PROSPECTUS
[LOGO] 1,000,000 TRUST PREFERRED SECURITIES
YARDVILLE CAPITAL TRUST
9.25% Cumulative Trust Preferred Securities
(Liquidation Amount $10 Per Trust Preferred Security)
guaranteed, as described herein, by
YARDVILLE NATIONAL BANCORP
The 9.25% Cumulative Trust Preferred Securities (the "Preferred Securities")
offered hereby represent preferred undivided beneficial interests in the assets
of Yardville Capital Trust, a statutory business trust created under the laws of
the State of Delaware (the "Trust"). Yardville National Bancorp, a New Jersey
corporation (the "Company"), will own all the common securities (the "Common
Securities" and, together with the Preferred Securities, the "Trust Securities")
representing undivided beneficial interests in the assets of the Trust.
(continued on next page)
The Preferred Securities have been approved for trading through the
National Association of Securities Dealer's "Electronic Bulletin Board." There
is no assurance that upon consummation of the Offering there will be an active
and liquid trading market for the Preferred Securities. See "Risk Factors --
Trading Price; Absence of Prior Public Market."
See "Risk Factors" beginning on page 14 for a discussion of
certain factors that should be considered by prospective investors.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY AND INVOLVE INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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==================================================================================================
Price to Public Underwriting Proceeds to
Discount(1) Trust(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security................. $ 10.00 (2) $ 10.00
- --------------------------------------------------------------------------------------------------
Total(3)............................... $ 10,000,000 (2) $ 10,000,000
==================================================================================================
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(1) The Company and the Trust have agreed to indemnify the Underwriter against
certain liabilities, including certain liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Subordinated Debentures, the Company, as
issuer of the Subordinated Debentures, has agreed to pay the Underwriter,
as compensation, $0.40 per Preferred Security or $400,000 in the aggregate
($460,000 if the over-allotment option is exercised in full). See
"Underwriting." The Company has also agreed to pay the expenses of the
offering estimated to be $340,000.
(3) The Trust has granted the Underwriter an option exercisable within 30 days
from the date of this Prospectus to purchase up to 150,000 additional
Preferred Securities on the same terms and conditions set forth above to
cover over-allotments, if any. If all such additional Preferred Securities
are purchased, the total Price to Public and Proceeds to Trust will be
$11,500,000. See "Underwriting."
The Preferred Securities are offered by the Underwriter subject to receipt
and acceptance by them, prior sale and the Underwriter's right to reject any
order in whole or in part. It is expected that delivery of the Preferred
Securities will be made through the facilities of the Depository Trust Company
("DTC") on or about October 16, 1997, against payment therefor in immediately
available funds.
Sandler O'Neill & Partners, L.P.
The date of this Prospectus is October 10, 1997
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(continued from cover page)
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of DTC. Beneficial interests in
the global securities will be shown on, and transfer thereof will be effected
only through, records maintained by DTC and its participants. Except as
described under "Description of Preferred Securities," Preferred Securities in
definitive form will not be issued and owners of beneficial interests in the
global securities will not be considered holders of the Preferred Securities.
Application has been made to include the Preferred Securities in Nasdaq's
National Market. Settlement for the Preferred Securities will be made in
immediately available funds. The Preferred Securities will trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity for the
Preferred Securities will therefore settle in immediately available funds.
Wilmington Trust Company is the Property Trustee (as defined herein) of the
Trust. The Trust exists for the purpose of issuing the Preferred Securities and
investing the proceeds thereof in an equivalent amount of 9.25% Subordinated
Debentures (the "Subordinated Debentures") of the Company. The Subordinated
Debentures will mature on November 1, 2027, which date may be (i) shortened to a
date not earlier than November 1, 2002, or (ii) extended to a date not later
than November 1, 2036, in each case if certain conditions are met (including, in
the case of shortening the Stated Maturity (as defined herein), the Company
having received prior approval of the Board of Governors of the Federal Reserve
System ("Federal Reserve") to do so if then required under applicable capital
guidelines or policies of the Federal Reserve). The Preferred Securities will
have a preference over the Common Securities under certain circumstances with
respect to cash distributions and amounts payable on liquidation, redemption or
otherwise. See "Description of Preferred Securities -- Subordination of Common
Securities."
Holders of Preferred Securities are entitled to receive preferential
cumulative cash distributions, at the annual rate of 9.25% of the liquidation
amount of $10 per Preferred Security (the "Liquidation Amount"), accruing from
October 16, 1997, the date of original issuance, and payable quarterly in
arrears on the last day of March, June, September and December of each year,
commencing December 31, 1997 (the "Distributions"). The Company has the right,
so long as no Debenture Event of Default (as defined herein) has occurred and is
continuing, to defer payment of interest on the Subordinated Debentures at any
time or from time to time for a period not to exceed 20 consecutive quarters
with respect to each deferral period (each, an "Extension Period"); provided
that no Extension Period may extend beyond the Stated Maturity of the
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due, the Company may elect to begin a new
Extension Period subject to the requirements set forth herein. If interest
payments on the Subordinated Debentures are so deferred, Distributions on the
Preferred Securities will also be deferred, and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to its capital stock or debt securities that
rank pari passu with or junior to the Subordinated Debentures. During an
extension period, interest on the Subordinated Debentures will continue to
accrue (and the amount of Distributions to which holders of the Preferred
Securities are entitled will accumulate) at the rate of 9.25% per annum,
compounded quarterly, and holders of the Preferred Securities will be required
to include interest income in their gross income for United States federal
income tax purposes in advance of receipt of the cash distributions with respect
to such deferred interest payments. Upon the occurrence of an Extension Period,
a holder of Preferred Securities that disposes of its Preferred Securities
between record dates for payments of Distributions (and consequently does not
receive a Distribution from the Trust for the period prior to such disposition)
will nevertheless be required to include accrued but unpaid interest on the
Subordinated Debentures through the date of disposition in income as ordinary
income and to add such amount to its adjusted tax basis in its pro rata share of
the underlying Subordinated
2
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Debentures deemed disposed of. See "Description of the Subordinated Debentures
- -- Option to Extend Interest Payment Period," "Certain Federal Income Tax
Consequences -- Potential Extension of Interest Payment Period and Original
Issue Discount" and "-- Disposition of Preferred Securities."
The Company and the Trust believe that, taken together, the obligations of
the Company under the Guarantee, the Trust Agreement, the Subordinated
Debentures, the Indenture and the Expense Agreement (each as defined herein)
provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of the Trust under the Preferred
Securities. See "Relationship Among the Preferred Securities, Subordinated
Debentures and the Guarantee -- Full and Unconditional Guarantee." The Guarantee
of the Company guarantees the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Trust, as described herein. See "Description of
the Guarantee -- General." If the Company does not make interest payments on the
Subordinated Debentures held by the Trust, the Trust will have insufficient
funds to pay Distributions on the Preferred Securities. The Guarantee does not
cover payments of Distributions when the Trust does not have sufficient funds to
pay such Distributions. In such event, a holder of Preferred Securities may
institute a legal proceeding directly against the Company pursuant to the terms
of the Indenture to enforce payments of amounts equal to such Distributions to
such holder. See "Description of the Subordinated Debentures -- Enforcement of
Certain Rights by Holders of the Preferred Securities." The obligations of the
Company under the Guarantee and the Preferred Securities are subordinate and
junior in right of payment to all Senior Debt, Subordinated Debt and Additional
Senior Obligations (each as defined herein) of the Company. The Subordinated
Debentures are unsecured obligations of the Company and are subordinated to all
Senior Debt, Subordinated Debt and Additional Senior Obligations of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Subordinated Debentures at maturity or their
earlier redemption. Subject to Federal Reserve approval, if then required under
applicable capital guidelines or policies of the Federal Reserve, the
Subordinated Debentures are redeemable prior to maturity at the option of the
Company (i) on or after November 1, 2002, in whole at any time or in part from
time to time, or (ii) at any time, in whole (but not in part), within 180 days
following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event (each as defined herein), in each case at a redemption
price equal to the accrued and unpaid interest on the Subordinated Debentures so
redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. See "Description of Preferred Securities -- Redemption or Exchange."
The Company, as holder of the Common Securities, has the right at any time
to dissolve the Trust, subject to the Company having received prior approval of
the Federal Reserve to do so if then required under applicable capital
guidelines or policies of the Federal Reserve. In the event of the voluntary or
involuntary dissolution of the Trust, after satisfaction of liabilities to
creditors of the Trust as required by applicable law, the holders of Preferred
Securities will be entitled to receive a Liquidation Amount of $10 per Preferred
Security, plus accumulated and unpaid Distributions thereon to the date of
payment, which may be in the form of a Subordinated Debenture having an
aggregate principal amount equal to the Liquidation Amount of such Preferred
Securities (and carrying with it accumulated interest in an amount equal to the
accumulated and unpaid Distributions then due on such Preferred Securities),
subject to certain exceptions. See "Description of Preferred Securities --
Redemption or Exchange" and "-- Liquidation Distribution Upon Dissolution."
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Prospective purchasers must carefully consider the information set forth in
"Certain ERISA Considerations."
The Company will provide to the holders of the Preferred Securities
quarterly reports containing unaudited financial statements and annual reports
containing financial statements audited by the Company's independent auditors.
The Company will also furnish annual reports on Form 10-K and quarterly reports
on Form 10-Q free of charge to holders of the Preferred Securities who so
request in writing addressed to the Secretary of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTTING THE PREFERRED SECURITIES AND
BIDDING FOR AND PURCHASING SUCH PREFERRED SECURITIES AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
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[MAP]
5
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. As used herein, (i) the
"Indenture " means the Indenture, to be dated as of October 16, 1997, as amended
and supplemented from time to time, between the Company and Wilmington Trust
Company, as trustee (the "Debenture Trustee"), relating to the Subordinated
Debentures, (ii) the "Trust Agreement" means the Amended and Restated Trust
Agreement relating to the Trust among the Company, as Depositor, and Wilmington
Trust Company, as Property Trustee (the "Property Trustee") and as Delaware
Trustee (the "Delaware Trustee"), and the Administrative Trustees named therein
(collectively, with the Property Trustee and Delaware Trustee, the "Issuer
Trustees") and (iii) the "Guarantee" means the Guarantee Agreement relating to
the Preferred Securities between the Company and Wilmington Trust Company, as
Guarantee Trustee (the "Guarantee Trustee").
YARDVILLE NATIONAL BANCORP
The Company is a bank holding company headquartered in Hamilton Township,
New Jersey, that provides retail and commercial banking services through its
wholly-owned subsidiary, The Yardville National Bank (the "Bank"). Founded in
1924, the Bank currently operates nine community banking offices in Mercer
County, New Jersey. At June 30, 1997, the Company had total consolidated assets
of $525.7 million, deposits of $414.8 million and stockholders' equity of $37.6
million.
The Bank provides financial products and services designed to meet the
borrowing and depository needs of small and medium sized businesses and
consumers in the local communities that it serves. As a community bank, the
Bank's business strategy emphasizes customer service and relationship banking
and targets those customers who desire personalized attention and prompt, local
decision making and with whom the Bank can develop both loan and deposit
relationships.
Financial Summary
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At or for the At or for the
Six Months Ended Year Ended
June 30, December 31,
------------------------ -----------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income............ $ 2,467 $ 1,983 $ 4,026 $ 3,403 $ 2,523 $ 1,925 $ 568
Earnings per share
(fully diluted)..... 0.99 0.81 1.64 1.60 1.56 1.86 0.61
Assets................ 525,720 459,169 490,545 403,115 280,550 223,438 205,494
Loans................. 352,941 285,755 331,237 245,054 196,910 134,983 106,993
Deposits.............. 414,830 317,058 364,445 302,972 259,296 206,688 192,223
Stockholders' equity.. 37,629 33,083 35,230 31,717 18,451 14,208 10,829
Return on average
stockholders' equity 13.64% 12.34% 12.25% 13.84% 15.89% 15.81% 5.44%
</TABLE>
The principal executive office of the Company is located at 3111
Quakerbridge Road, Trenton, New Jersey 08619 and its telephone number is (609)
585-5100.
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YARDVILLE CAPITAL TRUST
The Trust is a statutory business trust formed under Delaware law upon the
filing of a certificate of trust with the Delaware Secretary of State. The
Trust's business and affairs are conducted by the Issuer Trustees: the Property
Trustee, the Delaware Trustee, and the three individual Administrative Trustees,
who are officers of the Company. The Trust exists for the exclusive purposes of
(i) issuing and selling the Trust Securities, (ii) using the proceeds from the
sale of the Trust Securities to acquire the Subordinated Debentures issued by
the Company and (iii) engaging in only those other activities necessary,
advisable or incidental thereto. The Subordinated Debentures will be the sole
assets of the Trust and, accordingly, payments under the Subordinated Debentures
will be the sole revenue of the Trust. All of the Common Securities will be
owned by the Company.
THE OFFERING
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<S> <C>
Securities Offered.............................. 1,000,000 Preferred Securities having a Liquidation
Amount of $10 per Preferred Security. The Preferred
Securities represent preferred undivided beneficial
interests in the assets of the Trust, which will consist
solely of the Subordinated Debentures and payments
thereunder. The Trust has granted the Underwriter an
option, exercisable within 30 days after the date of this
Prospectus, to purchase up to an additional 150,000
Preferred Securities at the initial offering price, solely
to cover over-allotments, if any.
Offering Price.................................. $10 per Preferred Security (Liquidation amount $10).
Distributions................................... The Distributions payable on each Preferred Security
will be fixed at a rate per annum of 9.25% of the
Liquidation Amount of $10 per Preferred Security,
will be cumulative, will accrue from October 16,
1997, the date of original issuance of the Preferred
Securities, and will be payable quarterly in arrears, on
March 31, June 30, September 30 and December 31 of
each year, commencing December 31, 1997. See
"Description of Preferred Securities -- Distributions --
Payment of Distributions."
Option to Extend
Interest Payment Period......................... The Company has the right, at any time, so long as no
Debenture Event of Default has occurred and is
continuing, to defer payments of interest on the
Subordinated Debentures for a period not exceeding 20
consecutive quarters; provided, that no Extension
Period may extend beyond the Stated Maturity of
the Subordinated Debentures. As a consequence of
the extension by the Company of the interest payment
period, quarterly Distributions on the Preferred
Securities will be deferred (though such Distributions
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will continue to accrue with interest thereon
compounded quarterly, since interest will
continue to accrue and compound quarterly on
the Subordinated Debentures) during any such
Extension Period. During an Extension Period,
the Company will be prohibited, subject to
certain exceptions described herein, from
declaring or paying any cash distributions with
respect to its capital stock or debt securities
that rank pari passu with or junior to the
Subordinated Debentures. Upon the termination
of any Extension Period and the payment of all
amounts then due, the Company may commence a
new Extension Period, subject to the foregoing
requirements. See "Description of Preferred
Securities -- Distributions -- Extension
Period" and "Description of the Subordinated
Debentures -- Option to Extend Interest Payment
Period." Should an Extension Period occur,
holders of Preferred Securities will be
required to include deferred interest income in
their gross income for United States federal
income tax purposes in advance of receipt of
the cash distributions with respect to such
deferred interest payments. See "Certain
Federal Income Tax Consequences -- Potential
Extension of Interest Payment Period and
Original Issue Discount."
Optional Redemption............................. The Preferred Securities are subject to mandatory
redemption, in whole or in part, upon repayment of
the Subordinated Debentures at maturity or their
earlier redemption. Subject to Federal Reserve
approval, if then required under applicable capital
guidelines or policies of the Federal Reserve, the
Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or after
November 1, 2002, in whole at any time or in part
from time to time, or (ii) at any time, in whole (but
not in part), within 180 days following the occurrence
of a Tax Event, a Capital Treatment Event or an
Investment Company Event, in each case at a
redemption price equal to 100% of the principal
amount of the Subordinated Debentures, together with
any accrued but unpaid interest on the Subordinated
Debentures to the date fixed for redemption. See
"Description of the Subordinated Debentures --
Redemption or Exchange."
Ranking......................................... The Preferred Securities will rank pari passu,
and payments thereon will be made pro rata,
with the Common Securities except as described
under "Description of Preferred Securities --
Subordination of Common Securities." The
Subordinated Debentures
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will (i) rank pari passu with all other
indebtedness of the Company in respect of debt
securities issued to any trust, or any trustee
of such trust, partnership, or other entity
that is affiliated with the Company and is a
financing entity of the Company in connection
with the issuance by such entity of securities
that are similar to the Preferred Securities
(the "Other Preferred Securities"), and (ii)
and will constitute unsecured obligations of
the Company and will rank subordinate and
junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior
Obligations of the Company to the extent and in
the manner set forth in the Indenture. See
"Description of the Subordinated Debentures."
The Guarantee will rank pari passu with all
other guarantees (if any) issued by the Company
with respect to Other Preferred Securities and
will constitute an unsecured obligation of the
Company and will rank subordinate and junior in
right of payment to all Senior Debt,
Subordinated Debt and Additional Senior
Obligations of the Company to the extent and in
the manner set forth in the Guarantee
Agreement. See "Description of the Guarantee."
In addition, because the Company is a holding
company, the Subordinated Debentures and the
Guarantee will be effectively subordinated to
all existing and future liabilities of the
Company's subsidiaries, including the Bank's
deposit liabilities. See "Description of the
Subordinated Debentures -- Subordination."
Distribution of
Subordinated Debentures......................... The Company, as holder of the Common Securities,
has the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust
as required by applicable law, cause the Subordinated
Debentures to be distributed to holders of Preferred
Securities in liquidation of the Trust, subject to the
Company having received prior approval of the
Federal Reserve to do so if then required under
applicable capital guidelines or policies of the Federal
Reserve. See "Description of Preferred Securities --
Redemption or Exchange" and "Description of
Preferred Securities -- Liquidation Distribution Upon
Dissolution."
Guarantee....................................... The Company has guaranteed the payment of
Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in
each case to the extent of funds held by the Trust, as
described herein. The Company and the Trust believe
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that, taken together, the obligations of the
Company under the Guarantee, the Trust
Agreement, the Subordinated Debentures, the
Indenture and the Expense Agreement provide, in
the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated
basis, of all of the obligations of the Trust
under the Preferred Securities. The obligations
of the Company under the Guarantee and the
Preferred Securities are subordinate and junior
in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior
Obligations of the Company. If the Company does
not make principal or interest payments on the
Subordinated Debentures, the Trust will not
have sufficient funds to make distributions on
the Preferred Securities. In such event, the
Guarantee will not apply to such Distributions
until the Trust has sufficient funds available
therefor. See "Description of the Guarantee."
Voting Rights................................... The holders of the Preferred Securities will
have no voting rights except in limited
circumstances. See "Description of Preferred
Securities -- Voting Rights; Amendment of Trust
Agreement."
Use of Proceeds................................. All of the proceeds from the sale of the Trust
Securities will be invested by the Trust in the
Subordinated Debentures. The Company intends to use
the net proceeds from the sale of the Subordinated
Debentures for general corporate purposes, including
the repurchase of outstanding equity securities of the
Company and investments to leverage the Company's
capital, as well as for contributions to the Bank to
fund its operations, acquiring or establishing branch
offices and the financing of potential future
acquisitions by the Company. Initially, the net
proceeds may be used to make investments in short-
term investment grade obligations. See "Use of
Proceeds."
ERISA Considerations............................ For a discussion of certain restrictions on purchases,
see "Certain ERISA Considerations."
Trading Market.................................. The Preferred Securities have been approved for trading through
the National Association of Securities Dealer's "Electronic
Bulletin Board." There is no assurance that upon consummation
of the Offering there will be an active and liquid trading market
for the Preferred Securities. See "Risk Factors -- Trading Price;
Absence of Prior Public Market".
Risk Factors.................................... For a discussion of considerations relevant to an
investment in the Preferred Securities, see "Risk
Factors."
</TABLE>
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Summary Consolidated Financial Data
The following summary information regarding the Company should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto. Consolidated historical financial and other data regarding the Company
at or for the six months ended June 30, 1997 and 1996, have been prepared by the
Company without audit. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) that are necessary for a fair presentation
for such periods or dates have been made. The consolidated selected financial
data presented below has been retroactively adjusted to reflect the two-for-one
stock split effected in the form of a stock dividend in November 1994. Data
regarding the Company at and for the six months ended June 30, 1997, may not be
indicative of results as of and for the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
At or for the
Six Months Ended
June 30, At or for the Year Ended December 31,
------------------------- ---------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ---------- ----------- ----------- ----------- ----------- -----------
(dollars and shares in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Total assets $ 525,720 $ 459,169 $ 490,545 $ 403,115 $ 280,550 $ 223,438 $ 205,494
Securities available for sale 106,002 108,789 93,671 98,469 24,152 25,453 --
Investment securities 29,105 33,740 31,296 35,384 39,083 43,217 77,811
Loans 352,941 285,755 331,237 245,054 196,910 134,983 106,993
Allowance for loan losses 5,284 4,262 4,957 3,677 2,912 2,703 2,940
Deposits 414,830 317,058 364,445 302,972 259,296 206,688 192,223
Borrowed funds 68,139 105,577 86,339 65,221 1,215 1,298 1,215
Stockholders' equity 37,629 33,083 35,230 31,717 18,451 14,208 10,829
Consolidated Statement of Income Data:
Interest income 19,566 16,239 34,251 27,336 18,004 14,055 13,990
Interest expense 10,020 7,859 17,041 12,841 6,360 5,355 6,660
----------- ---------- ----------- ----------- ----------- ----------- -----------
Net interest income 9,546 8,380 17,210 14,495 11,644 8,700 7,330
Provision for loan losses 575 715 1,640 865 305 -- 50
----------- ---------- ----------- ----------- ----------- ----------- -----------
Net interest income, after
provision for loan losses 8,971 7,665 15,570 13,630 11,339 8,700 7,280
Non-interest income 1,240 1,035 2,113 1,855 1,554 2,190 2,003
Non-interest expense 6,409 5,615 11,479 10,260 9,285 8,423 8,325
----------- ---------- ----------- ----------- ----------- ----------- -----------
Income before income tax
expense and cumulative
effect of the change in
accounting principle 3,802 3,085 6,204 5,225 3,608 2,467 958
Income tax expense 1,335 1,102 2,178 1,822 1,085 733 390
----------- ---------- ----------- ----------- ----------- ----------- -----------
Income before cumulative
effect of the change
in accounting principle 2,467 1,983 4,026 3,403 2,523 1,734 568
Cumulative effect of the
change in accounting
principle -- -- -- -- -- 191 --
----------- ---------- ----------- ----------- ----------- ----------- -----------
Net income $ 2,467 $ 1,983 $ 4,026 $ 3,403 $ 2,523 $ 1,925 $ 568
=========== ========== =========== =========== =========== =========== ===========
Weighted average common
shares outstanding 2,492 2,389 2,462 2,192 1,757 1,036 926
</TABLE>
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<TABLE>
<CAPTION>
At or for the
Six Months Ended
June 30, At or for the Year Ended December 31,
------------------------- ---------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ---------- ----------- ----------- ----------- ----------- -----------
(dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Data(1):
Net income--fully diluted $ 0.99 $ 0.81 $ 1.64 $ 1.60 $ 1.56 $ 1.86 $ 0.61
Cash dividends 0.24 0.22 0.45 0.38 0.28 -- --
Book value 15.22 13.60 14.50 13.50 11.92 12.42 11.69
Selected Financial Data:
Return on average assets (2) 0.96% 0.94% 0.90% 0.99% 1.04% 0.92% 0.29%
Return on average equity (2) 13.64 12.34 12.25 13.84 15.89 15.81 5.44
Net interest margin (FTE)(3) 3.99 4.22 4.10 4.49 5.16 4.51 3.99
Dividend payout ratio 23.88 26.48 26.90 21.69 15.06 -- --
Allowance for loan losses to
total loans 1.50 1.49 1.50 1.50 1.48 2.00 2.75
Nonperforming loans to
total loans 2.16 0.97 2.46 1.15 1.05 1.83 4.32
Allowance for loan losses to
nonperforming loans (4) 69.26 153.31 60.90 130.44 140.95 109.30 63.65
Nonperforming assets to
total loans and other real
estate owned (5) 2.40 1.23 2.57 1.40 1.21 2.83 5.30
Efficiency ratio (6) 59.42 59.64 59.41 62.75 70.35 77.35 89.20
Capital Ratios:
Average stockholders' equity
to average assets 7.05 7.59 7.33 7.14 6.57 5.79 5.24
Total capital as a percent of
risk-weighted assets 11.40 12.24 11.43 13.20 10.84 10.64 10.07
Tier 1 capital as a percentage
of risk-weighted assets 10.15 10.99 10.17 11.95 9.59 9.38 8.81
Leverage ratio (7) 7.29 7.90 7.80 9.07 7.80 6.71 6.22
Ratio of Earnings to Combined
Fixed Charges (8):
Including interest on deposits 1.38 1.39 1.36 1.41 1.57 1.46 1.14
Excluding interest on deposits 2.72 2.37 2.25 3.54 38.98 146.12 37.85
</TABLE>
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(1) 1995 and 1994 earnings per share amounts were calculated utilizing the
modified treasury stock method, while remaining periods 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. 1992 and 1993 earnings per share amounts were calculated
utilizing the treasury stock method.
(2) Annualized for the six months ended June 30, 1997 and 1996.
(3) Tax equivalent based on a 34% Federal tax rate for all periods presented
(FTE = Federal tax equivalent basis).
(4) Nonperforming loans include nonaccrual loans, restructured loans and loans
90 days or more past due and still accruing.
(5) Nonperforming assets include nonperforming loans and other real estate
owned.
(6) Efficiency ratio is equal to non-interest expense divided by the sum of net
interest income and non-interest income.
(7) Leverage ratio is Tier 1 capital to average assets for the period.
(8) For purposes of calculating the ratio of earnings to combined fixed
charges, earnings consist of income before income tax expense and
cumulative effect of the change in accounting principle, plus interest and
rent expense. Fixed charges consist of interest and rent expense.
12
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, together with the other
information contained and incorporated by reference in this Prospectus, the
following risk factors in evaluating the Company and its business and the Trust
before purchasing the Preferred Securities offered hereby. Prospective investors
should note, in particular, that this Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and that actual results could differ
materially from those contemplated by such statements. The considerations listed
below represent certain important factors the Company believes could cause such
results to differ. These considerations are not intended to represent a complete
list of the general or specific risks that may affect the Company and the Trust.
It should be recognized that other risks may be significant, presently or in the
future, and the risks set forth below may affect the Company and the Trust to a
greater extent than indicated.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
Ranking of Subordinated Obligations Under the Guarantee and the
Subordinated Debentures
The obligations of the Company under the Guarantee issued for the benefit
of the holders of Preferred Securities and under the Subordinated Debentures are
unsecured and rank subordinate and junior in right of payment to all Senior
Debt, Subordinated Debt and Additional Senior Obligations of the Company,
whether now existing or hereafter incurred. As of June 30, 1997, there existed
no debt at the Company level, although the Bank had deposits, borrowings and
other liabilities of approximately $488.1 million. Because the Company is a
holding company, the right of the Company to participate in any distribution of
assets of the Bank upon the Bank's liquidation or reorganization or otherwise
(and thus the ability of holders of the Preferred Securities to benefit
indirectly from such distribution) is subject to the prior claims of creditors
of the Bank, except to the extent that the Company may itself be recognized as a
creditor of the Bank. The Subordinated Debentures, therefore, will be
effectively subordinated to all existing and future liabilities of the Bank and
holders of Subordinated Debentures and Preferred Securities should look only to
the assets of the Company for payments on the Subordinated Debentures. Neither
the Indenture, the Guarantee nor the Trust Agreement places any limitation on
the amount of secured or unsecured debt, including Senior Debt, Subordinated
Debt and Additional Senior Obligations, that may be incurred by the Company or
any of its subsidiaries. See "Description of the Guarantee -- Status of the
Guarantee" and "Description of the Subordinated Debentures -- Subordination."
The ability of the Trust to pay amounts due on the Preferred Securities is
solely dependent upon the Company making payments on the Subordinated Debentures
as and when required.
Option to Extend Interest Payment Period; Tax Consequences; Market Price
Consequences
The Company has the right under the Indenture, so long as no Debenture
Event of Default has occurred and is continuing, to defer the payment of
interest on the Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarters with respect to each Extension
Period; provided that no Extension Period may extend beyond the Stated Maturity
of the Subordinated Debentures. As a consequence of any such deferral, quarterly
Distributions on the Preferred Securities by the Trust will be deferred (and the
amount of Distributions to which holders of the Preferred Securities are
entitled will accumulate additional Distributions thereon at the rate of 9.25%
per annum, compounded quarterly from the relevant payment date for such
Distributions) during any such Extension Period. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's
13
<PAGE>
capital stock, (ii) make any payment of principal, interest or premium, if any,
on or repay, repurchase or redeem any debt securities of the Company that rank
pari passu with or junior in interest to the Subordinated Debentures or make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks pari passu
with or junior in interest to the Subordinated Debentures (other than payments
under the Guarantee), or (iii) redeem, purchase or acquire less than all of the
Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further defer the
payment of interest; provided, that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Subordinated
Debentures. Upon the termination of any Extension Period and the payment of all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 9.25% compounded quarterly, to the extent permitted by applicable law),
the Company may elect to begin a new Extension Period, subject to the above
requirements. Subject to the foregoing, there is no limitation on the number of
times that the Company may elect to begin an Extension Period. See "Description
of Preferred Securities -- Distributions -- Extension Period" and "Description
of the Subordinated Debentures -- Option to Extend Interest Payment Period."
Should an Extension Period occur, each holder of Preferred Securities will
be required to accrue and recognize income (in the form of original issue
discount ("OID")) in respect of its pro rata share of the interest accruing on
the Subordinated Debentures held by the Trust for United States federal income
tax purposes. A holder of Preferred Securities must, as a result, include such
income in gross income for United States federal income tax purposes in advance
of the receipt of cash, and will not receive the cash related to such income
from the Trust if the holder disposes of the Preferred Securities prior to the
record date for the payment of the related Distributions. See "Certain Federal
Income Tax Consequences -- Potential Extension of Interest Payment Period and
Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures. Should the Company elect, however, to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of its Preferred Securities during
an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Preferred Securities. As a
result of the existence of the Company's right to defer interest payments, the
market price of the Preferred Securities may be more volatile than the market
prices of other securities on which OID accrues that are not subject to such
optional deferrals.
Tax Event, Capital Treatment Event or Investment Company Event; Redemption
The Company has the right to redeem the Subordinated Debentures in whole
(but not in part) within 180 days following the occurrence of a Tax Event, a
Capital Treatment Event or an Investment Company Event (whether occurring before
or after November 1, 2002), and, therefore, cause a mandatory redemption of the
Preferred Securities. The exercise of such right is subject to the Company
having received prior approval of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust is, or will be within
14
<PAGE>
90 days of the date of such opinion, subject to United States federal income tax
with respect to income received or accrued on the Subordinated Debentures, (ii)
interest payable by the Company on the Subordinated Debentures is not, or,
within 90 days of such opinion, will not be, deductible by the Company, in whole
or in part, for United States federal income tax purposes, or (iii) the Trust
is, or will be within 90 days of the date of the opinion, subject to more than a
de minimis amount of other taxes, duties or other governmental charges. The
Company must request and receive an opinion with regard to such matters within a
reasonable period of time after it becomes aware of the possible occurrence of
any of the events described in clauses (i) through (iii) above. See "-- Risk
Factors Relating to the Preferred Securities -- Tax Legislation" for a
discussion of certain legislative proposals that, if adopted, could give rise to
a Tax Event, which may permit the Company to cause a redemption of the Preferred
Securities prior to November 1, 2002.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which proposed change,
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk of impairment of the Company's ability to treat the aggregate
Liquidation Amount of the Preferred Securities (or any substantial portion
thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then applicable to
the Company; provided, however, that the inability of the Company to treat all
or any portion of the Liquidation Amount of the Preferred Securities as Tier 1
Capital shall not constitute the basis for a Capital Treatment Event if such
inability results from the Company having cumulative preferred capital in excess
of the amount which may qualify for treatment as Tier 1 Capital under applicable
capital adequacy guidelines of the Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change
becomes effective on or after the date of original issuance of the Preferred
Securities.
Shortening or Extension of Stated Maturity of Subordinated Debentures
The Company has the right, at any time, to shorten the maturity of the
Subordinated Debentures to a date not earlier than November 1, 2002. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. The Company also has the right to extend the
maturity of the Subordinated Debentures (whether or not the Trust is dissolved
and the Subordinated Debentures are distributed to holders of the Preferred
Securities) to a date no later than November 1, 2036, the 39th anniversary of
the initial issuance of the Preferred Securities. Such right may only be
exercised, however, if at the time such election is made and at the time of such
extension (i) the Company is not in bankruptcy, otherwise insolvent or in
liquidation, (ii) the Company is not in default in the payment of any interest
or principal on the Subordinated Debentures, and (iii) the Trust is not in
arrears on payments of Distributions on the Preferred Securities and no deferred
Distributions are accumulated. See "Description of the Subordinated Debentures
- -- General."
15
<PAGE>
Rights Under the Guarantee
The Guarantee guarantees to the holders of the Preferred Securities, to the
extent not paid by the Trust, (i) any accrued and unpaid Distributions required
to be paid on the Preferred Securities, to the extent that the Trust has funds
available therefor at such time, (ii) the Redemption Price (as defined herein)
with respect to any Preferred Securities called for redemption, to the extent
that the Trust has funds available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of the Trust
(other than in connection with the distribution of Subordinated Debentures to
the holders of Preferred Securities or a redemption of all of the Preferred
Securities), the lesser of (a) the amount of the Liquidation Distribution (as
defined herein), to the extent the Trust has funds available therefor at such
time, and (b) the amount of assets of the Trust remaining available for
distribution to holders of the Preferred Securities in liquidation of the Trust.
The holders of not less than a majority in Liquidation Amount of the Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Guarantee or to direct the exercise of any trust power conferred upon the
Guarantee Trustee under the Guarantee. Any holder of the Preferred Securities
may institute a legal proceeding directly against the Company to enforce its
rights under the Guarantee without first instituting a legal proceeding against
the Trust, the Guarantee Trustee or any other Person (as defined in the
Guarantee). If the Company were to default on its obligation to pay amounts
payable under the Subordinated Debentures, the Trust would lack funds for the
payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of Preferred Securities
would not be able to rely upon the Guarantee for such amounts. In the event,
however, that a Debenture Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay interest on or
principal of the Subordinated Debentures on the payment date on which such
payment is due and payable, then a holder of Preferred Securities may institute
a legal proceeding directly against the Company for enforcement of payment to
such holder of the principal of or interest on such Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder (a "Direct Action"). The exercise by the
Company of its right, as described herein, to defer the payment of interest on
the Subordinated Debentures does not constitute a Debenture Event of Default.
The Company will have a right of set-off under the Indenture to the extent of
any payment made by the Company to such holder of Preferred Securities in the
Direct Action. Except as described herein, holders of Preferred Securities will
not be able to exercise directly any other remedy available to the holders of
the Subordinated Debentures or assert directly any other rights in respect of
the Subordinated Debentures. See "Description of the Subordinated Debentures --
Enforcement of Certain Rights by Holders of Preferred Securities," "Description
of the Subordinated Debentures -- Debenture Events of Default" and "Description
of the Guarantee." The Trust Agreement provides that each holder of Preferred
Securities by acceptance thereof agrees to the provisions of the Guarantee and
the Indenture.
No Voting Rights Except in Limited Circumstances
Holders of Preferred Securities will have no voting rights except in
limited circumstances relating only to the modification of the Preferred
Securities and the exercise of the rights of the Trust as holder of the
Subordinated Debentures and the Guarantee. Holders of Preferred Securities will
not be entitled to vote to appoint, remove or replace the Property Trustee or
the Delaware Trustee, as such voting rights are vested exclusively in the holder
of the Common Securities (except upon the occurrence of certain events described
herein). The Property Trustee, the Administrative Trustees and the Company may
amend the Trust Agreement without the consent of holders of Preferred Securities
to ensure that the Trust will be classified for United States federal income tax
purposes as a grantor trust even if such action adversely affects the interests
of such holders. See "Description of Preferred Securities -- Voting Rights;
16
<PAGE>
Amendment of Trust Agreement" and "Description of Preferred Securities --
Removal of the Trust Trustees."
Tax Legislation
In recent years, President Clinton has proposed in the administration's
fiscal year budget certain tax law changes that would, among other things,
generally deny corporate issuers a deduction for interest or OID in respect of
certain debt obligations similar to the Subordinated Debentures. However,
Congress has not enacted similar legislation. There can be no assurance that
legislation enacted after the date hereof will not otherwise adversely affect
the ability of the Company to deduct the interest payable on the Subordinated
Debentures. Consequently, there can be no assurance that a Tax Event will not
occur. A Tax Event would permit the Company, upon approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve, to cause a redemption of the Preferred Securities. See
"Description of the Subordinated Debentures -- Redemption or Exchange" and
"Description of Preferred Securities -- Redemption or Exchange -- Tax Event
Redemption, Capital Treatment Event Redemption or Investment Company Event
Redemption" and "Certain Federal Income Tax Consequences -- Effect of Changes in
Tax Laws."
Redemption; Exchange of Preferred Securities for Subordinated Debentures
The Company, as holder of the Common Securities, has the right at any time
to dissolve the Trust and cause the Subordinated Debentures, after satisfaction
of liabilities to creditors of the Trust, to be distributed to the holders of
the Preferred Securities in exchange therefor in liquidation of the Trust. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. The Company will have the right, in certain
circumstances, to redeem the Subordinated Debentures in whole or in part, in
lieu of a distribution of the Subordinated Debentures by the Trust, in which
event the Trust will redeem the Trust Securities on a pro rata basis to the same
extent as the Subordinated Debentures are redeemed by the Company. Any such
distribution or redemption prior to the Stated Maturity will be subject to prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description of Preferred
Securities -- Redemption or Exchange -- Tax Event Redemption, Capital Treatment
Event Redemption or Investment Company Event Redemption."
Under current United States federal income tax law, a distribution of
Subordinated Debentures upon the dissolution of the Trust would not be a taxable
event to holders of the Preferred Securities. If, however, the Trust is
characterized as an association taxable as a corporation at the time of the
dissolution of the Trust, the distribution of the Subordinated Debentures may
constitute a taxable event to holders of Preferred Securities. Moreover, upon
occurrence of a Tax Event, a dissolution of the Trust in which holders of the
Preferred Securities receive cash may be a taxable event to such holders. See
"Certain Federal Income Tax Consequences -- Receipt of Subordinated Debentures
or Cash Upon Liquidation of the Trust."
Because holders of Preferred Securities may receive Subordinated
Debentures, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Subordinated Debentures and should
carefully review all the information regarding the Subordinated Debentures
contained herein.
17
<PAGE>
Trading Price; Absence of Prior Public Market
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID, if the Subordinated
Debentures are treated as having been issued, or reissued, with OID) with
respect to the underlying Subordinated Debentures. A holder who disposes of his
Preferred Securities will be required to include in ordinary income (i) any
portion of the amount realized that is attributable to such accrued but unpaid
interest to the extent not previously included in income, or (ii) any amount of
OID, in either case, that has accrued on his pro rata share of the underlying
Subordinated Debentures during the taxable year of sale through the date of
disposition. Any such income inclusion will increase the holder's adjusted tax
basis in his Preferred Securities disposed of. To the extent that the amount
realized in the sale is less than the holder's adjusted tax basis, a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Disposition of
Preferred Securities."
There is no current public market for the Preferred Securities. The
Preferred Securities have been approved for trading through the National
Association of Securities Dealer's "Electronic Bulletin Board." There can be no
assurance that an active public market will develop for the Preferred Securities
or that, if such market develops, the market price will equal or exceed the
public offering price set forth on the cover page of this Prospectus. The
absence or discontinuance of such a market may have an adverse impact on both
the price and liquidity of the Preferred Securities. The public offering price
for the Preferred Securities has been determined through negotiations between
the Company and the Underwriter. Prices for the Preferred Securities will be
determined in the marketplace and may be influenced by many factors, including
prevailing interest rates, the liquidity of the market for the Preferred
Securities, investor perceptions of the Company and general industry and
economic conditions.
If the Subordinated Debentures are distributed to the holders of Preferred
Securities upon the liquidation of the Trust, the Company will use its best
efforts to list the Subordinated Debentures on The Nasdaq Stock Market or such
stock exchanges, if any, on which the Preferred Securities are then listed.
There can be no assurance as to the market price for the Subordinated Debentures
that may be distributed upon a dissolution or liquidation of the Trust and, in
that event, the Subordinated Debentures may trade at a discount to the price
that the investor paid to purchase the Preferred Securities offered hereby.
Securities are not Insured
Neither the Preferred Securities nor the Subordinated Debentures are
insured by the Bank Insurance Fund or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation or by any other governmental agency.
RISK FACTORS RELATING TO THE COMPANY
Economic Conditions and Monetary Policies
Conditions beyond the Company's control may have a significant impact on
changes in net interest income from one period to another. Examples of such
conditions could include: (i) the strength of credit demands by customers; (ii)
fiscal and debt management policies of the federal government, including changes
in tax laws; (iii) the Federal Reserve's monetary policy, including the
percentage of deposits that must be held in the form of non-earning cash
reserves; (iv) the introduction and growth of new investment instruments and
transaction accounts by non-bank financial competitors; and (v) changes in rules
and regulations governing the payment of interest on deposit accounts.
18
<PAGE>
Sensitivity to Fluctuations in Interest Rates
The Company's profitability, like that of most similarly situated financial
institutions, is dependent to a large extent upon the Bank's net interest
income, which is the difference between its interest income on interest-earning
assets, such as loans and investments, and its interest expense on
interest-bearing liabilities, such as deposits and borrowings. Accordingly, the
Company's results of operations and financial condition are largely dependent on
movements in market interest rates and its ability to manage its assets in
response to such movements. The difference between the amount of the total
interest-earning assets and interest-bearing liabilities which reprice within a
given time period could have a negative effect on the Bank's net interest income
depending on whether such difference was positive or negative and the direction
of movement of interest rates.
Increases in interest rates may reduce demand for loans and, thus, the
amount of loan and commitment fees. In addition, fluctuations in interest rates
may also result in disintermediation, which is the flow of funds away from
depository institutions into direct investments which pay a higher rate of
return, and may affect the value of the Company's investment securities and
other interest-earning assets. Given that the Bank's assets consist of a
substantial number of loans with interest rates which change in accordance with
changes in prevailing market rates, if interest rates rise sharply, many of the
Bank's borrowers would be required to make higher interest payments on their
loans. Thus, increases in interest rates may cause the Bank to experience an
increase in delinquent loans and defaults to the extent that borrowers are
unable to meet their increased debt servicing obligations. While the Company has
taken measures intended to manage the risks of operating in a changing interest
rate environment, there can be no assurance that such measures will be effective
in avoiding undue interest rate risk.
Adequacy of Allowance for Loan Losses
The risk of loan losses varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the value
of the collateral for the loan. Management maintains an allowance for loan
losses based upon, among other things, historical experience, an evaluation of
economic conditions and regular review of delinquencies and loan portfolio
quality. Based upon such factors, management makes various assumptions and
judgments about the ultimate collectibility of the loan portfolio and provides
an allowance for loan losses based upon a percentage of the outstanding balances
and for specific loans when their ultimate collectibility is considered
questionable. If management's assumption and judgments prove to be incorrect and
the allowance for loan losses is inadequate to absorb future credit losses, or
if the bank regulatory authorities require the Bank to increase the allowance
for loan losses, the Bank's earnings could be significantly and adversely
affected. Because certain lending activities involve greater risks, the
percentage applied to specific loan types may vary.
As of June 30, 1997, the allowance for loan losses was $5.3 million, which
represented 1.5% of total loans, net of unearned income. The allowance for loan
losses as a percentage of nonperforming loans was 69.3% as of June 30, 1997. The
Company actively manages its nonperforming loans in an effort to minimize credit
losses and monitors its asset quality to maintain an adequate allowance for loan
losses. Although management believes that its allowance for loan losses is
adequate, there can be no assurance that the allowance will prove sufficient to
cover future credit losses. Further, although management uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
substantially from the assumptions used or if the adverse developments arise
with respect to the Bank's nonperforming or performing loans. Material additions
to the Bank's allowance for loan losses would result in a decrease
19
<PAGE>
in the Company's net income, possibly its capital, and could result in the
inability to pay dividends, among other adverse consequences.
Legislative and Regulatory Developments
The financial institutions industry is subject to significant regulation
which has materially affected the financial institutions industry in the past
and will do so in the future. Such regulations, which affect the Company on a
daily basis, may be changed at any time, and the interpretation of the relevant
law and regulations are also subject to change by the authorities who examine
the Company and the Bank and interpret those laws and regulations. There can be
no assurance that any present or future changes in the laws or regulations or in
their interpretation will not adversely and materially affect the Company.
Competition
The Bank faces significant competition both in generating loans and in
attracting deposits. The central New Jersey area is a highly competitive market.
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. 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. 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 and can often offer lower loan rates than
banks. Financial institutions are intensely competitive in the interest rates
they offer on deposits. In addition, the Bank faces competition for deposits
from non-bank institutions such as brokerage firms and insurance companies in
such instruments as short-term money market funds, corporate and government
securities funds, mutual funds and annuities. 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.
Growth and Concentration of Loan Portfolio
The Bank's loan portfolio increased from $107.0 million to $352.9 million
between December 31, 1992, and June 30, 1997, an increase of approximately 230%.
Commercial loans and commercial mortgage loans increased during this period from
$28.4 million to $190.1 million, accounting for 65.8% of the total growth of the
loan portfolio, and represented 53.9% of the loan portfolio at June 30, 1997. As
a result of this recent growth, the Bank has not had a long period of experience
with some of its borrowers and, therefore, specific payment and loss experience
for this portion of the portfolio has not yet been fully established. However,
the majority of the growth in the Bank's commercial loan portfolio consisted of
loans to established businesses that, while new to the Bank, had been
experienced borrowers with other financial institutions. Further, the Bank's
loans are concentrated in Mercer County, New Jersey. As a result, a decline in
the general economic conditions of Mercer County could have a material adverse
effect on the Company's financial condition and results of operations taken as a
whole. In addition, while the increase in commercial loans has created a more
diversified loan portfolio, it has also increased the overall credit risk
inherent in the loan portfolio as commercial loans involve relatively more
20
<PAGE>
credit risk than other types of loans in the Bank's loan portfolio. Although the
Company intends to continue to focus on expanding the Bank's lending business,
it will do so only as management deems prudent given prevailing economic and
competitive conditions, as reflected in the rate of growth on the loan portfolio
for the six-month period ended June 30, 1997. During that period, the Bank's
loan portfolio increased by 6.6% from $331.2 million to $352.9 million, as
compared to a growth rate of 16.6% during the six-month period ended June 30,
1996. In addition, the Bank has several large loans. As of June 30, 1997, the
largest 25 loans in the Bank's loan portfolio totaled approximately $57.2
million, or 16.2% of the total loan portfolio, of which amount approximately
$8.9 million relate to real estate construction loans. A loss experience with
respect to a small number of such loans could have a material adverse impact on
the Bank's net income.
Lending Risks - Credit Quality
A central focus of the Company's strategy is the continued development and
growth of a diversified loan portfolio, with emphasis on commercial loans,
owner-occupied commercial mortgage loans and tenanted commercial real estate
loans. Certain risks are inherent in the lending function, including a
borrower's inability to pay, insufficient collateral coverage and changes in
interest rates. Repayment risk on commercial loans is significantly affected by
changing economic conditions in a particular geographical area, business or
industry which could impair future operating performance. Risks associated with
real estate loans and commercial loans include changes in general economic
conditions which may affect the borrower's ability to repay as well as
underlying collateral values. Installment and other consumer loans are subject
to repayment risk, which the Company believes is mitigated by the diverse
portfolio of such loans and the relatively low average balances outstanding on
individual extensions of credit.
In making loans, the Bank evaluates the borrower's ability to repay the
loan from cash flow and the collateral security for the loan. In almost all
cases, the Bank seeks collateral security to reduce the credit risk of its
commercial loans, which are made to finance inventory, equipment and working
capital needs. Such loans may be secured by real estate, business assets and
guarantees. The Bank attempts to offset the risks associated with commercial
real estate lending by primarily lending to individuals who have proven
management experience and who will be actively involved in the management of the
property. Economic events and government regulations, which are outside the
control of the borrower or lender, could affect the value of the security for
such loans or the future cash flow of the affected properties.
The Bank also originates real estate construction loans, which represented
8.5% of the loan portfolio at June 30, 1997. These are made primarily to finance
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. The Bank monitors these loans
closely and makes advances only after work is completed and inspected and
verified by qualified professionals.
Non-performing loans totaled $7.6 million at June 30, 1997, including two
real estate construction loans of approximately $4.6 million in the aggregate
that became nonaccrual loans in the fourth quarter of 1996. At June 30, 1997,
the Bank had $1.1 million in non-performing commercial real estate loans and
$4.6 million in non-performing real estate construction loans. For the six
months ended June 30, 1997, the Bank experienced no charge-offs on commercial
real estate loans or real estate construction loans. For the fiscal years ended
December 31, 1992 through December 31, 1996, the Bank's ratio of net charge-offs
to average loans outstanding was .45%, .20%, .06%, .05% and .13%, respectively.
At June 30, 1997, non-performing assets totaled $8.5 million. The ratio of
non-performing assets to total loans and other real estate owned was 2.40% at
June 30, 1997, compared to 2.57% and 1.40% at December 31, 1996 and 1995,
respectively.
21
<PAGE>
YARDVILLE NATIONAL BANCORP
The Company is a bank holding company headquartered in Hamilton Township,
New Jersey, that provides commercial and retail banking services through the
Bank. The Company was incorporated under the laws of New Jersey and became the
holding company of the Bank in 1985. The Bank received its charter from the
Office of the Comptroller of the Currency in 1924. The Bank's deposits are
insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation.
At June 30, 1997, the Company had total consolidated assets of $525.7 million,
deposits of $414.8 million and stockholders' equity of $37.6 million.
The Bank provides a full range of retail and commercial banking services
designed to meet the borrowing and depository needs of small and medium sized
businesses and consumers in the local communities that it serves. Deposit
products include checking, savings and money market accounts for individuals and
businesses, certificates of deposit, individual retirement accounts, and cash
management accounts for businesses. The Bank also provides letters of credit for
commercial transactions and makes a variety of loans, including commercial
loans, commercial mortgage loans, residential mortgage loans, real estate
construction loans, and home equity and other consumer loans. In order to
compete more effectively with larger financial institutions in its market area,
the Bank concentrates on building relationships through superior service and
attention to customers' needs.
The Company's strategy is focused primarily on expanding the Bank's lending
business as management deems prudent given economic and competitive conditions,
while increasing deposits to fund lending activities. By developing new products
and services and branching into contiguous geographic markets, the Company
intends to expand the Bank's existing customer relationships and attract new
customers to the Bank. Among its efforts in 1996, the Bank opened two additional
branch offices and introduced several new products, including an
interest-bearing checking account with a low minimum balance requirement, a
debit card, telephone banking service, and automated clearing house services for
business customers. In the fourth quarter of 1997, the Bank intends to improve
its telephone banking service by adding additional features and open a call
center to provide additional customer services and market various deposit and
loan products by telephone. The Bank seeks to attract customers that will have
both deposit and lending relationships with the Bank. The Company believes that
customers value personal service and attention and that its emphasis on personal
service and local customer relationships, together with its active approach to
lending and careful credit administration, have been and will continue to be
important factors in the Company's success and growth. To supplement net
interest income and to provide a more attractive return on equity, beginning in
June of 1995 the Company implemented an investment strategy of purchasing
securities using repurchase agreements and time deposits.
As a result of the Company's strategy, the Bank increased its loan
portfolio from $107.0 million at December 31, 1992, to $352.9 million at June
30, 1997, and presently maintains a diversified portfolio. At June 30, 1997, the
loan portfolio contained a mix of loans, with commercial mortgage loans
aggregating $112.6 million or 31.9% of the portfolio, residential mortgage loans
aggregating $84.5 million or 23.9% of the portfolio, commercial loans
aggregating $77.5 million or 22.0% of the portfolio, real estate construction
loans aggregating $30.1 million or 8.5% of the portfolio, and home equity,
consumer and other loans aggregating $48.2 million or 13.7% of the portfolio.
From December 31, 1992, to June 30, 1997, commercial and commercial mortgage
loans increased from $28.4 million to $190.1 million, accounting for 65.8% of
the total growth of the loan portfolio during that period, and represented 53.9%
of the loan portfolio at June 30, 1997. While the Bank presently intends to
maintain a comparable mix of loan types in its portfolio, it intends to continue
emphasizing commercial loans, owner-occupied commercial loans and tenanted
commercial real estate loans in its lending business. As a community bank, the
Bank's strategy in commercial lending has been to actively market its personal
22
<PAGE>
service and local presence and target small and medium sized businesses. The
sales volume of the Bank's commercial loan customers ranges from $0.5 to $105.0
million (with the average being approximately $2.0 million) and the average
commercial loan was approximately $372,000 at June 30, 1997. Substantially all
of the Bank's loans are to borrowers, and secured by property, located within
Mercer County or, to a lesser extent, the contiguous counties of Burlington and
Middlesex, New Jersey, and Bucks County, Pennsylvania.
In conducting its lending activities, the Bank emphasizes loan quality,
loan and credit administration and careful documentation. Credit risk represents
the possibility that a customer or counterparty may not perform in accordance
with contractual terms. The Bank incurs credit risk whenever it extends credit
to, or enters into other transactions with, its customers. The risks associated
with extensions of credit include general risk, which is inherent in the lending
business, and risk specific to individual borrowers. Credit administration is
responsible for the overall management of the Bank's credit risk and
development, application and enforcement of uniform credit policies and
procedures the principal purpose of which is to minimize such risk. One
objective of credit administration is to identify and, to the extent feasible,
diversify extensions of credit by industry concentration, geographic
distribution and the type of borrower. Loan review and other loan credit,
underwriting and loan documentation policies, procedures and practices are being
followed by the Bank's loan officers and are being applied uniformly throughout
the Bank. In recent years, the Bank has taken a number of steps to enhance its
credit administration and loan review functions in an effort to better manage
its credit risk, especially in light of the Bank's rapid growth. While the Bank
continues to review these and other related functional areas, there can be no
assurance that the steps the Bank has taken to date will be sufficient to enable
it to identify, measure, monitor and control all credit risk.
The Bank's primary source of funds for its lending activities is deposits.
As a result of the Bank's emphasis on increasing deposits and broad-based
customer relationships, the Bank's deposits have increased from $192.2 million
at December 31, 1992, to $414.8 million at June 30, 1997. The Company's lending
activities are funded primarily with core deposits (approximately 53% of
deposits are demand and savings deposits) with the balance being funded by
certificates of deposit and wholesale funding.
YARDVILLE CAPITAL TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement, dated as of August 28, 1997, executed by the Company,
as depositor, and the trustees of the Trust (together with the Property Trustee,
the "Trustees"), and (ii) a certificate of trust filed with the Secretary of
State of the State of Delaware on August 28, 1997. The initial trust agreement
will be amended and restated in its entirety (as so amended and restated, the
"Trust Agreement") substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Trust
Agreement will be qualified as an indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). Upon issuance of the Preferred
Securities, the purchasers thereof will own all of the Preferred Securities. The
Company will acquire all of the Common Securities, which will represent an
aggregate liquidation amount equal to at least 3% of the total capital of the
Trust. The Common Securities will rank pari passu, and payments will be made
thereon pro rata, with the Preferred Securities, except that upon the occurrence
and during the continuance of an Event of Default (as defined herein) under the
Trust Agreement resulting from a Debenture Event of Default, the rights of the
Company, as holder of the Common Securities, to payment in respect of
Distributions and payments upon liquidation, redemption or otherwise will be
subordinated to the rights of the holders of the Preferred Securities. See
"Description of Preferred Securities -- Subordination of Common Securities." The
Trust exists for the exclusive purposes of (i) issuing the Trust Securities
representing undivided
23
<PAGE>
beneficial interests in the assets of the Trust, (ii) investing the gross
proceeds of the Trust Securities in the Subordinated Debentures issued by the
Company, and (iii) engaging in only those other activities necessary, advisable,
or incidental thereto. The Subordinated Debentures and payments thereunder will
be the only assets of the Trust and payments under the Subordinated Debentures
will be the only revenue of the Trust. The Trust has a term of 40 years, but may
dissolve earlier as provided in the Trust Agreement. The principal executive
office of the Trust is 3111 Quakerbridge Road, Trenton, New Jersey 08619.
The number of Trustees will, pursuant to the Trust Agreement, initially be
four. Three of the Trustees (the "Administrative Trustees") will be persons who
are employees or officers of, or who are affiliated with, the Company. The
fourth trustee will be a financial institution that maintains its principal
place of business in the State of Delaware (the "Delaware Trustee") and is
unaffiliated with the Company, which trustee will serve as institutional trustee
under the Trust Agreement and as indenture trustee for the purposes of
compliance with the provisions of the Trust Indenture Act (the "Property
Trustee"). Wilmington Trust Company, a state chartered trust company organized
under the laws of the State of Delaware, will be the Property Trustee until
removed or replaced by the holder of the Common Securities. For purposes of
compliance with the provisions of the Trust Indenture Act, Wilmington Trust
Company will also act as trustee (the "Guarantee Trustee") under the Guarantee
and as Debenture Trustee (as defined herein) under the Indenture.
The Property Trustee will hold title to the Subordinated Debentures for the
benefit of the holders of the Trust Securities and in such capacity will have
the power to exercise all rights, powers and privileges under the Indenture. The
Property Trustee will also maintain exclusive control of a segregated
non-interest-bearing bank account (the "Property Account") to hold all payments
made in respect of the Subordinated Debentures for the benefit of the holders of
the Trust Securities. The Property Trustee will make payments of Distributions
and payments on liquidation, redemption and otherwise to the holders of the
Trust Securities out of funds from the Property Account. The Guarantee Trustee
will hold the Guarantee for the benefit of the holders of the Preferred
Securities. The Company, as the holder of all the Common Securities, will have
the right to appoint, remove or replace any Trustee and to increase or decrease
the number of Trustees. The Company will pay all fees and expenses related to
the Trust and the offering of the Trust Securities.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the Trust
Agreement, the Delaware Business Trust Act (the "Trust Act") and the Trust
Indenture Act. See "Description of Preferred Securities."
USE OF PROCEEDS
The Trust will use the gross proceeds from the sale of the Preferred
Securities to purchase Subordinated Debentures of the Company. The Company
intends to use the net proceeds of the sale of the Subordinated Debentures for
general corporate purposes, including the repurchase of outstanding equity
securities of the Company and investments to leverage the Company's capital, as
well as for contributions to the Bank to fund its operations, acquiring or
establishing branch offices and the financing of potential future acquisitions
by the Company. Initially, the net proceeds may be used to make investments in
short-term investment grade obligations pending its use for the purposes
described above.
On October 21, 1996, the Federal Reserve approved, subject to certain
limitations as to amount, the use of certain cumulative preferred instruments
such as the Preferred Securities as Tier 1 capital for bank holding companies
such as the Company. The Company has elected to issue the Preferred Securities
because the Company expects that the Preferred Securities will qualify as Tier 1
capital and
24
<PAGE>
the interest payable on the Subordinated Debentures to be a tax deductible
expense of the Company. The Company expects that, upon completion of the sale of
the Preferred Securities offered hereby, Preferred Securities having an
aggregate Liquidation Amount of approximately $10 million will be eligible to
qualify as Tier 1 capital under the capital guidelines of the Federal Reserve
(or approximately $11.5 million if the Underwriter's over-allotment option is
exercised in full). To the extent any portion of the Preferred Securities is not
eligible to qualify as Tier 1 capital, such amount is expected to be treated as
Tier 2 capital until all or some of that amount is eligible to qualify as Tier 1
capital under the capital guidelines of the Federal Reserve.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities have been approved for trading through the
National Association of Securities Dealer's "Electronic Bulletin Board."
Although the Underwriter has informed the Company that it presently intends to
make a market in the Preferred Securities, there can be no assurance that an
active and liquid trading market will develop, or, if developed, that such a
market will continue. The absence or discontinuance of such a market may have an
adverse impact on both the price and liquidity of the Preferred Securities. The
offering price and distribution rate have been determined by negotiations among
representatives of the Company and the Underwriter, and the offering price of
the Preferred Securities may not be indicative of the market price following the
Offering. See "Underwriting" and "Risk Factors -- Trading Price; Absence of
Prior Public Market."
ACCOUNTING TREATMENT
The Trust will be treated, for financial reporting purposes, as a
subsidiary of the Company and, accordingly, the accounts of the Trust will be
included in the consolidated financial statements of the Company. The Preferred
Securities will be presented in the consolidated balance sheet of the Company
under the caption "Company-obligated mandatorily redeemable security of
subsidiary holding solely parent-subordinated debentures," and appropriate
disclosures about the Preferred Securities, the Guarantee and the Subordinated
Debentures will be included in the notes to consolidated financial statements.
The Company will record Distributions payable on the Preferred Securities as an
expense in the consolidated statements of income for financial reporting
purposes.
All future reports of the Company filed under the Exchange Act will (a)
present the Trust Securities issued by the Trust on the balance sheet as a
separate category entitled "Company-obligated mandatorily redeemable security of
subsidiary holding solely parent-subordinated debentures," (b) include in a
footnote to the financial statements disclosure that the sole assets of the
Trust are the Subordinated Debentures (including the outstanding principal
amount, interest rate and maturity date of such Subordinated Debentures), and
(c) include in an audited footnote to the financial statements disclosure that
the Company owns all of the Common Securities of the Trust, that the sole assets
of the Trust are the Subordinated Debentures, and that the obligations of the
Company under the Guarantee, the Trust Agreement, the Expense Agreement, the
Subordinated Debentures and the Indenture, in the aggregate, constitute a full
and unconditional guarantee by the Company of the obligations of the Trust under
the Preferred Securities.
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at June 30, 1997 and (ii) the consolidated capitalization of the Company
giving effect to the issuance of the Preferred Securities hereby offered by the
Trust and receipt by the Company of the net proceeds from the corresponding sale
of the Subordinated Debentures to the Trust, as if the sale of the Preferred
Securities
25
<PAGE>
had been consummated on June 30, 1997, and assuming the Underwriter's
over-allotment option was not exercised.
<TABLE>
<CAPTION>
(Unaudited)
As Adjusted
For the Sale of
Actual Preferred Securities
------ --------------------
(Dollars in thousands)
<S> <C> <C>
Company-obligated mandatorily redeeemable security of
subsidiary holding solely parent-subordinated
debentures (1)............................................ $ -- $10,000
STOCKHOLDERS' EQUITY:
Preferred stock no par value, 1,000,000 shares -- --
authorized, none issued....................................
Common stock no par value, 6,000,000 shares
authorized; 2,472,954 outstanding......................... 17,625 17,625
Surplus..................................................... 2,205 2,205
Undivided profits........................................... 17,818 17,818
Net unrealized losses on securities available-for-sale...... (19) (19)
------- -------
Total stockholders' equity.............................. 37,629 37,629
------- -------
Total capitalization........................................ $37,629 $47,629
======= =======
COMPANY CAPITAL RATIOS(2):
Equity to total assets...................................... 7.2% 9.1%
Tier 1 risk-based capital ratio(3).......................... 10.1 12.9
Total risk-based capital ratio.............................. 11.4 14.1
Leverage ratio (4).......................................... 7.3 9.2
</TABLE>
- -------------
(1) Preferred Securities representing beneficial interests in an aggregate
principal amount of $10,000,000 of the 9.25% Subordinated Debentures
of the Company (not including the $1,500,000 aggregate principal amount of
Subordinated Debentures to be purchased in the event the Underwriter
exercises its over-allotment option). The Subordinated Debentures will
mature on November 1, 2027.
(2) The capital ratios, as adjusted, are computed including the total estimated
proceeds from the sale of the Preferred Securities, in a manner consistent
with Federal Reserve guidelines.
(3) Federal Reserve guidelines for calculation of Tier 1 capital limit the
amount of cumulative preferred stock which can be included in Tier 1
capital to 25% of total Tier 1 capital.
(4) Leverage ratio is Tier 1 capital to average assets for the period.
DESCRIPTION OF PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the Trust
Agreement. The Trust Agreement will be qualified as an indenture under the Trust
Indenture Act. The Property Trustee, Wilmington Trust Company, will act as
indenture trustee for the Preferred Securities under the Trust Agreement for
purposes of complying with the provisions of the Trust Indenture Act. The terms
of the Preferred Securities will include those stated in the Trust Agreement and
those made part of the Trust Agreement by the Trust Indenture Act. The following
summary of the material terms and provisions of the Preferred Securities and the
Trust Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Trust Agreement and the Trust
Indenture Act. Wherever particular defined terms of the Trust Agreement are
referred to, but not defined herein, such defined terms are incorporated herein
by reference. The form of the Trust Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
26
<PAGE>
General
Pursuant to the terms of the Trust Agreement, the Trustees, on behalf of
the Trust, will issue the Trust Securities. All of the Common Securities will be
owned by the Company. The Preferred Securities will represent preferred
undivided beneficial interests in the assets of the Trust and the holders
thereof will be entitled to a preference over the Common Securities in certain
circumstances with respect to Distributions and amounts payable on redemption or
liquidation, as well as other benefits as described in the Trust Agreement. The
Trust Agreement does not permit the issuance by the Trust of any securities
other than the Trust Securities or the incurrence of any indebtedness by the
Trust.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata with the Common Securities, except as described under " --
Subordination of Common Securities." Legal title to the Subordinated Debentures
will be held by the Property Trustee in trust for the benefit of the holders of
the Trust Securities. The Guarantee executed by the Company for the benefit of
the holders of the Preferred Securities will be a guarantee on a subordinated
basis with respect to the Preferred Securities, but will not guarantee payment
of Distributions or amounts payable on redemption or liquidation of such
Preferred Securities when the Trust does not have funds on hand available to
make such payments. Wilmington Trust Company, as Guarantee Trustee, will hold
the Guarantee for the benefit of the holders of the Preferred Securities. See
"Description of the Guarantee."
Distributions
Payment of Distributions. Distributions on each Preferred Security will be
payable at the annual rate of 9.25% of the stated Liquidation Amount of $10,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year, to the holders of the Preferred Securities on the relevant record
dates (each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). The record date will be the 15th day of the
month in which the relevant Distribution Date occurs. Distributions will
accumulate from October 16, 1997, the date of original issuance. The first
Distribution Date for the Preferred Securities will be December 31, 1997. The
amount of Distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional Distributions,
interest or other payment in respect of any such delay) with the same force and
effect as if made on the date such payment was originally due and payable.
"Business Day" means any day other than a Saturday or a Sunday, a day on which
banking institutions in the City of New York are authorized or required by law
or executive order to remain closed or a day on which the corporate trust office
of the Property Trustee or the Debenture Trustee is closed for business.
Extension Period. The Company has the right under the Indenture, so long as
no Debenture Event of Default has occurred and is continuing, to defer the
payment of interest on the Subordinated Debentures at any time, or from time to
time (each, an "Extension Period"), which, if exercised, would defer quarterly
Distributions on the Preferred Securities during any such Extension Period.
Distributions to which holders of the Preferred Securities are entitled will
accumulate additional Distributions thereon at the rate per annum of 9.25%
thereof, compounded quarterly from the relevant Distribution Date.
"Distributions," as used herein, includes any such additional Distributions. The
right to defer the payment of interest on the Subordinated Debentures is
limited, however, to a period, in each instance, not exceeding 20 consecutive
quarters and no Extension Period may extend beyond the Stated Maturity of the
Subordinated Debentures. During any such Extension Period, the Company may not
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with
27
<PAGE>
respect to, any of the Company's capital stock, (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities. Prior to the termination of any such Extension
Period, the Company may further defer the payment of interest, provided, that
such Extension Period may not exceed 20 consecutive quarters or extend beyond
the Stated Maturity of the Subordinated Debentures. Upon the termination of any
such Extension Period and the payment of all amounts then due, the Company may
elect to begin a new Extension Period, subject to the above requirements.
Subject to the foregoing, there is no limitation on the number of times that the
Company may elect to begin an Extension Period.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures.
Source of Distributions. The funds of the Trust available for distribution
to holders of its Preferred Securities will be limited to payments under the
Subordinated Debentures in which the Trust will invest the proceeds from the
issuance and sale of its Trust Securities. See "Description of the Subordinated
Debentures." Distributions will be paid through the Property Trustee who will
hold amounts received in respect of the Subordinated Debentures in the Property
Account for the benefit of the holders of the Trust Securities. If the Company
does not make interest payments on the Subordinated Debentures, the Property
Trustee will not have funds available to pay Distributions on the Preferred
Securities. The payment of Distributions (if and to the extent the Trust has
funds legally available for the payment of such Distributions and cash
sufficient to make such payments) is guaranteed by the Company. See "Description
of the Guarantee."
Redemption or Exchange
General. The Subordinated Debentures will mature on November 1, 2027. The
Company will have the right to redeem the Subordinated Debentures (i) on or
after November 1, 2002, in whole at any time or in part from time to time, or
(ii) at any time, in whole (but not in part), within 180 days following the
occurrence of a Tax Event, a Capital Treatment Event or an Investment Company
Event, in each case subject to receipt of prior approval by the Federal Reserve
if then required under applicable capital guidelines or policies of the Federal
Reserve. The Company will not have the right to purchase the Subordinated
Debentures, in whole or in part, from the Trust until after November 1, 2002.
See "Description of the Subordinated Debentures -- General."
Mandatory Redemption. Upon the repayment or redemption, in whole or in
part, of any Subordinated Debentures, whether at Stated Maturity or upon earlier
redemption as provided in the Indenture, the proceeds from such repayment or
redemption will be applied by the Property Trustee to redeem a Like Amount (as
defined herein) of the Trust Securities, upon not less than 30 nor more than 60
days notice, at a redemption price (the "Redemption Price") equal to the
aggregate Liquidation Amount of such Trust Securities plus accrued but unpaid
Distributions thereon to the date of redemption (the "Redemption Date"). See
"Description of the Subordinated Debentures -- Redemption or Exchange." If less
than all of the Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption will be
allocated to the redemption of the Trust Securities pro rata.
Distribution of Subordinated Debentures. Subject to the Company having
received prior approval of the Federal Reserve if so required under applicable
capital guidelines or policies of the Federal Reserve,
28
<PAGE>
the Company, as holder of the Common Securities, will have the right at any time
to dissolve the Trust and, after satisfaction of the liabilities of creditors of
the Trust as provided by applicable law, cause the Subordinated Debentures to be
distributed to the holders of Trust Securities in liquidation of the Trust.
See "-- Liquidation Distribution Upon Dissolution."
Tax Event Redemption, Capital Treatment Event Redemption or Investment
Company Event Redemption. If a Tax Event, a Capital Treatment Event or an
Investment Company Event in respect of the Trust Securities occurs and is
continuing, the Company has the right to redeem the Subordinated Debentures in
whole (but not in part) and thereby cause a mandatory redemption of such Trust
Securities in whole (but not in part) at the Redemption Price within 180 days
following the occurrence of such Tax Event, Capital Treatment Event or
Investment Company Event. In the event a Tax Event, a Capital Treatment Event or
an Investment Company Event in respect of the Trust Securities has occurred and
the Company does not elect to redeem the Subordinated Debentures and thereby
cause a mandatory redemption of such Trust Securities or to liquidate the Trust
and cause the Subordinated Debentures to be distributed to holders of such Trust
Securities in liquidation of the Trust as described below under "-- Liquidation
Distribution Upon Dissolution," such Preferred Securities will remain
outstanding and, if a Tax Event has occurred, Additional Interest (as defined
herein) shall be payable on the Subordinated Debentures. "Additional Interest"
means the additional amounts as may be necessary in order that the amount of
Distributions then due and payable by to the Trust on the outstanding Trust
Securities will not be reduced as a result of any additional taxes, duties and
other governmental charges to which the Trust has become subject as a result of
a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Subordinated Debentures to be contemporaneously redeemed in
accordance with the Indenture, which will be used to pay the Redemption Price of
such Trust Securities, and (ii) with respect to a distribution of Subordinated
Debentures to holders of Trust Securities in connection with a dissolution or
liquidation of the Trust, Subordinated Debentures having a principal amount
equal to the Liquidation Amount of the Trust Securities of the holder to whom
such Subordinated Debentures are distributed. Each Subordinated Debenture
distributed pursuant to clause (ii) above will carry with it accumulated
interest in an amount equal to the accumulated and unpaid interest then due on
such Subordinated Debenture.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
After the liquidation date fixed for any distribution of Subordinated
Debentures for Preferred Securities (i) such Preferred Securities will no longer
be deemed to be outstanding, and (ii) any certificates representing Preferred
Securities will be deemed to represent the Subordinated Debentures having a
principal amount equal to the Liquidation Amount of such Preferred Securities,
and bearing accrued and unpaid interest in an amount equal to the accrued and
unpaid Distributions on the Preferred Securities until such certificates are
presented to the Administrative Trustees or their agent for transfer or
reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities if a dissolution and liquidation of the Trust were to
occur. The Preferred Securities that an investor may purchase, or the
Subordinated Debentures that an investor may receive on dissolution and
liquidation of the Trust, may, therefore, trade at a discount to the price that
the investor paid to purchase the Preferred Securities offered hereby.
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Redemption Procedures
Preferred Securities redeemed on each Redemption Date will be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Subordinated Debentures. Redemptions of the Preferred
Securities will be made and the Redemption Price will be payable on each
Redemption Date only to the extent that the Trust has funds on hand available
for the payment of such Redemption Price. See "-- Subordination of Common
Securities."
If the Trust gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, New York time, on the Redemption Date, to the
extent funds are available in the case of Preferred Securities held in
book-entry form, the Property Trustee will deposit irrevocably with DTC funds
sufficient to pay the applicable Redemption Price and will give DTC irrevocable
instructions and authority to pay the Redemption Price to the holders of the
Preferred Securities. With respect to Preferred Securities not held in
book-entry form, the Property Trustee, to the extent funds are available, will
irrevocably deposit with the paying agent for the Preferred Securities funds
sufficient to pay the aggregate Redemption Price and will give the paying agent
for the Preferred Securities irrevocable instructions and authority to pay the
Redemption Price to the holders thereof upon surrender of their certificates
evidencing such Preferred Securities. Notwithstanding the foregoing,
Distributions payable on or prior to the Redemption Date for any Preferred
Securities called for redemption will be payable to the holders of such
Preferred Securities on the relevant record dates for the related Distribution
Dates. If notice of redemption will have been given and funds deposited as
required, then upon the date of such deposit, all rights of the holders of such
Preferred Securities so called for redemption will cease, except the right of
the holders of such Preferred Securities to receive the Redemption Price, but
without interest on such Redemption Price, and such Preferred Securities will
cease to be outstanding. In the event that any date fixed for redemption of
Preferred Securities is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding day which is a Business
Day (and without any additional Distribution, interest or other payment in
respect of any such delay) with the same force and effect as if made on such
date. In the event that payment of the Redemption Price in respect of Preferred
Securities called for redemption is improperly withheld or refused and not paid
either by the Trust, or by the Company pursuant to the Guarantee, Distributions
on such Preferred Securities will continue to accrue at the then applicable
rate, from the Redemption Date originally established by the Trust for such
Preferred Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be considered the date fixed for
redemption for purposes of calculating the Redemption Price. See "Description of
the Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), and, further provided that the Company does not and is
not continuing to exercise its right to defer interest payments on the
Subordinated Debentures, the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Subordinated Debentures to holders of Preferred Securities will
be made to the applicable record holders thereof as they appear on the register
for the Preferred Securities on the relevant record date, which date will be the
date 15 days prior to the Redemption Date or liquidation date, as applicable.
If less than all of the Trust Securities are to be redeemed on a Redemption
Date, then the aggregate Liquidation Amount of such Trust Securities to be
redeemed will be allocated pro rata to the Trust Securities based upon the
relative Liquidation Amounts of the two classes of Trust Securities. The
particular Preferred Securities to be redeemed will be selected by the Property
Trustee from the outstanding Preferred Securities not previously called for
redemption, by such method as the Property Trustee deems fair and appropriate
and which may provide for the selection for redemption of portions (equal to $10
or an integral multiple of $10 in excess thereof) of the Liquidation Amount of
Preferred Securities of a denomination larger than $10, or if the Preferred
Securities are then held in the form of a global preferred security, in
accordance with DTC's customary procedures. The Property Trustee will promptly
notify the registrar for
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the Preferred Securities in writing of the Preferred Securities selected for
redemption and, in the case of any Preferred Securities selected for partial
redemption, the Liquidation Amount thereof to be redeemed. For all purposes of
the Trust Agreement, unless the context otherwise requires, all provisions
relating to the redemption of Preferred Securities will relate to the portion of
the aggregate Liquidation Amount of Preferred Securities which has been or is to
be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the redemption price on the Subordinated Debentures, on and after the Redemption
Date interest will cease to accrue on such Subordinated Debentures or portions
thereof (and Distributions will cease to accrue on the related Preferred
Securities or portions thereof) called for redemption.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, will be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default has occurred and is continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, will be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for redemption,
will have been made or provided for, and all funds available to the Property
Trustee will first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the Preferred Securities then due and
payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effect of all such Events of Default with respect to
the Preferred Securities have been cured, waived or otherwise eliminated. Until
any such Events of Default under the Trust Agreement with respect to the
Preferred Securities has been so cured, waived or otherwise eliminated, the
Property Trustee will act solely on behalf of the holders of the Preferred
Securities and not on behalf of the Company, as holder of the Common Securities,
and only the holders of the Preferred Securities will have the right to direct
the Property Trustee to act on their behalf.
Liquidation Distribution Upon Dissolution
The Company, as holder of the Common Securities, will have the right at any
time to dissolve the Trust and cause the Subordinated Debentures, after
satisfaction of liabilities to creditors of the Trust, to be distributed to the
holders of the Preferred Securities. Such right is subject, however, to the
Company having received prior approval of the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal Reserve.
Pursuant to the Trust Agreement, the Trust will automatically dissolve upon
expiration of its term and will dissolve earlier on the first to occur of (i)
certain events of bankruptcy, dissolution or liquidation of the Company, (ii)
the Company, as depositor, giving written direction to the Property Trustee to
dissolve the Trust (which direction is optional and wholly within the discretion
of the Company, as depositor), (iii) redemption of all of the Preferred
Securities as described under
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"-- Redemption or Exchange -- Mandatory Redemption," or (iv) the entry
of an order for the dissolution of the Trust by a court of competent
jurisdiction.
If an early dissolution occurs as described in clause (i), (ii) or (iv) of
the preceding paragraph, the Trust will be liquidated by the Trustees as
expeditiously as the Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, to the holders of such Trust Securities a Like Amount of the Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out of
the assets of the Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to, in the case of holders of Preferred Securities, the
aggregate of the Liquidation Amount plus accrued but unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Preferred Securities will be paid on a pro rata basis. The Company, as the
holder of the Common Securities, will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Preferred Securities,
except that, if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a priority over the Common Securities. See "--
Subordination of Common Securities."
After the liquidation date fixed for any distribution of Subordinated
Debentures (i) the Preferred Securities will no longer be deemed to be
outstanding, (ii) DTC or its nominee, as the registered holder of Preferred
Securities, will receive a registered global certificate or certificates
representing the Subordinated Debentures to be delivered upon such distribution
with respect to Preferred Securities held by DTC or its nominee and (iii) any
certificates representing the Preferred Securities not held by DTC or its
nominee will be deemed to represent the Subordinated Debentures having a
principal amount equal to the stated Liquidation Amount of the Preferred
Securities and bearing accrued and unpaid interest in an amount equal to the
accumulated and unpaid Distributions on the Preferred Securities until such
certificates are presented to the security registrar for the Trust Securities
for transfer or reissuance.
Under current United States federal income tax law and interpretations and
assuming, as expected, that the Trust is treated as a grantor trust, a
distribution of the Subordinated Debentures should not be a taxable event to
holders of the Preferred Securities. Should there be a change in law, a change
in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences -- Receipt of Subordinated
Debentures or Cash Upon Liquidation of the Trust." If the Company elects neither
to redeem the Subordinated Debentures prior to maturity nor to liquidate the
Trust and distribute the Subordinated Debentures to holders of the Preferred
Securities, the Preferred Securities will remain outstanding until the repayment
of the Subordinated Debentures.
If the Company elects to dissolve the Trust and thereby causes the
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of the Trust, the Company will continue to have the right to
shorten or extend the maturity of such Subordinated Debentures, subject to
certain conditions. See "Description of the Subordinated Debentures -- General."
Liquidation Value
The amount of the Liquidation Distribution payable on the Preferred
Securities in the event of any liquidation of the Trust is $10 per Preferred
Security plus accrued but unpaid Distributions thereon to the date of payment,
which may be in the form of a distribution of such amount in Subordinated
Debentures, subject to certain exceptions. See "-- Liquidation Distribution Upon
Dissolution."
Events of Default; Notice
Any one of the following events constitutes an event of default under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
(whatever the reason for such Event of Default and whether voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative or
governmental body):
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(i) the occurrence of a Debenture Event of Default (see "Description of the
Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of 30
days; or
(iii) default by the Trust in the payment of any Redemption Price of any
Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of any
covenant or warranty of the Trustees in the Trust Agreement (other than a
covenant or warranty a default in the performance of which or the breach of
which is dealt with in clauses (ii) or (iii) above), and continuation of such
default or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Trustee(s) by the holders of at least 25%
in aggregate Liquidation Amount of the outstanding Preferred Securities, a
written notice specifying such default or breach and requiring it to be remedied
and stating that such notice is a "Notice of Default" under the Trust Agreement;
or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default has been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a preference over the Common Securities upon
dissolution of the Trust. See "-- Liquidation Distribution Upon Dissolution."
The existence of an Event of Default does not entitle the holders of Preferred
Securities to accelerate the maturity thereof.
Removal of the Trustees
Unless a Debenture Event of Default has occurred and is continuing, any
Trustee may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event, however, will the holders of the Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees, which voting
rights are vested exclusively in the Company as the holder of the Common
Securities. No resignation or removal of a Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
Co-trustees and Separate Property Trustee
Unless an Event of Default has occurred and is continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of the Trust Property (as defined
in the Trust Agreement) may at the time be located, the Company, as the holder
of the Common Securities, will have power to appoint one or more Persons (as
defined in the
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Trust Agreement) either to act as a co-trustee, jointly with the Property
Trustee, of all or any part of such Trust Property, or to act as separate
trustee of any such Trust Property, in either case with such powers as may be
provided in the instrument of appointment, and to vest in such Person or Persons
in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Trust Agreement. In case a Debenture
Event of Default has occurred and is continuing, the Property Trustee alone will
have power to make such appointment.
Merger or Consolidation of Trustees
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee is a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Trustee, will be the successor of such Trustee under the Trust Agreement,
provided such Person is otherwise qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except as described below. The Trust
may, at the request of the Company, with the consent of the Administrative
Trustees and without the consent of the holders of the Preferred Securities, the
Property Trustee or the Delaware Trustee, merge with or into, consolidate,
amalgamate, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to a trust organized as such under the laws
of any State; provided, that (i) such successor entity either (a) expressly
assumes all of the obligations of the Trust with respect to the Preferred
Securities, or (b) substitutes for the Preferred Securities other securities
having substantially the same terms as the Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Preferred
Securities rank in priority with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee in its capacity as the holder of the Subordinated Debentures,
(iii) the Successor Securities are listed, or any Successor Securities will be
listed upon notification of issuance, on any national securities exchange or
other organization on which the Preferred Securities are then listed (including,
if applicable, The Nasdaq Stock Market's National Market), if any, (iv) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not adversely affect the rights, preferences and privileges of the holders
of the Preferred Securities (including any Successor Securities) in any material
respect, (v) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Company has received an opinion from
independent counsel to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect, and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Trust nor such successor entity will be required
to register as an "investment company" under the Investment Company Act, and
(vi) the Company owns all of the common securities of such successor entity and
guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee, the Indenture, the
Subordinated Debentures, the Trust Agreement and the Expense Agreement.
Notwithstanding the foregoing, the Trust will not, except with the consent of
holders of 100% in Liquidation Amount of the Preferred Securities, consolidate,
amalgamate, merge with or into, or be replaced by or convey, transfer or lease
its properties and assets substantially as an entirety to any other Person or
permit any other Person to consolidate, amalgamate, merge with or into, or
replace it if such consolidation, amalgamation, merger, replacement,
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conveyance, transfer or lease would cause the Trust or the successor entity to
be classified as other than a grantor trust for United States federal income tax
purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided below and under "Description of the Guarantee --
Amendments and Assignment" and as otherwise required by the Trust Indenture Act
and the Trust Agreement, the holders of the Preferred Securities will have no
voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) with respect to acceptance of
appointment by a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement (provided such amendment is not
inconsistent with the other provisions of the Trust Agreement), or (iii) to
modify, eliminate or add to any provisions of the Trust Agreement to such extent
as is necessary to ensure that the Trust will be classified for United States
federal income tax purposes as a grantor trust at all times that any Trust
Securities are outstanding or to ensure that the Trust will not be required to
register as an "investment company" under the Investment Company Act; provided,
however, that in the case of clause (ii), such action may not adversely affect
in any material respect the interests of any holder of Trust Securities, and any
amendments of such Trust Agreement will become effective when notice thereof is
given to the holders of Trust Securities. The Trust Agreement may be amended by
the Trustees and the Company with (i) the consent of holders representing not
less than a majority in the aggregate Liquidation Amount of the outstanding
Trust Securities, and (ii) receipt by the Trustees of an opinion of counsel to
the effect that such amendment or the exercise of any power granted to the
Trustees in accordance with such amendment will not affect the Trust's status as
a grantor trust for United States federal income tax purposes or the Trust's
exemption from status as an "investment company" under the Investment Company
Act. Notwithstanding anything in this paragraph to the contrary, without the
consent of each holder of Trust Securities, the Trust Agreement may not be
amended to (a) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date, or (b)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
The Trustees will not, so long as any Subordinated Debentures are held by
the Property Trustee, (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or executing any
trust or power conferred on the Property Trustee with respect to the
Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Subordinated Debentures will be due and payable, or (iv)
consent to any amendment, modification or termination of the Indenture or the
Subordinated Debentures, where such consent is required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Preferred Securities; provided, however,
that where a consent under the Indenture requires the consent of each holder of
Subordinated Debentures affected thereby, no such consent will be given by the
Property Trustee without the prior consent of each holder of the Preferred
Securities. The Trustees may not revoke any action previously authorized or
approved by a vote of the holders of the Preferred Securities except by
subsequent vote of the holders of the Preferred Securities. The Property Trustee
will notify each holder of Preferred Securities of any notice of default with
respect to the Subordinated Debentures. In addition to obtaining the foregoing
approvals of the holders of the Preferred Securities, prior to taking any of the
foregoing actions, the Trustees must obtain an opinion of counsel experienced in
such matters
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to the effect that the Trust will not be classified as an association taxable as
a corporation for United States federal income tax purposes on account of such
action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for the Trust to redeem and cancel its Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustee, will, for purposes of such vote or
consent, be treated as if they were not outstanding.
Book Entry, Delivery and Form
The Preferred Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, DTC
and registered in the name of DTC's nominee. Unless and until it is exchangeable
in whole or in part for the Preferred Securities in definitive form, a global
security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such
nominee to a successor of such Depository or a nominee of such successor.
Ownership of beneficial interests in a global security will be limited to
persons that have accounts with DTC or its nominee ("Participants") or persons
that may hold interests through Participants. The Company expects that, upon the
issuance of a global security, DTC will credit, on its book-entry registration
and transfer system, the Participants' accounts with their respective principal
amounts of the Preferred Securities represented by such global security.
Ownership of beneficial interests in such global security will be shown on, and
the transfer of such ownership interests will be effected only through, records
maintained by DTC (with respect to interests of Participants) and on the records
of Participants (with respect to interests of Persons held through
Participants). Beneficial owners will not receive written confirmation from DTC
or their purchase, but are expected to receive written confirmations from the
Participants through which the beneficial owner entered into the transaction.
Transfers of ownership interests will be accomplished by entries on the books of
Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Subordinated Indenture. Except as provided below,
owners of beneficial interests in a global security will not be entitled to
receive physical delivery of the Preferred Securities in definitive form and
will not be considered the owners or holders thereof under the Subordinated
Indenture. Accordingly, each person owning a beneficial interest in such a
global security must rely on the procedures of DTC and, if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest, to exercise any rights of a holder of Preferred Securities under
the Subordinated Indenture. The Company understands that, under DTC's existing
practices, in the event that the Company requests any action of holders, or an
owner of a beneficial interest in such a global security desires to take any
action which a holder is entitled to take under the
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Subordinated Indenture, DTC would authorize the Participants holding the
relevant beneficial interests to take such action, and such Participants would
authorize beneficial owners owning through such Participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them. Redemption notices will also be sent to DTC. If less than all of the
Preferred Securities are being redeemed, the Company understands that it is
DTC's existing practice to determine by lot the amount of the interest of each
Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Trustees, any Paying Agent or any other agent of the
Company or the Trustees will have any responsibility or liability for any aspect
of the records relating to or payments made on account of beneficial ownership
interests in the global security for such Preferred Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests. Disbursements of Distributions to Participants shall be the
responsibility of DTC. DTC's practice is to credit Participants' accounts on a
payable date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payment on the payable
date. Payments by Participants to beneficial owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such Participant and not of DTC, the Company, the
Trustees, the Paying Agent or any other agent of the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Company or the Trustees. If DTC notifies the Company that it is unwilling to
continue as such, or if it is unable to continue or cease to be a clearing
agency registered under the Exchange Act and a successor depository is not
appointed by the Company within ninety days after receiving such notice or
becoming aware that DTC is no longer so registered, the Company will issue the
Preferred Securities in definitive form upon registration or transfer of, or in
exchange for, such global security. In addition, the Company may at any time and
in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
DTC has advised the Company and the Trust as follows: DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers (such as the Underwriter), banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with a Participant, either directly or indirectly.
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Same-Day Settlement and Payment
Settlement for the Preferred Securities will be made by the Underwriter in
immediately available funds.
Secondary trading in Preferred Securities of corporate issuers is generally
settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
Payment and Paying Agency
Payments in respect of the Preferred Securities will be made to DTC, which
will credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Preferred Securities are not held by DTC, such payments will be made
by check mailed to the address of the holder entitled thereto as such address
will appear on the register of holders of the Preferred Securities. The paying
agent for the Preferred Securities will initially be the Property Trustee and
any co-paying agent chosen by the Property Trustee and acceptable to the
Administrative Trustees and the Company. The paying agent for the Preferred
Securities may resign as paying agent upon 30 days' written notice to the
Property Trustee and the Company. In the event that the Property Trustee no
longer is the paying agent for the Preferred Securities, the Administrative
Trustees will appoint a successor (which must be a bank or trust company
acceptable to the Administrative Trustees and the Company) to act as paying
agent.
Registrar and Transfer Agent
The Property Trustee will act as the registrar and the transfer agent for
the Preferred Securities. Registration of transfers of Preferred Securities will
be effected without charge by or on behalf of the Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The Trust will not be required to register or cause to be
registered the transfer of Preferred Securities after such Preferred Securities
have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, upon the occurrence and
during the continuance of an Event of Default, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the Trust Agreement at
the request of any holder of Preferred Securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby. If no Event of Default has occurred and is continuing and the
Property Trustee is required to decide between alternative causes of action,
construe ambiguous provisions in the Trust Agreement or is unsure of the
application of any provision of the Trust Agreement, and the matter is not one
on which holders of Preferred Securities are entitled under the Trust Agreement
to vote, then the Property Trustee will take such action as is directed by the
Company and if not so directed, will take such action as it deems advisable and
in the best interests of the holders of the Trust Securities and will have no
liability except for its own bad faith, negligence or willful misconduct.
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Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. The Company and the Administrative Trustees are
authorized, in this connection, to take any action, not inconsistent with
applicable law, the certificate of trust of the Trust or the Trust Agreement,
that the Company and the Administrative Trustees determine in their discretion
to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
Concurrently with the issuance of the Preferred Securities, the Trust will
invest the proceeds thereof, together with the consideration paid by the Company
for the Common Securities, in the Subordinated Debentures issued by the Company.
The Subordinated Debentures will be issued as unsecured debt under the
Indenture, to be dated as of October 16, 1997 (the "Indenture"), between the
Company and Wilmington Trust Company, as trustee (the "Debenture Trustee"). The
Indenture will be qualified as an indenture under the Trust Indenture Act. The
following summary of the material terms and provisions of the Subordinated
Debentures and the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Indenture and to the Trust
Indenture Act. Wherever particular defined terms of the Indenture are referred
to, but not defined herein, such defined terms are incorporated herein by
reference. The form of the Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
General
The Subordinated Debentures will be limited in aggregate principal amount
to approximately $10,309,000 (or $11,856,000 if the option described under the
heading "Underwriting" is exercised by the Underwriter), such amount being the
sum of the aggregate stated Liquidation Amount of the Trust Securities. The
Subordinated Debentures will bear interest at the annual rate of 9.25% of the
principal amount thereof, payable quarterly in arrears on March 31, June 30,
September 30, and December 31 of each year (each, an "Interest Payment Date")
beginning December 31, 1997, to the Person (as defined in the Indenture) in
whose name each Subordinated Debenture is registered, subject to certain
exceptions, at the close of business on the fifteenth day of the last month of
the calendar quarter. It is anticipated that, until the liquidation of the
Trust, the Subordinated Debentures will be held in the name of the Property
Trustee in trust for the benefit of the holders of the Preferred Securities. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), with the same force and effect as if made on the date such
payment was originally payable. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of 9.25% thereof,
compounded quarterly. The term "interest,"
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as used herein, includes quarterly interest payments, interest on quarterly
interest payments not paid on the applicable Interest Payment Date and
Additional Interest, as applicable.
The Subordinated Debentures will mature on November 1, 2027 (such date, as
it may be shortened or extended as hereinafter described, the "Stated
Maturity"). Such date may be shortened at any time by the Company to any date
not earlier than November 1, 2002, subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Such date may also be extended at
any time at the election of the Company but in no event to a date later than
November 1, 2036, provided that at the time such election is made and at the
time of extension (i) the Company is not in bankruptcy, otherwise insolvent or
in liquidation, (ii) the Company is not in default in the payment of any
interest or principal on the Subordinated Debentures, and (iii) the Trust is not
in arrears on payments of Distributions on the Preferred Securities and no
deferred Distributions are accumulated. In the event that the Company elects to
shorten or extend the Stated Maturity of the Subordinated Debentures, it will
give notice thereof to the Debenture Trustee, the Trust and to the holders of
the Subordinated Debentures no more than 180 days and no less than 90 days prior
to the effectiveness thereof. The Company will not have the right to purchase
the Subordinated Debentures, in whole or in part, from the Trust until after
November 1, 2002, except if a Tax Event, a Capital Treatment Event or an
Investment Company Event has occurred and is continuing.
The Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of the Bank, upon the Bank's liquidation or reorganization or otherwise (and
thus the ability of holders of the Subordinated Debentures to benefit indirectly
from such distribution), is subject to the prior claims of creditors of the
Bank, except to the extent that the Company may itself be recognized as a
creditor of the Bank. The Subordinated Debentures will, therefore, be
effectively subordinated to all existing and future liabilities of the Bank, and
holders of Subordinated Debentures should look only to the assets of the Company
for payments on the Subordinated Debentures. The Indenture does not limit the
incurrence or issuance of other secured or unsecured debt of the Company or any
of its subsidiaries, including Senior Debt, Subordinated Debt and Additional
Senior Obligations, whether under the Indenture or any existing indenture or
other indenture that the Company may enter into in the future or otherwise.
See "-- Subordination."
The Indenture does not contain provisions that afford holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
Option to Extend Interest Payment Period
The Company has the right under the Indenture at any time during the term
of the Subordinated Debentures, so long as no Debenture Event of Default has
occurred and is continuing, to defer the payment of interest at any time, or
from time to time (each, an "Extension Period"). The right to defer the payment
of interest on the Subordinated Debentures is limited, however, to a period, in
each instance, not exceeding 20 consecutive quarters and no Extension Period may
extend beyond the Stated Maturity of the Subordinated Debentures. At the end of
each Extension Period, the Company must pay all interest then accrued and unpaid
(together with interest thereon at the annual rate of 9.25%, compounded
quarterly, to the extent permitted by applicable law). During an Extension
Period, interest will continue to accrue and holders of Subordinated Debentures
(or the holders of Preferred Securities if such securities are then outstanding)
will be required to accrue and recognize income for United States federal income
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tax purposes. See "Certain Federal Income Tax Consequences -- Potential
Extension of Interest Payment Period and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu
with or junior in interest to the Subordinated Debentures or make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks pari passu or junior in
interest to the Subordinated Debentures (other than payments under the
Guarantee), or (iii) redeem, purchase or acquire less than all of the
Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further defer the
payment of interest; provided, that no Extension Period may exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Subordinated
Debentures. Upon the termination of any such Extension Period and the payment of
all amounts then due on any Interest Payment Date, the Company may elect to
begin a new Extension Period subject to the above requirements. No interest will
be due and payable during an Extension Period, except at the end thereof. The
Company has no present intention of exercising its rights to defer payments of
interest on the Subordinated Debentures. The Company must give the Property
Trustee, the Administrative Trustees and the Debenture Trustee notice of its
election of such Extension Period at least two Business Days prior to the
earlier of (i) the next succeeding date on which Distributions on the Trust
Securities would have been payable except for the election to begin such
Extension Period, or (ii) the date the Trust is required to give notice of the
record date, or the date such Distributions are payable, to The Nasdaq Stock
Market's National Market (or other applicable self-regulatory organization) or
to holders of the Preferred Securities, but in any event at least one Business
Day before such record date. Subject to the foregoing, there is no limitation on
the number of times that the Company may elect to begin an Extension Period.
Additional Sums
If the Trust or the Property Trustee is required to pay any additional
taxes, duties or other governmental charges as a result of the occurrence of a
Tax Event, the Company will pay as additional amounts (referred to herein as
"Additional Interest") on the Subordinated Debentures such additional amounts as
may be required so that the net amounts received and retained by the Trust after
paying any such additional taxes, duties or other governmental charges will not
be less than the amounts the Trust would have received had such additional
taxes, duties or other governmental charges not been imposed.
Registration, Denomination and Transfer
The Subordinated Debentures will initially be registered in the name of the
Trust. If the Subordinated Debentures are distributed to holders of Preferred
Securities, it is anticipated that the depositary arrangements for the
Subordinated Debentures will be substantially identical to those in effect for
the Preferred Securities . See "Description of Preferred Securities - Book
Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Subordinated Debentures to be issued in definitive form.
Payments on Subordinated Debentures represented by a global security will
be made to Cede & Co., the nominee for DTC, as the registered holder of the
Subordinated Debentures, as described under "Description of Preferred Securities
- - Book Entry, Delivery and Form." If Subordinated Debentures are issued in
certificated form, principal and interest will be payable, the transfer of the
Subordinated Debentures will be registrable, and Subordinated Debentures will be
exchangeable for Subordinated Debentures of other authorized denominations of a
like aggregate principal amount, at the corporate trust office of the Debenture
Trustee in Wilmington, Delaware or at the offices of any Paying Agent or
transfer agent appointed by the Company, provided that payment of interest may
be made at the option of the Company by check mailed to the address of the
persons entitled thereto. However, a holder of $1 million or more in aggregate
principal amount of Subordinated Debentures may receive payments of interest
(other than interest payable at the Stated Maturity) by wire transfer of
immediately available funds upon written request to the Debenture Trustee not
later than 15 calendar days prior to the date on which the interest is payable.
Subordinated Debentures will be exchangeable for other Subordinated
Debentures of like tenor, of any authorized denominations, and of a like
aggregate principal amount.
Subordinated Debentures may be presented for exchange as provided above,
and may be presented for registration of transfer (with the form of transfer
endorsed thereon, or a satisfactory written instrument of transfer, duly
executed), at the office of the securities registrar appointed under the
Subordinated Debenture or at the office of any transfer agent designated by the
Company for such purpose without service charge and upon payment of any taxes
and other governmental charges as described in the Indenture.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Subordinated Debenture shall thereafter look,
as a general unsecured creditor, only to the Company for payment thereof.
Redemption or Exchange
The Company will have the right to redeem the Subordinated Debentures prior
to maturity (i) on or after November 1, 2002, in whole at any time or in part
from time to time, or (ii) at any time in whole (but not in part), within 180
days following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event, in each case at a redemption price equal to the
accrued and unpaid interest on the Subordinated Debentures so redeemed to the
date fixed for redemption, plus 100% of the principal amount thereof. Any such
redemption prior to the Stated Maturity will be subject to prior approval of the
Federal Reserve if then required under applicable capital guidelines or policies
of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing
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authority thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which pronouncement or
decision is announced on or after the date of issuance of the Preferred
Securities under the Trust Agreement, there is more than an insubstantial risk
that (i) interest payable by the Company on the Subordinated Debentures is not,
or within 90 days of the date of such opinion will not be, deductible by the
Company, in whole or in part, for United States federal income tax purposes,
(ii) the Trust is, or will be within 90 days after the date of such opinion of
counsel, subject to United States federal income tax with respect to income
received or accrued on the Subordinated Debentures, or (iii) the Trust is, or
will be within 90 days after the date of such opinion of counsel, subject to
more than a de minimis amount of other taxes, duties, assessments or other
governmental charges. The Company must request and receive an opinion with
regard to such matters within a reasonable period of time after it becomes aware
of the possible occurrence of any of the events described in clauses (i) through
(iii) above.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which proposed change,
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk of impairment of the Company's ability to treat the aggregate
Liquidation Amount of the Preferred Securities (or any substantial portion
thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then applicable to
the Company; provided, however, that the inability of the Company to treat all
or any portion of the Liquidation Amount of the Preferred Securities as Tier 1
Capital shall not constitute the basis for a Capital Treatment Event if such
inability results from the Company having cumulative preferred capital in excess
of the amount which may qualify for treatment as Tier 1 Capital under applicable
capital adequacy guidelines of the Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change becomes effective on or after the date of original
issuance of the Preferred Securities.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Subordinated Debentures to
be redeemed at its registered address. Unless the Company defaults in payment of
the redemption price for the Subordinated Debentures, on and after the
redemption date interest ceases to accrue on such Subordinated Debentures or
portions thereof called for redemption.
The Subordinated Debentures will not be subject to any sinking fund.
Distribution Upon Liquidation
As described under "Description of Preferred Securities -- Liquidation
Distribution Upon Dissolution," under certain circumstances involving the
dissolution of the Trust, the Subordinated Debentures may be distributed to the
holders of the Preferred Securities in liquidation of the Trust after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law. Any such distribution will be subject to receipt of prior approval by the
Federal Reserve if then required under applicable policies
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or guidelines of the Federal Reserve. If the Subordinated Debentures are
distributed to the holders of Preferred Securities upon the dissolution of the
Trust, the Company will use its best efforts to list the Subordinated Debentures
on The Nasdaq Stock Market's National Market or such stock exchanges, if any, on
which the Preferred Securities are then listed. There can be no assurance as to
the market price of any Subordinated Debentures that may be distributed to the
holders of Preferred Securities.
Restrictions on Certain Payments
If at any time (i) there has occurred a Debenture Event of Default, (ii)
the Company is in default with respect to its obligations under the Guarantee or
(iii) the Company has given notice of its election of an Extension Period as
provided in the Indenture with respect to the Subordinated Debentures and has
not rescinded such notice, or such Extension Period, or any extension thereof,
is continuing, the Company will not (1) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock, (2) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (3)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities.
Subordination
The Indenture provides that the Subordinated Debentures issued thereunder
are subordinated and junior in right of payment to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company. Upon any payment or
distribution of assets to creditors upon any liquidation, dissolution, winding
up, reorganization, assignment for the benefit of creditors, marshaling of
assets or any bankruptcy, insolvency, debt restructuring or similar proceedings
in connection with any insolvency or bankruptcy proceedings of the Company, the
holders of Senior Debt, Subordinated Debt and Additional Senior Obligations of
the Company will first be entitled to receive payment in full of principal of
(and premium, if any) and interest, if any, on such Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company before the holders of
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Subordinated Debentures.
In the event of the acceleration of the maturity of any Subordinated
Debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations of the Company outstanding at the time of such acceleration
will first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of the
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Subordinated Debentures.
No payments on account of principal or interest in respect of the
Subordinated Debentures may be made if there has occurred and is continuing a
default in any payment with respect to Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company or an event of default with respect
to any Senior Debt, Subordinated Debt or Additional Senior Obligations of the
Company resulting in the acceleration of the maturity thereof, or if any
judicial proceeding is pending with respect to any such default.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such Person for money borrowed, (ii) every
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obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business), (v) every capital lease obligation of such Person,
and (vi) every obligation of the type referred to in clauses (i) through (v) of
another Person and all dividends of another Person the payment of which, in
either case, such Person has guaranteed or is responsible or liable, directly or
indirectly, as obligor or otherwise.
"Senior Debt" means, with respect to the Company, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on or prior to the date of the Indenture
or thereafter incurred, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Subordinated Debentures
or to other Debt which is pari passu with, or subordinated to, the Subordinated
Debentures; provided, however, that Senior Debt will not be deemed to include
(i) any Debt of the Company which when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, (iii) any Debt to any employee of the Company, (iv) any
Debt which by its terms is subordinated to trade accounts payable or accrued
liabilities arising in the ordinary course of business to the extent that
payments made to the holders of such Debt by the holders of the Subordinated
Debentures as a result of the subordination provisions of the Indenture would be
greater than they otherwise would have been as a result of any obligation of
such holders to pay amounts over to the obligees on such trade accounts payable
or accrued liabilities arising in the ordinary course of business as a result of
subordination provisions to which such Debt is subject, and (v) Debt which
constitutes Subordinated Debt.
"Subordinated Debt" means, with respect to the Company, the principal of
(and premium, if any) and interest, if any (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
the Company whether or not such claim for post-petition interest is allowed in
such proceeding), on Debt, whether incurred on or prior to the date of the
Indenture or thereafter incurred, which is by its terms expressly provided to be
junior and subordinate to other Debt of the Company (other than the Subordinated
Debentures).
"Additional Senior Obligations" means, with respect to the Company, all
indebtedness, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements; provided, however, that Additional Senior Obligations do not
include claims in respect of Senior Debt or Subordinated Debt or obligations
which, by their terms, are expressly stated to be not superior in right of
payment to the Subordinated Debentures or to rank pari passu in right of payment
with the Subordinated Debentures. "Claim," as used herein, has the meaning
assigned thereto in Section 101(4) of the United States Bankruptcy Code of 1978,
as amended.
The Indenture places no limitation on the future issuance of securities
similar to the Subordinated Debentures, the amount of additional Senior Debt,
Subordinated Debt or Additional Senior Obligations that may be incurred by the
Company or any of its subsidiaries. The Company expects from time to time to
incur additional indebtedness constituting Senior Debt, Subordinated Debt and
Additional Senior Obligations. As of June 30, 1997, the Company had no
outstanding Senior Debt, Subordinated Debt or
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Additional Senior Obligations. Because the Company is a holding company, the
Subordinated Debentures are effectively subordinated to all existing and future
liabilities of the Company's subsidiaries, including obligations to depositors
of the Bank.
Registrar and Transfer Agent
The Debenture Trustee will act as the registrar and the transfer agent for
the Subordinated Debentures. Subordinated Debentures may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the registrar in Wilmington, Delaware. The Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts. The Company may at any time
designate additional transfer agents with respect to the Subordinated
Debentures. In the event of any redemption, neither the Company nor the
Debenture Trustee will be required to (i) issue, register the transfer of or
exchange Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Subordinated
Debentures and ending at the close of business on the day of mailing of the
relevant notice of redemption, or (ii) transfer or exchange any Subordinated
Debentures so selected for redemption, except, in the case of any Subordinated
Debentures being redeemed in part, any portion thereof not to be redeemed.
Modification of Indenture
The Company and the Debenture Trustee may, from time to time without the
consent of the holders of the Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of the
outstanding Subordinated Debentures, to modify the Indenture; provided, that no
such modification may, without the consent of the holder of each outstanding
Subordinated Debenture affected by such proposed modification, (i) extend the
fixed maturity of the
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Subordinated Debentures, or reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest thereon, or (ii) reduce the
percentage of principal amount of Subordinated Debentures, the holders of which
are required to consent to any such modification of the Indenture; provided that
so long as any of the Preferred Securities remain outstanding, no such
modification may be made that requires the consent of the holders of the
Subordinated Debentures, and no termination of the Indenture may occur, and no
waiver of any Debenture Event of Default may be effective, without the prior
consent of the holders of at least a majority of the aggregate Liquidation
Amount of the Preferred Securities and that if the consent of the holder of each
Subordinated Debenture is required, such modification will not be effective
until each holder of Trust Securities has consented thereto.
Debenture Events of Default
The Indenture provides that any one or more of the following described
events with respect to the Subordinated Debentures that has occurred and is
continuing constitutes an event of default (each, a "Debenture Event of
Default") with respect to the Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Subordinated Debentures
when due (subject to the deferral of any due date in the case of an Extension
Period); or
(ii) failure to pay any principal on the Subordinated Debentures when due,
whether at maturity, upon redemption by declaration or otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to the
Company from the Debenture Trustee or the holders of at least 25% in aggregate
outstanding principal amount of the Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee. The
Debenture Trustee, or the holders of not less than 25% in aggregate outstanding
principal amount of the Subordinated Debentures, may declare the principal due
and payable immediately upon a Debenture Event of Default. The holders of a
majority in aggregate outstanding principal amount of the Subordinated
Debentures may annul such declaration and waive the default if the default
(other than the non-payment of the principal of the Subordinated Debentures
which has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
Should the holders of the Subordinated Debentures fail to annul such declaration
and waive such default, the holders of a majority in aggregate Liquidation
Amount of the Preferred Securities will have such right.
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
If a Debenture Event of Default has occurred and is continuing, the
Property Trustee will have the right to declare the principal of and the
interest on such Subordinated Debentures, and any other amounts payable under
the Indenture, to be forthwith due and payable and to enforce its other rights
as a creditor with respect to such Subordinated Debentures.
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Enforcement of Certain Rights by Holders of the Preferred Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest on or
principal of the Subordinated Debentures on the payment date on which such
payment is due and payable, then a holder of Preferred Securities may institute
a legal proceeding directly against the Company for enforcement of payment to
such holder of the principal of or interest on such Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder (a "Direct Action"). The Company will have a
right of set-off under the Indenture to the extent of any payment made by the
Company to such holder of Preferred Securities in the Direct Action. The Company
may not amend the Indenture to remove the foregoing right to bring a Direct
Action without the prior written consent of the holders of all of the Preferred
Securities. If the right to bring a Direct Action is removed, the Trust may
become subject to the reporting obligations under the Exchange Act.
The holders of the Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Subordinated Debentures unless there has been an
Event of Default under the Trust Agreement. See "Description of Preferred
Securities -- Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Company may not consolidate with or merge into any other Person or
convey or transfer its properties and assets substantially as an entirety to any
Person, and no Person may consolidate with or merge into the Company or sell,
convey, transfer or otherwise dispose of its properties and assets substantially
as an entirety to the Company, unless (i) in the event the Company consolidates
with or merges into another Person or conveys or transfers its properties and
assets substantially as an entirety to any Person, the successor Person is
organized under the laws of the United States or any State or the District of
Columbia, and such successor Person expressly assumes by supplemental indenture
the Company's obligations on the Subordinated Debentures issued under the
Indenture, (ii) immediately after giving effect thereto, no Debenture Event of
Default, and no event which, after notice or lapse of time or both, would become
a Debenture Event of Default, has occurred and is continuing, and (iii) certain
other conditions prescribed in the Indenture are met.
Satisfaction and Discharge
The Indenture will cease to be of further effect (except as to the
Company's obligations to pay certain sums due pursuant to the Indenture and to
provide certain officers' certificates and opinions of counsel described
therein) and the Company will be deemed to have satisfied and discharged the
Indenture when, among other things, all Subordinated Debentures not previously
delivered to the Debenture Trustee for cancellation (i) have become due and
payable, or (ii) will become due and payable at their Stated Maturity within one
year or are to be called for redemption within one year, and the Company
deposits or causes to be deposited with the Debenture Trustee funds, in trust,
for the purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation, for the principal and interest to the date
of the deposit or to the Stated Maturity or redemption date, as the case may be.
Governing Law
The Indenture and the Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of New York.
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Information Concerning the Debenture Trustee
The Debenture Trustee has and is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Subordinated Debentures, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which might
be incurred thereby. The Debenture Trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties if the Debenture Trustee reasonably believes that repayment or
adequate indemnity is not reasonably assured to it.
Miscellaneous
The Company has agreed, pursuant to the Indenture, for so long as Trust
Securities remain outstanding, (i) to maintain directly or indirectly 100%
ownership of the Common Securities of the Trust (provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
Company's ownership of the Common Securities), (ii) not to voluntarily dissolve
the Trust, except upon prior approval of the Federal Reserve if then so required
under applicable capital guidelines or policies of the Federal Reserve, and (a)
in connection with a distribution of Subordinated Debentures to the holders of
the Preferred Securities in liquidation of the Trust, or (b) in connection with
certain mergers, consolidations or amalgamations permitted by the Trust
Agreement, and (iii) to use its reasonable efforts, consistent with the terms
and provisions of the Trust Agreement, to cause the Trust to remain classified
as a grantor trust and not as an association taxable as a corporation for United
States federal income tax purposes.
DESCRIPTION OF THE GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred Securities.
The Guarantee will be qualified as an indenture under the Trust Indenture Act.
The Guarantee Trustee will act as indenture trustee under the Guarantee for
purposes of complying with the provisions of the Trust Indenture Act. The
Guarantee Trustee, Wilmington Trust Company, will hold the Guarantee for the
benefit of the holders of the Preferred Securities. The following summary of the
material terms and provisions of the Guarantee does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all of the
provisions of the Guarantee and the Trust Indenture Act. Wherever particular
defined terms of the Guarantee are referred to, but not defined herein, such
defined terms are incorporated herein by reference. The form of the Guarantee
has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
General
The Company will, pursuant to the Guarantee, irrevocably agree to pay in
full on a subordinated basis, to the extent set forth therein, the Guarantee
Payments (as defined below) to the holders of the Preferred Securities, as and
when due, regardless of any defense, right of set-off or counterclaim that the
Trust may have or assert other than the defense of payment. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accrued and unpaid Distributions required to be paid on the
Preferred Securities, to the extent that the Trust has funds available therefor
at such time, (ii) the Redemption Price with respect to any Preferred Securities
called for redemption to the extent that the Trust has funds available therefor
at such time, and (iii) upon a voluntary or involuntary dissolution, winding up
or
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liquidation of the Trust (other than in connection with the distribution of
Subordinated Debentures to the holders of Preferred Securities or a redemption
of all of the Preferred Securities), the lesser of (a) the amount of the
Liquidation Distribution, to the extent the Trust has funds available therefor
at such time, and (b) the amount of assets of the Trust remaining available for
distribution to holders of Preferred Securities in liquidation of the Trust. The
obligation of the Company to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Company to the holders of the Preferred
Securities or by causing the Trust to pay such amounts to such holders.
The Guarantee will not apply to any payment of Distributions except to the
extent the Trust has funds available therefor. If the Company does not make
interest payments on the Subordinated Debentures held by the Trust, the Trust
will not pay Distributions on the Preferred Securities and will not have funds
legally available therefor.
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company in the same
manner as the Subordinated Debentures. The Guarantee does not place a limitation
on the amount of additional Senior Debt, Subordinated Debt or Additional Senior
Obligations that may be incurred by the Company or any of its subsidiaries. The
Company expects from time to time to incur additional indebtedness constituting
Senior Debt, Subordinated Debt and Additional Senior Obligations.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against any other Person). The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent not
paid by the Trust or upon distribution of the Subordinated Debentures to the
holders of the Preferred Securities. Because the Company is a holding company,
the right of the Company to participate in any distribution of assets of the
Bank upon the Bank's liquidation or reorganization or otherwise is subject to
the prior claims of creditors of the Bank, except to the extent the Company may
itself be recognized as a creditor of the Bank. The Company's obligations under
the Guarantee, therefore, will be effectively subordinated to all existing and
future liabilities of the Company's subsidiaries, and claimants should look only
to the assets of the Company for payments thereunder.
Amendments and Assignment
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. See "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement." All guarantees and agreements
contained in the Guarantee will bind the successors, assigns, receivers,
trustees and representatives of the Company and will inure to the benefit of the
holders of the Preferred Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
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conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee or
any other Person.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of any Preferred Securities, unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon (a)
full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of the Trust, or (c)
distribution of the Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Preferred Securities must
restore payment of any sums paid under such Preferred Securities or the
Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the laws
of the State of New York.
EXPENSE AGREEMENT
The Company will, pursuant to the Agreement as to Expenses and Liabilities
entered into by it under the Trust Agreement (the "Expense Agreement"),
irrevocably and unconditionally guarantee to each person or entity to whom the
Trust becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust, other than obligations of the Trust to pay to the
holders of the Preferred Securities or other similar interests in the Trust of
the amounts due such holders pursuant to the terms of the Preferred Securities
or such other similar interests, as the case may be. Third party creditors of
the Trust may proceed directly against the Company under the Expense Agreement,
regardless of whether such creditors had notice of the Expense Agreement.
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RELATIONSHIP AMONG THE PREFERRED SECURITIES,
SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." The Company and the Trust
believe that, taken together, the obligations of the Company under the
Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement, and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of Distributions
and other amounts due on the Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the obligations of the Trust under the Preferred Securities. If and to the
extent that the Company does not make payments on the Subordinated Debentures,
the Trust will not pay Distributions or other amounts due on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the Trust
does not have sufficient funds to pay such Distributions. In such event, the
remedy of a holder of Preferred Securities is to institute a legal proceeding
directly against the Company for enforcement of payment of such Distributions to
such holder. The obligations of the Company under the Guarantee are subordinate
and junior in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover Distributions
and other payments due on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Subordinated Debentures will be equal to the
sum of the aggregate stated Liquidation Amount of the Trust Securities, (ii) the
interest rate and interest and other payment dates on the Subordinated
Debentures will match the Distribution rate and Distribution and other payment
dates for the Preferred Securities, (iii) the Company will pay for all and any
costs, expenses and liabilities of the Trust (except the obligations of the
Trust to holders of the Preferred Securities), and (iv) the Trust Agreement
further provides that the Trust will not engage in any activity that is not
consistent with the limited purposes of the Trust.
Enforcement Rights of Holders of Preferred Securities
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Trust or
any other Person. A default or event of default under any Senior Debt,
Subordinated Debt or Additional Senior Obligations of the Company would not
constitute a default or Event of Default. In the event, however, of payment
defaults under, or acceleration of, Senior Debt, Subordinated Debt or Additional
Senior Obligations of the Company, the subordination provisions of the Indenture
provide that no payments may be made in respect of the Subordinated Debentures
until such Senior Debt, Subordinated Debt or Additional Senior Obligations has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on the Subordinated Debentures would
constitute an Event of Default.
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Limited Purpose of the Trust
The Preferred Securities evidence a preferred undivided beneficial interest
in the assets of the Trust. The Trust exists for the exclusive purposes of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Subordinated Debentures issued by the Company, and (iii) engaging in only
those other activities necessary, advisable, or incidental thereto. A principal
difference between the rights of a holder of a Preferred Security and the rights
of a holder of a Subordinated Debenture is that a holder of a Subordinated
Debenture is entitled to receive from the Company the principal amount of and
interest accrued on Subordinated Debentures held, while a holder of Preferred
Securities is entitled to receive Distributions from the Trust (or from the
Company under the Guarantee) if and to the extent the Trust has funds available
for the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of the Trust involving the
liquidation of the Subordinated Debentures, the holders of the Preferred
Securities will be entitled to receive, out of assets held by the Trust, the
Liquidation Distribution in cash. See "Description of Preferred Securities --
Liquidation Distribution Upon Dissolution." Upon any voluntary or involuntary
liquidation or bankruptcy of the Company, the Property Trustee, as holder of the
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company (as set forth in the Indenture),
but entitled to receive payment in full of principal and interest before any
shareholders of the Company receive payments or distributions. Since the Company
is the guarantor under the Guarantee and has agreed to pay for all costs,
expenses and liabilities of the Trust (other than the obligations of the Trust
to the holders of its Preferred Securities), the positions of a holder of the
Preferred Securities and a holder of the Subordinated Debentures are expected to
be substantially the same relative to other creditors and to shareholders of the
Company in the event of liquidation or bankruptcy of the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
In the opinion of Stradley, Ronon, Stevens & Young, LLP, in its capacity as
counsel to the Company ("Tax Counsel"), the following discussion summarizes the
material United States federal income tax consequences of the purchase,
ownership and disposition of the Preferred Securities.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date of this Prospectus, all of which
are subject to change, possibly on a retroactive basis. The authorities on which
this summary is based are subject to various interpretations, and the opinions
of Tax Counsel are not binding on the Internal Revenue Service (the "IRS") or
the courts, either of which could take a contrary position. Moreover, no rulings
have been or will be sought from the IRS with respect to the transactions
described herein. Accordingly, there can be no assurance that the IRS will not
challenge the opinions expressed herein or that a court would not sustain such a
challenge.
No attempt has been made in the following discussion to comment on all
United States federal income tax matters affecting purchasers of Preferred
Securities. Moreover, the discussion generally focuses on holders of Preferred
Securities who are individual citizens or residents of the United States and who
acquire Preferred Securities on their original issue at their offering price and
hold Preferred Securities
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as capital assets. The discussion has only limited application to dealers in
securities, corporations, estates, trusts or nonresident aliens and does not
address all the tax consequences that may be relevant to holders who may be
subject to special tax treatment, such as, for example, banks, thrifts, real
estate investment trusts, regulated investment companies, insurance companies,
dealers in securities or currencies, tax-exempt investors, or persons that will
hold the Preferred Securities as a position in a "straddle," as part of a
"synthetic security" or "hedge," as part of a "conversion transaction" or other
integrated investment, or as other than a capital asset. The following summary
also does not address the tax consequences to persons that have a functional
currency other than the U.S. dollar or the tax consequences to shareholders,
partners or beneficiaries of a holder of Preferred Securities. Further, it does
not include any description of any alternative minimum tax consequences or the
tax laws of any state or local government or of any foreign government that may
be applicable to the Preferred Securities. Accordingly, each prospective
investor should consult, and should rely exclusively on, such investor's own tax
advisors in analyzing the federal, state, local and foreign tax consequences of
the purchase, ownership or disposition of Preferred Securities.
Classification of the Subordinated Debentures
The Company and the Trust will agree to treat the Subordinated Debentures
as indebtedness for all United States federal income tax purposes. By acceptance
of a Preferred Security, each holder covenants to treat the Subordinated
Debentures as indebtedness and the Preferred Securities as evidence of an
indirect beneficial ownership interest in the Subordinated Debentures. No
assurance can be given, however, that such position of the Company will not be
challenged by the Internal Revenue Service or, if challenged, that such a
challenge will not be successful. The remainder of this discussion assumes that
the Subordinated Debentures will be classified for United States federal income
tax purposes as indebtedness of the Company.
Classification of the Trust
In connection with the issuance of the Preferred Securities, Tax Counsel
will render its opinion generally to effect that, under the current law and
based on the representations, facts and assumptions set forth in this
Prospectus, and assuming full compliance with the terms of the Trust Agreement
(and other relevant documents), and based on certain assumptions and
qualifications referenced in the opinion, the Trust will be characterized for
United States federal income tax purposes as a grantor trust and will not be
characterized as an association taxable as a corporation. Accordingly, for
United States federal income tax purposes, each holder of Preferred Securities
generally will be treated as owning an undivided beneficial interest in the
Subordinated Debentures, and each holder will be required to include all income
or gain recognized for United States federal income tax purposes with respect to
its allocable share of the Subordinated Debentures on its own income tax return.
Potential Extension of Interest Payment Period and Original Issue Discount
Under recently issued Treasury regulations (the "Regulations"), a debt
instrument will be deemed to be issued with OID if there is more than a "remote"
contingency that periodic stated interest payments due on the instrument will
not be timely paid. Because the exercise by the Company of its option to defer
the payment of stated interest on the Subordinated Debentures would prevent the
Company from declaring
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dividends on any class of equity, the Company believes that the likelihood of
its exercising the option is "remote" within the meaning of the Regulations. As
a result, the Company intends to take the position that the Subordinated
Debentures will not be deemed to be issued with OID. Accordingly, based on this
position, stated interest payments on the Subordinated Debentures will be
includible in the ordinary income of a holder at the time that such payments are
paid or accrued in accordance with the holder's regular method of accounting.
Because the Regulations have not yet been addressed in any published rulings or
other published interpretations issued by the Internal Revenue Service, it is
possible that the Internal Revenue Service could take a position contrary to the
position taken by the Company.
If the Company were to exercise its option to defer the payment of stated
interest on the Subordinated Debentures, the Subordinated Debentures would be
treated, solely for purpose of the OID rules, as being "reissued" at such time
with OID. Under these rules, a holder of the Subordinated Debentures would be
required to include OID in ordinary income, on a current basis, over the period
that the instrument is held even though the Company would not be making any
actual cash payments during the extended interest payment period. The amount of
interest income includible in the taxable income of a holder of the Subordinated
Debentures would be determined on the basis of a constant yield method over the
remaining term of the instrument and the actual receipt of future payments of
stated interest on the Subordinated Debentures would no longer be separately
reported as taxable income. The amount of OID that would accrue, in the
aggregate, during the extended interest payment period would be approximately
equal to the amount of the cash payment due at the end of such period. Any OID
included in income would increase the holder's adjusted tax basis in the
Subordinated Debentures and the holder's actual receipt of interest payments
would reduce such basis.
Because income on the Preferred Securities will constitute interest income
for United States federal income tax purposes, corporate holders of Preferred
Securities will not be entitled to claim a dividends received deduction in
respect of such income.
Market Discount and Acquisition Premium
Holders of Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interests in the Subordinated Debentures with "market discount"
or "acquisition premium" as such phrases are defined for United States federal
income tax purposes. Such holders are advised to consult their tax advisors as
to the income tax consequences of the acquisition, ownership and disposition of
the Preferred Securities.
Receipt of Subordinated Debentures or Cash Upon Liquidation of the Trust
Under certain circumstances, as described under "Description of Preferred
Securities -- Redemption or Exchange" and " -- Liquidation Distribution Upon
Dissolution," the Subordinated Debentures may be distributed to holders of
Preferred Securities upon a liquidation of the Trust. Under current United
States federal income tax law, such a distribution would be treated as a
nontaxable event to each such holder and would result in such holder having an
adjusted tax basis in the Subordinated Debentures received in the liquidation
equal to such holder's adjusted tax basis in the Preferred Securities
immediately before the distribution. A holder's holding period in the
Subordinated Debentures so received in liquidation of the Trust would include
the period for which such holder held the Preferred Securities.
If, however, a Tax Event occurs which results in the Trust being treated as
an association taxable as a corporation, the distribution would likely
constitute a taxable event to holders of the Preferred Securities. Under certain
circumstances described herein, the Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred
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Securities. Under current law, such a redemption would, for United States
federal income tax purposes, constitute a taxable disposition of the redeemed
Preferred Securities, and a holder would recognize gain or loss as if the holder
sold such Preferred Securities for cash. See "Description of Preferred
Securities -- Redemption or Exchange" and "-- Liquidation Distribution Upon
Dissolution."
Disposition of Preferred Securities
Upon the sale of the Preferred Securities, a holder will recognize gain or
loss in an amount equal to the difference between his adjusted tax basis in the
Preferred Securities and the amount realized in the sale (except to the extent
of any amount received in respect of accrued but unpaid interest not previously
included in income). A holder's adjusted tax basis in the Preferred Securities
generally will be his initial purchase price increased by OID (if any)
previously includible in the holder's gross income to the date of disposition
and decreased by payments (if any) received on the Preferred Securities in
respect of OID (if any) to the date of disposition. Such gain or loss generally
will be a capital gain or loss and will be a long-term capital gain or loss if
the Preferred Securities have been held for more than one year at the time of
the sale.
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID if the Subordinated
Debentures are treated as having been issued, or reissued, with OID) with
respect to the underlying Subordinated Debentures. A holder who disposes of his
Preferred Securities will be required to include in ordinary income (i) any
portion of the amount realized that is attributable to such accrued but unpaid
interest to the extent not previously included in income, or (ii) any amount of
OID, in either case, that has accrued on his pro rata share of the underlying
Subordinated Debentures during the taxable year of sale through the date of
disposition. Any such income inclusion will increase the holder's adjusted tax
basis in his Preferred Securities disposed of. To the extent that the amount
realized in the sale is less than the holder's adjusted tax basis, a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes.
Effect of Changes in Tax Laws
Although the Taxpayer Relief Act of 1997, signed into law by President
Clinton on August 5, 1997, does not deny interest deductions to be made with
respect to the Preferred Securities, there can be no assurance that other
legislation enacted after the date of this Prospectus will not otherwise
adversely affect the ability of the Company to deduct the interest payable on
the Subordinated Debentures. Consequently, there can be no assurance that a Tax
Event will not occur. A Tax Event would permit the Company, upon approval of the
Federal Reserve if then required under applicable capital guidelines or policies
of the Federal Reserve, to cause a redemption of the Preferred Securities
before, as well as after, November 1, 2002. See "Description of the Subordinated
Debentures -- Redemption or Exchange" and "Description of Preferred Securities
- -- Redemption or Exchange -- Tax Event Redemption, Capital Treatment Event
Redemption or Investment Company Event Redemption."
Backup Withholding and Information Reporting
The amount of OID accrued on the Preferred Securities held of record by
individual citizens or residents of the United States, or certain trusts,
estates, and partnerships, will be reported to the IRS on Forms 1099, which
forms should be mailed to such holders of Preferred Securities by January 31
following each calendar year. Payments made on, and proceeds from the sale of,
the Preferred Securities may be subject to a "backup" withholding tax (currently
at 31%) unless the holder complies with certain identification and other
requirements. Any amounts withheld under the backup withholding rules will be
55
<PAGE>
allowed as a credit against the holder's United States federal income tax
liability, provided the required information is provided to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF PREFERRED SECURITIES. HOLDERS OF PREFERRED
SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
CERTAIN ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), should consider their
obligations under ERISA in determining whether to purchase Preferred Securities.
In general, a person or entity that has discretionary authority or control over
the management of a plan's assets or provides investment advice for a fee is
considered to be a fiduciary of the plan. Section 404(a)(1) of ERISA requires
fiduciaries of plans to discharge their duties with respect to a plan solely in
the interest of the participants and beneficiaries of the plan and (1) for the
exclusive purpose of providing benefits to participants and their beneficiaries;
and deferring reasonable expenses of administering the plan; (2) with the care,
skill, prudence and diligence under the circumstances then prevailing that a
prudent man acting in a like capacity and familiar with such matters would use
in the conduct of enterprise of a like character and with like aims; (3) by
diversifying the investments of the plan so as to minimize the risk of large
losses, unless under the circumstances it is clearly prudent not to do so; and
(4) in accordance with the documents and instruments governing the plan insofar
as such documents and instruments are consistent with the provisions of ERISA.
Fiduciaries of plans subject to ERISA or Section 4975 of the Code should
also consider whether purchasing Preferred Securities may result in a prohibited
transaction under Section 406 of ERISA or Section 4975 of the Code. ERISA
prohibits certain transactions between an employee benefit plan and a "party in
interest," as that term is defined in Section 3(14) of ERISA. Engaging in a
prohibited transaction may subject fiduciaries of a plan subject to ERISA to
potential personal liability and may result in the imposition of an excise tax
on certain "disqualified persons," as that term is defined in Section 4975 of
the Code, with respect to the plan. In general, the terms "party in interest"
and "disqualified person" mean the employer which sponsors the plan, certain
affiliates of the employer, certain officers, directors, shareholders and
employees of the employer and fiduciaries or other parties who provide services
to the plan. Section 4975 of the Code contains similar restrictions and excise
tax penalties that are applicable to prohibited transactions involving Keoghs,
IRAs and other plans subject to Section 4975.
Among other things, Section 406(a) of ERISA prohibits a fiduciary with
respect to a plan from causing the plan to engage in a transaction, if he knows
or should know that such transaction constitutes a direct or indirect (1) sale
or exchange, or leasing, of any property between the plan and a party in
interest; (2) lending of money or other extension of credit between the plan and
a party in interest; or (3) transfer to, or use by or for the benefit of, a
party in interest, of any assets of the plan. Further, Section 406(b) of ERISA
prohibits a fiduciary of a plan from dealing with the assets of the plan in his
own interest or for his own account, or in its individual or any other capacity
acting in any transaction involving the plan on behalf of a party (or represent
a party) whose interests are adverse to the interest of the plan or the interest
of its participants or beneficiaries.
56
<PAGE>
If the Underwriter is a party in interest or disqualified person with
respect to a plan subject to ERISA or Section 4975 of the Code which purchases
Preferred Securities, such purchases may constitute or result in a prohibited
transaction under ERISA or the Code, unless such Preferred Securities are
acquired pursuant to and in accordance with an individual or class exemption
issued by the Department of Labor.
Fiduciaries acting on behalf of employee benefit plans subject to ERISA or
Section 4975 of the Code which purchase Preferred Securities should consider
whether the underlying assets of the Trust will be "plan assets" within the
meaning of Title 29 of the Code of Federal Regulations Section 2510.3-101. If
the underlying assets of the Trust are considered to be plan assets of plans
which purchase Preferred Securities, and the Company or any of its affiliates is
a party in interest or disqualified person with respect to such plans, any
purchases and holding of Preferred Securities by a plan may constitute or result
in a prohibited transaction unless such Preferred Securities are acquired and
held pursuant to and in accordance with an individual or class exemption issued
by the Department of Labor. Regulations issued by the U.S. Department of Labor
generally provide that when a plan invests in an equity interest in an entity
which is neither a "publicly offered security" nor a security issued by an
investment company registered under the Investment Company Act of 1940, its
assets include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless the entity is an operating company or
equity participation in the entity by "benefit plan investors" is not
significant.
The Department of Labor regulations provide that a "publicly offered
security" is a security that is (1) freely transferrable, (2) registered under
the applicable provisions of the federal securities laws and (3) owned by 100 or
more investors independent of the issuer and of one another. Although the
Preferred Securities are freely transferable and are registered under federal
securities laws, it is unknown whether they will be owned by 100 or more
investors independent of the issuer and one another. It is also unknown whether
equity participation in the Trust by benefit plan investors will be
"significant" within the meaning of the Department of Labor regulations.
Consequently, plans subject to ERISA or Section 4975 of the Code, with respect
to which the Company or any of its affiliates is a party in interest or
disqualified person, should not purchase Preferred Securities unless such
purchase is made pursuant to and in accordance with an applicable prohibited
transaction exemption.
The foregoing discussion is general in nature and is not intended to be all
inclusive. Accordingly, fiduciaries acting on behalf of plans subject to ERISA
or Section 4975 of the Code are urged to consult their own legal advisors with
respect to the considerations under ERISA and the Code associated with
purchasing and holding Preferred Securities.
UNDERWRITING
Sandler O'Neill & Partners, L.P. (the "Underwriter") has agreed, subject to
the terms and conditions set forth in the Underwriting Agreement, the form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, to purchase from the Trust the Preferred Securities.
The Underwriter has agreed in the Underwriting Agreement, subject to the terms
and conditions set forth therein, to purchase all the Preferred Securities
offered hereby if any of the Preferred Securities are purchased.
The Underwriter has advised the Trust that it proposes initially to offer
the Preferred Securities to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $0.20 per Preferred Security. The Underwriter may
allow, and such dealers may reallow, a discount not in excess of $0.10 per
Preferred Security to certain
57
<PAGE>
other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Subordinated Debentures of the Company,
the Underwriting Agreement provides that the Company will pay as compensation to
the Underwriter arranging the investment therein of such proceeds, an amount in
immediately available funds of $0.40 per Preferred Security (or $400,000 in the
aggregate) for the account of the Underwriter.
The Trust has granted the Underwriter an option to purchase up to an
additional 150,000 Preferred Securities at the public offering price. Such
option, which expires 30 days from the date of this Prospectus, may be exercised
solely to cover over-allotments.
To the extent that the Underwriter exercises its option to purchase
additional Preferred Securities, the Trust will issue and sell to the Company
additional Common Securities in such aggregate Liquidation Amount as is required
for the Company to continue to hold Common Securities in an aggregate
Liquidation Amount equal to at least 3% of the total capital of the Trust and
the Company will issue and sell to the Trust Subordinated Debentures in an
aggregate principal amount equal to the total aggregate Liquidation Amount of
the additional Preferred Securities being purchased pursuant to the option and
the additional Common Securities.
In connection with the offering of the Preferred Securities, the
Underwriter and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriter
creates a short position for its own account by selling more Preferred
Securities than it is committed to purchase from the Trust. In such case, to
cover all or part of the short position, the Underwriter may exercise the
over-allotment option described above or may purchase Preferred Securities in
the open market following completion of the initial offering of the Preferred
Securities. The Underwriter also may engage in stabilizing transactions in which
it bids for, and purchases, shares of the Preferred Securities at a level above
that which might otherwise prevail in the open market for the purpose of
preventing or retarding a decline in the market price of the Preferred
Securities. The Underwriter also may reclaim any selling concessions allowed to
a dealer if the Underwriter repurchases shares distributed by that dealer. Any
of the foregoing transactions may result in the maintenance of a price for the
Preferred Securities at a level above that which might otherwise prevail in the
open market. Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Preferred Securities. The
Underwriter is not required to engage in any of the foregoing transactions and,
if commenced, such transactions may be discontinued at any time without notice.
During a period of 180 days from the date of this Prospectus, neither the
Trust nor the Company will, subject to certain exceptions, without the prior
written consent of the Underwriter, directly or indirectly, sell, offer to sell,
grant any option for sale of, or otherwise dispose of, any Preferred Securities,
any security convertible into or exchangeable into or exercisable for Preferred
Securities or Subordinated Debentures or any debt securities substantially
similar to the Subordinated Debentures or equity securities substantially
similar to the Preferred Securities (except for Subordinated Debentures and the
Preferred Securities offered hereby).
58
<PAGE>
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Preferred Securities are a new issue of securities with no established
trading market. Application has been made to have Preferred Securities approved
for quotation on The Nasdaq Stock Market, subject to meeting the initial listing
requirements. There is no assurance that upon consummation of the Offering there
will be a sufficient number of shareholders or market makers to enable the
Preferred Securities to qualify for initial listing on the Nasdaq Stock Market.
If the Preferred Securities fail to meet the initial listing requirements of the
Nasdaq Stock Market, trading in the Preferred Securities, if any, would be
conducted in the over-the-counter market or through the National Association of
Securities Dealer's "Electronic Bulletin Board." The Underwriter has advised the
Trust that it presently intends to make a market in the Preferred Securities,
but no assurances can be made as to the liquidity of such Preferred Securities
or that an active and liquid trading market will develop or, if developed, that
it will continue. The absence or discontinuance of such a market may have an
adverse impact on both the price and liquidity of the Preferred Securities. The
offering price and distribution rate have been determined by negotiations among
representatives of the Company and the Underwriter, and the offering price of
the Preferred Securities may not be indicative of the market price following the
Offering. The Underwriter will have no obligation to make a market in the
Preferred Securities, however, and may cease market-making activities, if
commenced, at any time.
The Trust and the Company have agreed to indemnify the Underwriter
against, or contribute to payments that the Underwriter may be required to make
in respect of, certain liabilities, including liabilities under the Securities
Act.
Sandler O'Neill & Partners, L.P. engages in transactions with, and, from
time to time, has performed services for, the Company and its subsidiaries in
the ordinary course of business.
LEGAL MATTERS
Certain matters relating to the formation of the Trust, the enforceability
of the Trust Agreement, the validity of the Preferred Securities, the
Subordinated Debentures and the Guarantee, and United States federal income
taxes will be passed upon by Stradley, Ronon, Stevens & Young, LLP, counsel to
the Company and the Trust. Certain legal matters will be passed upon for the
Underwriter by Malizia, Spidi, Sloane & Fisch, P.C., Washington, D.C.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1995, and for each of the years in the three-year period ended December
31, 1996, appearing in the 1996 Annual Report of the Company to its stockholders
and incorporated by reference in the Annual Report on Form 10-K for the year
ended December 31, 1996, have been incorporated by reference in this Prospectus
and in the Registration Statement of which this Prospectus forms a part, in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, whose report thereon appears
therein, and upon the authority of said firm as experts in accounting and
auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated into this Prospectus by reference:
1. the Company's Annual Report on Form 10-K for the year ended December 31,
1996;
2. the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997; and
59
<PAGE>
3. the Company's Quarterly Report on Form 10-Q, as amended by Form 10-Q/A,
for the quarter ended June 30, 1997 (included herein as Appendix B).
In addition, the following portions of the Company's 1996 Annual Report to
Stockholders (included herein as Appendix A) are incorporated into this
Prospectus by reference:
1. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations; and
2. Selected Historical Consolidated Financial Data, Financial Statements
and Notes to Consolidated Financial Statements.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN (OTHER
THAN EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
IN SUCH DOCUMENTS). REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO: YARDVILLE
NATIONAL BANCORP, 4569 SOUTH BROAD STREET, YARDVILLE, NEW JERSEY 08620, ATTN:
CHIEF FINANCIAL OFFICER (TELEPHONE (609) 581-2883.
As used herein, the terms "Prospectus" and "herein" mean this Prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices at 7 World Trade Center,
13th Floor, Suite 1300, New York, New York 10048 and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material may also be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. If available, such information also may be accessed through the
Commission's electronic data gathering, analysis and retrieval system ("EDGAR")
via electronic means, including the Commission's home page on the Internet
(http://www.sec.gov). The Company's common stock is traded on the Nasdaq
National Market. Such reports, proxy statements and other information concerning
the Company also may be inspected at the
60
<PAGE>
offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") pursuant to the Securities Act, with respect
to the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules relating thereto as permitted by the rules and regulations of the
Commission. For further information pertaining to the Company and the securities
offered hereby, reference is made to the Registration Statement and the exhibits
thereto. Items of information omitted from this Prospectus, but contained in the
Registration Statement, may be obtained at prescribed rates or inspected without
charge at the offices of the Commission set forth above. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
No separate financial statements of the Trust have been included herein.
The Company does not consider that such financial statements would be material
to holders of the Preferred Securities because (i) all of the voting securities
of the Trust will be owned by the Company, a reporting company under the
Exchange Act, (ii) the Trust has no independent operations and exists for the
sole purpose of issuing securities representing undivided beneficial interest in
the assets of the Trust and investing the proceeds thereof in the Subordinated
Debentures issued by the Company, and (iii) the obligations of the Company
described herein to provide certain indemnities in respect of and be responsible
for certain costs, expenses, debts and liabilities of the Trust under the
Indenture and pursuant to the Trust Agreement, the guarantee issued by the
Company with respect to the Preferred Securities, and the Subordinated
Debentures purchased by the Trust and the related Indenture, taken together,
constitute, in the belief of the Company and the Trust, a full and unconditional
guarantee of payments due on the Preferred Securities. See "Description of the
Subordinated Debentures" and "Description of the Guarantee."
The Trust is not currently subject to the information reporting
requirements of the Exchange Act. The Trust will become subject to such
requirements upon the effectiveness of the Registration Statement, although it
intends to seek and expects to receive an exemption therefrom.
61
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APPENDIX A
<PAGE>
Yardville National Bancorp and Subsidiary
FINANCIAL HIGHLIGHTS
--------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 Increase
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Nonperforming loans to total assets 1.66 0.70
Nonperforming loans to year-end loans 2.46 1.15
- -----------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPHIC]
In the printed version of the document, a line graph appears which
depicts the following plot points:
NET INCOME
(dollars in thousands)
1992.......................... 568
1993.......................... 1,925
1994.......................... 2,523
1995.......................... 3,403
1996.......................... 4,026
[GRAPHIC]
In the printed version of the document, a line graph appears which
depicts the following plot points:
TOTAL ASSETS
(dollars in thousands)
1992.......................... 205,494
1993.......................... 223,438
1994.......................... 280,550
1995.......................... 403,115
1996.......................... 490,545
<PAGE>
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
YNB has positioned
itself for Success
in the Future
today's banking customers. For a discussion of our many new products,
please see "Ongoing Expansion for the Future" beginning on page four.
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.
-2-
<PAGE>
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.
[PICTURE]
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.
Leading YNB
into the future are (l. to r.)
Jay G. Destribats,
Chairman of the Board; [PHOTO]
Patrick M. Ryan,
President and CEO; and
Stephen F. Carman,
Executive Vice President and CFO.
Sincerely yours,
/s/ Jay G. Destribats /s/ Patrick M. Ryan
- ---------------------------- ----------------------------
Jay G. Destribats Patrick M. Ryan
Chairman of the Board President and Chief Executive Officer
-3-
<PAGE>
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-
<PAGE>
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 [PHOTO]
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-
<PAGE>
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-
<PAGE>
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 [PHOTO]
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-
<PAGE>
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.
Photo of John C. Stewart
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."
Photo of William J. Steiner, Jr.
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.
Photo of Edward M. Hendrickson
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.
-8-
<PAGE>
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.
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
* 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.
-9-
<PAGE>
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(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."
-10-
<PAGE>
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.
[GRAPHIC]
In the printed version of the document, a line graph appears which
depicts the following plot points:
RETURN ON AVERAGE ASSETS
1992............................. .29%
1993............................. .92%
1994............................. 1.04%
1995............................. .99%
1996............................. .90%
[GRAPHIC]
In the printed version of the document, a line graph appears which
depicts the following plot points:
RETURN ON AVERAGE STOCKHOLDERS' EQUITY
1992............................ 5.44%
1993............................ 15.81%
1994............................ 15.89%
1995............................ 13.84%
1996............................ 12.25%
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.
-11-
<PAGE>
FINANCIAL SUMMARY
Average Balances, Rates Paid and Yields
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(in thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
-12-
<PAGE>
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 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%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-13-
<PAGE>
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
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(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
-14-
<PAGE>
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.
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.
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
------------------------------------------------
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.
-15-
<PAGE>
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:
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.
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
------------------------------------------------
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
-16-
<PAGE>
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.
-17-
<PAGE>
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
<TABLE>
<CAPTION>
December 31, 1996
- -------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
(in thousands) one year five years ten years ten years Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
-18-
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 1996
- -------------------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
(in thousands) one year five years ten years ten years Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands) Amount % Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
-19-
<PAGE>
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 portfolio 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.
[GRAPHIC]
In the printed version of the document, a line graph appears which
depicts the following plot points:
TOTAL LOAN PORTFOLIO
(dollars in thousands)
1992....................... 106,993
1993....................... 134,983
1994....................... 196,910
1995....................... 245,054
1996....................... 331,237
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.
-20-
<PAGE>
The following table sets forth nonperforming assets and risk elements in
YNB's loan portfolio by type at the dates indicated.
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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.
[GRAPHIC]
In the printed version of the document, a line graph appears which
depicts the following plot points:
TOTAL NONPERFORMING ASSETS
(dollars in thousands)
1992........................ 5,726
1993........................ 3,866
1994........................ 2,380
1995........................ 3,444
1996........................ 8,535
-21-
<PAGE>
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 indicated, an analysis of
the allowance for loan losses and other related data.
<TABLE>
<CAPTION>
Year ended December 31,
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
-22-
<PAGE>
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.
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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.
-23-
<PAGE>
The following table provides information concerning average rates and
average balances of deposits for the years indicated:
AVERAGE DEPOSIT BALANCES AND RATES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
% of % of % of
(in thousands) Balance Rate Total Balance Rate Total Balance Rate Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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 below details amounts and maturities for certificates of
deposit of $100,000 or more at the date indicated.
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.
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
- -----------------------------------------------
[GRAPHIC]
In the printed version of the document, a line graph appears which
depicts the following plot points:
TOTAL DEPOSITS AT YEAR END
(dollars in thousands)
1992......................... 192,223
1993......................... 206,688
1994......................... 259,296
1995......................... 302,972
1996......................... 364,445
-24-
<PAGE>
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.
-25-
<PAGE>
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
<TABLE>
<CAPTION>
December 31, 1996
- -------------------------------------------------------------------------------------------------------------
After three After six After
Within months but months one year After
three within six but within but within five Non-interest
(in thousands) months months one year five years years sensitive (1) Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
sensitivity 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
</TABLE>
(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.
-26-
<PAGE>
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.
-27-
<PAGE>
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 I 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 below 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%
-28-
<PAGE>
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.
-29-
<PAGE>
Yardville National Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------
(in thousands, except share data) 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-30-
<PAGE>
Yardville National Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-31-
<PAGE>
Yardville National Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN
- -------------------------------------
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-32-
<PAGE>
Yardville National Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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.
-33-
<PAGE>
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-
<PAGE>
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 all amounts due according to the
contractual terms of the loan agreement.
When a loan is considered to be impaired, the amount of impairment is
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or fair value of the collateral. 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-
<PAGE>
3. SECURITIES
The amortized cost and estimated market value of securities available for sale
are as follows:
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market value of investment securities are as
follows:
<TABLE>
<CAPTION>
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
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 penalties.
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.
-36-
<PAGE>
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-
<PAGE>
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,
- --------------------------------------------------------------------------------
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-
<PAGE>
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,
- --------------------------------------------------------------------------------
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:
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
The Bank's actual capital amounts and ratios and capital adequacy requirements
are presented in the table below.
<TABLE>
<CAPTION>
To be well
For capital capitalized under
adequacy prompt corrective
Actual purposes action provision
- ---------------------------------------------------------------------------------------------------------------
(amounts in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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-
<PAGE>
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, 1995
- --------------------------------------------------------------------------------
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-
<PAGE>
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-
<PAGE>
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.
/s/ KPMG Peat Marwick LLP
- -------------------------------
Princeton, New Jersey
January 31, 1997
-46-
<PAGE>
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
-47-
<PAGE>
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 nomination to Director
-48-
<PAGE>
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
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For 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 Quakerbridge Road, Mercerville, New Jersey 08619
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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 August 1, 1997
Common Stock, no par value 2,473,934
--------------------------- ----------------------------
Class Number of shares outstanding
<PAGE>
INDEX
YARDVILLE NATIONAL BANCORP AND SUBSIDIARY
PART I FINANCIAL INFORMATION PAGE NO.
- ----------------------------- --------
Item 1. Financial Statements
Consolidated Statements of Condition
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income
Three months and six months ended
June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1997
and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-15
PART II OTHER INFORMATION
- -------------------------
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
Item 10.1 1988 Stock Option Plan 19
Exhibit 27.1 Financial Data Schedule 27
<PAGE>
<TABLE>
<CAPTION>
Yardville National Bancorp and Subsidiary
Consolidated Statements of Condition
(unaudited)
June 30, December 31,
(in thousands, except share data) 1997 1996
-------- ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 19,119 $ 13,110
Federal funds sold 1,250 4,040
Cash and Cash Equivalents 20,369 17,150
Interest bearing deposits 873 1,357
Securities available for sale 106,002 93,671
Investment securities (market value of $28,732 in 1997
and $30,878 in 1996) 29,105 31,296
Loans 352,941 331,237
Less: Allowance for loan losses (5,284) (4,957)
Loans, net 347,657 326,280
Bank premises and equipment, net 5,307 5,418
Other real estate 873 395
Other assets 15,534 14,978
Total Assets $525,720 $490,545
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits
Non-interest bearing $ 59,154 $ 55,519
Interest bearing 355,676 308,926
Total Deposits 414,830 364,445
Borrowed funds
Securities sold under agreements to repurchase 50,020 64,185
Other 18,119 22,154
Total Borrowed Funds 68,139 86,339
Other liabilities 5,122 4,531
Total Liabilities $488,091 $455,315
Stockholders' equity
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 2,472,954 shares in 1997
and 2,430,414 shares in 1996 17,625 17,246
Surplus 2,205 2,205
Undivided Profits 17,818 15,940
Unrealized loss - securities available for sale (19) (161)
Total Stockholders' Equity 37,629 35,230
Total Liabilities and Stockholders' Equity $525,720 $490,545
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
<PAGE>
Yardville National Bancorp and Subsidiary
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
(in thousands, except per share amounts) 1997 1996 1997 1996
------- ------- ------- -------
Interest Income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 7,751 $ 6,191 $15,096 $12,078
Interest on deposits with banks 16 32 32 66
Interest on securities available for sale 1,760 1,608 3,329 3,011
Interest on investment securities:
Taxable 329 395 671 805
Exempt from Federal income tax 100 97 202 193
Interest on Federal funds sold 72 29 236 86
Total Interest Income 10,028 8,352 19,566 16,239
Interest Expense:
Interest on savings account deposits 1,288 990 2,518 1,962
Interest on certificates of deposit of $100,000 or more 339 190 644 393
Interest on other time deposits 2,414 1,631 4,642 3,248
Interest on borrowed funds 1,059 1,281 2,216 2,256
Total Interest Expense 5,100 4,092 10,020 7,859
Net Interest Income 4,928 4,260 9,546 8,380
Less provision for loan losses 300 450 575 715
Net Interest Income After Provision for Loan Losses 4,628 3,810 8,971 7,665
Non-Interest Income:
Service charges on deposit accounts 287 294 570 584
Gains on sales of mortgages, net 9 -- 9 --
Security gains (losses), net 7 (25) 7 (46)
Other non-interest income 331 256 654 497
Total Non-Interest Income 634 525 1,240 1,035
Non-Interest Expense:
Salaries and employee benefits 1,852 1,619 3,669 3,200
Occupancy expense, net 241 225 475 445
Equipment 278 180 528 357
Other non-interest expense 959 773 1,737 1,613
Total Non-Interest Expense 3,330 2,797 6,409 5,615
Income before income tax expense 1,932 1,538 3,802 3,085
Income tax expense 677 547 1,335 1,102
Net Income $ 1,255 $ 991 $ 2,467 $ 1,983
Earnings Per Share:
Primary $ 0.50 $ 0.41 $ 0.99 $ 0.81
Fully diluted $ 0.50 $ 0.41 $ 0.99 $ 0.81
Weighted average shares outstanding 2,503 2,422 2,492 2,389
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
<PAGE>
Yardville National Bancorp and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
(in thousands) 1997 1996
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 2,467 $ 1,983
Adjustments:
Provision for Loan Losses 575 715
Depreciation 420 346
Amortization and accretion 216 309
(Gain) loss on sale of securities available for sale (7) 46
Writedown of other real estate 8 35
Increase in other assets (651) (4,268)
Increase in other liabilities 591 246
1,153 (2,571)
Net Cash Provided by Operating Activities 3,619 (588)
Cash Flows from Investing Activities:
Net (increase) decrease in interest bearing deposits 484 (2,324)
Proceeds from maturities and paydowns of
investment securities 2,113 2,004
Purchase of securities available for sale (25,970) (56,346)
Proceeds from sale of securities available for sale 2,011 28,181
Purchase of investment securities -- (453)
Maturities, calls & paydowns of securities
available for sale 11,734 16,061
Net increase in loans (22,438) (41,121)
Expenditures for bank premises and equipment (309) (1,712)
Proceeds from sale of O.R.E -- 141
Net Cash Used by Investing Activities (32,375) (55,569)
Cash Flows from Financing Activities:
Net increase in non-interest bearing
demand, money market, and saving deposits 28,755 9,893
Net increase in certificates of deposit 21,630 4,193
Net increase in borrowed funds (18,200) 40,356
Proceeds from issuance of common stock 379 821
Dividends paid (589) (525)
Net Cash Provided by Financing Activities 31,975 54,738
Net increase (decrease) in cash and cash equivalents 3,219 (1,419)
Cash and cash equivalents at beginning of period 17,150 12,835
Cash and Cash Equivalents at End of Period $ 20,369 $ 11,416
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense $ 9,131 $ 7,709
Income taxes 2,301 1,555
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
Supplemental Schedule of Non-cash Financing Activities: During the six month
period ended June 30, 1997 the Corporation transferred $486,000, net of charge
offs, from loans to other real estate.
<PAGE>
Yardville National Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Six Months Ended June 30, 1997
(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 revenues and expenses for the period. Actual results could differ
significantly from those estimates.
The consolidated financial data as of and for the six months ended June 30,
1997 and 1996 includes, in the opinion of management, all adjustments,
consisting of only normal recurring accruals, necessary for a fair presentation
of such periods. The consolidated financial data for the interim periods
presented is not necessarily indicative of the results of operations that might
be expected for the entire year ending December 31, 1997.
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 the valuation of other real estate, management obtains
independent appraisals for significant properties.
Consolidation
The consolidated financial statements include the accounts of Yardville
National Bancorp (the "Corporation") and its sole subsidiary, the Yardville
National Bank (the "Bank") and Yardville's wholly owned subsidiaries, The
Yardville National Investment Corporation, Brenden, Inc., a subsidiary of the
Bank utilized for the control and disposal of other real estate properties and
the YNB Real Estate Holding Company, a subsidiary of the Bank utilized to hold
Bank branch properties. All significant intercompany accounts and transactions
have been eliminated.
<PAGE>
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 the 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, as adjustments become necessary,
they are reported in the periods in which they become known. Management believes
that the allowance for losses on loans is adequate. While management uses
available information to recognize losses on loans and other real estate, 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 losses on loans and the valuation of other real estate.
Such agencies may require the Bank to recognize additions to the allowance or
adjustments to the carrying value of other real estate based on their judgments
about information available to them at the time of their examination.
<PAGE>
YARDVILLE NATIONAL BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This financial review presents Management's discussion and analysis of financial
condition and results of operations. It should be read in conjunction with the
consolidated financial statements and the accompanying notes. The term
"Yardville" as used herein refers to the Company together with its sole
subsidiary, the Bank.
FINANCIAL CONDITION
Assets
Total consolidated assets at June 30, 1997 totaled $525,720,000 an increase of
$35,175,000 or 7.2%, compared to $490,545,000 at December 31, 1996. The growth
in Yardville's asset base during the first six months of 1997 was primarily due
to an increase in loans and securities. The increase in loans was the product of
a strategy to improve profitability of the organization through relationship
banking and the continued consolidation in Yardville's marketplace, which has
solidified Yardville's competitive position in the small and middle markets.
Yardville's asset base includes investments of approximately $57,100,000
purchased utilizing repurchase agreements and time deposits (Investment Growth
Strategy) at June 30, 1997, an increase of $6,000,000 compared to approximately
$51,000,000 at December 31, 1996. The primary goals of the growth strategy are
to improve return on equity and earnings per share.
Securities
Total securities increased by $10,140,000 or 8.1% to $135,107,000 as of June 30,
1997 compared to year end 1996. The growth in the securities portfolio in the
first half of 1997 was due to the purchase of short term treasuries and
government agency bonds to enhance short-term liquidity and the increase in the
investment growth strategy offset by principal paydowns on mortgage-backed
securities.
At June 30, 1997, the amortized cost of investment securities classified as held
to maturity was $29,105,000 compared to $31,296,000 at December 31, 1996, a
decrease of $2,191,000 or 7.0%.
Net unrealized losses as of June 30, 1997 in Yardville's available for sale
securities portfolio were $31,000. Net unrealized losses, net of tax effect of
$19,000, were reported as a reduction of stockholders' equity at June 30, 1997.
The available for sale portfolio, except those securities purchased utilizing
repurchase agreements, provides a secondary source of liquidity.
-1-
<PAGE>
Federal Funds
At June 30, 1997 Federal funds sold totaled $1,250,000, a decrease of $2,790,000
as compared to $4,040,000 at December 31, 1996. While management continues to
focus on maintaining adequate short term liquidity levels, federal funds will
fluctuate due to other liquidity demands.
Loans
Total loans, net of unearned discounts, increased by $21,704,000 or 6.6%, to
$352,941,000 at June 30, 1997 compared to $331,237,000 at year end 1996.
Yardville's loan portfolio represented 67.1% of assets at June 30, 1997 compared
to 67.5% of assets at December 31, 1996.
Yardville's lending focus continues to be centered on commercial loans,
owner-occupied commercial mortgage loans and tenanted commercial real estate
loans. Yardville showed continued growth throughout its loan portfolio for the
six months ended June 30, 1997 as a result of management's emphasis on customer
relationships and opportunities associated with the continued consolidation of
the banking industry in Yardville's markets.
On a component basis, for the six month period ended June 30, 1997, commercial
loan balances increased $14,109,000 or 22.2%. Real estate-construction and real
estate-residential mortgage loan balances increased $4,189,000 and $1,280,000
respectively, or 16.1% and 1.5% respectively. Real estate-commercial mortgage
loan balances decreased $305,000 or 0.3% due to increased competition.
Liabilities
Yardville's deposit base is the principal source of funds supporting interest
earning assets. Total deposits amounted to $414,830,000 at June 30, 1997
compared to $364,445,000 at December 31, 1996, an increase of $50,385,000 or
13.8%. Yardville was successful in bidding for Mercer County Surrogate's
deposits which netted Yardville $15,000,000 in deposits in early January 1997.
Growth in Yardville's deposit base continues in higher yielding certificates of
deposit (CD's) and premium money market accounts, both higher cost funding
sources. Average interest bearing deposits including CD's of $100,000 or more,
increased $66,333,000 or 23.9% to total $343,303,000 for the six month period
ended June 30, 1997 as compared to $276,970,000 for the year ended December 31,
1996. Of the total increase, average time deposits grew $43,084,000 for the
comparable periods. Time deposits were competitively priced to reduce levels of
borrowed funds. Average non-interest bearing deposits have increased 9.2% for
the six month period ended June 30, 1997 compared to the year ended December 31,
1996. At June 30, 1997 interest bearing and non-interest bearing deposits
totaled $355,676,000 and $59,154,000, respectively.
Borrowed funds totaled $68,139,000 at June 30, 1997 compared to $86,339,000 at
December 31, 1996. The decrease of $18,200,000 or 21.1% in the first six months
of 1997 was principally due to the repayment of repurchase agreements.
Securities sold under agreements to repurchase decreased $14,165,000 or 22.1%
to $50,020,000 compared to $64,185,000 at December 31, 1996. Federal Home Loan
Bank advances are being utilized to strengthen short-term liquidity and support
core deposits in funding balance sheet growth. At June 30, 1997 Yardville has
$15,000,000 outstanding in FHLB advances. $10,000,000 of these advances will
mature on July 30, 1997 and the remaining $5,000,000 will mature in November of
1998.
Yardville has the availability to borrow up to $24,500,000 from the FHLB through
its line of credit program. In addition, the bank is eligible to borrow up to
-2-
<PAGE>
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. Yardville also has the ability to borrow at the Federal
Reserve discount window along with agreements to use two unsecured federal funds
lines of credit with two of its correspondent banks for daily funding needs.
Management's strategy, however, is to further build the bank's core deposit base
to fund asset growth. Borrowed funds will be utilized to meet short term
liquidity needs and as an additional source of funding for the loan and
investment portfolios.
Capital
Total stockholders' equity of $37,629,000 at June 30, 1997 increased $2,399,000
or 6.8% from $35,230,000 at December 31, 1996. This increase resulted from the
following factors during the six months ended June 30, 1997 (i) earnings of
$2,467,000 (less dividend payments of $589,000) and a decrease of $142,000 in
the unrealized loss on securities available for sale, net of income tax effect.
(ii) proceeds of $379,000 from exercised options.
Yardville's leverage ratio was 7.3% at June 30, 1997 compared to 7.8% at
December 31, 1996. At June 30, 1997 tier I and total tier I and II capital to
risk weighted assets were 10.1% and 11.4%, respectively. The risk based capital
levels at year end 1996 were 10.2% and 11.4% for tier I and total risk based
capital, respectively.
The minimum regulatory requirements require financial institutions to have a
tier I leverage ratio of 4.0%, a tier I risk-based ratio of 4.0% and a total
tier I and tier II ratio of 8.0%. A bank is considered "well capitalized" if it
has a minimum Tier 1 and total risk-based capital ratios of 6% and 10%,
respectively, and a minimum Tier 1 leverage ratio of 5%.
Credit Risk
At June 30, 1997, nonperforming loans, consisting of loans 90 days or more past
due, and nonaccruing loans totaled $7,630,000 compared to $8,140,000 at December
31, 1996. Other real estate owned at June 30, 1997 totaled $873,000 compared to
$395,000 at December 31, 1996.
Total nonperforming assets decreased $32,000 or 0.4% to $8,503,000 at June 30,
1997 compared to $8,535,000 at year end 1996. Nonperforming assets as a
percentage of total assets were 1.62% at June 30, 1997. Yardville continues to
actively manage nonperforming assets with the goal of reducing these assets in
relation to the entire portfolio. Where possible, existing loan relationships
are being restructured in an effort to return these loans to a performing
status.
The allowance for loan losses increased to $5,284,000 and remained at 1.50% of
total loans at June 30, 1997 compared to $4,957,000, or 1.50% of total loans, at
year end 1996. The provision for loan losses through June 30, 1997 was $575,000.
Yardville had net loan charge-offs of $248,000 for the six months ended June 30,
1997. At June 30, 1997 the allowance for loan losses covered 69.3% of
nonperforming loans and 62.1% of nonperforming assets. The allowance for loan
losses, in management's judgment, is adequate to provide for potential losses.
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<PAGE>
RESULTS OF OPERATIONS
Net Income
Yardville reported net income of $2,467,000 for the six months ended June 30,
1997, an increase of $484,000 or 24.4%, from net income of $1,983,000 reported
for the same time period in 1996. The increase in net income for the comparable
periods is attributable to an increase in net interest income, and to a lesser
extent, non-interest income, partially offset by an increase in non-interest
expenses. On a per share basis, the net income was $0.99 for the first six
months of 1997 compared to $0.81 for the first six months of 1996. The increase
in earnings per share is due primarily to the increase in net income during the
first six months of 1997 compared to the same time period in 1996.
On a quarterly basis, the income for the second quarter of 1997 was $1,255,000
or $0.50 per share, compared with $991,000 or $0.41 per share for the same
quarter a year ago. The increase in net income and net income per share for the
quarterly comparison are for the same reasons discussed above.
Net Interest Income
Yardville's net interest income for the six months ended June 30, 1997 was
$9,546,000, an increase of $1,166,000 or 13.9% over the $8,380,000 for the
comparable 1996 period. The principal factors contributing to the increase in
net interest income for the six months ended June 30, 1997 was an increase in
interest income of $3,327,000 resulting principally from an increase in
commercial loan volume, offset by an increase in interest expense of $2,161,000
due to increases in the volume of interest bearing deposits.
The net interest margin (tax equivalent basis) between yields on average
interest earning assets and costs of average funding sources was 3.99% at June
30, 1997 compared to 4.22% at June 30, 1996. The principal reason for the
decrease in the net interest margin was higher costs on interest bearing
liabilities.
The management strategy continuing through 1997 is to increase net interest
income by purchasing investments using repurchase agreements or other funding
sources. At June 30, 1997 approximately $57,100,000 was being utilized for this
purpose. The targeted spread on this strategy is 75 basis points after tax. This
strategy, while successful in increasing net interest income, has had a negative
impact on the net interest margin. Increased loan pricing competition and the
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<PAGE>
subsequent decrease in loan yields also accounted, in part, for the reduction in
the net interest margin of 23 basis points for the comparable periods.
On a quarterly comparison, net interest income was $4,928,000 for the second
quarter of 1997, an increase of $668,000 or 15.7% from net interest income of
$4,260,000 for the second quarter of 1996. The 1997 increase was the result of
an increase in average earning assets of $73,967,000 combined with a decrease of
$19,066,000 in average borrowed funds offset by an increase of $87,606,000 in
average interest bearing deposits compared to the second quarter of 1996.
Interest Income
For the six month period ended June 30, 1997 total interest income of
$19,566,000 increased $3,327,000 or 20.5% as compared to $16,239,000 reported
for the same period a year earlier. On a quarterly comparison, the second
quarter of 1997 experienced an increase of $1,676,000 or 20.1% in total interest
income compared to the same period a year earlier. The increase in interest
income is due primarily to the higher volume of average loan assets. Average
loans increased $76,972,000 or 29.0% for the six months ended June 30, 1997
compared to the same 1996 period. The average yield on the loan portfolio
decreased 28 basis points for the comparable period in a lower rate competitive
marketplace.
Interest income on securities increased $193,000 or 4.8%, for the first six
months of 1997, due to a 22 basis point increase in average yield and an
increase of $1,464,000 in average balances for the six months ended June 30,
1997 as compared to the same period a year earlier. On a quarterly comparison
interest on securities increased 4.2% primarily as a result of a 27 basis point
increase in average yield. Interest on Federal Funds sold increased $150,000 for
the six month period ended June 30, 1997 due to increases in average balances of
$5,803,000 combined with a decrease in the average yields of 12 basis points.
Overall, the yield on Yardville's interest earning assets decreased 1 basis
point to 8.06% for the period ended June 30, 1997 from 8.07% for the period
ended June 30, 1996 for the combined reasons discussed above.
Interest Expense
Total interest expense increased $2,161,000 or 27.5% to $10,020,000 for the six
months ended June 30, 1997 compared to $7,859,000 reported for the six months
ended June 30, 1996. The increase in interest expense for the comparable time
periods is the result of a larger deposit base, and higher market interest
rates. Deposit products continue to be competitively priced to increase the
bank's deposit base and provide a source of funds for asset growth.
Average interest bearing liabilities amounted to $420,437,000 for the six months
ended June 30, 1997 compared to $341,499,000 for the six months ended June 30,
1996. The average rate paid on interest bearing liabilities increased 17 basis
points for the time period discussed. Increases in deposit account relationships
are attributable in part to increased commercial loan activity, community
presence, ongoing consolidation within the banking industry and the impact of
new branches opened during 1996 that now have established deposit relationships
with the bank. Average time deposits, a higher cost funding source, increased
$55,741,000 or 42.6% for the first six months of 1997 compared to the first six
months of 1996.
For the second quarter of 1997, total interest expense increased $1,008,000 or
24.6% as compared to the second quarter of a year earlier. The increase in
interest expense for the comparable quarters is due primarily to higher levels
of average time deposits.
Interest expense on borrowed funds decreased during both the quarterly and
year-to-date periods when comparing 1997 to 1996. For the year-to-date
comparison interest expense decreased $40,000. For the three months ended June
30, 1997 interest on borrowed funds decreased $222,000 or 17.3% primarily as a
result of lower average balances. Repurchase agreements were repaid during the
period to reduce borrowed funds.
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<PAGE>
Provision For Loan Losses
Yardville provides for possible loan losses by a charge to current operations.
The provision for loan losses for the six months and three months ended June 30,
1997 was $575,000 and $300,000, respectively compared to $715,000 and $450,000,
respectively for the six months and three months ended June 30, 1996. The
year-to-date and quarterly 1997 provisions reflect management's continuing
analysis of the loan portfolio and non-performing assets. Management believes
that the allowance for loan losses is adequate in relation to credit risk
exposure levels.
Non-Interest Income
Total non-interest income was $1,240,000 for the first six months of 1997
compared to $1,035,000 for the same period in 1996. The increase of $205,000 or
19.8% is primarily attributable to an increase in other non-interest income
principally due to additional fee income derived from life insurance assets and
other fee income.
Service charges on deposit accounts decreased $14,000 or 2.4% for the first six
months of 1997 as compared to the same period a year earlier. The decrease in
service charge income resulted from a reduction in insufficient fund fees offset
by an increase in service charges on deposit accounts. Yardville realized $7,000
in gains on the sale of securities, net, in the first six months of 1997 versus
a loss of $46,000 on the sale of securities, net, in the first six months of
1996. Other non-interest income increased $157,000 or 31.6% in the first six
months of 1997 versus the first six months of 1996 for the reasons discussed
above.
For the second quarter comparison, the results were similar. Total non-interest
income for the second quarter of 1997 increased 20.8% over the same period a
year earlier. Service charges on deposit accounts decreased 2.4% for the
comparable quarters. Conversely, the increase experienced during the second
quarter of 1997 was in gains on the sale of securities of $7,000 net, compared
to a loss of $25,000 on the sale of securities net, for the three months ended
June 30, 1996. Other non-interest income increased $75,000 or 29.3% for the
three months ended June 30, 1997 compared to the three months ended June 30,
1996 due primarily to increased income derived from life insurance assets and
fee assessments for "others on us" Automated Teller Machine (ATM) card usage.
Offsetting these two increases was the elimination of the annual ATM fee for
Yardville National Bank cardholders in January 1997.
Non-Interest Expense
Total non-interest expense increased $794,000 or 14.1% to $6,409,000 for the
first six months of 1997 compared to $5,615,000 for the first six months of
1996. The increase in non-interest expense is primarily the result of increases
in salaries and employee benefits, equipment expenses and other non-interest
expenses.
Salaries and employee benefits were $3,669,000 for the first six months of 1997,
an increase of $469,000 or 14.7% compared to the same six month period of 1996.
The increase resulted from additional staffing required as Yardville has grown
for the comparable time periods and normal annual salary compensation and
benefit increases. Full time equivalent staff increased to 168 at June 30, 1997
from 152 at June 30, 1996.
Net occupancy increased $30,000 or 6.7% for the first six months of 1997 as
compared to the same period in 1996. This increase is primarily the result of
additional occupancy costs associated with new branch offices offset by
decreases in snow removal costs due to a milder winter.
Equipment expense increased $171,000 or 47.9% for the same period primarily due
to increased depreciation costs associated with new furniture and fixtures in
Yardville's new branches and in-house computer system as well as related
expenses of additional computer hardware and software upgrades required for the
implementation of a Windows 95 based computer system.
-6-
<PAGE>
Other non-interest expenses totaled $1,737,000 for the six months ended June 30,
1997, an increase of $124,000 or 7.7%, from the comparable 1996 period. The
increase in other non-interest expense is primarily the result of increased
professional fees, marketing costs and expenses incurred in working out troubled
loans and other real estate. Other real estate expenses totaled $127,000 for the
six months ended June 30, 1997 compared to $44,000 for the six months ended June
30, 1996. The increase in other non-interest expenses was offset partially by
the elimination of computer service fees in late February 1996 with Yardville's
conversion to an in-house computer system.
When comparing the second quarter of 1997 with the second quarter of 1996, the
explanations for the fluctuations are similar to those presented above for the
six month period ended June 30. Non-interest expenses increased $533,000 or
19.1% versus the same period a year earlier. Salary and employee benefits
increased $233,000 or 14.4%. Net occupancy and equipment expenses increased 7.1%
and 54.4%, respectively. Other non-interest expenses increased 24.1% in the
second quarter of 1997 compared to the same period in 1996. The quarterly
comparison increase is due primarily to the same factors discussed in the
year-to-date review above.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share." SFAS 128 supersedes AFB opinion No. 15, "Earnings Per
Share," and specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. This statement is effective for financial statements for periods
ending after December 15, 1997. The adoption of this statement should not have a
material effect on the consolidated financial statements of Yardville.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure." SFAS 129 lists required
disclosures about capital structure that have been included in a number of
separate statements and opinions. This statement is effective for financial
statements for periods ending after December 15, 1997. The adoption of the
Statement should not have a material effect on the consolidated financial
statements of Yardville.
-7-
<PAGE>
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. The following exhibits are filed with this Form 10-Q for the fiscal quarter
ended June 30, 1997 by Yardville National Bancorp:
INDEX TO EXHIBITS
No. Exhibits Page
---- -------- ----
* 3.1 Restated Certificate of Incorporation of
the Registrant
++ 3.2 By-Laws of the Registrant
++ 4.1 Specimen of Share of Common Stock
10.1 1988 Stock Option Plan 19
+++ 10.2 1997 Stock Option Plan
27.1 Financial Data Schedule 27
* Incorporated by reference to the Issuer's Annual Report on Form 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 Issuer's Registration Statement on Form
SB-2 (Registration No. 33-78050)
+++ Incorporated by reference to the Issuer's Registration Statement on Form
S-8 (Registration No. 333-28193)
B. No reports on FORM 8-K were filed by the registrant during the quarter
ended June 30, 1997.
<PAGE>
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 15, 1997 By: /s/ Stephen F. Carman
------------------ ---------------------------------------
Stephen F. Carman
Executive Vice President
and Chief Financial Officer
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For 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 Quakerbridge Road, Mercerville, New Jersey 08619
- -------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(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 August 1, 1997
Common Stock, no par value 2,473,934
-------------------------- ----------------------------
Class Number of shares outstanding
<PAGE>
YARDVILLE NATIONAL BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This financial review presents Management's discussion and analysis of financial
condition and results of operations. It should be read in conjunction with the
consolidated financial statements and the accompanying notes. The term
"Yardville" as used herein refers to the Company together with its sole
subsidiary, the Bank.
FINANCIAL CONDITION
Assets
Total consolidated assets at June 30, 1997 totaled $525,720,000 an increase of
$35,175,000 or 7.2%, compared to $490,545,000 at December 31, 1996. The growth
in Yardville's asset base during the first six months of 1997 was primarily due
to an increase in loans and securities. The increase in loans was the product of
a strategy to improve profitability of the organization through relationship
banking and the continued consolidation in Yardville's marketplace, which has
solidified Yardville's competitive position in the small and middle markets.
Yardville's asset base includes investments of approximately $57,100,000
purchased utilizing repurchase agreements and time deposits (Investment Growth
Strategy) at June 30, 1997, an increase of $6,000,000 compared to approximately
$51,000,000 at December 31, 1996. The primary goals of the growth strategy are
to improve return on equity and earnings per share.
Securities
Total securities increased by $10,140,000 or 8.1% to $135,107,000 as of June 30,
1997 compared to year end 1996. The growth in the securities portfolio in the
first half of 1997 was due to the purchase of short term treasuries and
government agency bonds to enhance short-term liquidity and the increase in the
investment growth strategy offset by principal paydowns on mortgage-backed
securities.
At June 30, 1997, the amortized cost of investment securities classified as held
to maturity was $29,105,000 compared to $31,296,000 at December 31, 1996, a
decrease of $2,191,000 or 7.0%.
Net unrealized losses as of June 30, 1997 in Yardville's available for sale
securities portfolio were $31,000. Net unrealized losses, net of tax effect of
$19,000, were reported as a reduction of stockholders' equity at June 30, 1997.
The available for sale portfolio, except those securities purchased utilizing
repurchase agreements, provides a secondary source of liquidity.
-1-
<PAGE>
Federal Funds
At June 30, 1997 Federal funds sold totaled $1,250,000, a decrease of $2,790,000
as compared to $4,040,000 at December 31, 1996. While management continues to
focus on maintaining adequate short term liquidity levels, federal funds will
fluctuate due to other liquidity demands.
Loans
Total loans, net of unearned discounts, increased by $21,704,000 or 6.6%, to
$352,941,000 at June 30, 1997 compared to $331,237,000 at year end 1996.
Yardville's loan portfolio represented 67.1% of assets at June 30, 1997 compared
to 67.5% of assets at December 31, 1996.
Yardville's lending focus continues to be centered on commercial loans,
owner-occupied commercial mortgage loans and tenanted commercial real estate
loans. Yardville showed continued growth throughout its loan portfolio for the
six months ended June 30, 1997 as a result of management's emphasis on customer
relationships and opportunities associated with the continued consolidation of
the banking industry in Yardville's markets.
On a component basis, for the six month period ended June 30, 1997, commercial
loan balances increased $14,109,000 or 22.2%. Real estate-construction and real
estate-residential mortgage loan balances increased $4,189,000 and $1,280,000
respectively, or 16.1% and 1.5% respectively. Real estate-commercial mortgage
loan balances decreased $305,000 or 0.3% due to increased competition.
Liabilities
Yardville's deposit base is the principal source of funds supporting interest
earning assets. Total deposits amounted to $414,830,000 at June 30, 1997
compared to $364,445,000 at December 31, 1996, an increase of $50,385,000 or
13.8%. Yardville was successful in bidding for Mercer County Surrogate's
deposits which netted Yardville $15,000,000 in deposits in early January 1997.
Growth in Yardville's deposit base continues in higher yielding certificates of
deposit (CD's) and premium money market accounts, both higher cost funding
sources. Average interest bearing deposits including CD's of $100,000 or more,
increased $66,333,000 or 23.9% to total $343,303,000 for the six month period
ended June 30, 1997 as compared to $276,970,000 for the year ended December 31,
1996. Of the total increase, average time deposits grew $43,084,000 for the
comparable periods. Time deposits were competitively priced to reduce levels of
borrowed funds. Average non-interest bearing deposits have increased 9.2% for
the six month period ended June 30, 1997 compared to the year ended December 31,
1996. At June 30, 1997 interest bearing and non-interest bearing deposits
totaled $355,676,000 and $59,154,000, respectively.
Borrowed funds totaled $68,139,000 at June 30, 1997 compared to $86,339,000 at
December 31, 1996. The decrease of $18,200,000 or 21.1% in the first six months
of 1997 was principally due to the repayment of repurchase agreements.
Securities sold under agreements to repurchase decreased $14,165,000 or 22.1%
to $50,020,000 compared to $64,185,000 at December 31, 1996. Federal Home Loan
Bank advances are being utilized to strengthen short-term liquidity and support
core deposits in funding balance sheet growth. At June 30, 1997 Yardville has
$15,000,000 outstanding in FHLB advances. $10,000,000 of these advances will
mature on July 30, 1997 and the remaining $5,000,000 will mature in November of
1998.
Yardville has the availability to borrow up to $24,500,000 from the FHLB through
its line of credit program. In addition, the bank is eligible to borrow up to
-2-
<PAGE>
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. Yardville also has the ability to borrow at the Federal
Reserve discount window along with agreements to use two unsecured federal funds
lines of credit with two of its correspondent banks for daily funding needs.
Management's strategy, however, is to further build the bank's core deposit base
to fund asset growth. Borrowed funds will be utilized to meet short term
liquidity needs and as an additional source of funding for the loan and
investment portfolios.
Capital
Total stockholders' equity of $37,629,000 at June 30, 1997 increased $2,399,000
or 6.8% from $35,230,000 at December 31, 1996. This increase resulted from the
following factors during the six months ended June 30, 1997 (i) earnings of
$2,467,000 (less dividend payments of $589,000) and a decrease of $142,000 in
the unrealized loss on securities available for sale, net of income tax effect.
(ii) proceeds of $379,000 from exercised options.
Yardville's leverage ratio was 7.3% at June 30, 1997 compared to 7.8% at
December 31, 1996. At June 30, 1997 tier I and total tier I and II capital to
risk weighted assets were 10.1% and 11.4%, respectively. The risk based capital
levels at year end 1996 were 10.2% and 11.4% for tier I and total risk based
capital, respectively.
The minimum regulatory requirements require financial institutions to have a
tier I leverage ratio of 4.0%, a tier I risk-based ratio of 4.0% and a total
tier I and tier II ratio of 8.0%. A bank is considered "well capitalized" if it
has a minimum Tier 1 and total risk-based capital ratios of 6% and 10%,
respectively, and a minimum Tier 1 leverage ratio of 5%.
Credit Risk
At June 30, 1997, nonperforming loans, consisting of loans 90 days or more past
due, and nonaccruing loans totaled $7,630,000 compared to $8,140,000 at December
31, 1996. Other real estate owned at June 30, 1997 totaled $873,000 compared to
$395,000 at December 31, 1996.
Total nonperforming assets decreased $32,000 or 0.4% to $8,503,000 at June 30,
1997 compared to $8,535,000 at year end 1996. Nonperforming assets as a
percentage of total assets were 1.62% at June 30, 1997. Yardville continues to
actively manage nonperforming assets with the goal of reducing these assets in
relation to the entire portfolio. Where possible, existing loan relationships
are being restructured in an effort to return these loans to a performing
status.
The allowance for loan losses increased to $5,284,000 and remained at 1.50% of
total loans at June 30, 1997 compared to $4,957,000, or 1.50% of total loans, at
year end 1996. The provision for loan losses through June 30, 1997 was $575,000.
Yardville had net loan charge-offs of $248,000 for the six months ended June 30,
1997. At June 30, 1997 the allowance for loan losses covered 69.3% of
nonperforming loans and 62.1% of nonperforming assets. The allowance for loan
losses, in management's judgment, is adequate to provide for potential losses.
-3-
<PAGE>
RESULTS OF OPERATIONS
Net Income
Yardville reported net income of $2,467,000 for the six months ended June 30,
1997, an increase of $484,000 or 24.4%, from net income of $1,983,000 reported
for the same time period in 1996. The increase in net income for the comparable
periods is attributable to an increase in net interest income, and to a lesser
extent, non-interest income, partially offset by an increase in non-interest
expenses. On a per share basis, the net income was $0.99 for the first six
months of 1997 compared to $0.81 for the first six months of 1996. The increase
in earnings per share is due primarily to the increase in net income during the
first six months of 1997 compared to the same time period in 1996.
On a quarterly basis, the income for the second quarter of 1997 was $1,255,000
or $0.50 per share, compared with $991,000 or $0.41 per share for the same
quarter a year ago. The increase in net income and net income per share for the
quarterly comparison are for the same reasons discussed above.
Net Interest Income
Yardville's net interest income for the six months ended June 30, 1997 was
$9,546,000, an increase of $1,166,000 or 13.9% over the $8,380,000 for the
comparable 1996 period. The principal factors contributing to the increase in
net interest income for the six months ended June 30, 1997 was an increase in
interest income of $3,327,000 resulting principally from an increase in
commercial loan volume, offset by an increase in interest expense of $2,161,000
due to increases in the volume of interest bearing deposits.
The net interest margin (tax equivalent basis) between yields on average
interest earning assets and costs of average funding sources was 3.99% at
June 30, 1997 compared to 4.22% at June 30, 1996. The principal reason for the
decrease in the net interest margin was higher costs on interest bearing
liabilities.
The management strategy continuing through 1997 is to increase net interest
income by purchasing investments using repurchase agreements or other funding
sources. At June 30, 1997 approximately $57,100,000 was being utilized for this
purpose. The targeted spread on this strategy is 75 basis points after tax. This
strategy, while successful in increasing net interest income, has had a negative
impact on the net interest margin. Increased loan pricing competition and the
-4-
<PAGE>
subsequent decrease in loan yields also accounted, in part, for the reduction in
the net interest margin of 23 basis points for the comparable periods.
On a quarterly comparison, net interest income was $4,928,000 for the second
quarter of 1997, an increase of $668,000 or 15.7% from net interest income of
$4,260,000 for the second quarter of 1996. The 1997 increase was the result of
an increase in average earning assets of $73,967,000 combined with a decrease of
$19,066,000 in average borrowed funds offset by an increase of $87,606,000 in
average interest bearing deposits compared to the second quarter of 1996.
Interest Income
For the six month period ended June 30, 1997 total interest income of
$19,566,000 increased $3,327,000 or 20.5% as compared to $16,239,000 reported
for the same period a year earlier. On a quarterly comparison, the second
quarter of 1997 experienced an increase of $1,676,000 or 20.1% in total interest
income compared to the same period a year earlier. The increase in interest
income is due primarily to the higher volume of average loan assets. Average
loans increased $76,972,000 or 29.0% for the six months ended June 30, 1997
compared to the same 1996 period. The average yield on the loan portfolio
decreased 28 basis points for the comparable period in a lower rate competitive
marketplace.
Interest income on securities increased $193,000 or 4.8%, for the first six
months of 1997, due to a 22 basis point increase in average yield and an
increase of $1,464,000 in average balances for the six months ended June 30,
1997 as compared to the same period a year earlier. On a quarterly comparison
interest on securities increased 4.2% primarily as a result of a 27 basis point
increase in average yield. Interest on Federal Funds sold increased $150,000 for
the six month period ended June 30, 1997 due to increases in average balances of
$5,803,000 combined with a decrease in the average yields of 12 basis points.
Overall, the yield on Yardville's interest earning assets decreased 1 basis
point to 8.06% for the period ended June 30, 1997 from 8.07% for the period
ended June 30, 1996 for the combined reasons discussed above.
Interest Expense
Total interest expense increased $2,161,000 or 27.5% to $10,020,000 for the six
months ended June 30, 1997 compared to $7,859,000 reported for the six months
ended June 30, 1996. The increase in interest expense for the comparable time
periods is the result of a larger deposit base, and higher market interest
rates. Deposit products continue to be competitively priced to increase the
bank's deposit base and provide a source of funds for asset growth.
Average interest bearing liabilities amounted to $420,437,000 for the six months
ended June 30, 1997 compared to $341,499,000 for the six months ended June 30,
1996. The average rate paid on interest bearing liabilities increased 17 basis
points for the time period discussed. Increases in deposit account relationships
are attributable in part to increased commercial loan activity, community
presence, ongoing consolidation within the banking industry and the impact of
new branches opened during 1996 that now have established deposit relationships
with the bank. Average time deposits, a higher cost funding source, increased
$55,741,000 or 42.6% for the first six months of 1997 compared to the first six
months of 1996.
For the second quarter of 1997, total interest expense increased $1,008,000 or
24.6% as compared to the second quarter of a year earlier. The increase in
interest expense for the comparable quarters is due primarily to higher levels
of average time deposits.
Interest expense on borrowed funds decreased during both the quarterly and
year-to-date periods when comparing 1997 to 1996. For the year-to-date
comparison interest expense decreased $40,000. For the three months ended June
30, 1997 interest on borrowed funds decreased $222,000 or 17.3% primarily as a
result of lower average balances. Repurchase agreements were repaid during the
period to reduce borrowed funds.
-5-
<PAGE>
Provision For Loan Losses
Yardville provides for possible loan losses by a charge to current operations.
The provision for loan losses for the six months and three months ended June 30,
1997 was $575,000 and $300,000, respectively compared to $715,000 and $450,000,
respectively for the six months and three months ended June 30, 1996. The
year-to-date and quarterly 1997 provisions reflect management's continuing
analysis of the loan portfolio and non-performing assets. Management believes
that the allowance for loan losses is adequate in relation to credit risk
exposure levels.
Non-Interest Income
Total non-interest income was $1,240,000 for the first six months of 1997
compared to $1,035,000 for the same period in 1996. The increase of $205,000 or
19.8% is primarily attributable to an increase in other non-interest income
principally due to additional fee income derived from life insurance assets and
other fee income.
Service charges on deposit accounts decreased $14,000 or 2.4% for the first six
months of 1997 as compared to the same period a year earlier. The decrease in
service charge income resulted from a reduction in insufficient fund fees offset
by an increase in service charges on deposit accounts. Yardville realized $7,000
in gains on the sale of securities, net, in the first six months of 1997 versus
a loss of $46,000 on the sale of securities, net, in the first six months of
1996. Other non-interest income increased $157,000 or 31.6% in the first six
months of 1997 versus the first six months of 1996 for the reasons discussed
above.
For the second quarter comparison, the results were similar. Total non-interest
income for the second quarter of 1997 increased 20.8% over the same period a
year earlier. Service charges on deposit accounts decreased 2.4% for the
comparable quarters. Conversely, the increase experienced during the second
quarter of 1997 was in gains on the sale of securities of $7,000 net, compared
to a loss of $25,000 on the sale of securities net, for the three months ended
June 30, 1996. Other non-interest income increased $75,000 or 29.3% for the
three months ended June 30, 1997 compared to the three months ended June 30,
1996 due primarily to increased income derived from life insurance assets and
fee assessments for "others on us" Automated Teller Machine (ATM) card usage.
Offsetting these two increases was the elimination of the annual ATM fee for
Yardville National Bank cardholders in January 1997.
Non-Interest Expense
Total non-interest expense increased $794,000 or 14.1% to $6,409,000 for the
first six months of 1997 compared to $5,615,000 for the first six months of
1996. The increase in non-interest expense is primarily the result of increases
in salaries and employee benefits, equipment expenses and other non-interest
expenses.
Salaries and employee benefits were $3,669,000 for the first six months of 1997,
an increase of $469,000 or 14.7% compared to the same six month period of 1996.
The increase resulted from additional staffing required as Yardville has grown
for the comparable time periods and normal annual salary compensation and
benefit increases. Full time equivalent staff increased to 168 at June 30, 1997
from 152 at June 30, 1996.
Net occupancy increased $30,000 or 6.7% for the first six months of 1997 as
compared to the same period in 1996, This increase is primarily the result of
additional occupancy costs associated with new branch offices offset by
decreases in snow removal costs due to a milder winter.
Equipment expense increased $171,000 or 47.9% for the same period primarily due
to increased depreciation costs associated with new furniture and fixtures in
Yardville's new branches and in-house computer system as well as related
expenses of additional computer hardware and software upgrades required for the
implementation of a Windows 95 based computer system.
-6-
<PAGE>
Other non-interest expenses totaled $1,737,000 for the six months ended June 30,
1997, an increase of $124,000 or 7.7%, from the comparable 1996 period. The
increase in other non-interest expense is primarily the result of increased
professional fees, marketing costs and expenses incurred in working out troubled
loans and other real estate. Other real estate expenses totaled $127,000 for the
six months ended June 30, 1997 compared to $44,000 for the six months ended
June 30, 1996. The increase in other non-interest expenses was offset partially
by the elimination of computer service fees in late February 1996 with
Yardville's conversion to an in-house computer system.
When comparing the second quarter of 1997 with the second quarter of 1996, the
explanations for the fluctuations are similar to those presented above for the
six month period ended June 30. Non-interest expenses increased $533,000 or
19.1% versus the same period a year earlier. Salary and employee benefits
increased $233,000 or 14.4%. Net occupancy and equipment expenses increased 7.1%
and 54.4%, respectively. Other non-interest expenses increased 24.1% in the
second quarter of 1997 compared to the same period in 1996. The quarterly
comparison increase is due primarily to the same factors discussed in the
year-to-date review above.
Recently Issued Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share." SFAS 128 supersedes AFB opinion No. 15, "Earnings Per
Share," and specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. This statement is effective for financial statements for periods
ending after December 15, 1997. The adoption of this statement should not have a
material effect on the consolidated financial statements of Yardville.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information about Capital Structure." SFAS 129 lists required
disclosures about capital structure that have been included in a number of
separate statements and opinions. This statement is effective for financial
statements for periods ending after December 15, 1997. The adoption of the
Statement should not have a material effect on the consolidated financial
statements of Yardville.
-7-
<PAGE>
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 15, 1997 By: /s/ Stephen F. Carman
------------------ ---------------------------------------
Stephen F. Carman
Executive Vice President
and Chief Financial Officer
<PAGE>
No person has been authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the company or any underwriter. This
prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any of the securities offered hereby to any person or by anyone in any
jurisdiction in which it is unlawful to make such offer or solicitation. Neither
the delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any date subsequent to the date hereof.
TABLE OF CONTENTS
PAGE
----
Summary......................................... 6
Summary Consolidated Financial Data.............12
Risk Factors....................................14
Yardville National Bancorp......................23
Yardville Capital Trust.........................25
Use of Proceeds.................................26
Market for Preferred Securities.................26
Accounting Treatment............................27
Capitalization..................................28
Description of Preferred Securities.............29
Description of the Subordinated
Debentures....................................42
Description of the Guarantee....................51
Expense Agreement...............................54
Relationship Among the Preferred
Securities, Subordinated
Debentures and the Guarantee..................54
Certain Federal Income Tax
Consequences..................................56
Certain ERISA Considerations....................59
Underwriting....................................61
Legal Matters...................................63
Experts.........................................63
Incorporation of Certain Documents by
Reference....................................63
Available Information...........................64
Appendix A - 1996 Annual Report to
Stockholders
Appendix B - Quarterly Report on Form 10-Q, as
amended, for the Quarter ended
June 30, 1997
1,000,000 Trust Preferred Securities
YARDVILLE CAPITAL
TRUST
9.25% Cumulative Trust Preferred Securities
(Liquidation Amount $10 per Trust
Preferred Security)
guaranteed, as described herein, by
[LOGO]
YARDVILLE NATIONAL
BANCORP
PROSPECTUS
Sandler O'Neill & Partners, L.P.
October 10, 1997
