1.25% level. Premiums totaling approximately $168,000 were rebated to YNB on September 15, 1995. YNB's deposit insurance premium assessment was lowered from 23 basis points to 4 basis points effective for the fourth quarter of 1995. As defined by the FDIC, YNB is a well capitalized institution and under new FDIC guidelines 1996 premiums were eliminated. Other real estate (O.R.E.) expense decreased by $3,000, or 1.8%, in 1996 to $163,000 from $166,000 in 1995. O.R.E. expenses declined by 45.8% in 1995 compared to 1994. Throughout the comparative periods, management has effectively managed the level of other real estate owned and the expenses associated with loan workout and foreclosed properties. Computer services expense decreased $202,000, or 70.9%, in 1996 to $83,000. These expenses were $285,000 in 1995, an increase of $15,000, or 5.6%, from $270,000 in 1994. Effective late February 1996 management terminated its agreement with its outside computer servicer as the result of implementing a new in-house computer system. The decrease in computer expenses in 1996 compared to 1995 is a result of service expenses for only two months, including conversion costs, compared to a full year's expense in 1995. The increase in computer expenses in 1995 compared to 1994 resulted from increased volume processing due to growth. Marketing expenses increased by $43,000, or 9.0%, in 1996 to $522,000, compared to $479,000 in 1995. Marketing expenses totaled $415,000 in 1994. The primary increase in marketing expenses in 1996 over 1995 relates to increased advertising to attract deposits to fund loan growth in a very competitive marketplace. The increase in marketing expenses for the comparative periods reflects YNB's emphasis on participation in community activities and additional promotional costs in connection with branch openings. Other expenses, which include various professional fees, communication expense, postage expense, and various loan related expenses, were $1,976,000 in 1996, an increase of $261,000, or 15.2%, from $1,715,000 in 1995. Other expenses totaled $1,377,000 in 1994. The increase in other expenses in 1996 compared to 1995, in part, is attributable to loan related expenses due to the substantial growth in the loan portfolio, attorney fees, and a full year's processing costs by an outside vendor of YNB's mortgages to improve service quality and management flexibility. YNB's ratio of non-interest expense to average assets decreased to 2.6% for 1996 compared to 3.0% for 1995 and 3.8% for 1994. INCOME TAXES The provision for income taxes, which is comprised of Federal and state income taxes, was $2,178,000 in 1996 compared to $1,822,000 in 1995 and $1,085,000 in 1994. The increase was primarily the result of higher pre-tax income. The provision for income taxes for 1996, 1995, and 1994 was at effective tax rates of 35.1%, 34.9%, and 30.1%, respectively. The slight increase in the effective tax rate for 1996 was the result of increased pre-tax earnings with a relatively constant level of tax-free income. FINANCIAL CONDITION - ------------------- As of December 31, 1996 and 1995 TOTAL ASSETS YNB's assets were $490,545,000 at year-end 1996 versus $403,115,000 the previous year, an increase of $87,430,000, or 21.7%. The growth in YNB's asset base throughout 1996 was due primarily to an increase in loans. The increase in loans was the product of a strategy to improve the profitability of the organization through relationship banking and the continued consolidation in YNB's marketplace, which has solidified YNB's competitive position in the small and middle markets. YNB's ratio of average interest earning assets to average assets decreased slightly to 94.9% for the year ended December 31, 1996 compared to 95.0% for 1995. YNB's ratio of average interest bearing liabilities to average assets increased from 80.0% for the year ended December 31, 1995 to 81.2% for 1996. SECURITIES YNB's securities portfolio represented $124,967,000 or 25.5% of assets at December 31, 1996 versus $133,853,000 or 33.2% of assets at December 31, 1995. On an average basis, the securities portfolio represented 31.0% of average interest earning assets for the year ended December 31, 1996 compared to 29.8% of average interest earning assets for the year ended December 31, 1995. The investment growth strategy, purchasing investments using repurchase agreements, peaked at approximately $68,000,000 at the end of June 1996 and stands at approximately $51,000,000 at December 31, 1996. All securities in this strategy are held in the available for sale portfolio. The purpose of this strategy is designed to improve return on equity and earnings per share. This strategy is considered by management to be temporary until loan growth can generate sufficient net interest income to improve performance measurements. Throughout the year loan demand has continued to be strong in YNB's marketplace. In July 1996, management decided to begin to gradually reduce assets purchased with repurchase agreements to reduce interest rate risk exposure. The securities available for sale portfolio decreased to $93,671,000 at December 31, 1996 from $98,469,000 at December 31, 1995. The decrease is a result of YNB's downsizing of the investment growth strategy coupled with principal paydowns from mortgage backed securities, called U.S. agency securities, and maturities and sales of U.S. Treasury securities, offset by short term security purchases to strengthen liquidity. During 1996, the only securities purchased not held in the available for sale portfolio were municipal bonds. Securities available for sale are held for indefinite periods of time and may be sold due to changing market and interest rate conditions as part of YNB's asset/liability management strategy. As of December 31, 1996 available for sale securities represented 75.0% of the entire portfolio. This portfolio is principally comprised of mortgage-backed securities issued by Federal agencies, U.S. Treasury, and other agency securities. The available for sale portfolio, except securities purchased using repurchase agreements, provides a secondary source of liquidity for YNB. There are no securities designated for trading. Investment securities classified as held to maturity totaled $31,296,000 at December 31, 1996 compared to $35,384,000 at December 31, 1995. This portfolio is comprised of mortgage-backed securities and state and municipal securities. The following table shows the maturities, at amortized cost, and average weighted yields for the securities available for sale at December 31, 1996. SECURITY MATURITIES AND AVERAGE WEIGHTED YIELDS
December 31, 1996 - ----------------------------------------------------------------------------------------------------------------------------------- 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 government agencies $6,005 $15,946 $ - $10,000 $31,951 Mortgage-backed securities 365 2,690 6,863 49,523 59,441 Federal Reserve Bank Stock - - - 572 572 Federal Home Loan Bank Stock - - - 1,975 1,975 - ----------------------------------------------------------------------------------------------------------------------------------- Total $6,370 $18,636 $6,863 $62,070 $93,939 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average yield 5.61% 6.09% 6.98% 7.38% 6.98% - -----------------------------------------------------------------------------------------------------------------------------------
Investments in mortgage-backed securities involve prepayment and interest rate risk. At December 31, 1996 and 1995 YNB had mortgage-backed securities totaling $81,667,000 and $105,479,000, respectively. At December 31, 1996 and 1995 there were $59,078,000 and $56,682,000 in fixed-rate mortgage-backed securities outstanding, respectively. The risk associated with fixed-rate mortgage-backed securities is similar to fixed-rate loans. In rising interest rate environments, the rate of prepayment on fixed-rate, pass-through mortgage-backed securities tends to decrease because of lower repayments on the underlying mortgages and, conversely, as interest rates fall, repayments on such securities tend to rise. YNB attempts to minimize these risks by diversifying the coupons of the mortgage-backed securities, buying seasoned securities with consistent and predictable prepayment histories, and adhering to strict pricing policies when purchasing mortgage-backed securities. Collateralized mortgage obligations (CMOs) totaled approximately $5,300,000 at December 31, 1996. A CMO is a mortgage-backed security that is comprised of classes of bonds created by prioritizing the cash flows from the underlying mortgage pool in order to meet different objectives of investors. The CMOs in the investment portfolio are agency named and were generally originally purchased with short average lives of two to four years. At December 31, 1996 YNB held no private labeled or corporate CMOs. Stress tests are performed at least semi-annually to assess prepayment speeds and their impact to the average lives and yields on those securities. All CMOs at December 31, 1996 were held in the available for sale category. The maturities and average weighted yields for investment securities were as follows:
December 31, 1996 - ----------------------------------------------------------------------------------------------------------------------------------- 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 $760 $ 3,091 $5,004 $ 215 $ 9,070 Mortgage-backed securities - 14,691 - 7,535 22,226 - ----------------------------------------------------------------------------------------------------------------------------------- Total $760 $17,782 $5,004 $7,750 $31,296 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average yield 3.49% 5.25% 4.78% 6.58% 5.46% - -----------------------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO The continued consolidation in YNB's marketplace and management's emphasis on establishing relationships has solidified YNB's competitive position in the small and middle markets. During 1996, total loans increased $86,183,000, or 35.2%, to $331,237,000 at December 31, 1996 from $245,054,000 at December 31, 1995. YNB's loan portfolio represented 67.5% of assets at December 31, 1996 versus 60.8% at the prior year end. The following table sets forth the components of YNB's loan portfolio at the dates indicated. LOAN PORTFOLIO COMPOSITION
December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Amount % Amount % Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------------------------------------- Real estate - mortgage: Residential $ 83,183 25.1% $ 73,076 29.8% $ 60,156 30.5% $ 35,283 26.1% $37,632 35.2% Commercial 112,914 34.1 73,164 29.8 49,186 25.0 32,517 24.1 13,559 12.7 Home equity 23,457 7.1 26,951 11.0 29,388 14.9 30,107 22.3 28,648 26.8 Commercial and agricultural 63,426 19.2 33,218 13.6 26,626 13.5 17,642 13.1 14,822 13.8 Real estate - construction 25,958 7.8 19,353 7.9 15,560 7.9 9,742 7.2 5,250 4.9 Consumer 15,034 4.5 12,386 5.1 10,934 5.6 7,440 5.5 6,287 5.9 Other loans 7,265 2.2 6,906 2.8 5,060 2.6 2,252 1.7 795 0.7 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans $331,237 100.0% $245,054 100.0% $196,910 100.0% $134,983 100.0% $106,993 100.0% - -----------------------------------------------------------------------------------------------------------------------------------
YNB's lending focus continues to be centered on commercial loans, owner-occupied commercial mortgage loans, and tenanted commercial real estate loans. In underwriting such loans, YNB first evaluates the cash flow capability of the borrower to repay the loan. In addition, a majority of commercial loans are secured by real estate, business assets, and guarantees. YNB makes commercial loans primarily to small to medium-sized businesses and professionals. Real estate - residential loans are primarily comprised of residential mortgage loans and business loans secured by residential real estate. This portion of the portfolio totaled $83,183,000 at December 31, 1996, up $10,107,000, or 13.8%, from the prior year. Residential mortgage loans represented $52,817,000, or 63.5% of the total. YNB's residential mortgage loans are secured by first liens on the underlying real property. At December 31, 1996 approximately 34% of the residential mortgage loan portfo lio had fixed interest rates and 66% had adjustable interest rates. The home equity portfolio totaled $23,457,000 or 7.1% of YNB's loan portfolio at December 31, 1996. This compares to $26,951,000, or 11.0% of the total loan portfolio at December 31, 1995. Aggressive competition for home equity loans in YNB's market accounted for the decline in outstanding balances. The home equity portfolio has provided consistent operating income to YNB with controllable delinquencies and minimal losses. Total Loan Portfolio (dollars in thousands) 350,000------------------------------------------------------------------------ 331,237 300,000------------------------------------------------------------------------ 250,000---------------------------------------------245,054-------------------- 200,000-----------------------------196,910------------------------------------ 150,000------------------------------------------------------------------------ 134,983 106,993 100,000------------------------------------------------------------------------ 50,000------------------------------------------------------------------------ 0------------------------------------------------------------------------ 1992 1993 1994 1995 1996 Real estate - commercial loans increased by $39,750,000, or 54.3% in 1996 to $112,914,000 from $73,164,000 at December 31, 1995. YNB's lending policies require an 80% or lower loan-to-value ratio for commercial real estate mortgages. Collateral values are established based upon independently prepared appraisals. Generally, these loans are secured by owner-occupied properties and are part of a broader commercial lending relationship. Commercial and agricultural loans increased $30,208,000, or 90.9%, at December 31, 1996 to $63,426,000 from $33,218,000 at December 31, 1995. Commercial and agricultural loans are made to small to middle market businesses for inventory, working capital, and equipment needs. These loans are generally secured by business assets of the borrower. Agricultural loans represent less than 1% of the total. Real estate - construction loans increased $6,605,000 to $25,958,000 at December 31, 1996 compared to $19,353,000 at December 31, 1995. These loans represented 7.8% of the total loan portfolio at December 31, 1996. YNB makes loans to finance primarily the construction of residential and, to a limited extent, non-residential properties. Construction loans generally are secured by first liens on real estate and have floating rates of interest. These loans are closely monitored with advances made only after work is completed and independently inspected and verified by qualified professionals. YNB makes automobile, motorcycle, personal, and other loans to consumers. Consumer loans increased to $15,034,000 at December 31, 1996 compared to $12,386,000 at December 31, 1995. The majority of YNB'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 real estate market and economy. NONPERFORMING ASSETS Nonperforming assets consist of nonperforming loans and other real estate owned. In accordance with SFAS No. 114, insubstance foreclosures have been reclassified as nonperforming loans for all periods presented. Nonperforming loans are composed of (1) loans on a nonaccrual basis, (2) loans which are contractually past due 90 days or more as to interest and principal payments but have not been classified as nonaccrual, and (3) 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. YNB's policy with regard to nonaccrual loans varies by the type of loan involved. 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. Consumer loans are generally charged off after they become 90 days past due. Mortgage loans are not generally placed on a nonaccrual basis 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. Nonperforming loans totaled $8,140,000 at December 31, 1996, an increase of $5,321,000 from the $2,819,000 amount reported at December 31, 1995. The increase in nonperforming loans is principally the result of two real estate - construction loans, totaling approximately $4,600,000, going into nonaccrual status in the last quarter of 1996. Management is diligently striving to resolve both loans. The following table sets forth nonperforming assets and risk elements in YNB's loan portfolio by type at the dates indicated.
December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial and agricultural $ 961 $ - $ - $ - $ 34 Real estate - mortgage 1,451 1,395 1,203 1,764 2,651 Real estate - construction 4,659 142 521 480 1,514 Consumer 12 30 - 17 17 - ----------------------------------------------------------------------------------------------------------------------------------- Total 7,083 1,567 1,724 2,261 4,216 - ----------------------------------------------------------------------------------------------------------------------------------- Restructured loan - 612 - - - - ----------------------------------------------------------------------------------------------------------------------------------- Loans 90 days or more past due: Commercial and agricultural - - - - 1 Real estate - mortgage 1,014 588 326 209 388 Consumer 43 52 16 3 14 - ----------------------------------------------------------------------------------------------------------------------------------- Total 1,057 640 342 212 403 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 8,140 2,819 2,066 2,473 4,619 - ----------------------------------------------------------------------------------------------------------------------------------- Other real estate 395 625 314 1,393 1,107 - ----------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $8,535 $3,444 $2,380 $3,866 $5,726 - -----------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets increased $5,091,000 to $8,535,000, at December 31, 1996 compared to $3,444,000 at December 31, 1995. The increase in nonperforming assets is primarily attributable to the two loans going into nonaccrual status in the fourth quarter of 1996, as previously discussed. Nonperforming assets represented 1.74% of total assets at December 31, 1996 and 0.85% at December 31, 1995. Nonaccrual loans were $7,083,000, or 2.1% of total loans, at December 31, 1996, and $1,567,000, or 0.6% of total loans, at December 31, 1995. The one restructured loan totaled $612,000 at December 31, 1995. This loan is in full compliance with the restructured terms and conditions and, accordingly, has been returned to performing status at December 31, 1996. At December 31, 1996, loans that were 90 days or more past due but still accruing interest income totaled $1,057,000, or 0.3% of total loans, compared to $640,000, or 0.3% of total loans, at December 31, 1995. Management's decision to accrue income on these loans was based on the level of collateral and the status of collection efforts. Other real estate (O.R.E.) totaled $395,000 at December 31, 1996 and $625,000 at December 31, 1995. O.R.E. represented 0.1% of total loans at December 31, 1996 and is reflective of an active strategy to liquidate these assets and re-employ the proceeds in YNB's loan portfolio. Total Nonperforming Assets (dollars in thousands) 10,000------------------------------------------------------------------------- 8,535 8,000------------------------------------------------------------------------- 6,000-5,726------------------------------------------------------------------- 4,000-----------------3,866--------------------------------------------------- 3,444 2,380 2,000------------------------------------------------------------------------- 0------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ALLOWANCE FOR LOAN LOSSES Management utilizes a systematic and documented allowance adequacy methodology for loan losses that requires specific allowance assessment for all loans, including residential real estate mortgages and consumer loans. This methodology assigns reserves based upon credit risk ratings for specific loans and general reserves for all other loans. The general reserves are based on various factors, including historical performance and the current economic environment. On a quarterly basis, management reviews all criticized credits as reported by the loan review officer and monitors weekly all commercial loan and mortgage, residential, and consumer delinquencies. Management continually reviews the process utilized to determine the adequacy of the allowance for loan losses. The following table presents, for the years indicted, an analysis of the allowance for loan losses and other related data.
Year ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Allowance balance, beginning of year $ 3,677 $ 2,912 $ 2,703 $ 2,940 $ 3,310 Charge offs: Commercial, financial, and agricultural - - (47) - (291) Real estate - mortgage (72) (26) (51) (222) (42) Real estate - construction (75) (30) (25) (45) (270) Consumer (252) (153) (83) (84) (101) - ----------------------------------------------------------------------------------------------------------------------------------- Total charge offs (399) (209) (206) (351) (704) - ----------------------------------------------------------------------------------------------------------------------------------- Recoveries: Commercial, financial, and agricultural - - 20 21 135 Real estate - mortgage - 64 43 37 20 Consumer 39 45 47 56 129 - ----------------------------------------------------------------------------------------------------------------------------------- Total recoveries 39 109 110 114 284 - ----------------------------------------------------------------------------------------------------------------------------------- Net charge offs (360) (100) (96) (237) (420) Provision charged to operations 1,640 865 305 - 50 - ----------------------------------------------------------------------------------------------------------------------------------- Allowance balance, end of year $ 4,957 $ 3,677 $ 2,912 $ 2,703 $ 2,940 - ----------------------------------------------------------------------------------------------------------------------------------- Loans, end of year $331,237 $245,054 $196,910 $134,983 $106,993 Average loans outstanding $287,289 $221,232 $157,411 $117,671 $ 93,245 Ratio of allowance for loan losses to total loans, end of year 1.50% 1.50% 1.48% 2.00% 2.75% Ratio of net charge offs to average loans outstanding 0.13% 0.05% 0.06% 0.20% 0.45% Nonperforming loans to total loans 2.46% 1.15% 1.05% 1.83% 4.32% Nonperforming assets to total loans and other real estate owned, end of year 2.57% 1.40% 1.21% 2.83% 5.30% Ratio of allowance for loan losses to nonperforming assets, end of year 58.08% 106.77% 122.35% 69.92% 51.34% Ratio of allowance for loan losses to nonperforming loans, end of year 60.90% 130.44% 140.95% 109.30% 63.65%
YNB provides for possible loan losses by a charge to current operations to maintain the allowance for loan losses at an adequate level determined according to management's documented allowance adequacy methodology. The provision for loan losses for 1996 was $1,640,000, reflective of the continued substantial growth in the loan portfolio and increased nonperforming asset levels experienced in the last quarter. This compares to a provision for loan losses of $865,000 in 1995 and $305,000 in 1994. It is management's assessment that the allowance for loan losses is adequate in relation to credit risk exposure levels. At December 31, 1996, the allowance for loan losses totaled $4,957,000, an increase of $1,280,000 or 34.8%, from $3,677,000 at December 31, 1995, which compares to $2,912,000 at December 31, 1994. The ratio of allowance for loan losses to total loans was 1.50%, 1.50%, and 1.48% at December 31, 1996, 1995, and 1994, respectively. Another measure of the allowance for loan losses is the ratio of the allowance to total nonperforming loans. At December 31, 1996 this ratio was 60.9% versus 130.4% at December 31, 1995. YNB's gross charge offs in 1996 totaled $399,000, compared with $209,000 in 1995, and $206,000 in 1994. 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. YNB's gross recoveries totaled $39,000 in 1996 compared to $109,000 in 1995 and $110,000 in 1994 as a result of collection efforts. The balance of the allowance for loan losses is determined by an overall analysis of the loan portfolio and reflects an amount which, in management's judgment, is adequate to provide for potential loan losses. Management has established the necessary steps to identify potential credit problems in its loan portfolio by strengthening lending policies and improving loan and credit administration. Management reviews all criticized loans on a quarterly basis. Allocations to the allowance for loan losses, both specific and general, are determined after this review. Loans are classified as "satisfactory, special mention, substandard, doubtful, and loss." Loan classifications are based on internal reviews and evaluations performed by the lending staff. These evaluations are, in turn, examined by YNB's internal loan review officer. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following tables describe the allocation for loan losses among various categories of loans and certain other information as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future loan losses may occur. The total allowance is available to absorb losses from any segment of loans.
December 31, 1996 December 31, 1995 - ----------------------------------------------------------------------------------------------------------------------------------- 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 and agricultural $1,704 34.4% 19.2% $ 983 26.7% 13.6% Real estate - mortgage 2,064 41.7 66.3 1,816 49.4 70.6 Real estate - construction 938 18.9 7.8 664 18.1 7.9 Consumer 175 3.5 4.5 132 3.6 5.1 Other loans 76 1.5 2.2 82 2.2 2.8 - ----------------------------------------------------------------------------------------------------------------------------------- Total $4,957 100.0% 100.0% $3,677 100.0% 100.0% - -----------------------------------------------------------------------------------------------------------------------------------
DEPOSITS YNB's deposit base is the principal source of funds supporting interest earning assets. YNB offers a full range of deposit products, including demand deposits, savings deposits, insured money market accounts, and certificates of deposit (CDs). YNB's overall philosophy of building and maintaining long-term customer relationships is the key to further expanding the deposit base, which, in turn, presents opportunities for YNB to cross-sell its services. Total deposits amounted to $364,445,000 at year-end 1996 compared to $302,972,000 at the end of 1995, an increase of 20.3%. Average total deposits during 1996 totaled $326,048,000 compared to $284,508,000 during 1995, an increase of 14.6%. In 1996, YNB's deposit base grew due to several factors. YNB opened two new branches bringing YNB's total branch network to nine. The Always Win CD, introduced in 1995, was complemented by the introduction of the nine and fifteen month CD in the second half of 1996. These featured CD products were competitively priced to help fund loan growth. In 1996, depositors continued to place their funds in higher yielding CDs which is reflected in the growing percentage of average time deposits to average total deposits. With the investment in computer systems and technology in 1996, YNB's objective is to develop and deliver products and services that anticipate and meet the needs of YNB's diverse customer base while maintaining quality customer service. The following table provides information concerning average rates and average balances of deposits for the years indicated:
AVERAGE DEPOSIT BALANCES AND RATES - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- % of % of % of (in thousands) Balance Rate Total Balance Rate Total Balance Rate Total - ----------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing demand deposits $ 49,078 -% 15.05% $ 42,321 -% 14,88% $ 36,634 -% 16.43% Interest bearing demand deposits 23,554 2.50 7.22 21,236 2.77 7.46 16,346 2.01 7.33 Savings deposits 109,896 3.12 33.71 101,793 3.46 35.78 96,893 2.92 43.45 Time deposits 143,520 5.62 44.02 119,158 5.60 41.88 73,103 4.25 32.79 - ----------------------------------------------------------------------------------------------------------------------------------- Total $326,048 3.70% 100.00% $284,508 3.79% 100.00% $222.976 2.81% 100.00% - -----------------------------------------------------------------------------------------------------------------------------------
The average balance of non-interest bearing demand deposits was $49,078,000 during 1996, an increase of $6,757,000, or 16.0%, from $42,321,000 during 1995. Non-interest bearing demand deposits represent a stable, interest free source of funds. The increase in demand deposits is a contributing factor in the growth of net interest income. Average interest bearing demand, savings, and time deposits increased 10.9%, 8.0%, and 20.4%, respectively, from 1995 to 1996. Total average time deposits, which consist of certificates of deposit and individual retirement accounts, increased $24,362,000 to $143,520,000 during 1996 from $119,158,000 in 1995. The average rate paid on YNB's deposit balances in 1996 was 3.70%, a 2.4% decrease from the 3.79% average rate for 1995. The table at right details amounts and maturities for certificates of deposit of $100,000 or more at the date indicated. December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 - --------------------------------------------------------------- Maturity Range: Within three months $ 3,273 $ 3,095 After three but within six months 3,955 3,323 After six but within twelve months 9,291 5,890 After twelve months 5,643 2,713 - --------------------------------------------------------------- Total $22,162 $15,021 - --------------------------------------------------------------- Certificates of deposit of $100,000 or more totaled $22,162,000, or 6.1% of deposits, at December 31, 1996 compared to $15,021,000, or 5.0% of deposits, at December 31, 1995. YNB does not depend on historically less stable funding sources. YNB has not purchased deposits through wholesale deposit brokers, preferring to rely on more stable core deposits and borrowings to support growth. Total Deposits at Year End (dollars in thousands) 400,000------------------------------------------------------------------------ 364,445 350,000------------------------------------------------------------------------ 302,972 300,000------------------------------------------------------------------------ 259,296 250,000------------------------------------------------------------------------ 206,688 200,000-192,223---------------------------------------------------------------- 150,000------------------------------------------------------------------------ 100,000------------------------------------------------------------------------ 50,000------------------------------------------------------------------------ 0------------------------------------------------------------------------ 1992 1993 1994 1995 1996 BORROWED FUNDS Borrowed funds consist of securities sold under agreements to repurchase, Federal Home Loan Bank of New York (FHLB) advances, Federal funds purchased, treasury tax and loan deposits, and other forms of short-term borrowings. Management utilizes, from time to time, two unsecured Federal funds lines of credit with two of its correspondent banks for daily funding needs. Borrowed funds totaled $86,339,000 at December 31, 1996 compared to $65,221,000 at December 31, 1995. YNB used FHLB advances in 1996 in order to meet particularly strong commercial loan demand. Repurchase agreements totaling approximately $51,000,000 at year-end 1996 were used as part of a strategy to increase net interest income by purchasing investments. Borrowed funds averaged $87,065,000 in 1996, an increase of $53,726,000 from the average reported in 1995 of $33,339,000. At year-end 1996 there was $20,813,000 in outstanding borrowings with the FHLB and no outstanding borrowings from YNB's correspondents. Management will continue to strategically utilize borrowed funds to meet short-term liquidity needs and as an additional source of funding for the loan and investment portfolios. LIQUIDITY Liquidity measures the ability to satisfy current and future cash flow needs as they become due. YNB has an Asset/Liability Committee (ALCO) whose function is to monitor and coordinate all activities relating to maintaining adequate liquidity and protection of net interest income from fluctuations in market interest rates. Liquidity management refers to YNB's ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of customers. In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality, and availability of funding affect a bank's ability to meet its liquidity needs. On the asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset based liquidity is derived from scheduled loan and investment repayments of principal and interest from mortgage-backed securities. On the liability side, the primary source of liquidity is the ability to generate core deposits, which generally excludes CDs over $100,000. Short term borrowings are used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earning assets. At December 31, 1996, liquid assets (excluding securities purchased utilizing repurchase agreements) amounted to $62,574,000, as compared to $60,162,000 at December 31, 1995. This represents 15.2% and 18.3% of earning assets, and 14.2% and 17.2% of total assets at December 31, 1996 and 1995, respectively. YNB has the availability to borrow up to $20,000,000 from the FHLB through its line of credit program. In addition, the bank is eligible to borrow up to 30% of assets under the FHLB advance program subject to FHLB stock level requirements, collateral requirements, and individual advance proposals based on FHLB credit standards. YNB also has the ability to borrow at the Federal Reserve discount window along with agreements to borrow from two of its correspondent banks. INTEREST RATE SENSITIVITY The objectives of interest rate risk management are to reduce, minimize, and to the degree possible, control the effect of interest rate fluctuations on net interest income. ALCO manages the interest rate sensitivity or repricing characteristics of YNB's assets and liabilities. ALCO has established strategies and procedures to protect net interest income against significant changes in interest rates. Generally, these strategies are designed to achieve an acceptable level of net interest income based upon management's projections of future changes in interest rates. A traditional form of asset/liability management is the static gap report. The static gap report categorizes interest bearing assets and liabilities by repricing maturity characteristics. These static measurements do not reflect the results of any projected activity. On a cumulative basis, as of December 31, 1996, more of YNB's liabilities than assets repriced in the three month, six month and one year periods. As shown below, interest rate sensitivity to interest rate fluctuations is measured in a number of time frames. The following table sets forth rate sensitive assets and liabilities.
YARDVILLE NATIONAL BANCORP AND SUBSIDIARY RATE SENSITIVE ASSETS AND LIABILITIES December 31, 1996 - ----------------------------------------------------------------------------------------------------------------------------------- After three After six After Within months but months one year three within six but within but within After five Non-interest (in thousands) months months one year five years years sensitive (1) Total - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS: Federal funds sold and interest bearing deposits $ 5,397 $ - $ - $ - $ - $ - $ 5,397 Available for sale securities (2) 21,437 4,117 3,404 18,637 43,797 2,547 93,939 Investment securities - 325 435 17,782 12,754 - 31,296 Loans, net of unearned income 126,852 4,271 14,631 137,103 41,023 7,357 331,237 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets $153,686 $ 8,713 $18,470 $173,522 $97,574 $ 9,904 $461,869 - ----------------------------------------------------------------------------------------------------------------------------------- FUNDING SOURCES: Portion of non-interest bearing funding sources used to fund earning assets - 66,604 66,604 Savings and interest checking 134,357 - - - - - 134,357 Certificates of deposit of $100,000 or more 3,273 3,955 9,291 5,643 - - 22,162 Other time deposits 21,481 23,010 23,990 83,926 - - 152,407 Borrowed funds 52,696 19,500 8,330 5,813 - - 86,339 - ----------------------------------------------------------------------------------------------------------------------------------- Total funding sources $211,807 $ 46,465 $41,611 $ 95,382 $ - $66,604 $461,869 - ----------------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap (58,121) (37,752) (23,141) 78,140 97,574 (56,700) Ratio of rate sensitive assets to rate sensitive liabilities 0.73 0.19 0.44 1.82 - 0.15 Cumulative interest rate sensitive gap (58,121) (95,873) (119,014) (40,874) 56,700 - Ratio of cumulative rate sensitive assets to rate sensitive liabilities 0.73 0.63 0.60 0.90 1.14 1.00
(1) Non-interest sensitive includes assets and liabilities that do not earn or pay interest, such as nonaccrual loans, overdrafts and demand deposits. (2) Available for sale securities are included in the above table at amortized cost. Note: No effect is given to prepayments of loans or mortgage-backed securities in the amounts included above. Mortgage-backed securities are shown by their maturity date as opposed to contractual principal amortization. At December 31, 1996, YNB's twelve month cumulative gap position was negative $119,014,000. Over the next twelve months, $119,014,000 more liabilities are eligible to reprice than assets, indicating a liability sensitive position. A liability sensitive gap may indicate an exposure to earnings if interest rates increase. However, YNB's deposits that reprice within one year are predominantly core savings, NOW, and money market deposits that are bank administered. Historically, these accounts have been much less volatile than the prime and Federal funds rates, which to a large degree affect earning asset yields. Therefore, management believes the static gap position may overstate the actual risk to earnings over the next twelve month period. To analyze the potential future effect on earnings of its market sensitive assets and less rate sensitive core deposit accounts, management utilizes a simulation model to project levels of net interest income under various interest rate environments and balance sheet structures. The "base case" scenario uses the current balance sheet strategy and tests the income effects of flat interest rates, rising rates of 3% and falling rates of 3% over a 12 and 24 month period. Management has established guidelines to limit the amount that net interest income can vary within these rate ranges. The use of simulation models assists management in its continuing effort to develop strategies to produce consistent earnings growth in changing interest rate environments. YNB is in the process of developing longer-term measures of interest rate sensitivity including duration of equity and equity at risk. Such models are designed to estimate the impact on the value of equity resulting from changes in interest rates and supplement the simulation model and gap analysis. STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY Stockholders' equity at December 31, 1996 totaled $35,230,000 compared to $31,717,000 at December 31, 1995. This represents an increase of $3,513,000 or 11.1%. This increase resulted from (i) earnings of $4,026,000 (less dividend payments of $1,083,000) and offset by a negative equity adjustment of $267,000 for the unrealized loss on securities available for sale, (ii) proceeds of $562,000 from exercised options, and (iii) proceeds of $275,000 from warrants exercised that were issued in connection with YNB's 1993 Private Placement Capital Offering and 1994 Stockholders' Rights Offering. In 1996, 16,940 warrants were exercised yielding additional capital of $275,000. On June 13, 1996, all outstanding warrants from prior capital offerings expired. YNB trades on the NASDAQ National Market System under the symbol "YANB." The listing on the NASDAQ National Market System has provided increased liquidity for YNB stockholders. During 1996, 1,775,965 shares were traded. There were 2,430,414 shares of common stock outstanding at December 31, 1996. Dividends paid per share in 1996 totaled $0.45. As a result of YNB's performance during 1996, the common stock dividend was increased from $0.11 per share to $0.12 per share in the last quarter of 1996. Yardville National Bancorp and subsidiary is subject to minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. The measurement of risk-based capital takes into account the credit risk of both balance sheet assets and off-balance sheet exposures. These guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital and 8% for total capital (Tier I plus Tier II). In addition, the current minimum regulatory guideline for the Tier 1 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, 1996, the capital ratios for YNB exceeded the above ratios required to be well capitalized. The table to the right summarizes YNB's capital ratios at the dates indicated: December 31, - -------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------- Tier 1 leverage ratio 7.8% 9.1% 7.8% Tier 1 risk-based 10.2% 12.0% 9.6% Total risk-based 11.4% 13.2% 10.8% RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was issued by the Financial Accounting Standards Board (FASB) in June 1996. SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Management believes the implementation of SFAS 125 will not have a material impact on the consolidated financial statements of the Corporation. Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued by the FASB in March 1995. SFAS 121 requires that a review for impairment be performed whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. In performing the review for recoverability, the Corporation should estimate the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The Corporation adopted this standard during 1996. The adoption of this standard did not have a material impact on the consolidated financial statements of the Corporation. Statement of Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights," was issued by the FASB in May 1995. This statement amends SFAS 65, "Accounting for Certain Mortgage Banking Activities." This statement eliminates the accounting distinction between originated and purchased mortgage servicing rights. In addition, guidance is provided for a consistent structure in measuring impairment of mortgage servicing rights. The adoption of SFAS 122 did not have a material effect on the 1996 financial statements. Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," was issued by the FASB in October 1995. SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The Corporation elected to remain with the accounting of Opinion 25 for the employee and director stock option plans and has provided the pro forma disclosures required by SFAS 123. Yardville National Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF CONDITION
December 31, - ---------------------------------------------------------------------------------------------------------- (in thousands, except share data) 1996 1995 - ----------------------------------------------------------------------------------------------------------- ASSETS: Cash and due from banks (Note 2) $ 13,110 $ 10,040 Federal funds sold 4,040 2,795 - ----------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents 17,150 12,835 - ----------------------------------------------------------------------------------------------------------- Interest bearing deposits 1,357 1,033 Securities available for sale (Note 3) 93,671 98,469 Investment securities (market value of $30,878 in 1996 and $35,037 in 1995) (Note 3) 31,296 35,384 Loans 331,237 245,054 Less: Allowance for loan losses (4,957) (3,677) - ----------------------------------------------------------------------------------------------------------- Loans, net (Note 4) 326,280 241,377 Bank premises and equipment, net (Note 5) 5,418 4,026 Other real estate 395 625 Other assets (Note 8) 14,978 9,366 - ----------------------------------------------------------------------------------------------------------- Total Assets $490,545 $403,115 - ----------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits Non-interest bearing $ 55,519 $ 46,682 Interest bearing 308,926 256,290 - ----------------------------------------------------------------------------------------------------------- Total Deposits (Note 6) 364,445 302,972 Borrowed funds Securities sold under agreements to repurchase 64,185 54,830 Other 22,154 10,391 - ----------------------------------------------------------------------------------------------------------- Total Borrowed Funds (Note 7) 86,339 65,221 Other liabilities 4,531 3,205 - ----------------------------------------------------------------------------------------------------------- Total Liabilities $455,315 $371,398 Commitments and Contingent Liabilities (Notes 9 and 12) Stockholders' equity (Notes 9 and 10) Preferred stock: no par value Authorized 1,000,000 shares, none issued Common stock: no par value Authorized 6,000,000 shares Issued and outstanding 2,430,414 shares in 1996 and 2,349,592 shares in 1995 17,246 16,409 Surplus 2,205 2,205 Undivided profits (Note 13) 15,940 12,997 Unrealized (loss) gain - securities available for sale (161) 106 - ----------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 35,230 31,717 - ----------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $490,545 $403,115 - -----------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements. Yardville National Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, - ---------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans (Note 4) $25,731 $21,080 $14,168 Interest on deposits with banks 98 36 23 interest on securities available for sale 6,262 3,592 1,347 Interest on investment securities: Taxable 1,536 1,792 2,079 Exempt from Federal income tax 396 372 335 Interest on Federal funds sold 228 464 52 - ---------------------------------------------------------------------------------------------------- Total Interest Income 34,251 27,336 18,004 - ---------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on savings account deposits 4,014 4,107 3,156 Interest on certificates of deposit of $100,000 or more 922 883 299 Interest on other time deposits 7,138 5,792 2,810 Interest on borrowed funds (Note 7) 4,967 2,059 95 - ---------------------------------------------------------------------------------------------------- Total Interest Expense 17,041 12,841 6,360 - ---------------------------------------------------------------------------------------------------- Net Interest Income 17,210 14,495 11,644 Less provision for loan losses (Note 4) 1,640 865 305 - ---------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 15,570 13,630 11,339 - ---------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Service charges on deposit accounts 1,153 1,069 932 Gains on sales of mortgages, net 21 19 92 Security losses, net (136) (91) (124) Other non-interest income 1,075 858 654 - ---------------------------------------------------------------------------------------------------- Total Non-Interest Income 2,113 1,855 1,554 - ---------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits (Note 9) 6,629 5,693 5,028 Occupancy expense, net (Note 5) 920 726 611 Equipment (Note 5) 695 513 466 Other non-interest expense (Note 11) 3,235 3,328 3,180 - ---------------------------------------------------------------------------------------------------- Total Non-Interest Expense 11,479 10,260 9,285 - ---------------------------------------------------------------------------------------------------- Income before income tax expense 6,204 5,225 3,608 Income tax expense (Note 8) 2,178 1,822 1,085 - ---------------------------------------------------------------------------------------------------- Net Income $ 4,026 $ 3,403 $ 2,523 - ---------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Primary $ 1.64 $ 1.61 $ 1.58 Fully Diluted $ 1.64 $ 1.60 $ 1.56 - ----------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements. Yardville National Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, 1996, 1995 and 1994 - ------------------------------------------------------------------------------------------------------------------------------ Unrealized gain Common Common Undivided (loss) - securities (in thousands, except share amounts) shares stock Surplus profits available for sale Total - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1993 1,144,488 $ 3,814 $ 2,205 $ 8,189 $ - $14,208 Net income 2,523 2,523 Cash dividends (380) (380) Common stock issued: Exercise of stock options 2,100 6 6 Proceeds from issuance of common stock, net of related expense 401,492 3,186 3,186 Unrealized loss - securities available for sale, net of tax (1,092) (1,092) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1994 1,548,080 $ 7,006 $ 2,205 $10,332 $ (1,092) $18,451 Net income 3,403 3,403 Cash dividends (738) (738) Common stock issued: Exercise of stock options 27,663 202 202 Exercise of warrants 83,849 1,283 1,283 Proceeds from issuance of common stock, net of related expense 690,000 7,918 7,918 Unrealized gain - securities available for sale, net of tax 1,198 1,198 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1995 2,349,592 $16,409 $ 2,205 $12,997 $106 $31,717 Net income 4,026 4,026 Cash dividends (1,083) (1,083) Common stock issued: Exercise of stock options 63,882 562 562 Exercise of warrants 16,940 275 275 Unrealized loss - securities available for sale, net of tax (267) (267) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1996 2,430,414 $17,246 $ 2,205 $15,940 $ (161) $35,230 - -------------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements. Yardville National Bancorp and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, - ------------------------------------------------------------------------------------------------------- (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 4,026 $ 3,403 $ 2,523 Adjustments: Provision for loan losses 1,640 865 305 Depreciation 666 474 411 Amortization and accretion 555 368 320 Losses on sales of securities available for sale 136 91 124 Writedown of other real estate 69 66 182 Increase in other assets (5,434) (3,289) (4,017) Increase in other liabilities 1,326 1,617 344 - ------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 2,984 3,595 192 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in interest bearing deposits ( 324) 61 328 Purchase of securities available for sale (65,492) (100,065) (15,408) Maturities, calls and paydowns of securities available for sale 23,475 17,000 5,450 Proceeds from sales of securities available for sale 45,864 10,481 9,380 Proceeds from maturities and paydowns of investment securities 4,355 4,148 4,859 Purchase of investment securities (452) (646) (1,109) Net increase in loans (86,915) (48,962) (62,353) Expenditures for bank premises and equipment (2,058) (565) (497) Proceeds from sale of other real estate 533 353 1,301 Capital improvements to other real estate - (12) (74) - ------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (81,014) (118,207) (58,123) - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in non-interest bearing demand, money market, and savings deposits 15,704 19,044 12,128 Net increase in certificates of deposit 45,769 24,632 40,480 Net increase (decrease) in borrowed funds 21,118 64,006 (83) Proceeds from issuance of common stock 837 9,403 3,192 Dividends paid (1,083) (738) (380) - ------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 82,345 116,347 55,337 - ------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 4,315 1,735 (2,594) Cash and cash equivalents as of beginning of year 12,835 11,100 13,694 - ------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents as of End of Year $17,150 $12,835 $11,100 - ------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $16,338 $11,432 $ 5,979 Income taxes 2,324 1,908 1,744 - -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: The Corporation transferred $372 in 1996, $454 in 1995, and $220 in 1994, net of charge offs, from loans to other real estate. See Accompanying Notes to Consolidated Financial Statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ________________________________________________________________________________ Years ended December 31, 1996, 1995 and 1994 1. Summary of Significant Accounting Policies Business Yardville National Bancorp through its subsidiary Yardville National Bank (the Bank) provides a full range of services to individuals and corporate customers in Mercer County. The Bank is subject to competition from other financial institutions. 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 generally accepted accounting principles. In preparing the 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 sole subsidiary, the Bank and the Bank's wholly owned subsidiary, the Yardville National Investment Corporation (collectively, the Corporation). All significant inter-company accounts and transactions have been eliminated. 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: held to maturity, available for sale and trading. The Corporation currently has no securities classified as 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. 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. 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. 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. Consumer loans are generally charged off after they become 90 days past due. Mortgage loans are not generally placed on a nonaccrual basis 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. 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. Mortgage Servicing Rights - Effective January 1, 1996, the Corporation adopted SFAS No. 122 "Accounting for Mortgage Servicing Rights and Excess Servicing Receivables and for Securitization of Mortgage Loans" (SFAS 122). This standard prospectively requires the Corporation, which services mortgage loans for others in return for a servicing fee, to recognize these servicing rights as assets, regardless of how such assets were acquired. Additionally, the Corporation is required to assess the fair value of these assets at each reporting date to determine impairment. The adoption of SFAS 122 did not have a material effect on the 1996 financial statements. The mortgage servicing rights (included in other assets) are amortized against loan servicing fee income on an accelerated basis in proportion to, and over the period of, estimated net future loan servicing fee income, which periods initially do not exceed seven years. Service fee income is recognized when the related loan payments are collected. 34 F. Allowance for Loan Losses - For financial reporting purposes, 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. The Corporation adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," on January 1, 1995. 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 al l 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. Impairment losses are included in the allowance for loan losses through provisions charged to operations. In accordance with the adoption of SFAS No. 114, insubstance foreclosures are classified as nonperforming loans for all periods presented. G. Bank Premises and Equipment - Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the assets (buildings 25 to 50 years, furniture and fixtures 7 to 10 years). Charges for maintenance and repairs are expensed as they are incurred. H. Other Real Estate (O.R.E.) - O.R.E. 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 sales of other real estate are included in other non-interest income, while losses are included in non-interest expense. I. Federal 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. J. Stock Based Compensation - The Corporation adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for transactions entered into after December 15, 1995. The Corporation elected to continue to apply Accounting Principles Board (APB) Opinion 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Pro forma disclosures, as required by SFAS 123, have been included for awards granted after January 1, 1995 (see note 9). K. Earnings Per Share - Earnings per share are based on the weighted average number of shares outstanding including common stock equivalents (2,462,000 shares in 1996, 2,192,000 shares in 1995 and 1,757,000 shares in 1994) utilizing the treasury stock method in 1996 and the modified treasury stock method in 1995 and 1994. The modified treasury stock method includes the potential dilutive effect of options and warrants not included in the treasury stock method. 2. Cash and Due From Banks The Corporation maintains various deposits with other banks. As of December 31, 1996 and 1995, the Corporation maintained sufficient cash on hand to satisfy Federal regulatory requirements. 35 3. SECURITIES The amortized cost and estimated market value of securities available for sale are as follows:
December 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- 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 and corporations $31,951 $ 27 $ (36) $31,942 $17,795 $ 63 $ (35) $17,823 Mortgage-backed securities 59,441 339 (598) 59,182 78,725 320 (171) 78,874 Federal Reserve Bank Stock 572 - - 572 512 - - 512 Federal Home Loan Bank Stock 1,975 - - 1,975 1,260 - - 1,260 - ----------------------------------------------------------------------------------------------------------------------------------- Total $93,939 $366 $(634) $93,671 $98,292 $383 $(206) $98,469 - -----------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities are as follows:
December 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amoritized Unrealized Unrealized Market Amoritized Unrealized Unrealized Market (in Thousands) Cost Gains Losses Value Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------------- Obligations of state and political subdivisions $ 9,070 $ 62 $ (24) $ 9,108 $ 8,630 $ 56 $ (27) $ 8,659 Mortgage-backed securities 22,226 - (456) 21,770 26,754 - (376) 26,378 - ----------------------------------------------------------------------------------------------------------------------------------- Total $31,296 $ 62 $(480) $30,878 $35,384 $ 56 $(403) $35,037 - -----------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market value of securities available for sale and investment securities as of December 31, 1996 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalities Securities available for sale: Estimated Amortized Market (in thousands) Cost Value -------------------------------------------------------------- Due in 1 year or less $ 6,005 $ 5,998 Due after 1 year through 5 years 15,946 15,944 Due after 10 years 12,547 12,547 -------------------------------------------------------------- Subtotal 34,498 34,489 Mortgage-backed securities 59,441 59,182 -------------------------------------------------------------- Total $93,939 $93,671 -------------------------------------------------------------- Investment securities: Estimated Amortized Market (in thousands) Cost Value -------------------------------------------------------------- Due in 1 year or less $ 760 $ 760 Due after 1 year through 5 years 3,091 3,084 Due after 5 years through 10 years 5,004 5,039 Due after 10 years 215 225 -------------------------------------------------------------- Subtotal 9,070 9,108 Mortgage-backed securities 22,226 21,770 -------------------------------------------------------------- Total $31,296 $30,878 -------------------------------------------------------------- Proceeds from sales of securities available for sale during 1996, 1995, and 1994 were $45,864,000, $10,481,000 and $9,380,000, respectively. Gross gains of $43,000, $27,000, and $23,000 and gross losses of $179,000, $118,000, and $147,000, respectively, were realized on those sales. Securities with a carrying value of approximately $74,953,000 as of December 31, 1996 were pledged to secure public deposits and for other purposes as required or permitted by law. As of December 31, 1996, Federal Home Loan Bank (FHLB) stock with a carrying value of $1,975,000 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: December 31, - ------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------- Commercial and agricultural loans $ 63,426 $ 33,218 Real estate loans -- mortgage 219,554 173,191 Real estate loans -- construction 25,958 19,353 Consumer loans 15,034 12,386 Other loans 7,265 6,906 - ------------------------------------------------------- Total loans $331,237 $245,054 - ------------------------------------------------------- Residential mortgage loans held for sale amounted to $2,921,000, and $2,979,000 as of December 31, 1996 and 1995, 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 Freddie Mac and FNMA. Generally, servicing on such loans is retained by the Corporation. As of December 31, 1996 and 1995, loans serviced for Freddie Mac were $44,637,000, and $49,097,000, respectively. Loans serviced for FNMA were $2,682,000 and $1,503,000, respectively, as of December 31, 1996 and 1995. In accordance with the provisions of SFAS 122, the Corporation has capitalized $29,000 of originated servicing rights as of December 31, 1996. These rights are included in other assets in the consolidated balance sheet. The Corporation has extended credit in the ordinary course of business to directors, officers, and their associates on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other customers of the Corporation. The following table summarizes activity with respect to such loans: Year Ended December 31, - ------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------- Balance as of beginning of year $3,581 $2,633 Additions 752 1,400 Repayments and resignations 1,003 452 - ------------------------------------------------------- Balance as of end of year $3,330 $3,581 - ------------------------------------------------------- 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 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, creating cash flow. Changes in the allowance for loan losses are as follows: Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Balance as of beginning of year $3,677 $2,912 $2,703 Loans charged off (399) (209) (206) Recoveries of loans charged off 39 109 110 - ---------------------------------------------------------------- Net charge offs (360) (100) (96) Provision charged to operations 1,640 865 305 - ---------------------------------------------------------------- Balance as of end of year $4,957 $3,677 $2,912 - ---------------------------------------------------------------- The detail of loans charged off is as follows: Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Commercial and agricultural $ -- $ -- $ 47 Real estate loans - mortgage 72 26 51 Real estate loans - construction 75 30 25 Consumer loans 252 153 83 - --------------------------------------------------------------- Total $399 $209 $206 - --------------------------------------------------------------- Nonperforming assets include nonperforming loans and other real estate. The nonperforming loan category includes loans on which accrual of interest has been discontinued with subsequent interest payments credited to income as received and loans 90 days past due or greater on which interest is still accruing. Nonperforming loans as a percentage of total loans were 2.46% as of December 31, 1996 and 1.15% as of December 31, 1995. -37- A summary of nonperforming assets is as follows: December 31, - ------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------- Nonaccruing loans: Commercial and agricultural loans $ 961 $ -- Real estate loans -- mortgage 1,451 1,395 Real estate loans -- construction 4,659 142 Consumer loans 12 30 - ------------------------------------------------------- Total nonaccruing loans $7,083 $1,567 - ------------------------------------------------------- Restructured loan $ -- $ 612 - ------------------------------------------------------- Past due 90 days or more: Real estate loans -- mortgage $1,014 $ 588 Consumer loans 43 52 - ------------------------------------------------------- Total past due 90 days or more 1,057 640 - ------------------------------------------------------- Total nonperforming loans 8,140 2,819 Other real estate 395 625 - ------------------------------------------------------- Total nonperforming assets $8,535 $3,444 - ------------------------------------------------------- The Corporation adopted the provisions of SFAS No. 114 and SFAS No. 118 effective January 1, 1995. All loans receivable have been evaluated for collectibility under the provisions of these statements. The Corporation has defined the population of impaired loans to be all nonaccrual commercial loans. Impaired loans are individually assessed to determine that the loan's carrying value is not 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, 1996 and 1995 was $6,827,000 and $1,291,000, respectively. The related allowance for loan losses on these loans as of December 31, 1996 and 1995 was $861,000 and $184,000, respectively. The average recorded investment in impaired loans during 1996 and 1995 was $2,548,000 and $1,322,000, respectively. There was no interest income recognized on impaired loans in 1996 or 1995. Additional income before income taxes amounting to approximately $351,000 in 1996, $143,000 in 1995, and $183,000 in 1994 would have been recognized if interest on all loans had been recorded based upon original contract terms. There was $9,858 of interest income recorded on the restructured loan during 1995. There are no restructured loans as of December 31, 1996. 5. Bank Premises and Equipment The following table represents comparative information for premises and equipment: December 31, - ------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------- Land and improvements $ 528 $ 524 Buildings and improvements 4,296 3,874 Furniture and equipment 5,128 3,496 - ------------------------------------------------------- Total 9,952 7,894 Less accumulated depreciation 4,534 3,868 - ------------------------------------------------------- Bank premises and equipment, net $5,418 $4,026 - ------------------------------------------------------- 6. Deposits Total deposits consist of the following: December 31, - ------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------- Non-interest bearing demand deposits $55,519 $ 46,682 Money market deposits 62,783 56,759 Savings deposits 71,574 70,731 Certificates of deposit of $100,000 and over 22,162 15,021 Other time deposits 152,407 113,779 - ------------------------------------------------------- Total $364,445 $302,972 - ------------------------------------------------------- A summary of certificates of deposit by maturity is as follows: December 31, - ------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------- Within one year $84,529 $73,602 One to two years 50,357 20,579 Two to three years 27,731 13,500 Three to four years 9,942 12,408 Four to five years 2,010 8,711 - ------------------------------------------------------- Total $174,569 $128,800 - ------------------------------------------------------- 7. BORROWED FUNDS Borrowed funds include securities sold under agreements to repurchase and FHLB advances. Other borrowed funds consist of Federal funds purchased and Treasury tax and loan deposits. -38- The following table presents comparative data related to borrowed funds of the Corporation at and for the years ended December 31, 1996 and 1995. December 31, - -------------------------------------------------------- (in thousands) 1996 1995 - -------------------------------------------------------- Securities sold under agreements to repurchase $ 64,185 $54,830 FHLB advances 20,813 10,000 Other 1,341 391 - -------------------------------------------------------- Total $ 86,339 $65,221 - -------------------------------------------------------- Maximum amount outstanding at any month end $105,577 $65,221 Average interest rate on year end balance 5.72% 6.01% Average amount outstanding during the year $87,065 $33,339 Average interest rate for the year 5.70% 6.18% - -------------------------------------------------------- The following is a summary of securities sold under agreements to repurchase and their maturities as of December 31, 1996: (in thousands) - ------------------------------------------------------- 30 to 90 days $41,355 Over 90 days 22,830 - ------------------------------------------------------- Total $64,185 - ------------------------------------------------------- The FHLB advances as of December 31, 1996, mature as follows: (in thousands) - ------------------------------------------------------- Less than three months $10,000 Three to six months 5,000 Over one year 5,813 - ------------------------------------------------------- Total $20,813 Interest expense on borrowed funds is comprised of the following: Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Securities sold under agreements to repurchase $3,792 $1,429 $-- FHLB advances 1,116 576 -- Other 59 54 95 - --------------------------------------------------------------- Total $4,967 $2,059 $95 - --------------------------------------------------------------- 8. Income Taxes Income taxes reflected in the consolidated financial statements for 1996, 1995, and 1994 are as follows: Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Statements of Income: Federal: Current $2,281 $1,881 $1,238 Deferred (521) (400) (129) State: Current $ 560 $ 253 $ 34 Deferred (142) 88 (58) - --------------------------------------------------------------- Total tax expense $2,178 $1,822 $1,085 - --------------------------------------------------------------- Statements of Condition: Deferred tax on securities available for sale $ (178) $ 798 $ (727) - --------------------------------------------------------------- Deferred income taxes for 1996, 1995, and 1994 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 1996, 1995, and 1994 are as follows: Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Deferred tax assets: Deferred loan fees $ 170 $ 119 $141 Allowance for loan losses 1,686 1,174 838 Writedown of basis of O.R.E. properties 36 36 46 Deferred income 1 1 5 Nonaccrual loans 40 40 59 Net state operating loss carryforward -- -- 124 Unrealized loss on securities available for sale 107 -- 727 Deferred compensation 223 183 -- Other -- 26 93 - --------------------------------------------------------------- Total deferred tax assets $2,263 $1,579 $2,033 - --------------------------------------------------------------- Valuation allowance (78) (78) (78) - --------------------------------------------------------------- Deferred tax liabilities: Unrealized gain on securities available for sale -- (71) -- Unamortized discount accretion (94) (76) (39) Depreciation (207) (227) (304) - --------------------------------------------------------------- Net deferred tax assets $1,884 $1,127 $1,612 - --------------------------------------------------------------- -39- 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) 1996 1995 1994 - --------------------------------------------------------------- Income tax expense at statutory rate $2,105 $1,776 $1,227 State income taxes, net of Federal benefit, before change in valuation reserve 276 226 151 Changes in taxes resulting from: Tax exempt interest (122) (117) (117) Tax exempt income (142) (93) -- Non-deductible expenses 61 30 76 Change in Federal valuation reserve -- -- (252) - --------------------------------------------------------------- Total $2,178 $1,822 $1,085 - --------------------------------------------------------------- 9. 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 1996 and 25% in 1995 and 1994, up to 6% of base compensation. Employer contributions to the plan amounted to $83,000 in 1996, $36,000 in 1995, and $31,000 in 1994. 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. SFAS 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," requires an employer to recognize the cost of retiree health and life insurance benefits over the employees' period of service. The transition obligation is being amortized over a twenty year period. The periodic postretirement benefit cost under SFAS 106 was as follows: Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Service cost $ 79 $ 50 $ 46 Interest cost 83 68 47 Amortization of transition obligation 30 30 30 Amortization of actuarial loss 13 -- -- - --------------------------------------------------------------- Net postretirement cost $205 $148 $123 - --------------------------------------------------------------- The actuarial present value of benefit obligations was as follows: Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Actuarial present value of benefit obligations: Retirees $ 316 $ 325 $143 Fully eligible active plan participants 320 299 212 Other active plan participants 701 582 274 - --------------------------------------------------------------- Accumulated postretirement benefit obligation 1,337 1,206 629 Unrecognized transition obligation (480) (510) (540) Unrecognized actuarial (loss) gain (337) (350) 137 - --------------------------------------------------------------- Accrued postretirement benefit obligation $ 520 $ 346 $226 - --------------------------------------------------------------- The assumed annual rate of future increases in per capita cost of health care benefits was 10% for 1996 and 11% for 1995. The rate was assumed to decline gradually to 5% in 2001 and remain at that level thereafter. Increasing the health care cost trend by 1% in each year would increase the accumulated postretirement benefit obligation by $349,000 and $300,000 and the service, interest and amortization costs by $49,000 and $29,000 in 1996 and 1995, respectively. The weighted average discount rate used in determining the accumulated benefit obligation was 7% in 1996 and 8.5% in 1995. -40- Stock Option Plan In March 1988, the Stockholders approved an incentive stock option plan (employee plan) for the purpose of assisting the Corporation in attracting and retaining highly qualified persons as employees of the Corporation and to provide such key employees with incentives to contribute to the growth and development of the Corporation. In general, the plan allows the granting of up to 44,000 shares of the Corporation's common stock at an option price to be no less than the fair market value of the stock on the date such options are granted. The vesting schedule of the stock options is set by a committee appointed by the Board of Directors. In April 1994, the stock option plan was amended and approved by the Board of Directors to increase the maximum number of shares subject to grant to 164,000. Stock options vest during a period of up to five years after the date of grant. The status of the plan for the years ended December 31, 1996, 1995, and 1994 is as follows: Options Outstanding - --------------------------------------------------------------- Price Shares Per Share - --------------------------------------------------------------- Balance, December 31, 1993 39,850 $3.10 - $8.00 - --------------------------------------------------------------- Shares: Granted 122,480 $8.75 Exercised 2,100 $3.10 - --------------------------------------------------------------- Balance, December 31, 1994 160,230 $3.10 - $ 8.75 - --------------------------------------------------------------- Shares: Granted 3,520 $14.75 Exercised 16,720 $3.10 - $14.75 Expired 2,350 $8.00 - $ 8.75 - --------------------------------------------------------------- Balance, December 31, 1995 144,680 $8.00 - $14.75 - --------------------------------------------------------------- Shares: Exercised 57,339 $8.75 - $14.75 Expired 2,811 $8.75 - $14.75 - --------------------------------------------------------------- Balance, December 31, 1996 84,530 $8.00 - $14.75 - --------------------------------------------------------------- Shares exercisable as of December 31, 1996 84,530 $8.00 - $14.75 - --------------------------------------------------------------- 1994 Stock Option Plan In April 1994, the Board of Directors approved a non-qualified stock option plan (director plan) for non-employee directors for the purpose of assisting the Corporation in attracting and retaining highly qualified persons as non-employee members of the Board of Directors and to provide such directors with incentives to contribute to the growth and development of the business of the Corporation. In general, the plan allows for the granting of up to 40,000 shares of the Corporation's common stock at an option price to be no less than the fair market value of the stock on the date such options are granted. The vesting schedule of the stock options is set by a committee appointed by the Board of Directors. The shares granted in 1994 under this plan, vested immediately. The status of the plan for the years ended December 31, 1996, 1995, and 1994 is as follows: Options Outstanding - --------------------------------------------------------------- Price Shares Per Share - --------------------------------------------------------------- Balance, December 31, 1994 32,000 $ 8.75 - --------------------------------------------------------------- Shares: Exercised 10,943 $ 8.75 Expired 3,200 $ 8.75 - --------------------------------------------------------------- Balance, December 31, 1995 17,857 $ 8.75 - --------------------------------------------------------------- Shares: Granted 3,200 $15.75 Exercised 6,543 $ 8.75 Expired 800 $ 8.75 - --------------------------------------------------------------- Balance, December 31, 1996 13,714 $8.75 - $15.75 - --------------------------------------------------------------- Shares exercisable as of December 31, 1996 13,714 $8.75 - $15.75 - --------------------------------------------------------------- As of December 31, 1996, there were 2,261 and 8,800 additional shares available for grant under the employee and director plans, respectively. As presented in the tables above, there were 3,200 options granted under the director plan in 1996 and 3,520 options granted under the employee plan in 1995. The per share weighted average fair value of stock options granted during 1996 and 1995 was $2.46 and $2.00, respectively, on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions in 1996 and 1995: (1) an expected annual dividend of $0.45 and $0.38, respectively, (2) risk free interest rate of 5.2% and 5.1%, respectively, and expected life of approximately 1 year. The Corporation adopted the provisions of SFAS 123 for transactions entered into after December 15, 1995. Pro forma disclosures for options granted in 1996 and 1995 are required. 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. -41- Had the Corporation determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Corporation's 1996 and 1995 net income would have been reduced to the pro forma amounts indicated below: (in thousands) 1996 1995 - -------------------------------------------------------- Net income: As reported $4,026 $3,403 Pro forma 4,019 3,395 - -------------------------------------------------------- Earnings per share: Primary: As reported $ 1.64 $ 1.61 Pro forma 1.64 1.61 Fully diluted: As reported $ 1.64 $ 1.60 Pro forma 1.64 1.60 - -------------------------------------------------------- Benefit Plans The Corporation has a salary continuation plan for three key executives and a director deferred compensation plan for five board members. The plans provide for yearly retirement benefits to be paid over a specified period. The present value of the benefits accrued under these plans as of December 31, 1996 and 1995 is approximately $226,000 and $110,000, respectively, and is included in other liabilities in the accompanying consolidated statements of condition. Compensation expense of approximately $120,000 and $100,000 is included in the accompanying consolidated statements of income for the years ended December 31, 1996 and 1995, respectively. In connection with the benefit plans, the Corporation has purchased life insurance policies on the lives of the executives and directors. The Corporation is the owner and beneficiary of the policies. The cash surrender values of the policies are approximately $5,560,000 and $5,020,000 as of December 31, 1996 and 1995, respectively, and are included in other assets in the accompanying consolidated statements of condition. The Corporation implemented an officer group term replacement plan for certain executives in 1996. This plan replaces group term life insurance for these executives. This plan is funded through life insurance policies purchased by the Corporation. This plan is a split dollar plan; therefore, the policy interests are divided between the bank and the employee. The death benefits over and above the cash surrender of the life insurance policy, if any, are endorsed to the beneficiary of the executive. The cash surrender value of the policies is approximately $2,990,000 as of December 31, 1996 and is included in other assets in the accompanying consolidated statements of condition. 10. Common Stock On September 23, 1994, the Corporation completed its Rights Offering. This offering, available only to stockholders of record on August 8, 1994, raised $2,901,000, net of offering expenses. In connection with the 1993 private placement capital offering, the Corporation agreed, subject to limits on total ownership of common stock, to offer up to 21,000 shares to two accredited private investors ("Additional Units Offering"). On October 11, 1994 each private investor purchased the additional shares. The Corporation issued 401,492 units, from the Rights Offering and the Additional Units Offering, consisting of one share of common stock and one warrant to purchase one share of common stock. The proceeds from these offerings were $3,186,000, net of offering expenses. During 1996 and 1995, warrants totaling 16,940 and 83,849, respectively, were exercised with proceeds of $275,000 and $1,283,000, respectively. On June 13, 1996, all outstanding warrants from prior capital offerings expired. On June 14, 1995 the Corporation completed its underwritten public offering by issuing 690,000 shares of common stock. The proceeds from this offering were $7,918,000, net of offering expenses. 11. Other Non-Interest Expense Other non-interest expense included the following: Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- FDIC insurance premium $ 1 $ 290 $ 464 O.R.E. expenses 163 166 306 Stationery and supplies 388 300 229 Computer services 83 285 270 Insurance (other) 102 93 119 Marketing 522 479 415 Other 1,976 1,715 1,377 - --------------------------------------------------------------- Total $3,235 $3,328 $3,180 - --------------------------------------------------------------- 12. 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, 1996 and 1995 for commitments to extend credit were $56,071,000 and $63,531,000, respectively. For standby letters of credit, the contract amounts were $6,831,000 and $6,720,000, respectively. -42- Many such commitments to extend 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 the FHLB and two of its correspondent banks. There were approximately $27,000,000 in lines of credit available as of December 31, 1996. The Corporation leases its banking offices in Ewing Township, East Windsor Township, Trenton and Hamilton Square. Total lease rental expense was $186,305, $103,002, and $42,678 for the years ended December 31, 1996, 1995, and 1994, respectively. Minimum rentals under the terms of these leases for years 1997 through 2001 are $222,922, $222,922, $224,602, $225,162, and $229,017, respectively. 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. 13. 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 (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, 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.
To be well For capital capitalized under adequacy prompt corrective Actual purposes action provision - -------------------------------------------------------------------------------------------------- (amounts in thousands) Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------- As of December 31, 1996: Total capital (to risk-weighted assets) $39,304 11.4% $27,521 8.0% $34,401 10.0% Tier I capital (to risk-weighted assets) 34,996 10.2 13,761 4.0 20,641 6.0 Tier I capital (to average assets) 34,996 7.8 17,940 4.0 22,425 5.0 As of December 31, 1995: Total capital (to risk-weighted assets) 34,498 13.2 20,914 8.0 26,142 10.0 Tier I capital (to risk-weighted assets) 31,230 12.0 10,457 4.0 15,685 6.0 Tier I capital (to average assets) 31,230 9.1 13,776 4.0 17,219 5.0
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 $5,651,000 as of December 31, 1996. On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Improvement Act") became law. While 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 new mandatory supervisory measures on savings associations and banks. 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. -43- 14. 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. Securities and Mortgage-backed Securities: The carrying amounts for short-term investments approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of longer-term investments and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans, except residential mortgage loans, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities: The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, and NOW accounts, and money market and checking accounts, 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 fair value was based on rates currently available to the Corporation for agreements with similar terms and remaining maturities. 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, 1996 - --------------------------------------------------------------- Carrying Fair (in thousands) Value Value - --------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 17,150 $ 17,150 Interest bearing deposits 1,357 1,357 Securities available for sale 93,671 93,671 Investment securities 31,296 30,878 Loans 326,280 333,502 Financial Liabilities: Deposits 364,445 365,976 Borrowed funds 86,339 86,042 - --------------------------------------------------------------- December 31, 1996 - --------------------------------------------------------------- Carrying Fair (in thousands) Value Value - --------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 12,835 $ 12,835 Interest bearing deposits 1,033 1,033 Securities available for sale 98,469 98,469 Investment securities 35,384 35,037 Loans 241,377 249,848 Financial Liabilities: Deposits 302,972 304,039 Borrowed funds 65,221 64,333 - --------------------------------------------------------------- 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 -44- 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. 15. 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) 1996 1995 - ------------------------------------------------------- Assets: Cash $ 316 $ 342 Investment in subsidiary 34,835 31,336 Other assets 79 39 - ------------------------------------------------------- Total Assets $35,230 $31,717 - ------------------------------------------------------- Stockholders' Equity $35,230 $31,717 - ------------------------------------------------------- Condensed Statements of Income Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Operating Income: Dividends from subsidiary $1,083 $ 843 $ 580 - --------------------------------------------------------------- Total Operating Income 1,083 843 580 - --------------------------------------------------------------- Operating Expense: Other expense 114 115 11 - --------------------------------------------------------------- Total Operating Expense 114 115 11 - --------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiary 969 728 569 Federal income tax benefit (40) (41) (3) - --------------------------------------------------------------- Income before equity in undistributed income of subsidiary 1,009 769 572 Equity in undistributed income of subsidiary 3,017 2,634 1,951 - --------------------------------------------------------------- Net Income $4,026 $3,403 $2,523 - --------------------------------------------------------------- Condensed Statements of Cash Flows Year Ended December 31, - --------------------------------------------------------------- (in thousands) 1996 1995 1994 - --------------------------------------------------------------- Cash Flows from Operating Activities: Net Income $4,026 $3,403 $2,523 Adjustments: (Decrease) increase in other assets (40) (36) 96 Equity in undistributed income of subsidiary (3,017) (2,634) (1,951) Decrease in other liabilities -- (1) (5) - --------------------------------------------------------------- Net Cash Provided by Operating Activities 969 732 663 - --------------------------------------------------------------- Cash flows from investing activities: Investing in subsidiary (749) (9,650) (2,902) - --------------------------------------------------------------- Net Cash Used by Investing Activities (749) (9,650) (2,902) - --------------------------------------------------------------- Cash flows from financing activities: Proceeds from shares issued 837 9,403 3,192 Dividends paid (1,083) (738) (380) - --------------------------------------------------------------- Net Cash (Used) Provided by Financing Activities (246) 8,665 2,812 - --------------------------------------------------------------- Net (decrease) increase in cash (26) (253) 573 Cash as of beginning of year 342 595 22 - --------------------------------------------------------------- Cash as of End of Year $ 316 $ 342 $ 595 - --------------------------------------------------------------- -45- 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 subsidiary as of December 31, 1996 and 1995, 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, 1996. 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 generally accepted auditing standards. 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 subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Princeton, New Jersey January 31, 1997 OFFICERS ------------ Yardville National Bancorp President and Chief Executive Officer Patrick M. Ryan Secretary and Treasurer Stephen F. Carman Assistant Secretary and Treasurer Diane H. Polyak Yardville National Bank President and Chief Executive Officer Patrick M. Ryan Executive Vice President, Chief Financial Officer and Cashier Stephen F. Carman First Senior Vice President/Senior Loan Officer James F. Doran First Senior Vice President/Credit Administration Mary C. O'Donnell Senior Vice President and Controller Richard A. Kauffman Senior Vice President and Bank Administrator Frank Durand III Senior Vice President/Commercial Loans Sarah J. Strout Vice Presidents Maida H. Bell James T. Brotherton Vincent P. Ditta Elmer C. Fawcett Kathleen A. Fone Nancy C. German Maurice F. Lippincott Sandra R. Malanga Thomas A. McBain Nina D. Melker Thomas L. Nash Diane H. Polyak Jane M. Trout Susan M. Valentino Assistant Vice Presidents Shawn Chase-Merritt Scott W. Civil Nancy J. Collar Sandra A. Gray Dale K. Inman Anne S. Marsilio Debra L. Mincarelli Leslie Rita Christine A. Secrist Joan M. Tarr Assistant Cashiers Sharon E. Bokma June A. Haney Fay Horrocks Peggy A. Iucolino Linda A. Kelly Kathleen M. Kirkham Patricia D. Majeski Dawn L. Melker Barbara G. Morgan Michael J. Pelosci Joseph H. Robotin Elizabeth A. Salvatore Flora B. Shiarappa BOARD OF DIRECTORS Yardville National Bancorp Jay G. Destribats, Chairman of the Board John C. Stewart, Vice Chairman* Patrick M. Ryan, President and C.E.O. C. West Ayres Elbert G. Basolis, Jr. Lorraine Buklad Anthony M. Giampetro, M.D., F.C.C.P. Gilbert W. Lugossy Weldon J. McDaniel, Jr. William J. Steiner, Jr.*+ F. Kevin Tylus Edward M. Hendrickson, Director Emeritus+ * Director Emeritus as of March 1997 + Deceased as of March 1997 Yardville National Bank Jay G. Destribats, Chairman of the Board John C. Stewart, Vice Chairman* Patrick M. Ryan, President and C.E.O. C. West Ayres Elbert G. Basolis, Jr. Lorraine Buklad Anthony M. Giampetro, M.D., F.C.C.P. Gilbert W. Lugossy Weldon J. McDaniel, Jr. William J. Steiner, Jr.*+ F. Kevin Tylus Edward M. Hendrickson, Director Emeritus+ * Director Emeritus as of March 1997 + Deceased as of March 1997 ADVISORY BOARD William C. Broderick W. Michael Bryant Nancy S. Ellis William G. Engel Daniel J. Graziano, Esq. Sidney L. Hofing++ James J. Kelly++ John J. Klein III Richard J. Klockner Nancy J. Knight Eugene P. Marfuggi George S. Martin Louis R. Matlack, Ph.D. ++ Robert E. Mule Joyce H. Rainear Marvin A. Rosen N. Gerald Sapnar Ronald K. Vernon Robert L. Workman Harold N. Zeltt ++On the proxy ballot for anomination to Director EX-23 8 EXHIBIT 23.1 Independent Auditors' Consent The Board of Directors Yardville National Bancorp: We consent to incorporation by reference in the registration statement (No. 33-98076) on Form S-8 of Yardville National Bancorp of our report dated January 31, 1997 relating to the consolidated statements of condition of Yardville National Bancorp and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report is incorporated by reference in the December 31, 1996 annual report on Form 10-K of Yardville National Bancorp. /s/ KPMG Peat Marwick LLP --------------------- KPMG Peat Marwick LLP Princeton, New Jersey March 28, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 DEC-31-1996 13,110 1,357 4,040 0 93,939 93,939 93,671 331,237 4,957 490,545 364,445 86,339 4,531 0 0 0 17,246 17,984 490,545 25,731 8,194 326 34,251 12,074 17,041 17,210 1,640 (136) 11,479 6,204 6,204 2,178 0 4,026 1.64 1.64 8.05 7,083 1,057 0 0 3,677 399 39 4,957 4,957 0 0
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