10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934 For the quarterly period ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934 For transition period from Commission File Number: 0-26086 YARDVILLE NATIONAL BANCORP -------------------------- (Exact name of registrant as specified in its charter) New Jersey 22-2670267 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2465 Kuser Road, Hamilton, New Jersey 08690 ------------------------------------------- (Address of principal executive offices) (609) 585-5100 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable ---------------------------------------------------- (Former name, former address and former fiscal year, if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 10, 2000, the following class and number of shares were outstanding: Common Stock, no par value 7,442,534 -------------------------- ---------------------------- Class Number of shares outstanding INDEX YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES PART 1 FINANCIAL INFORMATION PAGE NO. -------------------------------------------------------------------------------- Item 1. Financial Statements Consolidated Statements of Condition June 30, 2000 and December 31, 1999 Consolidated Statements of Income Three months ended June 30, 2000 and 1999 Consolidated Statements of Income Six months ended June 30, 2000 and 1999 Consolidated Statements of Cash Flows Six months ended June 30, 2000 and 1999 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART 2 OTHER INFORMATION ----------------------------------- Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES Exhibit 27.1 Financial Data Schedule 2 Item 1. Financial Statements Yardville National Bancorp and Subsidiaries Consolidated Statements of Condition (Unaudited)
June 30, December 31, ------------------------------------------------------------------------------------------------------- (in thousands, except share data) 2000 1999 ------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks 19,359 $ 17,582 Federal funds sold 82,625 8,035 ------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents 101,984 25,617 ------------------------------------------------------------------------------------------------------- Interest bearing deposits with banks 1,131 955 Securities available for sale 343,793 309,298 Investment securities (market value of $100,422 in 2000 and $100,121 in 1999) 108,087 108,167 Loans 724,906 646,737 Less: Allowance for loan losses (9,776) (8,965) ------------------------------------------------------------------------------------------------------- Loans, net 715,130 637,772 Bank premises and equipment, net 9,228 9,400 Other real estate 2,330 2,585 Other assets 31,570 29,804 ------------------------------------------------------------------------------------------------------- Total Assets $1,313,253 $1,123,598 ------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Deposits Non-interest bearing $ 101,620 $ 90,219 Interest bearing 762,830 653,588 ------------------------------------------------------------------------------------------------------- Total Deposits 864,450 743,807 ------------------------------------------------------------------------------------------------------- Borrowed funds Securities sold under agreements to repurchase 15,000 45,000 Federal Home Loan Bank advances 320,281 250,293 Obligation for Employee Stock Ownership Plan (ESOP) 1,400 1,600 Other 1,241 1,796 ------------------------------------------------------------------------------------------------------- Total Borrowed Funds 337,922 298,689 Company - obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust holding solely junior Subordinated Debentures of the Company 26,500 11,500 Other liabilities 15,190 10,777 ------------------------------------------------------------------------------------------------------- Total Liabilities $1,244,062 $1,064,773 ------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock: no par value Authorized 1,000,000 shares, none issued Common Stock: no par value Authorized 12,000,000 shares Issued 7,614,534 in 2000 and 6,917,794 shares in 1999 46,884 40,052 Surplus 2,205 2,205 Undivided profits 31,136 27,462 Treasury stock, at cost, 172,000 shares in 2000 and 1999 (3,030) (3,030) Unallocated ESOP shares (1,400) (1,600) Accumulated other comprehensive loss (6,604) (6,264) ------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 69,191 58,825 ------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $1,313,253 $1,123,598 -------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements. 3 Yardville National Bancorp and Subsidiaries Consolidated Statements of Income (Unaudited)
Three Months Ended June 30, ---------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 2000 1999 ---------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $15,629 $11,364 Interest on deposits with banks 21 9 Interest on securities available for sale 6,012 3,618 Interest on investment securities: Taxable 1,178 1,018 Exempt from Federal income tax 389 327 Interest on Federal funds sold 549 234 ---------------------------------------------------------------------------------------------- Total Interest Income 23,778 16,570 ---------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on savings account deposits 1,850 1,187 Interest on certificates of deposit of $100,000 or more 1,461 623 Interest on other time deposits 5,933 4,238 Interest on borrowed funds 4,790 3,156 Interest on trust preferred securities 298 266 ---------------------------------------------------------------------------------------------- Total Interest Expense 14,332 9,470 ---------------------------------------------------------------------------------------------- Net Interest Income 9,446 7,100 Less provision for loan losses 900 750 ---------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 8,546 6,350 ---------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Service charges on deposit accounts 384 317 Gains on sales of mortgages, net 11 15 Securities gains, net 40 3 Other non-interest income 457 420 ---------------------------------------------------------------------------------------------- Total Non-Interest Income 892 755 ---------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 2,848 2,437 Occupancy expense, net 610 321 Equipment expense 476 367 Other non-interest expense 1,775 1,203 ---------------------------------------------------------------------------------------------- Total Non-Interest Expense 5,709 4,328 ---------------------------------------------------------------------------------------------- Income before income tax expense 3,729 2,777 Income tax expense 1,100 787 ---------------------------------------------------------------------------------------------- Net Income $ 2,629 $ 1,990 ---------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Basic $ 0.39 $ 0.34 Diluted $ 0.39 $ 0.34 ---------------------------------------------------------------------------------------------- Weighted average shares outstanding: Basic 6,723 5,788 Diluted 6,740 5,815 ----------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements. 4 Yardville National Bancorp and Subsidiaries Consolidated Statements of Income (Unaudited)
Six Months Ended June 30, ----------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 2000 1999 ----------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $29,983 $22,075 Interest on deposits with banks 36 28 Interest on securities available for sale 11,458 6,471 Interest on investment securities: Taxable 2,368 1,615 Exempt from Federal income tax 773 585 Interest on Federal funds sold 762 394 ----------------------------------------------------------------------------------------------- Total Interest Income 45,380 31,168 ----------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on savings account deposits 3,438 2,282 Interest on certificates of deposit of $100,000 or more 2,672 1,114 Interest on other time deposits 11,395 8,039 Interest on borrowed funds 9,120 5,684 Interest on trust preferred securities 564 532 ----------------------------------------------------------------------------------------------- Total Interest Expense 27,189 17,651 ----------------------------------------------------------------------------------------------- Net Interest Income 18,191 13,517 Less provision for loan losses 1,700 1,400 ----------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 16,491 12,117 ----------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Service charges on deposit accounts 761 625 (Losses) gains on sales of mortgages, net (10) 30 Securities (losses) gains, net (5) 18 Other non-interest income 879 810 ----------------------------------------------------------------------------------------------- Total Non-Interest Income 1,625 1,483 ----------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 5,656 4,728 Occupancy expense, net 1,232 634 Equipment expense 944 729 Other non-interest expense 3,199 2,582 ----------------------------------------------------------------------------------------------- Total Non-Interest Expense 11,031 8,673 ----------------------------------------------------------------------------------------------- Income before income tax expense 7,085 4,927 Income tax expense 2,060 1,383 ----------------------------------------------------------------------------------------------- Net Income $ 5,025 $ 3,544 ----------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Basic $ 0.75 $ 0.66 Diluted $ 0.75 $ 0.65 ----------------------------------------------------------------------------------------------- Weighted average shares outstanding: Basic 6,691 5,398 Diluted 6,708 5,425 -----------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements. 5 Yardville National Bancorp and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, --------------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 --------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income $ 5,025 $ 3,544 Adjustments: Provision for loan losses 1,700 1,400 Depreciation 758 554 ESOP fair value adjustment (55) -- Amortization and accretion 126 345 Losses (gains) on sales of securities available for sale 5 (18) Loss on sales of other real estate 15 1 Write down of other real estate 179 278 Increase in other assets (1,583) (2,610) Increase in other liabilities 4,415 1,577 --------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 10,585 5,071 --------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Net (increase) decrease in interest bearing deposits with banks (176) (97) Purchase of securities available for sale (92,366) (122,685) Maturities, calls, and paydowns of securities available for sale 15,782 20,374 Proceeds from sales of securities available for sale 41,460 9,019 Proceeds from maturities and paydowns of investment securities 2,123 1,786 Purchase of investment securities (2,070) (66,743) Net increase in loans (79,262) (62,850) Expenditures for bank premises and equipment (586) (1,313) Proceeds from sale of other real estate 265 702 --------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (114,830) (221,807) --------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net increase in non-interest bearing demand, money market, and savings deposits 41,732 14,650 Net increase in certificates of deposit 78,911 92,618 Net increase in borrowed funds 39,233 97,989 Proceeds from issuance of trust preferred securities 15,000 -- Proceeds from issuance of common stock 6,887 19,686 Decrease (increase) in unallocated ESOP shares 200 (1,800) Treasury shares acquired -- (22) Dividends paid (1,351) (821) --------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 180,612 222,300 --------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 76,367 5,564 Cash and cash equivalents as of beginning of period 25,617 16,526 --------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents as of End of Period $ 101,984 $ 22,090 --------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Cash paid during period for: Interest expense 24,429 16,919 Income taxes 1,162 982 --------------------------------------------------------------------------------------------------------- Supplemental Schedule of Non-cash Investing and Financing Activities: Transfers to other real estate from loans, net of charge offs 204 700 ---------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements. 6 Yardville National Bancorp and Subsidiaries Notes to Consolidated Financial Statements Three and Six Months Ended June 30, 2000 (Unaudited) 1. Summary of Significant Accounting Policies 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 as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and other real estate, management obtains independent appraisals for significant properties. The consolidated financial data as of and for the three and six months ended June 30, 2000 includes, in the opinion of management, all adjustments, consisting of only normal recurring accruals necessary for a fair presentation of such periods. The consolidated financial data for the interim periods presented is not necessarily indicative of the result of operations that might be expected for the entire year ending December 31, 2000. Consolidation The consolidated financial statements include the accounts of Yardville National Bancorp (the "Holding Company") and its subsidiaries, Yardville Capital Trust (the "Trust"), Yardville Capital Trust II (the "Trust II") and The Yardville National Bank (the "Bank"), and the Bank's wholly owned subsidiaries, Yardville National Investment Corporation, Brendan, Inc., Nancy Beth, Inc., Jim Mary, Inc., Yardville Real Estate Corporation, YNB Financial Services, Inc., YNB Realty Inc., and Capital Development, Inc., (collectively, "YNB"). All significant inter-company accounts and transactions have been eliminated. Brendan, Inc., Nancy Beth, Inc. and Jim Mary, Inc. are utilized for the control and disposal of other real estate properties. Yardville Real Estate Corporation is utilized to hold Bank branch properties, YNB Financial Services, Inc., provides alternative investment services, and YNB Realty, Inc., a real estate investment trust, is utilized to more effectively manage a portion of the Bank's real estate related loans. Capital Development is utilized for nontraditional lending opportunities. Allowance for Loan Losses The provision for loan losses charged to operating expense is determined by management and based upon a periodic review of the loan portfolio, past experience, the economy, and other factors that may affect a borrower's ability 7 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 Bank's allowance for loan losses and the valuation of other real estate. Such agencies may require the Bank to recognize additions to the allowance or adjustments to the carrying value of other real estate based on their judgement about information available at the time of their examination. Company - Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company (Trust Preferred Securities) On June 23, 2000, Yardville Capital Trust II, a statutory business trust and a wholly owned subsidiary of the Holding Company, issued $15,000,000 of 9.50% Trust Preferred Securities to one nonaffiliated financial institution and $464,000 of Common Securities to the Holding Company. Proceeds from the issuance of the Trust Preferred Securities were immediately used by the Trust to purchase $15,464,000 of 9.50% Subordinated Debentures due June 22, 2030 from the Holding Company. The Trust exists for the sole purpose of issuing Trust Preferred Securities and investing the proceeds in Subordinated Debentures of the Holding Company. These Subordinated Debentures constitute the sole assets of the Trust. On October 16, 1997, Yardville Capital Trust, a statutory business trust and a wholly owned subsidiary of the Holding Company, issued $11,500,000 of 9.25% Trust Preferred Securities to the public and $356,000 of 9.25% Common Securities to the Holding Company. Proceeds from the issuance of the Trust Preferred Securities were immediately used by the Trust to purchase $11,856,000 of 9.25% Subordinated Debentures maturing November 1, 2027 from the Holding Company. The Trust exists for the sole purpose of issuing Trust Preferred Securities and investing the proceeds in Subordinated Debentures of the Holding Company. These Subordinated Debentures constitute the sole assets of the Trust. 2. Earnings Per Share Weighted average shares for the basic net income per share calculation for the three months ended June 30, 2000 and 1999 were 6,723,000 and 5,788,000 respectively. For the diluted net income per share computation, potential common stock of 17,000 and 27,000 are included for the three months ended June 30, 2000 and 1999, respectively. Weighted average shares for the basic net income per share calculation for the six months ended June 30, 2000 and 1999 were 6,691,000 and 5,398,000 respectively. For the diluted net income per share computation, potential common stock of 17,000 and 27,000 are included for the six months ended June 30, 2000 and 1999, respectively. 8 3. Comprehensive Income Listed below is the statement of comprehensive income for three and six months ended June 30, 2000 and 1999.
Comprehensive Income Three Months Ended June 30, 2000 ----------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 ----------------------------------------------------------------------------------------------------- Net Income $2,629 $ 1,990 ----------------------------------------------------------------------------------------------------- Other comprehensive income (loss) Net change in unrealized loss for the period, net of tax 1,628 (2,921) Reclassification of realized net gain on sale of securities available for sale, net of tax 26 2 ----------------------------------------------------------------------------------------------------- Holding gain (loss) arising during the period, net of tax and reclassification 1,654 (2,919) ----------------------------------------------------------------------------------------------------- Reclassification adjustment for realized net gain, net of tax (26) (2) ----------------------------------------------------------------------------------------------------- Other comprehensive income (loss) for the period, net of tax 1,628 (2,921) ----------------------------------------------------------------------------------------------------- Total comprehensive income (loss) $4,257 $ (931) ===================================================================================================== Comprehensive Income Six Months Ended June 30, 2000 ----------------------------------------------------------------------------------------------------- (in thousands) 2000 1999 ----------------------------------------------------------------------------------------------------- Net Income $5,025 $ 3,544 ----------------------------------------------------------------------------------------------------- Other comprehensive income (loss) Net change in unrealized loss for the period, net of tax (340) (3,561) Reclassification of realized net (loss) gain on sale of securities available for sale, net of tax (3) 12 ----------------------------------------------------------------------------------------------------- Holding loss arising during the period, net of tax and reclassification (343) (3,549) ----------------------------------------------------------------------------------------------------- Reclassification adjustment for realized net loss (gain), net of tax 3 (12) ----------------------------------------------------------------------------------------------------- Other comprehensive loss for the period, net of tax (340) (3,561) ----------------------------------------------------------------------------------------------------- Total comprehensive income (loss) $4,685 $ (17) =====================================================================================================
4. Employee Stock Ownership Plan The Bank established an Employee Stock Ownership Plan and related trust ("ESOP") for eligible employees. The ESOP is a tax-qualified plan subject to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Employees with twelve months of employment with the Bank and who have worked at least 1,000 hours are eligible to participate. The ESOP borrowed $2,000,000 from an unaffiliated financial institution and purchased 155,340 shares of common stock, no par value, of the Holding Company. Shares purchased by the ESOP are held in a suspense account pending allocation among participants as the loan is repaid. 9 Compensation expense is recognized based on the fair value of the stock when it is committed to be released. Compensation expense amounted to approximately $66,000 and $88,000 for the three months and approximately $120,000 and $175,000 for the six months ended June 30, 2000 and 1999 respectively. The fair value of unearned shares at June 30, 2000 is $1,320,390. Unallocated shares are deducted from common shares outstanding for earnings per share purposes with shares which are committed to be released during the year added back into weighted average shares outstanding. YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES (YNB) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This financial review presents management's discussion and analysis of the financial condition and results of operations. It should be read in conjunction with the 1999 Annual Report to stockholders and Form 10-K for the fiscal year ended December 31, 1999 as well as with the unaudited consolidated financial statements and the accompanying notes in this Form 10-Q. This Form 10-Q report contains express and implied statements relating to the future financial condition, results of operations, plans, objectives, performance, and business of YNB, which are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements that relate to, among other things, profitability, liquidity, loan loss reserve adequacy, plans for growth, interest rate sensitivity, market risk, and financial and other goals. Actual results may differ materially from those expected or implied as a result of certain risks and uncertainties, including, but not limited to, changes in economic conditions, interest rate fluctuations, continued levels of loan quality and origination volume, competitive product and pricing pressures within YNB's markets, continued relationships with major customers including sources for loans and deposits, personal and corporate customers' bankruptcies, legal and regulatory barriers and structure, inflation, and technological changes, as well as other risks and uncertainties detailed from time to time in the filings of YNB with the U.S. Securities and Exchange Commission. Financial Condition Assets Total consolidated assets at June 30, 2000 were $1,313,253,000 an increase of $189,655,000 or 16.9% compared to $1,123,598,000 at December 31, 1999. The growth in YNB's asset base during the six months of 2000 was primarily due to increases in loans, Federal funds sold, and available for sale securities. The increase in the loan portfolio was the product of an ongoing consistent strategy to improve the profitability of the organization through relationship banking. With consolidation in its markets YNB has established its niche as the preeminent business community bank in Mercer County specializing in commercial lending. YNB's asset base includes US agency securities of approximately $242,000,000 purchased utilizing primarily Federal Home Loan Bank advances 10 (Investment Growth Strategy). The Investment Growth Strategy securities at June 30, 2000 increased approximately $14,200,000 or 6.2% from the reported total of $228,400,000 at December 31, 1999. The primary goals of the Investment Growth Strategy, improving return on average equity and earnings per share, continue to be achieved. Federal funds sold At June 30, 2000 Federal funds sold totaled $82,625,000 compared to $8,035,000 at December 31, 1999. The higher amount of Federal funds sold at June 30, 2000 was primarily due to increased certificate of deposit (CD) balances, private trust preferred and private equity capital offering proceeds and borrowed funds raised to fund loan growth and effectively manage liquidity. The average Federal funds sold balance for the first six months of 2000 was $24,820,000 compared to $16,824,000 for the same period in 1999. Management remains focused on maintaining adequate liquidity to fund loan growth and to enhance the liquidity profile of YNB. Securities The following tables present the amortized cost and market value of YNB's securities portfolios as of June 30, 2000 and December 31, 1999.
Available For Sale Securities June 30, 2000 December 31, 1999 ------------------------------------------------------------------------------------------------------------------ Amortized Market Amortized Market (in thousands) Cost Value Cost Value ------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of other U.S. government agencies $129,336 $124,544 $117,496 $112,731 Mortgage-backed securities 197,508 191,968 170,775 166,164 Corporate obligations 8,849 9,020 5,783 5,522 All other securities 18,261 18,261 24,881 24,881 ------------------------------------------------------------------------------------------------------------------ Total $353,954 $343,793 $318,935 $309,298 ================================================================================================================== Investment Securities June 30, 2000 December 31, 1999 ------------------------------------------------------------------------------------------------------------------ Amortized Market Amortized Market (in thousands) Cost Value Cost Value ------------------------------------------------------------------------------------------------------------------ Obligations of other U.S. government agencies $ 69,184 $ 63,893 $ 69,184 $ 63,992 Obligations of state and political subdivisions 33,243 31,143 31,892 29,281 Mortgage-backed securities 5,660 5,386 7,091 6,848 ------------------------------------------------------------------------------------------------------------------ Total $108,087 $100,422 $108,167 $100,121 ==================================================================================================================
Securities represented 34.4% of total assets at June 30, 2000 and 37.2% at December 31, 1999. Total securities increased $34,415,000 or 8.2% at June 30, 11 2000 to $451,880,000, compared to $417,465,000 at year-end 1999. The available for sale portfolio represents 76.1% of the total security holdings of YNB at June 30, 2000, compared to 74.1% at year-end 1999. The net unrealized loss on available for sale securities was $10,161,000 as of June 30, 2000 and was $9,637,000 at December 31, 1999. Net unrealized loss, net of tax effect, was $6,604,000 as reported in Accumulated other comprehensive loss in Stockholders' Equity at June 30, 2000, and $6,264,000 reported at December 31, 1999. The increase in the net unrealized loss on available for sale securities is primarily due to the changes in interest rates from December 31, 1999 to June 30, 2000 and the increased size of the available for sale securities portfolio. Securities available for sale increased $34,495,000 or 11.2% at June 30, 2000 when compared to the December 31, 1999 balance of $309,298,000. The largest increase was in mortgage-backed securities, which increased $25,804,000. Mortgage-backed securities purchased were primarily comprised of floating rate CMO's which increased by $31,059,000 and that increase was offset by paydowns in fixed and adjustable rate mortgage backed securities. Floating rate CMO's have been purchased to improve the performance of the investment portfolio in a rising rate environment. U.S. Treasury and other U.S. agency obligations increased $11,813,000 or 10.5%. The growth was primarily in shorter term callable bonds purchased to enhance YNB's liquidity profile. Investment securities decreased $80,000 to $108,087,000 at June 30, 2000 from $108,167,000 at December 31, 1999. The decrease was due to a modest increase in obligations of state and political subdivisions offset by principal paydowns on mortgage backed securities. The Investment Growth Strategy securities increased $14,206,000 over the year-end 1999 level. The largest increase was in floating rate US agency collateralized mortgage obligations, which increased $14,955,000. The next largest growth was in US agency callable bonds that increased $5,000,000. Reductions were recorded in fixed rate mortgage backed securities, which decreased by $3,989,000 as a result of paydowns and floating rate mortgage backed securities, which decreased, by $1,760,000 as a result of paydowns. At June 30, 2000, the Investment Growth Strategy portfolio was comprised of 73.7% of fixed rate securities and 26.3% of adjustable or floating rate securities compared to 77.8% fixed rate securities and 22.2% adjustable rate securities at year end 1999. Loans Total loans, net of unearned income, increased $78,169,000 or 12.1% at June 30, 2000 to $724,906,000 from $646,737,000 at December 31, 1999. This growth exceeded the growth experienced in the first six months of 1999 of $61,604,000. YNB's loan portfolio represented 55.2% of total assets at June 30, 2000 compared to 57.6% at December 31, 1999. YNB's lending focus continues to be on commercial and industrial loans, and commercial real estate loans. The ability of YNB to enter into larger loan relationships and management's philosophy of relationship banking are key factors in continued strong loan growth. Strong competition from both bank and nonbank competitors could result in comparatively lower yields on new and established lending relationships. In addition, borrowers' concerns over the economy, real estate prices and interest rates could all be factors in slowing future loan growth. Management anticipates continued loan growth for the 12 second half of 2000 but at a lower rate than the first half of 2000. Continued profitable loan growth is a key factor in meeting earnings growth goals.
Loan Portfolio Composition -------------------------------------------------------------------------------------------------------- (in thousands) 6/30/00 12/31/99 Change % change -------------------------------------------------------------------------------------------------------- Commercial real estate $310,390 $294,413 $15,977 5.4% Real estate - mortgage Residential 141,317 120,556 1 17.2 Home equity 24,196 23,581 615 2.6 Commercial and industrial 136,807 114,388 22,419 19.6 Real Estate - construction 79,934 59,457 20,477 34.4 Consumer 22,403 22,879 (476) 2.1 Other loans 9,859 11,463 (1,604) 14.0 ------------------------------------------------------------------------------------------------------- Total loans $724,906 $646,737 $78,169 12.1% =======================================================================================================
The table above lists loan growth by type for the period of December 31, 1999 to June 30, 2000. In June of 2000, management completed a review of the collateral related to loans on the commercial loan system and reclassified loans to more accurately reflect portfolio classifications. This resulted in commercial and industrial, real estate construction and consumer loans decreasing and real estate residential and commercial real estate loans increasing. The December 31, 1999 numbers have been reclassified to reflect the new classifications at June 30, 2000. Commercial and industrial loans had the greatest growth increasing $22,419,000 or 19.6%. Commercial real estate loans increased $15,977,000 or 5.4% and Real estate construction loans increased $20,477,000 or 34.4%. These three loan categories increased $58,893,000 and accounted for 75.3% of the total loan growth for the period. YNB continued success in generating these types of loans is based on several factors. First, management's focus on commercial related lending has resulted in YNB's growing reputation as a business lender in our market place. Second, the consolidation in YNB's market continues to generate new loan business and YNB's increased legal lending limit allows for larger loans to both new and existing customers. Real estate residential loans are primarily composed of 1-4 family residential loans, multi family residential loans, fixed rate home equity loans and business loans secured by residential real estate. Growth in this portfolio remained strong in the first six months of 2000 with an increase in the outstanding balance of $20,761,000 or 17.2% for the period June 30, 2000 from year end 1999. Residential mortgage loans represented $68,633,000 or 48.6% of the total at June 30, 2000 compared to $60,942,000 or 50.6% of the total at year-end 1999. Growth in residential mortgages was $7,691,000 and accounted for 37.0% of the total increase for the period. All other loan types in this category had positive loan growth. Home equity loans increased $615,000 or 2.6%. Consumer loans and other loans were the only loan types to decrease. The total decrease was $2,080,000 for the period. Strong competition for quality consumer loans is a key factor in the modest reduction in outstanding consumer loans. 13 Deposit liabilities The following table provides information concerning YNB's deposit base at June 30, 2000 and December 31, 1999.
Deposits --------------------------------------------------------------------------------------------------------- (in thousands) 6/30/00 12/31/99 Change % Change --------------------------------------------------------------------------------------------------------- Non-interest bearing demand deposits $101,620 $ 90,219 $ 11,401 12.6% Interest bearing demand deposits 67,383 61,483 5,900 9.6 Money market deposits 85,589 57,143 28,446 49.8 Savings deposits 76,279 80,300 (4,021) 5.0 Certificates of deposit of $100,000 or over 112,399 72,528 39,871 55.0 Other time deposits 421,180 382,134 39,046 10.2 --------------------------------------------------------------------------------------------------------- Total $864,450 $743,807 $120,643 16.2% =========================================================================================================
YNB's deposit base is the principal source of funds supporting interest-earning assets. Total deposits increased $120,643,000 or 16.2% to $864,450,000 at June 30, 2000 compared to $743,807,000 at December 31, 1999. In January 2000, YNB increased the rates on its Premier Money Market Accounts for both business and personal customers and launched an aggressive advertising and calling campaign to promote the higher rates. Management's goal is to fund asset growth with lower costing and more stable money market account balances instead of higher costing certificates of deposit. Certificates of deposit were also competitively priced in the first and second quarter of 2000 to fund new loan growth and improve liquidity. Certificates of deposits continue to be an important source of funding for YNB in 2000. Certificates of deposit of $100,000 or over increased $39,871,000 or 55.0% to $112,399,000 from $72,528,000 at December 31, 1999 and accounted for 33.0% of the total deposit growth for the period. Other time deposits increased $39,046,000 or 10.2% to $421,180,000 from $382,134,000 at December 31, 1999. Growth in time deposits accounted for 65.4% of the total increase in deposits for the first six months of 2000. Certificates of deposit accounted for 61.7% of total deposits at June 30, 2000 compared to 61.1% at year-end 1999. Management continues to initiate marketing strategies designed to attract lower cost deposits. YNB also markets its certificates of deposit through a nationwide computer based service. This service allows YNB to have access to a wider market to raise needed funding. At June 30, 2000, YNB had approximately $153,000,000 in outstanding certificates of deposit raised through this service. This includes $52,400,000 raised in the first six months of 2000. Management anticipates that this market will continue to play an important role in funding future asset growth. Non-interest bearing demand deposits increased $11,401,000 or 12.6% to $101,620,000 at June 30, 2000 when compared to $90,219,000 at December 31, 1999. This increase is primarily due to management's ongoing efforts to capture and expand the deposit relationships of both new and existing consumer and business customers. YNB recently introduced and is aggressively marketing a totally free checking account for personal depositors. This account has been well received and its growth accounts for a portion of the increased non-interest bearing deposit balances and provides YNB with increased opportunities to cross sell other products. 14 Interest bearing demand deposits increased $5,900,000 or 9.6% to $67,383,000 at June 30, 2000 from $61,483,000 at year-end 1999. In addition, money market balances increased $28,446,000 or 49.8% to $85,589,000 at June 30, 2000 from $57,143,000 at December 31, 1999. This increase resulted from higher rates paid and the aggressive marketing campaign of the Premier Money Market Account conducted by YNB. Savings deposits decreased $4,021,000 or 5.0% to $76,279,000 at June 30, 2000 from $80,300,000 at December 31, 1999. A key factor for this decline was the migration of accounts from lower yielding savings to higher yielding money market accounts. While it is management's intention to fund earning asset growth with the lowest cost deposits, core deposit growth levels, excluding certificates of deposit, are not adequate to meet current or projected loan demand. YNB's ability to generate lower cost deposits could affect achieving earnings targets. The continuing reliance on higher cost certificates of deposit to fund asset growth is a major factor in the continued pressure on YNB's net interest margin. YNB continues to seek lower cost funding sources. In January 2000, YNB introduced YNB Online, PC based home and business banking service. This service will allow customers to have greater access to their accounts and should help to make YNB's deposit products more competitive in the market place. Another source of low cost funds is the opening of new branches to serve a wider market area. In April 2000, YNB opened its first supermarket branch located in Ewing Township, New Jersey. Management believes that this branch should be a strong source of both core deposits and consumer loans. In addition, management continues to seek additional branch sites. YNB currently has regulatory approval to open three additional branches by the end of 2000. One of these branches will be located in Lawrence Township, Mercer County, New Jersey and will fill a gap in YNB's existing market coverage. The other two branches will expand YNB into the neighboring counties of Burlington and Hunterdon. The Burlington County branch will be located in Bordentown, New Jersey and allow YNB to better serve a market where it already does business. The Hunterdon County branch will be located in Flemington, New Jersey. Management intends to continue to seek and evaluate opportunities for additional branches both inside and outside of its core Mercer County market place. Management believes that expanding the branch network to tap new deposit markets is the best solution for generating lower cost funds to support asset growth. Borrowed Funds Borrowed funds totaled $337,922,000 at June 30, 2000, an increase of $39,233,000 or 13.1% when compared to $298,689,000 at December 31, 1999. The growth in Federal Home Loan Bank advances (FHLB) used to fund the investment growth strategy and to replace called or matured securities sold under agreements to repurchase accounted for the increase in borrowed funds. Approximately $239,000,000 or 70.7% of borrowed funds at June 30, 2000 are related to the Investment Growth Strategy. In determining funding, as Investment Growth Strategy funding matures or is called, management evaluates several factors: the future outlook for interest rates, interest rate risk, the trade off between maximizing current income or preserving longer term earnings and other relevant factors. Management anticipates that funding costs associated with borrowed funds will increase as shorter term repurchase agreements mature and callable funding at below market rates is called. At June 30, 2000, $222,000,000 or 15 93.7% of the Investment Growth Strategy funding was in callable funding compared to $220,000,000 or 97.8% at December 31, 1999. Securities sold under agreements to repurchase totaled $15,000,000 at June 30, 2000 compared to $45,000,000 at December 31, 1999. $10,000,000 or 66.7% of the repurchase agreements outstanding at June 30, 2000 were callable compared to $40,000,000 or 88.9% at December 31, 1999. Management has been shifting funding from repurchase agreements to callable FHLB advances due to lower funding costs available at the FHLB. With the increase in interest rates since the end of 1999, management anticipates that repurchase agreement costs will rise as shorter-term repurchase agreements mature and below market rate callable repurchase agreements are called and are replaced at higher market rates. YNB had FHLB advances outstanding of $320,281,000 at June 30, 2000, an increase of $69,988,000 or 28.0% when compared to $250,293,000 at December 31, 1999. YNB continues to utilize callable FHLB advances to fund both Investment Growth Strategy purchases as well as other earning assets. In the first half of 2000, as advances were called or matured, management replaced this funding with callable funding having relatively shorter call periods. This has helped to reduce the impact of higher rates on borrowing costs. At June 30, 2000 callable advances totaled $292,500,000 or 91.3% of advances outstanding compared to $239,500,000 or 95.7% at December 31, 1999. Callable FHLB advances have terms of ten years and are callable after periods ranging from three months to five years. There is $114,500,000 in callable advances with call dates in 2000 outstanding as of June 30, 2000. Management anticipates that, if rates continue to rise, some or all of these advances will be called and will have to be replaced with higher costing advances. Borrowed funds included $1,400,000 related to the ESOP. The ESOP purchased 155,340 shares of the common stock, no par value, of the Holding Company with a loan from a nonaffiliated financial institution. The financing is for a term of five years with an interest rate of 7.00% and a maturity date in 2004. The interest rate is fixed for the period of the loan, and the loan will be repaid in equal monthly installments over the term of the loan. The shares purchased by the ESOP were used as collateral for the loan. The Holding Company guarantees the repayment of the loan. YNB has the ability to borrow up to $37,845,000 from the FHLB through its line of credit program, subject to collateral requirements. In addition, YNB is eligible to borrow up to 30% of assets under the FHLB advance program subject to FHLB stock requirements, collateral requirements and other restrictions. YNB also maintains unsecured federal funds lines with four commercial banks totaling $25,000,000 for daily funding needs. YNB's funding strategy is to rely on deposits to fund new loan growth whenever possible and to rely on borrowed funds as a secondary funding source for loans. 16 Company - Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company (Trust Preferred Securities) On June 23, 2000, the Holding Company through the Trust II, completed the sale of $15,000,000 of 9.50% Trust Preferred Securities to a nonaffiliated financial institution. As of June 30, 2000, $25,265,000 or 95.3% of the $26,500,000 in trust preferred securities outstanding qualify as Tier I capital. The remaining $1,235,000 is treated as Tier II capital. Management anticipates that all Trust Preferred outstanding at June 30, 2000 will qualify for Tier I capital within the next 12 months. On October 16, 1997, the Holding Company through the Trust, completed the sale of $11,500,000, of 9.25% Trust Preferred Securities to the public. For regulatory capital purposes the entire amount of the issue is treated as Tier 1 capital at the Holding Company level. 17 Capital On June 23, 2000, the Holding Company completed the private placement of 68,500 units, each unit consisting of 10 shares of common stock and 1 common stock purchase warrant. The units were sold to a limited number of investors and generated gross proceeds of $6,850,000. Net proceeds after offering costs was $6,835,000. $21,300,000 of the total proceeds raised by the trust preferred and equity offerings was contributed to the Bank to support future asset growth. Stockholders' equity at June 30, 2000 totaled $69,191,000, an increase of $10,366,000 or 17.6%, compared to $58,825,000 at December 31, 1999. This net increase resulted from the following factors: (i) YNB earned net income of $5,025,000 for the period and paid cash dividends of $1,351,000. (ii) The unrealized loss on available for sale securities was $6,604,000 at June 30, 2000 compared to an unrealized loss of $6,264,000 at December 31, 1999. This increase in the unrealized loss resulted in a $340,000 reduction in stockholders' equity. (iii) YNB received $52,000 in proceeds from exercised options and $6,835,000 from the equity capital offering. Offsetting these increases was a $55,000 decrease associated with the fair market value adjustment related to the allocation of shares from the employee stock option plan. (iv) A reduction in commitment to ESOP of $200,000 to $1,400,000 at June 30, 2000 from $1,600,000 resulted in an increase of $200,000 in Stockholders' equity. While total Stockholders' equity increased $10,366,000, Tier one regulatory capital increased $24,471,000 or 32.0% and total regulatory capital increased $26,517,000 or 31.0%. The following table sets forth regulatory capital ratios for the Holding Company and the Bank as of June 30, 2000 and December 31, 1999.
Amount Ratios -------------------------------------------------------------------------------------------------------- dollars in thousands 06/30/00 12/31/99 06/30/00 12/31/99 -------------------------------------------------------------------------------------------------------- Risk-based capital: Tier 1: Holding Company $101,060 $76,579 11.9% 10.3% Bank 101,153 76,279 11.9 10.2 -------------------------------------------------------------------------------------------------------- Total: Holding Company 112,071 85,544 13.2 11.5 Bank 110,929 85,244 13.1 11.4 -------------------------------------------------------------------------------------------------------- Tier 1 leverage: Holding Company 101,060 76,579 8.4 7.9 Bank $101,153 $76,279 8.3% 7.8% --------------------------------------------------------------------------------------------------------
18 The minimum regulatory capital requirements for financial institutions require institutions to have a Tier 1 leverage ratio of 4.0%; a Tier 1 risk-based capital ratio of 4.0% and a total risked based capital ratio of 8.0%. To be considered "well capitalized" an institution must have a minimum Tier 1 capital and total risk-based capital ratio of 6.0% and 10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. At June 30, 2000, the ratios of the Holding Company and the Bank exceeded the ratios required to be considered well capitalized. It is management's goal to provide YNB with adequate capital to continue to support asset growth and maintain both the Bank and Holding Company as well capitalized institutions. Credit Quality The following table sets forth nonperforming assets and risk elements in YNB's loan portfolio by type as of June 30, 2000 and December 31, 1999.
Nonperforming Assets --------------------------------------------------------------------------------------------------- (in thousands) 06/30/00 12/31/99 --------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial and industrial $ 993 $ 676 Real estate - mortgage 2,321 1,189 Consumer 9 12 Other -- 312 --------------------------------------------------------------------------------------------------- Total 3,323 2,189 --------------------------------------------------------------------------------------------------- Restructured loans 723 540 --------------------------------------------------------------------------------------------------- Loans 90 days or more past due: Commercial and industrial 539 46 Real estate - mortgage 669 277 Consumer 26 26 --------------------------------------------------------------------------------------------------- Total 1,234 349 --------------------------------------------------------------------------------------------------- Total nonperforming loans 5,280 3,078 --------------------------------------------------------------------------------------------------- Other real estate 2,330 2,585 --------------------------------------------------------------------------------------------------- Total nonperforming assets $ 7,610 $` 5,663 --------------------------------------------------------------------------------------------------- Allowance for loan losses to total loans, end of period 1.35% 1.39% Allowance for loan losses to nonperforming loans, end of period 185.15% 291.26% ===================================================================================================
At June 30, 2000, nonperforming loans, which are loans 90 days and more past due, restructured loans and nonaccrual loans, totaled $5,280,000, a $2,202,000 or 71.6% increase from the $3,078,000 at December 31, 1999. The increase in nonperforming loans was primarily due to a $1,132,000 increase in nonaccrual Real Estate loans and a $885,000 increase in loans 90 days or more past due since year end 1999. One loan relationship totaling $1,775,000 accounted for 80.6% of the increase in nonperforming loans since year-end 1999. Nonperforming loans as a percentage of total loans at June 30, 2000 was 0.73% an increase from the 0.48% ratio at December 31, 1999 but in line with the 0.66% at June 30, 1999. 19 Other real estate at June 30, 2000 totaled $2,330,000, a $255,000 or 9.9% decrease when compared to $2,585,000 at December 31, 1999. Nonperforming assets at June 30, 2000 totaled $7,610,000 a $1,947,000 or 34.4% increase from the $5,663,000 level at December 31, 1999. Total nonperforming assets as a percentage of total assets were 0.58% at June 30, 2000 compared to 0.50% at December 31, 1999. The increase in nonperforming assets resulted from the higher level of nonperforming loans partially offset by a reduction in other real estate. Allowance for Loan Losses The allowance for loan losses totaled $9,776,000 at June 30, 2000, an increase of $811,000 from the $8,965,000 at year-end 1999. The provision for loan losses for the first six months of 2000 was $1,700,000 compared to $1,400,000 for the same period of 1999. Gross chargeoffs were $975,000 for the first six months of 2000 compared to $590,000 for the same period in 1999. Gross recoveries were $86,000 for the first six months of 2000 compared to $45,000 for the same period in 1999. Annualized net chargeoffs as a percentage of average loans were 0.26% for the first six months of 2000 and 0.17% for the year ended December 31, 1999. Management maintains the allowance for loan losses at a level determined in accordance with management's documented allowance adequacy methodology. It is management's assessment, based on management's estimates, that the allowance is adequate in relation to the credit risk exposure levels. One measure of the adequacy of the allowance for loan losses is the ratio of allowance for loan losses to total loans. This ratio was 1.35% at June 30, 2000 compared to 1.39% at December 31, 1999. Another measure of the adequacy of the allowance for loan losses is the ratio of the allowance for loan losses to total nonperforming loans. This ratio was 185.15% at June 30, 2000 compared to 291.26% at December 31, 1999. Results of Operations Net Income YNB reported net income of $5,025,000 for the six months ended June 30, 2000, an increase of $1,481,000 or 41.8% over the $3,544,000 for the same period in 1999. The increase in net income for the first six months of 2000 compared to the same period in 1999 is attributable to higher net interest income and increased non-interest income offset by increased non-interest expenses and, to a lesser extent, a higher provision for loan losses. Basic earnings per share for the six months ended June 30, 2000 increased $0.09 or 13.6% to $0.75 compared to $0.66 for the same period in 1999. Diluted earnings per share for the six months ended June 30, 2000 was $0.75, an increase of $0.10 or 15.4% when compared to $0.65 for the same period of 1999. On a quarterly basis, net income for the second quarter of 2000 was $2,629,000 and represented a $639,000 or 32.1% increase over net income for the same period in 1999. On a per share basis, basic and diluted earnings per share for the second quarter of 2000 were $0.39, an increase of $0.05 or 14.7% when compared to the second quarter of 1999. The reasons for the increase are the same as discussed above. 20 Net Interest Income YNB's net interest income for the first six months of 2000 was $18,191,000, an increase of $4,674,000 or 34.6% from the same period in 1999. The principal factor contributing to this increase was an increase in interest income of $14,212,000 resulting from increased loan and securities balances and higher yields offset by an increase of $9,538,000 in interest expense. This increase in interest expense was primarily due to both higher average balances of time deposits and borrowed funds and higher interest rates on all deposit types and borrowed funds. The net interest margin (tax equivalent basis) which is net interest income divided by average interest earning assets, for the first six months of 2000, was 3.23% a 7 basis point or 2.1% decline compared to 3.30% for the same period in 1999. The principal factors causing the narrowing of the net interest margin were the more rapid increase in the cost of interest bearing liabilities as compared to the increased yield on interest earning assets. Total interest bearing liability costs increased 52 basis points as compared to a 42 basis point increase in the yield on interest earning assets. On a quarterly basis, net interest income was $9,446,000 an increase of $2,346,000 or 33.0% when compared to the second quarter of 1999. The net interest margin (tax equivalent basis) for the three months ended June 30, 2000 was 3.24% a 2 basis point or 0.6% decrease from the same period in 1999. The reasons for the decline are the same as discussed above. The net interest margin for the 2000 and 1999 comparative periods was also negatively impacted by the Investment Growth Strategy. The securities in the Investment Growth Strategy at June 30, 2000, were approximately $242,600,000 compared to $236,400,000 at June 30, 1999. The targeted spread on this strategy is 75 basis points after tax. Because of the targeted spread on this strategy, there is a negative impact to the net interest margin and return on average assets. Conversely, this strategy is designed to increase both return on average equity and earnings per share, the primary goals of the strategy. The goals of this strategy continue to be achieved. Interest Income For the first six months of 2000 total interest income was $45,380,000, an increase of $14,212,000 or 45.6% when compared to interest income of $31,168,000 for the same period in 1999. This increase is due to higher average balances in both loans and securities and higher yields on both earning asset types. Average loans increased $146,566,000 or 27.5% and the yield increased 54 basis points to 8.82% from 8.28%. The increased loan yields reflected the higher prime rate of interest as well as higher overall interest rates in the first half of 2000 compared to the same period in 1999. Interest and fees on loans for the six months ended June 30, 2000 increased $7,908,000 or 35.8% to $29,983,000 from $22,075,000 for the same period in 1999. Average securities outstanding for the six months ended June 30, 2000 increased $161,887,000 or 56.4% to $448,943,000 when compared to the $287,056,000 for the same period of 1999. Over the same period, the yield on the securities portfolio increased 46 basis points to 6.50% from 6.04%. These factors resulted in interest on securities increasing $5,928,000 or 68.4% to $14,599,000 for the six months ended June 30, 2000 21 compared to $8,671,000 for the same period in 1999. Overall, the yield on YNB's interest earning asset portfolio increased 42 basis points to 7.86% for the six months ended June 30, 2000 from the 7.44% for the same period in 1999. For the second quarter of 2000, total interest income was $23,778,000, an increase of $7,208,000 or 43.5% when compared to $16,570,000 for the second quarter of 1999. The increase was due to both higher average balances of both loans and securities and higher yields on both asset types. The overall yield on earning assets for the second quarter of 2000 was 7.96% a 55 basis point increase from the 7.41% for the same period of 1999. The increase in yield was primarily due to the higher prime rate of interest and higher yields on the securities portfolio. Interest Expense Total interest expense increased $9,538,000 or 54.0% to $27,189,000 for the first six months of 2000 compared to $17,651,000 for the same period in 1999. The increase in interest expense for the comparable time periods is primarily from higher levels of time deposits and borrowed funds. In addition to the higher balances, the rates paid on both deposits and borrowed funds increased due to the higher rates experienced in 2000 when compared to 1999. The average rate paid on interest bearing liabilities for the six months ended June 30, 2000 increased 52 basis points to 5.23% from 4.71% for the same period of 1999. Interest on other time deposits under $100,000 increased $3,356,000 to $11,395,000 for the six months ended June 30, 2000 from $8,039,000 for the same period in 1999. This increase was caused by both an increase of $99,645,000 in the average outstanding balance to $395,972,000 for the six months ended June 30, 2000, when compared to the outstanding average balance of $296,327,000 for the six months ended June 30, 1999 and an increase of 33 basis points in the cost to 5.76% from 5.43% for the same period as described above. Interest expense on certificates of deposit under $100,000 accounted for 41.9% of total interest expense for the six months ended June 30, 2000 and 35.2% of the total increase in interest expense for that period. During the first six months of 2000, YNB offered attractive rates on CDs locally and nationwide to fund loan growth and enhance the liquidity profile of YNB. Interest on certificates of deposit (CDs) of $100,000 or more increased $1,558,000 or 139.9% to $2,672,000 for the six months ended June 30, 2000 from $1,114,000 for the same period in 1999. The increase was caused by an increase in the average outstanding balance of $45,005,000 or 102.8% to $88,805,000 for the six months ended June 30, 2000 when compared to the outstanding average balance of $43,800,000 for the six months ended June 30, 1999. The cost of certificates of deposit of $100,000 or more increased 93 basis points to 6.02% for the first six months of 2000 from 5.09% for the same period in 1999. Besides attracting CDs of $100,000 or more in its markets, YNB also utilizes a software program which allows YNB to market its CDs nationwide. YNB anticipates that attracting CDs of $100,000 or more will continue to play an important part in funding future earning asset growth. Interest expense on borrowed funds increased $3,436,000 or 60.5% to $9,120,000 for the first six months of 2000 when compared to $5,684,000 for the same period 22 in 1999. The increased expense was caused by a $104,302,000 increase in the average balance outstanding in the first six months of 2000 to $325,344,000 when compared to the $221,042,000 for the same period in 1999. The rate paid on borrowed funds increased 47 basis points for the six months ended June 30, 2000 to 5.61% from the 5.14% for the same period last year. The primary causes for the increase in interest expense on borrowed funds are higher rates and the higher level of borrowings used to fund both the Investment Growth Strategy and other earning asset growth. The higher interest rate environment in 2000 has resulted in increased costs as existing below market callable FHLB advances and repurchase agreements are called and are replaced at current market level rates. Management anticipates that if interest rates continue to rise the cost of borrowed funds will also increase. Interest expense on savings, money markets and interest bearing demand accounts increased $1,156,000 or 50.7% to $3,438,000 for the first six months of 2000 when compared to the $2,282,000 for the same period in 1999. Early in January 2000, YNB redesigned its Premier Money Market Account for both personal and business customers. The most significant change was an increase, on a tiered basis, in the rate paid to be more competitive in the market place. This had the immediate impact of increasing the cost of existing money market balances and was a key factor in the increased cost on these deposit types. Money market accounts are historically less expensive than CDs and present more opportunities to cross sell other bank products and services. YNB has already experienced substantial growth in Premier Money Market balances due to the higher rate and aggressive marketing campaign conducted to promote the product. The cost of savings, money markets and interest bearing demand deposits increased 59 basis points to 3.17% for the first six months of 2000 when compared to 2.58% for the same period in 1999. At the same time, the average balance of these deposit types increased $40,059,000 or 22.6% to $217,070,000 for the first six months of 2000 from $177,011,000 for the same period in 1999. Total interest expense for the second quarter of 2000 increased $4,862,000 or 51.3% to $14,332,000 from $9,470,000 for the same period in 1999. The overall cost of interest bearing liabilities increased 58 basis points to 5.33% from 4.75% for the second quarter of 1999. The reasons for the increase in interest expense for the second quarter are the same as discussed above. While YNB seeks to fund asset growth with lower cost savings, money market, interest bearing checking and non-interest bearing demand deposits, this is not always possible, as asset growth rates continue to exceed the growth rate in these deposit types. To attract lower cost deposits to fund asset growth, management has launched several new products including YNB Online, an improved Premier Money Market account and a new free checking product. Management anticipates that over time, these new products, along with additional branches in new markets should result in lower cost core deposits providing a higher percentage of the new funding than has been experienced recently. This anticipated improvement in the deposit mix will help to control interest expense going forward. However, the ability of YNB to lower the cost of interest bearing liabilities is dependent on market conditions. If interest rates should continue to rise, YNB's interest expense will also increase. 23 Provision for Loan Losses YNB provides for possible loan losses by a charge to current operations. The provision for loan losses for the six months ended June 30, 2000 was $1,700,000, a $300,000 or 21.4% increase over the $1,400,000 provision recorded for the same period of 1999. For the three months ended June 30, 2000 the provision for loan losses was $900,000, a $150,000 or 20.0% increase from the same period in 1999. The increase in the provision for both the quarter and year to date comparisons was primarily due to strong loan growth and to a lesser extent, increased net charge offs. Management believes that the reserve for loan losses is adequate in relation to the credit risk exposure levels. Non-interest Income Total non-interest income for the first six months of 2000 was $1,625,000, an increase of $142,000 or 9.6% over non-interest income of $1,483,000 for the same period in 1999. The increase was due principally to increased service charges on deposit accounts. Service charges on deposit accounts increased $136,000 or 21.8% to $761,000 for the six months ended June 30, 2000 compared to $625,000 for the same period in 1999. This increase accounted for 95.8% of the total increase in non-interest income for the period. This increase reflects the continuing growth in core deposits as well as better collection efforts. Other non-interest income increased $69,000 or 8.5% to $879,000 for the six months ended June 30, 2000 from $810,000 for the same period in 1999. Increases in ATM fees and income on Bank owned life insurance assets accounted for the increase. The single largest component of other non-interest income was income derived from bank owned life insurance assets, which totaled $411,000 for the first six months of 2000 as compared to $380,000 for the same period in 1999. This income represented 46.8% and 46.9% of total other non-interest income for the first six months of 2000 and 1999 respectively. The income earned on these assets is used to offset expenses on deferred compensation programs. For the three months ended June 30, 2000 total non-interest income increased $137,000 or 18.1% to $892,000 from $755,000 for the same period in 1999. The key factors for the increase are the same as discussed above with service charges on deposit accounts increasing $67,000 and accounting for 48.9% of the total increase in non-interest income. Non-interest income represented 3.5% of YNB's total revenue in the first six months of 2000 and 3.6% of total revenue for the second quarter of 2000 compared to 4.5% and 4.4% for the same periods in 1999. The reduction in these ratios was caused by the growth rate of interest income exceeding the growth rate of non-interest income. Management continues to closely evaluate both traditional and non-traditional sources of new non-interest income as part of a longer-term strategy to increase earnings. 24 Non-interest Expense Total non-interest expense increased $2,358,000 or 27.2% to $11,031,000 for the first six months of 2000 compared to $8,673,000 for the same period in 1999. The increase in non-interest expense was primarily due to increases in salaries and employee benefits, occupancy, and other non-interest expenses. Total non-interest expenses, on an annualized basis, as a percentage of average assets were 1.83% for the first six months of 2000 compared to 1.97% for the same period of 1999. The improvement in this ratio is due to the strong asset growth experienced by YNB. YNB's efficiency ratio for the first six months of 2000 was 55.7%, a decrease from the 57.8% for the same period in 1999. The efficiency ratio is computed by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income while a decrease would indicate a more efficient allocation of resources. Salary and employee benefits increased $928,000 or 19.6% to $5,656,000 for the first six months of 2000 compared to $4,728,000 for the same period in 1999. Salary and benefits expense accounted for 51.3% of total non-interest expenses for the first six months of 2000. Salary expense increased $813,000 or 22.2% reflecting increased staffing levels throughout YNB as the organization continues to grow and normal salary increases. Benefit expense increased $115,000 or 10.8%. The increase in salary and benefit expense in the first six months of 2000 accounted for 39.4% of the total increase in non-interest expense when the first six months of 2000 is compared to the same period in 1999. Occupancy expense for the first six months of 2000 was $1,232,000, an increase of $598,000 or 94.3% compared to $634,000 for the same period in 1999. Total rent expense on leased properties increased $311,000 and accounted for 52.0% of the total increase for the period. The primary cause for the increase in rent expense, as well as the total increase in occupancy expense, were the expenses associated with YNB's corporate headquarters building. YNB first occupied the building in October of 1999. Equipment expense increased $215,000 or 29.5% to $944,000 for the first six months of 2000 from $729,000 for the same period in 1999. The increase in equipment costs reflects the continuing efforts of YNB to maintain and upgrade technology in order to provide the highest quality products and service and increase productivity. Equipment costs included depreciation on equipment, which totaled $571,000 for the first six months of 2000 reflecting an increase of $129,000 or 29.2% from the $442,000 for the same period in 1999. The increase in depreciation accounted for 60.0% of the total increase in equipment expense. A significant portion of the increased equipment expense related to the equipment costs associated with YNB's new corporate headquarters. Other non-interest expenses increased $617,000 or 23.9% to $3,199,000 for the first six months of 2000 when compared to the $2,582,000 for the same period in 1999. A key factor for the increase in other non-interest expenses related to $411,000 in costs associated with the restructuring of one commercial loan relationship. This expense accounted for 66.6% of the total increase in other non-interest expense and 17.4% of the increase in total non-interest expense. While most expense categories that are included in other non-interest expenses increased the total increase was reduced by a $98,000 decline in expenses related to other real estate owned to $256,000 in the first six months of 2000 compared to $354,000 for the same period in 1999. Management closely monitors 25 non-interest expenses and seeks to control the growth of these expenses. However, as YNB continues to grow, the costs associated with properly managing the organization will also continue to increase. For the three months ended June 30, 2000 total non-interest expense increased $1,381,000 or 31.9% to $5,709,000 from 4,328,000 for the same period in 1999. A key factor in the increase was the aforementioned loan restructuring charge which totaled $311,000 for the quarter which accounted for 22.5% of the total increase for the period. Total non-interest expense on an annualized basis, as a percentage of average assets was 1.83% for the three months ended June 30, 2000 and in line with the 1.84% for the same period in 1999. YNB's efficiency ratio for the three months ended June 30, 2000 was 55.2% and in line with the 55.1% for the same period in 1999. Salary and benefit expense increased $411,000 or 16.9% to $2,848,000 from $2,437,000 for the same period in 1999. Occupancy expense increased $289,000 or 90.0% to $610,000 from $321,000 for the same period in 1999. Equipment expense increased $109,000 or 29.7% to $467,200 from $367,000 for the same period in 1999. Other non-interest expense increased $572,000 or 47.5% to $1,775,000 from $1,203,000 for the same period in 1999. The above mentioned loan restructuring of $311,000 accounted for 54.4% of the total increase in other non-interest expense. The other reasons for the increase in non-interest expense for the quarter are the same as discussed above. Income Tax Expense The effective income tax rate for the six months ended June 30, 2000 was 29.1% compared to 28.1% for the same period in 1999. The modest increase in the tax rate resulted from the growth in tax-free income not keeping pace with the growth in overall income. Total income tax expense for the six months ended June 30, 2000 was $2,060,000, an increase of $677,000 from the $1,383,000 for the same period in 1999. The increase in tax expense resulted from higher taxable income and a higher effective tax rate. The effective income tax rate for the three months ended June 30, 2000 was 29.5% compared to 28.3% for the same period in 1999. Total income tax expense for the three months ended June 30, 2000 was $1,100,000, an increase of $313,000 from the $787,000 for the same period in 1999. The reasons for the increase are the same as these discussed above. 26 Item 3: Quantitative and Qualitative Disclosure about Market Risk There have been no material changes in YNB's market risk from December 31, 1999 except as discussed below. For information regarding YNB's market risk refer to the Company's 1999 Annual Report to stockholders. Changes in Earnings Risk Net interest income over the next twelve-month period indicates an increased risk to lower rates (-200 basis points) at June 30, 2000 than reported at December 31, 1999. Comparing the simulation results of this low rate scenario to the flat rate interest rate scenario indicates a change in net interest income of -5.1% compared to -2.5% at year end 1999. At the same time, YNB's exposure to higher rates (+200 basis points) increased modestly to a 2.6% change in net interest income compared to a 1.5% change at year-end 1999. The cumulative one-year gap remained a negative $57,364,000 or -4.4% of total assets at June 30, 2000 compared to a negative $152,280,000 or 13.6% of assets at year-end 1999. The dollar change in the gap was $94,916,000. Changes in Market risk Management measures longer-term market risk through the Economic Value of Portfolio Equity ("EVPE"). The present value of asset and liability cash flows are subjected to rate shocks of plus or minus 200 basis points. The variance in the residual, or economic value of equity is measured as a percentage of total assets. This variance is managed within a negative 3% boundary. At June 30, 2000, the EVPE changes by -3.51% for rate shifts of +200 and -1.01% for rate shifts of -200 basis points. The non-symmetry of the results is indicative of the callable funding utilized to fund earning asset growth. This compares to changes of -3.67% and -0.01% respectively at December 31, 1999 and -4.26% and -0.14% at June 30, 1999. The primary causes for this change in risk to rising rates since year-end 1999 are discussed below: Asset duration decreased to 2.11 years at June 30, 2000 from 2.39 years at December 31, 1999. The primary cause for this decrease in duration was a reduction in the duration of the investment portfolio to 3.43 years at June 30, 2000 from 3.79 years at December 31, 1999. Liability duration also decreased to 1.21 years at June 30, 2000 from 1.37 years at December 31, 1999. This decline was caused by the shortening of the duration of both total deposits and borrowed funds since the end of 1999. Management has initiated strategies designed to bring this measurement back within policy guidelines. 27 PART II: OTHER INFORMATION Item 1: Legal Proceedings Not Applicable. Item 2: Changes in Securities and Use of Proceeds Not Applicable. Item 3: Defaults Upon Senior Securities Not Applicable. Item 4: Submission of Matters to a Vote of Securities Holders The annual stockholders meeting of Yardville National Bancorp was held May 2, 2000. The matters voted at that meeting were reported in the 1st quarter 10Q. Item 5: Other Information Not Applicable Item 6: Exhibits and Reports on Form 8-K (a) Exhibits (b) Reports on Form 8-K. There were no Form 8-K reports filed during the quarter for which this report is filed. 28 INDEX TO EXHIBITS Exhibit Number Description Page -------------------------------------------------------------------------------- (G) 3.1 Restated Certificate of Incorporation of the Company, as amended by the Certificate of Amendment thereto filed on March 6, 1998. (B) 3.2 By-Laws of the Company (B) 4.1 Specimen Share of Common Stock (I) 4.2 See Exhibits 3.1 and 3.2 for the Registrant's Certificate of Incorporation and By-Laws, which contain provisions defining the rights of stockholders of the Registrant. (I) 4.3 Amended and Restated Trust Agreement dated October 16, 1997, among the Registrant, as depositor, Wilmington Trust Company, as property trustee, and the Administrative Trustees of Yardville Capital Trust. (I) 4.4 Indenture dated October 16, 1997, between the Registrant and Wilmington Trust Company, as trustee, relating to the Registrant's 9.25% Subordinated Debentures due 2027. (I) 4.5 Preferred Securities Guarantee Agreement dated as of October 16, 1997, between the Registrant and Wilmington Trust Company, as trustee, relating to the Preferred Securities of Yardville Capital Trust. (L) 10.1 Employment Contract between Registrant and Patrick M. Ryan. (L) 10.2 Employment Contract between Registrant and Jay G. Destribats (L) 10.3 Employment Contract between Registrant and Stephen F. Carman (M) 10.4 Employment Contract between Registrant and James F. Doran (M) 10.5 Employment Contract between Registrant and Richard A. Kauffman (M) 10.6 Employment Contract between Registrant and Mary C. O'Donnell (M) 10.7 Employment Contract between Registrant and Frank Durand III (D) 10.8 Salary Continuation Plan for the Benefit of Patrick M. Ryan 29 INDEX TO EXHIBITS (continued) Exhibit Number Description Page -------------------------------------------------------------------------------- (D) 10.9 Salary Continuation Plan for the Benefit of Jay G. Destribats (E) 10.10 1988 Stock Option Plan (M) 10.11 Employment Contract between Registrant and Thomas L. Nash (A) 10.12 Directors' Deferred Compensation Plan (B) 10.13 Lease Agreement between Jim Cramer and the Bank dated November 3, 1993 (L) 10.14 Lease between Gardeners Property Partnership and the Bank (A) 10.15 Agreement between the Lalor Urban Renewal Limited Partnership and the Bank dated October, 1994 (C) 10.16 Survivor Income Plan for the Benefit of Stephen F. Carman (C) 10.17 Lease Agreement between Devon Inc. and the Bank dated as of February 9, 1996 (N) 10.18 1997 Stock Option Plan, as amended effective May 2, 2000. (M) 10.19 Employment Contract between Registrant and Howard N. Hall (M) 10.20 Employment Contract between Registrant and Sarah J. Strout (M) 10.21 Employment Contract between Registrant and Nina D. Melker (L) 10.22 Employment Contract between Registrant and Timothy J. Losch (G) 10.23 Survivor Income Plan for the Benefit of Timothy J. Losch (G) 10.24 Lease Agreement between the Ibis Group and the Bank dated July 1997 (H) 10.25 Lease Agreement between Hilton Realty Co. of Princeton and the bank dated March 31, 1998. 30 INDEX TO EXHIBITS (continued) Exhibit Number Description Page -------------------------------------------------------------------------------- (H) 10.26 1994 Stock Option Plan. (J) 10.27 Lease agreement between Crestwood Construction and the Bank dated May 25, 1998 (K) 10.29 Yardville National Bank Employee Stock Ownership Plan, As amended (L) 10.30 Lease Agreement between Sycamore Street Associates and the Bank dated October 30, 1998 10.31 List of Subsidiaries of the Registrant (M) 10.32 Employment Contract between Registrant and Kathleen A. Fone 10.33 Lease agreement between Samuel and Margaret Marrazzo and the Bank dated April 1, 2000 27.1 Financial Data Schedule ------------------------------------------------------------------------- (A) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB/A filed on July 25, 1995 (B) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-78050) (C) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (D) Incorporate by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (E) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997, as amended by Form 10-Q/A filed on August 15, 1997 (F) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-28193) (G) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 31 (H) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998, as amended by Form 10-Q/A filed June 9, 1998 (I) Incorporated by reference to the Registrant's Registration Statement on Form S-2 (Registration Nos. 333-35061 and 333-35061-01) (J) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (K) Incorporated by reference to the Registration Statement on Form S-8 (Registration No. 333-71741). (L) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 as amended by Form 10-K/A filed on April 20, 1999. (M) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. (N) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. YARDVILLE NATIONAL BANCORP ------------------------------------ (Registrant) Date: August 14, 2000 By: /s/ Stephen F. Carman ---------------------------- ------------------------------------ Stephen F. Carman Executive Vice President and Chief Financial Officer 33