<PAGE>
File Pursuant To Rule 424(b)(1)
Registration No. 333-76647
PROSPECTUS
1,400,000 Shares
[GRAPHIC OMITTED]
Common Stock
The common stock of Yardville National Bancorp is traded on the Nasdaq
National Market under the symbol "YANB." On May 12, 1999, the closing bid price
for our common stock was $12.63.
You should read the "Risk Factors" section beginning on page 6 before
investing.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common stock or determined if
this prospectus is accurate or adequate. Any representation to the contrary is
a criminal offense.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
================================================================================
Price to Underwriting Proceeds to
Public Discount YNB
- --------------------------------------------------------------------------------
Per Share ......... $ 12.00 $ 0.78 $ 11.22
- --------------------------------------------------------------------------------
Total ............. $16,800,000 $1,092,000 $15,708,000
================================================================================
We have granted the underwriters, Legg Mason Wood Walker, Incorporated and
Advest, Inc., a 30-day option to purchase up to 210,000 additional shares to
cover any over-allotments.
Legg Mason Wood Walker, Incorporated, on behalf of the underwriters,
expects to deliver the shares on or about May 18, 1999, subject to customary
closing conditions.
Legg Mason Wood Walker Advest, Inc.
Incorporated
The date of this prospectus is May 13, 1999.
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[MAP OF REGION AND MARKET AREA]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary ................................................................... 3
Risk Factors ......................................................................... 6
Use of Proceeds ...................................................................... 8
Market for Common Stock and Dividends ................................................ 8
Capitalization ....................................................................... 9
Business ............................................................................. 10
Selected Financial Data .............................................................. 12
Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Management ........................................................................... 38
Stock Ownership of Management and Principal Stockholders ............................. 39
Description of Capital Stock ......................................................... 41
Underwriting ......................................................................... 43
Legal Matters ........................................................................ 45
Experts .............................................................................. 45
Where You Can Find More Information .................................................. 45
Index to Consolidated Financial Statements ........................................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
In this prospectus, we frequently use the terms "we" and "YNB" to refer to
both Yardville National Bancorp and The Yardville National Bank, our wholly
owned bank subsidiary. We sometimes refer to The Yardville National Bank as the
"Bank." To understand the offering fully and for a more complete description of
the offering you should read this entire document carefully, including
particularly the "Risk Factors" section, as well as the documents identified in
the section called "Where You Can Find More Information."
CAUTION ABOUT FORWARD LOOKING STATEMENTS
We make forward looking statements in this prospectus that are subject to
risks and uncertainties. These forward looking statements include statements
regarding profitability, liquidity, allowance for loan losses, interest rate
sensitivity, market risk, Year 2000 compliance, and financial and other goals.
The words "believes," "expects," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends" or other similar words or
terms are intended to identify forward looking statements.
These forward looking statements are subject to significant uncertainties
because they are based upon or are affected by factors including:
o Continued levels of loan quality and origination volume;
o Interest rate fluctuations and other economic conditions;
o Competition in product offerings and product pricing;
o Implementation of Year 2000 technology changes by us and our vendors and
suppliers;
o Continued relationships with major customers;
o Future laws and regulations; and
o Other factors, including those matters discussed in the "Risk Factors"
section and the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus.
Because of these uncertainties, our actual future results may be
materially different from the results indicated by these forward looking
statements. In addition, our past results of operations do not necessarily
indicate our future results.
<PAGE>
PROSPECTUS SUMMARY
This prospectus summary calls your attention to selected information in
this document, but may not contain all the information that is important to
you.
Our Company
Yardville National Bancorp is a bank holding company. We provide
commercial and retail banking services through our principal operating
subsidiary, The Yardville National Bank. We serve customers and borrowers
located primarily in Mercer County, New Jersey and contiguous counties in New
Jersey and Pennsylvania through eleven offices. At December 31, 1998, we had
consolidated assets of $757.7 million, deposits of $519.6 million and
stockholders' equity of $40.8 million.
We are a community bank which provides a broad range of commercial and
retail banking services designed to meet the borrowing and depository needs of
small and medium-sized businesses and consumers in the communities we serve. We
believe that such businesses and individuals in our market are under-served by
the larger regional and super-regional banking institutions which have acquired
local institutions in the recent consolidation in the New Jersey banking
market. As a community bank, we seek to provide these banking customers with
the technological support that banking in today's market requires, and make
available to them a broad range of products and services. At the same time, we
are dedicated to serving our community by emphasizing local decision making
within our organization and providing attentive personal service to our
customers. By combining the technological support and products and services
that our customers seek with accessibility to senior management and responsive
customer service, we seek to foster a business banking environment that allows
us to effectively compete in our particular market with other financial
institutions of all sizes.
In recent years we have experienced strong growth in our assets, loan
portfolio, and deposits. To continue our development and build long-term value
for our stockholders, we will continue to implement a strategy that includes
the following:
o Emphasizing lending to small and medium-sized businesses (annual sales of
$25 million or less) in our market area,
o Expanding our geographic market by adding branches,
o Enhancing customer service through technology,
o Actively managing our investment portfolio to supplement our return on
equity, and
o Diversifying our sources of income to include additional products and
services that will complement our existing loan and deposit business.
Our strategy emphasizes relationship banking by targeting customers with
whom the Bank can develop both loan and deposit relationships.
Our principal executive offices are located at 3111 Quakerbridge Road,
Mercerville, New Jersey 08619, and our telephone number is (609) 585-5100. Our
website address is http://www.yanb.com.
Recent Developments
Our net income for the three months ended March 31, 1999 was $1,554,000,
an increase of $220,000, or 16.5%, compared to $1,334,000 for the three months
ended March 31, 1998. Diluted earnings per share for the three months ended
March 31, 1999 was $0.31, a 19.2% increase over the $0.26 diluted earnings per
share reported for the three months ended March 31, 1998. Our return on average
equity increased to 15.02% for the quarter ended March 31, 1999 compared to
13.35% for the quarter ended March 31, 1998.
3
<PAGE>
For the three months ended March 31, 1999, our net interest income
increased $1,138,000, or 21.6%, compared to the same period in 1998. The change
was principally due to an increase in interest income resulting from increased
loan and security volume. This was partially offset by decreases in loan and
security yields and increased interest expense from a higher volume of time
deposits and borrowed funds. The net interest margin for the three months ended
March 31, 1999 was 3.35%, compared to 3.67% for the same period last year.
Non-interest expense increased $841,000 for the three months ended March 31,
1999 compared to the same period in 1998, primarily due to higher personnel
costs, expenses associated with real estate obtained through foreclosures and
other operating expenses associated with a larger institution.
Our total assets at March 31, 1999 were $894,849,000, an increase of
$137,183,000, or 18.1%, from total assets at December 31, 1998. The growth in
our asset base in the first quarter was due primarily to an increase in loans
and securities. Loans increased $52,202,000, or 10.8%, in the first quarter of
1999 reflecting the strong commercial loan demand in our marketplace.
Sustaining loan quality continues to be a major emphasis of management.
Nonperforming assets decreased $685,000, or 7.8%, to $8,145,000 at March 31,
1999 from $8,830,000 at December 31, 1998. Securities increased by $69,110,000
principally as a result of securities purchased utilizing borrowed funds,
consistent with our investment growth strategy, to supplement net interest
income, return on average equity and earnings per share.
Our deposits at March 31, 1999 were $603,665,000, an increase of
$84,022,000, or 16.2%, from deposits at December 31, 1998. The growth in our
deposits was primarily a result of competitive pricing of certificates of
deposits to fund strong commercial loan and securities growth recorded in the
first quarter. We increased borrowed funds, which consist primarily of Federal
Home Loan Bank advances and securities sold under agreements to repurchase, by
$51,950,000 to support our investment strategy discussed above. Total
stockholders' equity increased $634,000 to $41,390,000 at March 31, 1999. As a
result of our recent growth, regulatory capital ratios trended downward in the
first quarter of 1999 although we remained a well capitalized bank. Our Tier 1
leverage ratio, Tier 1 risk-based and total risk-based capital ratios were
6.55%, 8.91%, and 10.10% respectively at March 31, 1999.
The Offering
We have assumed in presenting the information under this subheading that
the underwriters' over-allotment option will not be exercised.
Common Stock Offered..... 1,400,000 shares.
Common Stock Outstanding After
the Offering............ 6,595,473 shares. In addition, at March 31, 1999,
we had options outstanding to purchase 478,751
shares of common stock. Of such options, 343,667
will become exercisable during the years 2000
through 2003 at a weighted-average exercise price of
$17.09 per share, and the balance are currently
exercisable at a weighted-average exercise price of
$12.63 per share.
Use of Proceeds.......... We intend to use the net proceeds for general
corporate purposes, including providing additional
equity capital to the Bank to support future growth
and to finance possible future acquisitions.
Proposed Purchases of Common
Stock................... Directors, senior officers and certain
stockholders of YNB intend to purchase approximately
163,000 shares of common stock in the offering.
Dividends................ Our annualized dividend is currently $0.32 per
share.
Nasdaq National
Market Symbol............ YANB
4
<PAGE>
Financial Summary
The following table sets forth certain historical financial data of YNB
and its subsidiaries on a consolidated basis. This table should be read in
conjunction with YNB's historical consolidated financial statements and related
notes.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------------
1999 1998
------------- -------------
(dollars in thousands, except
per share data)
<S> <C> <C>
Statement of Income Data:
Net interest income ........................... $ 6,417 $ 5,279
Provision for loan losses ..................... 650 400
Securities gains (losses), net ................ 15 9
Other non-interest income ..................... 713 679
Non-interest expense .......................... 4,345 3,504
Net income .................................... 1,554 1,334
Balance Sheet Data:
Assets ........................................ $ 894,849 $ 655,092
Securities .................................... 290,798 177,429
Loans, net of unearned income ................. 544,255 409,094
Allowance for loan losses ..................... 7,172 5,902
Deposits ...................................... 603,665 451,776
Stockholders' equity .......................... 41,390 39,937
Per Share Data(1):
Net income--basic ............................. $ 0.31 $ 0.26
Net income--diluted ........................... 0.31 0.26
Cash dividends ................................ 0.08 0.07
Book value .................................... 8.26 7.87
Financial Ratios:
Return on average assets ...................... 0.76% 0.86%
Return on average stockholders' equity ........ 15.02 13.35
Net interest margin (FTE)(2) .................. 3.35 3.67
Efficiency ratio(3) ........................... 60.81 58.72
Total loans to total assets ................... 60.82 62.45
Capital Ratios:
Stockholders' equity to total assets .......... 4.63% 6.10%
Tier 1 leverage ratio(4) ...................... 6.55 8.26
Tier 1 capital to risk-weighted assets ........ 8.91 11.80
Total capital to risk-weighted assets ......... 10.10 13.05
Asset Quality Ratios:
Nonperforming assets(5) to total assets ....... 0.91% 1.31%
Nonperforming assets(5) to total loans and
other real estate owned ...................... 1.48 2.07
Allowance for loan losses to
nonperforming loans(6) ....................... 218.13 116.43
Net loan charge offs to average total loans.... 0.19 0.07
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ------------- ------------- -------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net interest income ........................... $ 22,531 $ 19,668 $ 17,210 $ 14,495 $ 11,644
Provision for loan losses ..................... 1,975 1,125 1,640 865 305
Securities gains (losses), net ................ 151 24 (136) (91) (124)
Other non-interest income ..................... 2,851 2,520 2,249 1,946 1,678
Non-interest expense .......................... 15,337 13,341 11,479 10,260 9,285
Net income .................................... 5,582 5,006 4,026 3,403 2,523
Balance Sheet Data:
Assets ........................................ $ 757,666 $ 614,686 $ 490,545 $ 403,115 $ 280,550
Securities .................................... 221,688 186,636 124,967 133,853 63,235
Loans, net of unearned income ................. 491,649 385,751 331,237 245,054 196,910
Allowance for loan losses ..................... 6,768 5,570 4,957 3,677 2,912
Deposits ...................................... 519,643 422,944 364,445 302,972 259,296
Stockholders' equity .......................... 40,756 39,745 35,230 31,717 18,451
Per Share Data(1):
Net income--basic ............................. $ 1.11 $ 0.99 $ 0.82 $ 0.85 $ 0.85
Net income--diluted ........................... 1.10 0.98 0.80 0.82 0.82
Cash dividends ................................ 0.29 0.24 0.22 0.19 0.14
Book value .................................... 8.20 7.82 7.07 6.58 5.81
Financial Ratios:
Return on average assets ...................... 0.82% 0.93% 0.90% 0.99% 1.04%
Return on average stockholders' equity ........ 13.96 13.32 12.25 13.84 15.89
Net interest margin (FTE)(2) .................. 3.55 3.95 4.10 4.49 5.16
Efficiency ratio(3) ........................... 60.07 60.06 59.41 62.75 70.35
Total loans to total assets ................... 64.89 62.76 67.52 60.79 70.19
Capital Ratios:
Stockholders' equity to total assets .......... 5.38% 6.47% 7.18% 7.87% 6.58%
Tier 1 leverage ratio(4) ...................... 7.68 9.53 7.80 9.07 7.84
Tier 1 capital to risk-weighted assets ........ 9.91 12.24 10.17 11.95 9.59
Total capital to risk-weighted assets ......... 11.17 13.49 11.43 13.20 10.84
Asset Quality Ratios:
Nonperforming assets(5) to total assets ....... 1.17% 1.38% 1.74% 0.85% 0.85%
Nonperforming assets(5) to total loans and
other real estate owned ...................... 1.78 2.18 2.57 1.40 1.21
Allowance for loan losses to
nonperforming loans(6) ....................... 174.75 104.80 60.90 130.44 140.95
Net loan charge offs to average total loans.... 0.18 0.14 0.13 0.05 0.06
</TABLE>
- -------------
(1) All per share data has been restated to reflect the 2.5% stock dividend
declared in March 1998 and the two-for-one stock splits effected in the
form of stock dividends declared in December 1997 and November 1994.
(2) Tax equivalent based on a 34% Federal tax rate for all periods presented
(FTE = Federal tax equivalent basis).
(3) Efficiency ratio is equal to non-interest expense divided by the sum of the
net interest income and non-interest income.
(4) Tier 1 leverage ratio is Tier 1 capital to average assets.
(5) Nonperforming assets include nonperforming loans and other real estate
owned.
(6) Nonperforming loans include nonaccrual loans, restructured loans, and loans
90 days past due or greater and still accruing.
5
<PAGE>
RISK FACTORS
You should carefully consider the risk factors listed below before
investing. These risk factors may adversely impact our financial condition,
including future earnings or cash flow. You should read this section together
with the other information in this prospectus and the documents that are
incorporated into the prospectus by reference.
We may not be able to maintain and manage our current rate of growth.
During the last four years, we have experienced significant growth, and
our business strategy calls for similar continued expansion. In particular, we
intend to use the funds raised in this offering to support anticipated
increases in our loans and investments. Our ability to continue to grow
depends, in part, upon our ability to open new branch locations, successfully
attract deposits to those locations, and identify loan and investment
opportunities. Our ability to manage growth successfully will also depend on
whether we can continue to efficiently fund this balance sheet growth and
maintain cost controls and asset quality, as well as on factors beyond our
control, such as economic conditions and interest rate trends. The growth of
our commercial and industrial loans and commercial real estate loans has been
the principal factor in our increased earnings in the past few years. In the
event that we are unable to sustain our historic growth rate in a favorable
interest rate environment, our earnings could be adversely impacted. If we grow
too quickly, however, and are not able to control costs and maintain asset
quality such growth could adversely affect our financial performance.
Our exposure to credit risk is increased because we focus on commercial
lending.
There are certain risks inherent in making all loans. These risks include
interest rate changes over the time period in which loans may be repaid, risks
resulting from changes in our regional economy, risks inherent in dealing with
individual borrowers, and, in the case of a loan backed by collateral, risks
resulting from uncertainties about the future value of the collateral.
Our loan portfolio contains a high percentage of commercial and industrial
loans and commercial real estate loans in relation to our total loans and total
assets. Commercial loans are generally viewed as having more risk of default
than residential real estate loans or consumer loans. These types of loans are
also typically larger than residential real estate loans and consumer loans.
Because our loan portfolio contains a significant number of commercial and
industrial loans and commercial real estate loans with relatively large
balances, the deterioration of one or a few of these loans may cause a
significant increase in nonperforming loans. An increase in nonperforming loans
could result in a loss of earnings from these loans, an increase in the
provision for loan losses and an increase in loan charge-offs.
The Bank maintains an allowance for loan losses based on, among other
things, historical experience, an evaluation of economic conditions, and
regular reviews of delinquencies and loan portfolio quality. We cannot assure
you that charge-offs in future periods will not exceed the allowance for loan
losses or that additional increases in the allowance for loan losses will not
be required. Additions to the allowance for loan losses would result in a
decrease in our net income and, possibly, our capital.
Changes in interest rates may adversely affect our earnings and financial
condition.
Our net income depends principally upon our net interest income. Net
interest income is the difference between interest earned on loans, investments
and other interest-earning assets and the interest paid on deposits and
borrowed funds. Net interest income represented approximately 88% of our net
revenues in fiscal year 1998. Changes in interest rates can increase or reduce
net interest income and net income.
Different types of assets and liabilities may react differently, and at
different times, to changes in market interest rates. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
period, an increase in market rates of interest could reduce net interest
income. When interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could reduce net interest
income. Changes in market interest rates are affected by many factors beyond
our control, including inflation, unemployment, money supply, international
events, and events in the United States and other financial markets.
6
<PAGE>
We attempt to manage risk from changes in market interest rates, in part,
by controlling the mix of interest rate sensitive assets and interest rate
sensitive liabilities. However, interest rate risk management techniques are
not exact. A rapid increase or decrease in interest rates could adversely
affect our financial performance.
Adverse conditions in our market area may have an adverse effect on us.
Substantially all of our business is with customers located within Mercer
County, New Jersey, and contiguous counties. The businesses to whom we make
loans are small and medium sized and are dependent upon the regional economy.
Adverse economic and business conditions in our market area could affect our
borrowers, their ability to repay their loans, and consequently our financial
condition and performance.
Competition with other financial institutions could adversely affect our
profitability.
We face substantial competition in originating loans and in attracting
deposits. This competition in originating loans comes principally from other
banks, savings institutions, mortgage banking companies and other lenders. Many
of our competitors enjoy advantages including greater financial resources, a
wider geographic presence or more accessible branch office locations, the
ability to offer a wider array of services, or more favorable pricing
alternatives and lower origination and operating costs. This competition could
decrease the number and size of loans which we originate and the interest rate
which we receive on these loans.
In attracting deposits, we compete with other insured depository
institutions such as banks, savings institutions and credit unions, as well as
institutions offering uninsured investment alternatives, including money market
funds. These competitors may offer higher interest rates than we do, which
could decrease the deposits that we attract or require us to increase our rates
to attract new deposits. Increased deposit competition could increase our cost
of funds and adversely affect our ability to generate the funds necessary for
our lending operations.
Government regulation significantly affects our business.
The banking industry is extensively regulated. Banking regulations are
intended primarily to protect depositors and the federal deposit insurance
funds, not stockholders. We are subject to regulation and supervision by the
Board of Governors of the Federal Reserve System. The Bank is subject to
regulation and supervision by the Office of the Comptroller of the Currency.
Regulatory requirements affect our lending practices, capital structure,
investment practices, dividend policy and growth. For example, the Bank is
subject to various regulatory capital requirements, which involve both
quantitative measures of the Bank's assets and liabilities and qualitative
judgments by regulators regarding risk and other factors. The Bank's failure to
meet minimum capital requirements could result in actions by its regulators
that could adversely affect our ability to pay dividends or otherwise adversely
impact our operations. Changes in laws, regulations and regulatory practices
affecting the banking industry could impose additional costs on us and
otherwise adversely affect us.
Problems related to the Year 2000 issue could adversely affect our business.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The failure to
correct any such programs or hardware could result in system failures or
miscalculations causing disruptions of our operations, including a temporary
inability to process transactions or engage in similar normal business
activities.
The Year 2000 issue may adversely affect the credit quality of our loan
portfolio if our customers were unable to service their bank debt due to their
own Year 2000 problems or that of their key customers or suppliers. Year 2000
problems for our suppliers may have an adverse effect on us. For example,
without electrical power and telephone communications, it would be very
difficult for YNB to operate effectively.
We are subject to anti-takeover provisions.
Our Restated Certificate of Incorporation and By-Laws contain several
provisions that may make it more difficult for another company to acquire
control of us. A merger or other business combination with another
7
<PAGE>
company may require a supermajority vote of our stockholders or prior Board of
Directors approval of our disinterested directors. We also maintain a
classified Board of Directors, and directors may be removed by our stockholders
only by a supermajority vote. We also may issue preferred stock from time to
time without stockholder approval upon such terms as the Board of Directors
determines. Our Board of Directors in its discretion may also accelerate the
vesting of outstanding stock options in connection with any sale or conveyance
of all or substantially all of our assets, any consolidation or merger to which
we are a party or certain changes in control of YNB. These provisions (together
with the significant ownership of our common stock by our directors and
management) could discourage, delay or prevent an acquisition of YNB which does
not have the approval of our Board of Directors.
USE OF PROCEEDS
We will receive net proceeds of approximately $15.2 million ($17.6 million
if the underwriters' over-allotment option is exercised in full), after
deduction of expenses of the offering (estimated at $460,000) and the
underwriting discount.
We will use the net proceeds from this offering for general corporate
purposes, including providing additional equity capital to the Bank and to
finance possible future acquisitions. We are not presently in negotiations and
have not entered into any agreements or understandings with respect to any
acquisitions.
MARKET FOR COMMON STOCK AND DIVIDENDS
Market for Common Stock
Our common stock is listed for quotation on the Nasdaq National Market
under the symbol YANB. As of March 31, 1999, our common stock was held by 593
stockholders of record.
Set forth below are the high and low bid prices per share for our common
stock for each quarter of 1997 and 1998, and for 1999 through May 12, as well
as the amount of cash dividends per share we declared in each quarter. All data
has been restated to reflect the 2.5% stock dividend we declared in March 1998
and the two-for-one stock split effected in the form of a stock dividend we
declared in December 1997.
<TABLE>
<CAPTION>
Period High Low Dividend
- ----------------------------------------- ----------- ---------- -----------
<S> <C> <C> <C>
1997
First Quarter ........................... $ 11.22 $ 9.39 $ 0.060
Second Quarter .......................... 12.19 9.64 0.060
Third Quarter ........................... 13.84 11.95 0.060
Fourth Quarter .......................... 17.78 13.91 0.060
1998
First Quarter ........................... 19.03 17.08 0.070
Second Quarter .......................... 19.75 16.38 0.070
Third Quarter ........................... 16.75 12.00 0.075
Fourth Quarter .......................... 14.25 12.00 0.075
1999
First Quarter ........................... 14.50 12.32 0.080
Second Quarter (through May 12) ......... 14.00 11.38 0.080
</TABLE>
The closing bid price for our common stock on May 12, 1999, as reported on
the Nasdaq National Market was $12.63 per share.
Dividends
Substantially all of the funds available for the payment of cash dividends
are derived from the Bank. Future cash dividends will depend primarily upon the
Bank's earnings, financial condition, need for funds, and government policies
and regulations applicable to both the Bank and YNB. As of December 31, 1998,
the net profits of the Bank available for distribution to YNB as dividends
without regulatory approval were approximately $7,952,000. We cannot pay
dividends should we elect to defer interest payments on our 9.25% subordinated
debentures or if we are in default of our obligations relating to the
debentures. YNB presently intends to pay dividends for each quarter of 1999,
each in an amount of not less than $0.08 per share, subject to our financial
condition. We declared a cash dividend of $0.08 per share on April 28, 1999,
payable to stockholders of record on May 12, 1999. Investors who purchase
common stock in this offering will not be entitled to receive that dividend.
8
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization at December
31, 1998 and as adjusted to give effect to our sale of 1,400,000 shares of
common stock at $12.00 per share in this offering. For this table we have
assumed that our net proceeds will be approximately $15.2 million after
expenses, and that these proceeds will be invested in assets with a 20% risk
weighting for regulatory capital purposes. If the underwriters' over-allotment
option is exercised in full, 1,610,000 shares would be sold, resulting in net
proceeds of approximately $17.6 million. This table does not include 11,740
shares of common stock issuable under stock options exercised in the first
quarter of 1999. Nor does it include 155,340 shares of common stock issued on
February 3, 1999, to the Yardville National Bank Employee Stock Ownership Plan
Trust. This table also does not reflect our repurchase of 1,700 shares of common
stock during the first quarter of 1999.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
Actual As Adjusted
----------- ------------
(dollars in thousands,
except per share data)
<S> <C> <C>
Long-Term Debt:
Company-obligated Mandatorily Redeemable Trust Preferred Secu-
rities of Subsidiary Trust holding solely junior Subordinated
Debentures of the Company .................................... $ 11,500 $ 11,500
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized, none
issued ....................................................... -- --
Common stock, no par value, 12,000,000 shares authorized,
5,138,474 shares issued, 6,538,474 as adjusted ............... 20,364 35,612
Surplus ........................................................ 2,205 2,205
Undivided profits .............................................. 21,479 21,479
Treasury stock, at cost, 170,300 shares ........................ (3,008) (3,008)
Accumulated other comprehensive income ......................... (284) (284)
-------- --------
Total stockholders' equity ..................................... 40,756 56,004
-------- --------
Total Capitalization ............................................ $ 52,256 $ 67,504
======== ========
Book Value Per Share ............................................ $ 8.20 $ 8.79
Capital Ratios:
Tier 1 leverage ratio ........................................ 7.68% 9.91%
Tier 1 capital to risk-weighted assets ....................... 9.91 12.71
Total capital to risk-weighted assets ........................ 11.17 13.96
</TABLE>
9
<PAGE>
BUSINESS
Yardville National Bancorp is a bank holding company headquartered in
Hamilton Township, New Jersey. We provide commercial and retail banking
services through our principal operating subsidiary, The Yardville National
Bank. At December 31, 1998, we had total consolidated assets of $757.7 million,
deposits of $519.6 million and stockholders' equity of $40.8 million.
We operate primarily in Mercer County, New Jersey, and contiguous counties
midway between New York City and Philadelphia through eleven offices. Those
counties have a moderate to heavy concentration of lower middle market
businesses with annual sales between $1 million and $25 million. In 1999, we
extended our market area to Bucks County, Pennsylvania by opening a new branch
in Newtown, approximately 30 miles northeast of downtown Philadelphia. During
the past decade, Bucks County's population has been growing rapidly, making it
one of the fastest growing counties in the region.
We are a community bank which provides a broad range of commercial and
retail banking services designed to meet the borrowing and depository needs of
small and medium-sized businesses and consumers in the communities we serve. We
believe that such businesses and individuals in our market are under-served by
the larger regional and super-regional banking institutions which have acquired
local institutions in the recent consolidation in the New Jersey banking
market. As a community bank, we seek to provide these banking customers with
the technological support that banking in today's market requires, and make
available a broad range of products and services for both businesses and
consumers. At the same time, we are dedicated to serving our community by
emphasizing local decision making within our organization and providing
attentive personal service to our customers. By combining the technological
support and products and services that our customers seek with accessibility to
senior management and responsive customer service, we seek to foster a business
banking environment that allows us to effectively compete in our particular
market with other financial institutions of all sizes.
Strategy
In order to continue our development as a supercommunity bank and build
long-term value for our stockholders, we will continue to implement a strategy
with the following primary objectives:
o Emphasize commercial lending activities. We intend to continue focusing
our lending efforts on small to medium-sized businesses in our market.
Since 1994, our loan portfolio has grown from $196.9 million, to $491.6
million at December 31, 1998. Our commercial and industrial loans and
commercial real estate loans accounted for $75.8 million or 38.5% of the
total loan portfolio at December 31, 1994, and accounted for $300.0
million or 61.0% of the total loan portfolio at December 31, 1998. Because
of the consolidation in the New Jersey banking market, we have had
opportunities to establish new lending and deposit relationships with
established businesses. As a result of an increase in our loan limits, we
have been able to develop and expand our lending relationships, make
larger loans and attract larger business customers.
o Expand our geographic market. In 1998, we opened a new branch in
Pennington, Mercer County, and are following this expansion with the
addition of three new offices in 1999. In March 1999, we expanded into
Pennsylvania by opening our first branch office in Bucks County. We will
also be opening a corporate headquarters branch in Hamilton in August 1999
to meet expanding market needs in our core market, and our first banking
office in Burlington County in 1999. We intend to expand further into
contiguous markets by opening several additional branches within the next
two to three years. As we have grown and because of our focus on
commercial lending, we have continued to find business lending
opportunities throughout New Jersey.
o Enhance customer service through technology. We have upgraded our
computer systems to improve customer service, increase our efficiency,
enhance our ability to provide sophisticated services to our customers and
maximize our marketing capabilities. In 1998, we spent approximately
$615,000 on major
10
<PAGE>
computer equipment, including a new mainframe computer and a reader
sorter. We will continue to invest in our computer systems and other
technology to achieve these goals, although we do not expect to invest in
major hardware in 1999. This year we have created our web site to provide
information on rates, products, office locations and financial planning to
our customers and potential customers. In 1999, we also intend to
introduce "YNB OnLine" to provide PC-banking for our customers.
o Actively manage our investment portfolio. Our investment portfolio
includes mortgage-backed securities, and agency-sponsored securities which
are funded through advances from the Federal Home Loan Bank and other
borrowings. The primary goal of our investment strategy is to supplement
net interest income, return on average equity and earnings per share. We
manage this strategy proactively, analyzing risk and reward relationships
in different interest rate environments based upon the composition of our
investment portfolio and our overall interest rate risk position.
o Diversify our sources of income. We intend to explore and introduce
additional products and services to improve our non-interest income
growth. Presently, we earn non-interest income primarily from a variety of
fee-based services, such as automated teller machine fees and mortgage
servicing fees. We are in the process of analyzing other initiatives that
will complement our existing banking products and services.
Our strategy emphasizes relationship banking by targeting customers with
whom the Bank can develop both loan and deposit relationships and relationships
based on our other products and services.
Products and Services
We provide a wide variety of commercial and consumer lending and deposit
services. We offer these traditional banking products and services, and provide
related information, to customers through our branch offices and sales
representatives, our telephone help center, our telephone banking system and
our web site on the internet. To assist in our marketing efforts, all of our
branch representatives have undergone sales training in the past year to
enhance their product knowledge and marketing skills.
Loans. Our loan portfolio represents our largest earning asset and is our
principal source of interest income. Our lending strategy stresses quality
growth and portfolio diversification. We make a variety of loans, including
commercial business loans, commercial real estate loans, residential mortgage
loans, real estate construction loans, home equity and other consumer loans.
Our primary lending focus and our principal area of loan growth in recent years
has been commercial lending. Commercial and industrial loans have grown from
$26.6 million at December 31, 1994 to $133.3 million at December 31, 1998.
Commercial real estate loans have grown from $49.2 million at the end of 1994
to $166.7 million at the end of 1998. Loans in these two categories are
primarily to small to medium-sized businesses and professionals with $25
million or less in annual revenues.
Deposits. Deposits are our principal source of funds. We offer a wide
range of deposit products, including demand deposits, savings deposits, insured
money market accounts and certificates of deposit. Our deposit base increased
by 22.9% in 1998 to $519.6 million at the end of the year. We have continued to
experience strong deposit growth in our market and have supplemented that
growth by marketing our certificates of deposit nationwide since March 1998.
This marketing program played a significant role in our deposit growth in 1998
and will continue to be a part of our strategy for attracting deposits.
Other. We also offer non-lending services to both businesses and consumers
to complement our traditional banking products and services. For our business
customers, we recently added several new products and services, including
lockbox and cash management services. Consumer banking customers can now
purchase mutual funds and annuities from a representative at our branch
offices. We also initiated private banking in 1998, and are looking at other
opportunities to make our bank the kind of "one-stop," extended financial
services institution that many customers seek.
11
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data of YNB
and its subsidiaries on a consolidated basis. This table should be read in
conjunction with YNB's historical consolidated financial statements and related
notes.
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
-------------- --------------
(in thousands, except per share
data)
<S> <C> <C>
Statement of Income:
Interest income ..................................... $ 50,923 $ 40,768
Interest expense .................................... 28,392 21,100
---------- ----------
Net interest income ................................. 22,531 19,668
Provision for loan losses ........................... 1,975 1,125
Securities gains (losses), net ...................... 151 24
Other non-interest income ........................... 2,851 2,520
Non-interest expense ................................ 15,337 13,341
---------- ----------
Income before income tax expense .................... 8,221 7,746
Income tax expense .................................. 2,639 2,740
---------- ----------
Net income .......................................... $ 5,582 $ 5,006
========== ==========
Balance Sheet:
Assets .............................................. $ 757,666 $ 614,686
Loans, net of unearned income ....................... 491,649 385,751
Allowance for loan losses ........................... 6,768 5,570
Securities .......................................... 221,688 186,636
Deposits ............................................ 519,643 422,944
Borrowed funds ...................................... 177,888 134,316
Stockholders' equity ................................ 40,756 39,745
Per Share Data:(1)
Net income--basic ................................... $ 1.11 $ 0.99
Net income--diluted ................................. 1.10 0.98
Cash dividends ...................................... 0.29 0.24
Book value .......................................... 8.20 7.82
Other Data:(1)
Average shares outstanding--basic ................... 5,017 5,052
Average shares outstanding--diluted ................. 5,059 5,117
Financial Ratios:
Return on average assets ............................ 0.82% 0.93%
Return on average stockholders' equity .............. 13.96 13.32
Net interest margin (FTE)(2) ........................ 3.55 3.95
Efficiency ratio(3) ................................. 60.07 60.06
Dividend payout ratio ............................... 25.96 24.63
Tier 1 leverage ratio(4) ............................ 7.68 9.53
Tier 1 capital to risk-weighted assets .............. 9.91 12.24
Total capital to risk-weighted assets ............... 11.17 13.49
Asset Quality Ratios:
Nonperforming assets(5) to total assets ............. 1.17% 1.38%
Nonperforming assets(5) to total loans and
other real estate owned ............................ 1.78 2.18
Allowance for loan losses to total loans ............ 1.38 1.44
Allowance for loan losses to nonperforming
loans(6) ........................................... 174.75 104.80
Net loan charge offs to average total loans ......... 0.18 0.14
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Income:
Interest income ..................................... $ 34,251 $ 27,336 $ 18,004
Interest expense .................................... 17,041 12,841 6,360
--------- --------- ---------
Net interest income ................................. 17,210 14,495 11,644
Provision for loan losses ........................... 1,640 865 305
Securities gains (losses), net ...................... (136) (91) (124)
Other non-interest income ........................... 2,249 1,946 1,678
Non-interest expense ................................ 11,479 10,260 9,285
--------- --------- ---------
Income before income tax expense .................... 6,204 5,225 3,608
Income tax expense .................................. 2,178 1,822 1,085
--------- --------- ---------
Net income .......................................... $ 4,026 $ 3,403 $ 2,523
========= ========= =========
Balance Sheet:
Assets .............................................. $ 490,545 $ 403,115 $ 280,550
Loans, net of unearned income ....................... 331,237 245,054 196,910
Allowance for loan losses ........................... 4,957 3,677 2,912
Securities .......................................... 124,967 133,853 63,235
Deposits ............................................ 364,445 302,972 259,296
Borrowed funds ...................................... 86,339 65,221 1,215
Stockholders' equity ................................ 35,230 31,717 18,451
Per Share Data:(1)
Net income--basic ................................... $ 0.82 $ 0.85 $ 0.85
Net income--diluted ................................. 0.80 0.82 0.82
Cash dividends ...................................... 0.22 0.19 0.14
Book value .......................................... 7.07 6.58 5.81
Other Data:(1)
Average shares outstanding--basic ................... 4,938 4,026 2,974
Average shares outstanding--diluted ................. 5,040 4,151 3,093
Financial Ratios:
Return on average assets ............................ 0.90% 0.99% 1.04%
Return on average stockholders' equity .............. 12.25 13.84 15.89
Net interest margin (FTE)(2) ........................ 4.10 4.49 5.16
Efficiency ratio(3) ................................. 59.41 62.75 70.35
Dividend payout ratio ............................... 26.90 21.69 15.06
Tier 1 leverage ratio(4) ............................ 7.80 9.07 7.84
Tier 1 capital to risk-weighted assets .............. 10.17 11.95 9.59
Total capital to risk-weighted assets ............... 11.43 13.20 10.84
Asset Quality Ratios:
Nonperforming assets(5) to total assets ............. 1.74% 0.85% 0.85%
Nonperforming assets(5) to total loans and
other real estate owned ............................ 2.57 1.40 1.21
Allowance for loan losses to total loans ............ 1.50 1.50 1.48
Allowance for loan losses to nonperforming
loans(6) ........................................... 60.90 130.44 140.95
Net loan charge offs to average total loans ......... 0.13 0.05 0.06
</TABLE>
- --------------------------------------------------------------------------------
(1) All share and per share data has been restated to reflect the 2.5% stock
dividend declared in March 1998 and the two-for-one stock splits effected
in the form of stock dividends declared in December 1997 and November
1994.
(2) Tax equivalent based on a 34% Federal tax rate for all periods presented
(FTE = Federal tax equivalent basis).
(3) Efficiency ratio is equal to non-interest expense divided by the sum of the
net interest income and non-interest income.
(4) Tier 1 leverage ratio is Tier 1 capital to average assets.
(5) Nonperforming assets include nonperforming loans and other real estate
owned.
(6) Nonperforming loans include nonaccrual loans, restructured loans, and loans
90 days past due or greater and still accruing.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1998 Overview
In 1998 YNB was challenged by intense competition, changing customer
demands and increased pricing pressures. Traditional loan and deposit
activities face particularly challenging competitive pressures as both banks
and non-banks compete for customers with access to a broad array of products.
YNB's emphasis on relationship banking paid dividends again in 1998. YNB
posted increases in net income, loans, and deposits. Technology upgrades have
increased product diversity and enhanced customer service.
Net income amounted to $5,582,000, an 11.5% increase, compared to the
record results of $5,006,000 reported in 1997. Earnings were primarily enhanced
by commercial loan growth and, to a lesser extent, securities growth
experienced throughout the year. Earnings per share, on a diluted basis,
adjusted for the 2.5% stock dividend declared March 25, 1998 increased from
$0.98 in 1997 to $1.10 in 1998.
Led by commercial loans, YNB's loan portfolio grew 27.5% in 1998 compared
to 1997. At December 31, 1998 total loans reached $491,649,000 compared to
$385,751,000 recorded at the end of 1997. The allowance for loan losses totaled
$6,768,000 or 1.38% of total loans, covering 174.7% of total nonperforming
loans. YNB's deposit base increased 22.9% to $519,643,000 at December 31, 1998.
CDs were competitively priced throughout the year to fund loan growth. YNB's
emphasis on relationship banking is reflected in the 13.3% increase in demand
deposits in 1998.
Two industry measures of the performance by a bank are its return on
average assets and return on average equity. Return on average assets decreased
to 0.82% in 1998 from 0.93% in 1997 due primarily to the growth in average
assets. Return on average equity is determined by dividing annual net income by
average stockholders' equity and indicates how effectively a company can
generate net income on the capital invested by its stockholders. For 1998 YNB's
return on average equity was 13.96% compared to 13.32% in 1997.
Results of Operations
YNB earned $5,582,000 or $1.10 per share (diluted) for the year ended
December 31, 1998 compared to $5,006,000 or $0.98 per share (diluted) for the
year ended December 31, 1997. Net income and earnings per share grew 11.5% and
12.2%, respectively, in 1998. YNB posted net income of $4,026,000 or $0.80 per
share (diluted) in 1996.
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.
This component represented 88.2% of YNB's net revenues in 1998. Net interest
income depends upon the relative amounts of interest earning assets, interest
bearing liabilities, and the interest rate earned or paid on them.
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 or rate for the
years ended December 31, 1998, 1997, and 1996. The yields and costs are derived
by dividing income and expense by the average balance of assets or liabilities.
13
<PAGE>
Financial Summary Average Balances, Rates Paid and Yields
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ ---------- --------- ------------ ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Time deposits with other banks ................. $ 3,365 $ 175 5.20% $ 2,533 $ 107 4.22%
Federal funds sold ............................. 6,180 333 5.39 7,121 380 5.34
Securities ..................................... 198,890 12,197 6.13 140,655 8,770 6.24
Loans, net of unearned income (1) .............. 438,050 38,218 8.72 355,526 31,511 8.86
--------- -------- ----- --------- -------- -----
Total interest earning assets ................. $ 646,485 $ 50,923 7.88% $ 505,835 $ 40,768 8.06%
--------- -------- ----- --------- -------- -----
NON-INTEREST EARNING ASSETS:
Cash and due from banks ........................ $ 15,398 $ 15,425
Allowance for loan losses ...................... (6,102) (5,254)
Premises and equipment, net .................... 5,786 5,288
Other assets ................................... 22,599 15,337
--------- ---------
Total non-interest earning assets ............. 37,681 30,796
--------- ---------
Total assets ................................... $ 684,166 $ 536,631
========= =========
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets, and interest
bearing demand ............................... $ 165,534 $ 5,034 3.04% $ 159,720 $ 5,083 3.18%
Certificates of deposit of $100,000 or
more ......................................... 25,550 1,386 5.42 23,357 1,273 5.45
Other time deposits ........................... 211,790 12,152 5.74 168,962 9,759 5.78
--------- -------- ----- --------- -------- -----
Total interest bearing deposits .............. 402,874 18,572 4.61 352,039 16,115 4.58
Borrowed funds ................................ 158,106 8,756 5.54 84,492 4,761 5.63
Trust preferred securities .................... 11,500 1,064 9.25 2,422 224 9.25
--------- -------- ----- --------- -------- -----
Total interest bearing liabilities ........... 572,480 28,392 4.96 438,953 21,100 4.81
--------- -------- ----- --------- -------- -----
NON-INTEREST BEARING
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Demand deposits ................................ $ 66,857 $ 56,700
Other liabilities .............................. 4,857 3,404
Stockholders' equity ........................... 39,972 37,574
--------- ---------
Total non-interest bearing liabilities
and stockholders' equity .................... $ 111,686 $ 97,678
--------- ---------
Total liabilities and stockholders' equity ..... $ 684,166 $ 536,631
========= =========
Interest rate spread (2) ....................... 2.92% 3.25%
===== =====
Net interest income and margin (3) ............. $ 22,531 3.49% $ 19,668 3.89%
======== ===== ======== =====
Net interest income and margin (tax equiva-
lent basis) (4) ............................... $ 22,950 3.55% $ 19,993 3.95%
======== ===== ======== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------
Average
Average Yield/
Balance Interest Rate
----------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Time deposits with other banks ................. $ 1,992 $ 98 4.92%
Federal funds sold ............................. 4,265 228 5.35
Securities ..................................... 132,036 8,194 6.21
Loans, net of unearned income (1) .............. 287,289 25,731 8.96
-------- ------- -----
Total interest earning assets ................. $425,582 $34,251 8.05%
-------- ------- -----
NON-INTEREST EARNING ASSETS:
Cash and due from banks ........................ $ 11,905
Allowance for loan losses ...................... (4,190)
Premises and equipment, net .................... 5,037
Other assets ................................... 10,156
--------
Total non-interest earning assets ............. 22,908
--------
Total assets ................................... $448,490
========
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets, and interest
bearing demand ............................... $133,450 $ 4,014 3.01%
Certificates of deposit of $100,000 or
more ......................................... 18,188 922 5.07
Other time deposits ........................... 125,332 7,138 5.70
-------- ------- -----
Total interest bearing deposits .............. 276,970 12,074 4.36
Borrowed funds ................................ 87,065 4,967 5.70
Trust preferred securities .................... -- -- --
-------- ------- -----
Total interest bearing liabilities ........... 364,035 17,041 4.68
-------- ------- -----
NON-INTEREST BEARING
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Demand deposits ................................ $ 49,078
Other liabilities .............................. 2,507
Stockholders' equity ........................... 32,870
--------
Total non-interest bearing liabilities
and stockholders' equity .................... $ 84,455
--------
Total liabilities and stockholders' equity ..... $448,490
========
Interest rate spread (2) ....................... 3.37%
=====
Net interest income and margin (3) ............. $17,210 4.04%
======= =====
Net interest income and margin (tax equiva-
lent basis) (4) ............................... $17,432 4.10%
======= =====
</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 $419,000, $325,000, and $222,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
14
<PAGE>
Changes in net interest income and margin result from the interaction
between the volume and composition of interest earning assets, interest bearing
liabilities, related yields, and associated funding costs. The following table
demonstrates the impact on net interest income of changes in the volume of
interest earning assets and interest bearing liabilities and changes in
interest rates earned and paid.
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Due to changes in: Due to changes in:
--------------------------------------- --------------------------------------
Volume Rate Total Volume Rate Total
------------ ----------- ---------- ----------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Time deposits with other banks ............ $ 40 $ 28 $ 68 $ 24 $ (15) $ 9
Federal funds sold ........................ (51) 4 (47) 152 -- 152
Securities ................................ 3,574 (147) 3,427 537 39 576
Loans, net of unearned income (1) ......... 7,207 (500) 6,707 6,051 (271) 5,780
------- ------- ------- ------- ------- -------
Total interest income ................... 10,770 (615) 10,155 6,764 (247) 6,517
------- ------- ------- ------- ------- -------
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets, and interest
bearing demand ........................... 181 (230) (49) 826 243 1,069
Certificates of deposit of $100,000 or
more ..................................... (6) 119 113 278 73 351
Other time deposits ....................... 2,458 (65) 2,393 2,519 102 2,621
-------- ------- ------- ------- ------- -------
Total deposits .......................... 2,633 (176) 2,457 3,623 418 4,041
Borrowed funds ............................ 4,078 (83) 3,995 (61) (145) (206)
Trust preferred securities ................ 840 -- 840 224 -- 224
-------- ------- ------- ------- ------- -------
Total interest expense .................. 7,551 (259) 7,292 3,786 273 4,059
-------- ------- ------- ------- ------- -------
Change in net interest income ............. $ 3,219 $ (356) $ 2,863 $ 2,978 $ (520) $ 2,458
======== ======= ======= ======= ======= =======
</TABLE>
- ------------
(1) Loan origination fees are considered adjustments to interest income.
YNB's net interest income totaled $22,531,000 in 1998, an increase of
14.6% from the $19,668,000 reported in 1997. The prior year's increase was
14.3% from 1996's net interest income of $17,210,000. The principal factor
contributing to the increase in net interest income in 1998 was an increase in
interest income of $10,155,000 resulting from increased loan and security
volumes. This was partially offset by decreases in loan and security yields and
increased volumes of other time deposits, borrowed funds and trust preferred
securities and the related interest expense.
Average interest earning assets increased by $140,650,000 or 27.8% for
1998 with increases of $82,524,000 in loans and $58,235,000 in securities. Led
by commercial loans, YNB's average loan portfolio grew by 23.2%, however, loan
yields averaged 8.72% in 1998 or 14 basis points lower than 1997. Commercial
loan yields moved lower as a result of prime rate reductions in the last
quarter of 1998 as well as declining market interest rates. Approximately 48%
of YNB's commercial, commercial mortgage, and real estate - construction loans
have floating interest rates. YNB's average securities portfolio grew by 41.4%,
however, the yield on that portfolio decreased 11 basis points when comparing
1998 to 1997, due to a flat treasury yield curve and increased prepayment
speeds on mortgage-backed securities. Overall, the yield on earning assets
decreased 18 basis points to 7.88% in 1998 from 8.06% in 1997.
Interest expense was $28,392,000 for 1998, an increase of $7,292,000, or
34.6%, from $21,100,000 a year ago. The increase in interest expense for the
comparable time period is attributable to higher levels of time deposits,
borrowed funds, and the impact of trust preferred securities issued in October
1997. Time deposits were aggressively priced throughout 1998 to fund loan
growth. The cost on these deposits, however, dropped 4 basis points in 1998
from 1997. Average interest bearing liabilities rose 30.4% in 1998 compared to
1997. The cost of total interest bearing liabilities rose 15 basis points to
4.96% in 1998 from 4.81% in 1997. Trust preferred securities accounted for
approximately 40% of this increase.
15
<PAGE>
Net interest income was $19,668,000 in 1997, an increase of 14.3% from
$17,210,000 in 1996. The principal factor contributing to the improvement was
an increase in interest income due to a substantial increase in commercial loan
volume. This was partially offset by decreases in loan yields and increases in
deposits and trust preferred securities and the related interest expense.
The net interest margin (tax equivalent basis), which is net interest
income divided by average interest earning assets, was 3.55% in 1998 versus
3.95% in 1997 and 4.10% in 1996. The decrease in the net interest margin
resulted from the factors discussed previously. In addition, management has
continued to use an investment growth strategy which negatively impacts the
margin.
The investment growth strategy is designed to increase net interest income
by purchasing investments utilizing borrowed funds with a targeted spread of 75
basis points after tax. The primary goals of the strategy are to improve return
on average equity and earnings per share. Incrementally, any increase to net
interest income by this strategy will improve return on average equity and
earnings per share. The targeted spread on this strategy, however, will result
in a negative impact to the net interest margin and return on average assets.
For the period ended December 31, 1998 the investment growth strategy averaged
approximately $132,900,000. The positive impact to return on average equity and
earnings per share was approximately 2.00% and $0.17, respectively. The
negative impact to the net interest margin and return on average assets was
approximately .69% and .04%, respectively. This strategy is proactively
managed, analyzing risk and reward relationships in different interest rate
environments based on the composition of investments in the strategy and YNB's
overall interest rate risk position.
Nonaccrual loans totaled $2,046,000 at December 31, 1998, a decrease of
$1,309,000 from the $3,355,000 reported at December 31, 1997. The decrease in
nonaccrual loans was primarily the result of these loans being transferred into
other real estate owned. Had such 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 $249,000 in 1998,
$254,000 in 1997 and $351,000 in 1996.
Average non-interest bearing demand deposits increased 17.9% to
$66,857,000 in 1998 from $56,700,000 in 1997. Throughout the comparative
periods, increases in average non-interest bearing deposits contributed to the
increase in net interest income.
Non-Interest Income
Non-interest income amounted to $3,002,000 in 1998 compared to $2,544,000
the prior year, an increase of $458,000 or 18.0%. Non-interest income in 1997
increased by $431,000, or 20.4% from 1996's posted total of $2,113,000.
Non-interest income represented 5.6% of total revenues in 1998. Part of
YNB's strategic plan is to improve non-interest income growth. In 1998, YNB's
product development and management committee re-introduced annuities and mutual
funds to our marketplace. YNB has broadened its product lines and is in the
process of analyzing several key strategic initiatives (e.g. insurance
products), designed to provide additional sources of fee income that complement
our established banking products and services.
The major components of non-interest income are presented in the following
table.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts ........... $ 1,246 $ 1,174 $ 1,153
Other service fees ............................ 611 593 438
Gains on sales of mortgages, net .............. 62 30 21
Securities gains (losses), net ................ 151 24 (136)
Earnings on bank owned life insurance ......... 708 541 419
Other non-interest income ..................... 224 182 218
------- ------- -------
Total ....................................... $ 3,002 $ 2,544 $ 2,113
======= ======= =======
</TABLE>
16
<PAGE>
Service charges on deposit accounts represent the largest single source of
non-interest income. Service charge revenues in 1998 totaled $1,246,000, an
increase of 6.1%, compared to $1,174,000 in 1997. Service charge income totaled
$1,153,000 in 1996. This component of non-interest income represented 41.5%,
46.1% and 54.6% of the total non-interest income in 1998, 1997, and 1996,
respectively. Service charge income increased in 1998 principally due to an
increase in income from overdraft fees. Management has pursued a strategy of
requiring compensating balances from its commercial customers. Those who meet
balance requirements are not service charged.
YNB also generates non-interest income from a variety of fee-based
services. These include safe deposit rentals, lockbox services and automated
teller machine fees on non-customers. Deposit and fee services are repriced
annually by the product development and management committee to reflect current
costs and competitive factors.
Gains on sales of mortgages, net, increased in 1998 to $62,000 from
$30,000 in 1997. Gains on sales of mortgages, net, totaled $21,000 in 1996.
While income realized from sales of mortgages increased for the comparable time
periods, YNB has not been an active participant in the secondary mortgage
market.
YNB recorded net securities gains of $151,000 and $24,000 in 1998 and
1997, respectively. In 1996 YNB realized $136,000 in net securities losses. The
net gains in 1998 were the result of routine sales and repositioning
transactions to take advantage of the volatility in the treasury yield curve.
Income from bank owned life insurance totaled $708,000 in 1998, an
increase of $167,000 or 30.9% compared to 1997. Income from bank owned life
insurance totaled $419,000 in 1996. Bank owned life insurance assets are
utilized to offset the costs of executive compensation plans and a deferred
compensation plan for directors.
Other non-interest income is primarily composed of income derived from
mortgage servicing. Other non-interest income totaled $224,000 in 1998, an
increase of $42,000 or 23.1%, when compared to $182,000 in 1997. Other
non-interest income totaled $218,000 in 1996.
Non-Interest Expense
Non-interest expense totaled $15,337,000 in 1998, an increase of
$1,996,000 or 15.0%, compared to $13,341,000 in 1997. Non-interest expense in
1997 increased 16.2% from $11,479,000 in 1996. The largest increase in
non-interest expense in 1998 compared to 1997 was in salaries and employee
benefits. To a lesser extent, occupancy, equipment, and other non-interest
expenses also increased for the comparable periods.
The following table presents the major components of non-interest expense
for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Salaries and employee benefits ................... $ 8,115 $ 7,446 $ 6,629
Occupancy expense, net ........................... 1,070 977 920
Equipment expense ................................ 1,299 1,107 695
Audit & examination fees ......................... 306 227 216
Attorneys' fees .................................. 379 373 153
O.R.E. expenses .................................. 573 378 163
Outside services and processing .................. 328 332 325
Stationery and supplies .......................... 403 347 388
Communication and postage ........................ 434 373 354
FDIC insurance premium ........................... 53 47 1
Insurance (other) ................................ 101 127 102
Marketing ........................................ 747 575 522
Amortization of trust preferred expenses ......... 160 27 --
Other ............................................ 1,369 1,005 1,011
------- ------- -------
Total .......................................... $15,337 $13,341 $11,479
======= ======= =======
</TABLE>
17
<PAGE>
Salaries and employee benefits, which represent the largest portion of
non-interest expense, increased $669,000 in 1998 or 9.0% over 1997. These
expenses in 1997 increased $817,000 or 12.3% over 1996. Contributing to this
increase was the additional staffing required with the opening of YNB's tenth
branch located in Pennington, as well as additional staffing due to YNB's
growth. Normal annual salary compensation increases also account for part of
the increase in this category. Employee benefits decreased 2.4% for the
comparable periods due primarily to reductions in expenses for postretirement
benefits. Full time equivalent employees increased to 187 at December 31, 1998
from 173 at December 31, 1997. 1997's increase over 1996 primarily was the
result of additional staffing and related benefit expenses due to YNB's growth.
In 1997 executive management was also strengthened and YNB opened its Telephone
Help Center, which both contributed to the increase of salaries and employee
benefits. Salaries and employee benefits as a percent of average assets was
1.2% in 1998, 1.4% in 1997 and 1.5% in 1996, respectively.
During 1998 net occupancy expense increased $93,000 to $1,070,000 in 1998
from $977,000 reported in 1997. The increase in occupancy expenses in 1998
compared to 1997 was due primarily to new rental lease payments on YNB's
Pennington branch, additional space for the East Windsor branch, as well as
routine rent increases. In the last quarter of 1998 YNB began lease payments on
its Newtown, Pennsylvania branch which opened in the first quarter of 1999. In
1998, YNB also signed a lease for a 45,000 square foot corporate headquarters
building. This new location will include a full service bank branch. Lease
payments will not commence until the completion of the building, which is
projected to be in the third quarter of 1999. The increase in occupancy
expenses in 1997 compared to 1996 was attributable to increased maintenance
costs, and to a lesser extent, rental and other expenses associated with the
Telephone Help Center which opened in September 1997. This component of
non-interest expense has remained constant as a percentage of average assets at
0.2% in 1998, 1997, and 1996, respectively.
Equipment expenses increased $192,000, or 17.3%, to $1,299,000 in 1998
from $1,107,000 in 1997. Throughout 1998 YNB upgraded its technology capacity
to increase productivity as well as resolve Year 2000 issues. More information
on YNB's Year 2000 plan can be found later in management's discussion of
financial condition. YNB's enhanced technology will allow management to further
diversify business and consumer product lines. The technology upgrades
undertaken in 1998 have already improved efficiency and enhanced quality
customer service. The increase in equipment expenses in 1997 compared to 1996
was due to increased depreciation costs on YNB's in-house computer system as
well as hardware and software upgrades designed to address Year 2000 issues.
Other non-interest expenses were $4,853,000, $3,811,000, and $3,235,000 in
1998, 1997, and 1996, respectively.
Other real estate (O.R.E.) expenses increased $195,000 to $573,000 in 1998
when compared to 1997. O.R.E. expenses increased 131.9% in 1997 to $378,000
from $163,000 in 1996. Legal fees and real estate taxes associated with the two
real estate-construction loans that were placed in nonaccrual in late 1996
account for the increased O.R.E. expenses in 1998 and 1997. Both of these
construction projects are in the work-out process.
Communications and postage expense increased $61,000, or 16.4%, to
$434,000 in 1998. This increase was attributable to higher telecommunication
costs, as a result of additional wiring and technology upgrades.
Marketing expenses increased by $172,000, or 29.9% in 1998 to $747,000,
compared to $575,000 in 1997. Marketing expenses totaled $522,000 in 1996. In
1998 the two primary focuses in the marketing division were: advertising to
generate deposits to fund loan growth and YNB's continued emphasis on
participation in community activities.
Other expenses, which include various professional fees, loan-related
expenses and other operating expenses, have increased primarily due to the
increasing size of the organization. In 1998 other expenses were $1,369,000, an
increase of $364,000 or 36.2% from $1,005,000 in 1997. Other expenses totaled
$1,011,000 in 1996. The increase in 1998 other expenses compared to 1997 is
primarily attributable to expenses related to loan growth, increased
professional fees, and other operating expenses associated with a larger
institution.
YNB's ratio of non-interest expense to average assets decreased to 2.2%
for 1998 compared to 2.5% for 1997 and 2.6% for 1996.
An important industry productivity measure is the efficiency ratio. The
efficiency ratio is calculated by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio
18
<PAGE>
indicates that more resources are being utilized to generate the same or
greater volume of income while a decrease would indicate a more efficient
allocation of resources. YNB's efficiency ratio increased slightly in 1998 to
60.07% compared to 60.06% in 1997, and 59.41% in 1996.
Income Taxes
The provision for income taxes, which is comprised of Federal and state
income taxes, was $2,639,000 in 1998 compared to $2,740,000 in 1997 and
$2,178,000 in 1996. The decrease was primarily due to a state tax savings
strategy initiated in 1998. Those savings are anticipated to continue into
1999. Management has also increased the size of its tax-free securities
portfolio to reduce Federal income tax expense. The provisions for income taxes
for 1998, 1997, and 1996 represented effective tax rates of 32.1%, 35.4% and
35.1%, respectively. The decrease in the effective tax rate for 1998 was the
result of the factors discussed above.
19
<PAGE>
Financial Condition Years Ended December 31, 1998 and 1997
Total Assets
YNB's assets were $757,666,000 at year-end 1998 versus $614,686,000 the
previous year, an increase of $142,980,000, or 23.3%. The growth in YNB's asset
base throughout 1998 was due primarily to an increase in loans and securities
available for sale. Average loans and securities grew 23.2% and 41.4%
respectively, in 1998. YNB over the last several years has established its
niche as one of the leading community banks in Mercer County specializing in
commercial lending. The increase in loans, particularly commercial loans, was
the product of YNB's relationship banking philosophy and the continued
consolidation in the marketplace, which has solidified YNB's competitive
position in the small and middle markets.
Average interest earning assets in 1998 were $646,485,000, a 27.8%
increase from $505,835,000 in 1997. YNB's ratio of average interest earning
assets to average assets increased slightly to 94.5% at December 31, 1998
compared to 94.3% at December 31, 1997.
Securities
YNB's securities portfolio represented $221,688,000, or 29.3% of assets at
December 31, 1998 versus $186,636,000, or 30.4%, of assets at December 31,
1997. The $35,052,000 or 18.8% increase for the comparable period was primarily
due to the increase in available for sale securities purchased as part of the
investment growth strategy. On an average basis the securities portfolio
represented 30.8% of average interest earning assets for the year ended
December 31, 1998 compared to 27.8% of average interest earning assets for the
year ended December 31, 1997.
Securities included in the investment growth strategy totaled
approximately $142,200,000 at December 31, 1998 compared to approximately
$108,200,000 at December 31, 1997. The investment growth strategy is
diversified and consists of fixed and floating rate mortgage-backed securities
as well as agency callable securities. Management utilizes asset and liability
simulation models to analyze risk and reward relationships and the degree of
interest rate exposure associated with this strategy. The purpose of this
strategy is designed to improve return on average equity and earnings per
share.
The available for sale securities portfolio increased $25,853,000 to
$185,577,000 at December 31, 1998 from $159,724,000 at December 31, 1997. The
increase was primarily a result of securities purchased for the investment
growth strategy. The available for sale portfolio principally consists of U.S.
Treasury, U.S. agency and agency mortgage-backed securities. Activity in this
portfolio is undertaken primarily to manage liquidity and interest rate risk
and to take advantage of market conditions that create more attractive returns
on these investments. As of December 31, 1998, available for sale securities
represented 83.7% of the entire portfolio. These securities are reported at
fair value, with unrealized gains and losses, net of tax, included as a
separate component of stockholders' equity.
In late 1998 YNB established a trading account policy. Trading securities
are purchased specifically for short-term appreciation with the intent of
selling in the near future. There were no trading securities outstanding at
December 31, 1998.
Investment securities classified as held to maturity totaled $36,111,000
at December 31, 1998 compared to $26,912,000 at December 31, 1997. This
portfolio is principally comprised of mortgage-backed securities issued by
Federal agencies and state and municipal securities. The municipal bond
portfolio grew to $20,773,000 at December 31, 1998 from $8,819,000 at December
31, 1997. Municipal bonds were purchased to reduce YNB's effective tax rate.
20
<PAGE>
The following tables present the amortized cost and market values of YNB's
securities portfolios as of December 31, 1998, 1997, and 1996.
Available For Sale Securities
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obliga-
tions of other U.S. government
agencies ............................ $ 55,051 $ 55,039 $ 62,465 $ 62,540 $ 31,951 $ 31,942
Mortgage-backed securities ........... 120,410 119,986 91,193 91,316 59,441 59,182
Corporate obligations ................ 2,867 2,867 3,297 3,306 -- --
Federal Reserve Bank Stock ........... 812 812 587 587 572 572
Federal Home Loan Bank Stock ......... 6,873 6,873 1,975 1,975 1,975 1,975
--------- --------- --------- --------- -------- --------
Total ............................... $ 186,013 $ 185,577 $ 159,517 $ 159,724 $ 93,939 $ 93,671
========= ========= ========= ========= ======== ========
</TABLE>
Investment Securities
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ -----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- ---------- ----------- ---------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Obligations of other U.S. govern-
ment agencies ..................... $ 4,994 $ 4,935 $ -- $ -- $ -- $ --
Obligations of state and political
subdivisions ...................... 20,773 20,982 8,819 8,957 9,070 9,108
Mortgage-backed securities ......... 10,344 10,286 18,093 17,891 22,226 21,770
------- ------- ------- ------- ------- -------
Total .............................. $36,111 $36,203 $26,912 $26,848 $31,296 $30,878
======= ======= ======= ======= ======= =======
</TABLE>
21
<PAGE>
Security Maturities and Average Weighted Yields
The expected maturities and average weighted yields for YNB's securities
portfolio as of December 31, 1998 are shown below. Yields for tax-exempt
securities are presented on a fully-taxable equivalent basis assuming a 34% tax
rate.
Available for Sale Securities
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------
After one After five
Within but within but within After
one year five years ten years ten years Total
------------ ------------ ------------ ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of other U.S. government agencies ......... $ 2,999 $ 8,953 $ 35,000 $ 8,099 $ 55,051
Mortgage-backed securities ................. -- 2,778 3,349 114,283 120,410
Corporate obligations ...................... -- -- -- 2,867 2,867
Federal Reserve Bank Stock ................. -- -- -- 812 812
Federal Home Loan Bank Stock ............... -- -- -- 6,873 6,873
-------- --------- --------- --------- ---------
Total ..................................... $ 2,999 $ 11,731 $ 38,349 $ 132,934 $ 186,013
======== ========= ========= ========= =========
Weighted average yield, computed on a
tax equivalent basis ...................... 6.26% 5.51% 6.58% 6.53% 6.47%
======== ========= ========= ========= =========
</TABLE>
Investment Securities
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------
After one After five
but within but within After
five years ten years ten years Total
------------ ------------ ----------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Obligations of other U.S. government
agencies ................................. $ -- $ 1,998 $ 2,996 $ 4,994
Obligations of state and political subdivi-
sions .................................... 3,812 2,678 14,283 20,773
Mortgage-backed securities ................ 6,076 2,843 1,425 10,344
-------- -------- -------- --------
Total .................................... $ 9,888 $ 7,519 $ 18,704 $ 36,111
======== ======== ======== ========
Weighted average yield, computed on a
tax equivalent basis ..................... 6.19% 6.64% 6.95% 6.67%
======== ======== ======== ========
</TABLE>
Investments in mortgage-backed securities involve prepayment and interest
rate risk. At December 31, 1998 and 1997, YNB had mortgage-backed securities
totaling $130,754,000 and $109,286,000, respectively. At December 31, 1998 and
1997, there were $96,654,000 and $73,565,000 in fixed-rate mortgage-backed
securities outstanding, respectively. The risk to fixed-rate mortgage-backed
securities is similar to fixed-rate loans. In rising interest rate
environments, the rate of prepayment on fixed-rate mortgage-backed securities
tends to decrease because of lower prepayments on the underlying mortgages, and
conversely, as interest rates fall, prepayments on such securities tend to
rise. In 1998 YNB realized $46,041,000 in principal cash flows from
mortgage-backed securities, compared to $16,900,000 in 1997. The increased cash
flows are the result of lower interest rates and a larger mortgage-backed
security portfolio.
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. In 1998 management sold higher coupon
fixed-rate mortgage-backed securities to mitigate the impact of prepayments.
Securities with lower coupons were then purchased with the goal of more
consistent cash flows. The yield on YNB's mortgage-backed security portfolio
was impacted negatively in 1998 due to higher prepayment speeds.
22
<PAGE>
Collateralized mortgage obligations (CMOs) totaled approximately
$9,836,000 at December 31, 1998. 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 average lives of two to four years. At December 31,
1998, 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, 1998
were held in the available for sale category.
Loan Portfolio
The loan portfolio represents YNB's largest earning asset class and is a
significant source of interest income. YNB's lending strategy stresses quality
growth and portfolio diversification.
YNB's lending focus continues to be principally 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 substantial majority of
commercial loans are secured by real estate, business assets, or guarantees.
YNB makes commercial loans primarily to small and medium sized businesses and
professionals.
During 1998, total loans increased $105,898,000, or 27.5% to $491,649,000
at December 31, 1998 from $385,751,000 at December 31, 1997. YNB's strength as
a commercial business lender was reflected in the 1998 results. The principal
areas of loan growth in 1998 were commercial and industrial loans and
commercial real estate loans which grew 51.0% and 24.0%, respectively. YNB's
loan portfolio represented 64.9% of assets at December 31, 1998 versus 62.8% at
the prior year end.
The following table sets forth the components of YNB's loan portfolio at
the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997
----------------------- -----------------------
Amount % Amount %
----------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Real estate -- mortgage:
Commercial ................... $166,725 33.9% $134,499 34.9%
Residential .................. 93,540 19.0 85,754 22.2
Home equity .................. 23,474 4.8 23,805 6.2
Commercial and industrial ..... 133,263 27.1 88,228 22.9
Real estate -- construction ... 38,386 7.8 28,182 7.3
Consumer ...................... 24,531 5.0 18,519 4.8
Other loans ................... 11,730 2.4 6,764 1.7
-------- ----- -------- -----
Total loans .................. $491,649 100.0% $385,751 100.0%
======== ===== ======== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
----------- ---------- ----------- ---------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate -- mortgage:
Commercial ................... $112,914 34.1% $ 73,164 29.8% $ 49,186 25.0%
Residential .................. 83,183 25.1 73,076 29.8 60,156 30.5
Home equity .................. 23,457 7.1 26,951 11.0 29,388 14.9
Commercial and industrial ..... 63,426 19.2 33,218 13.6 26,626 13.5
Real estate -- construction ... 25,958 7.8 19,353 7.9 15,560 7.9
Consumer ...................... 15,034 4.5 12,386 5.1 10,934 5.6
Other loans ................... 7,265 2.2 6,906 2.8 5,060 2.6
-------- ----- -------- ----- -------- -----
Total loans .................. $331,237 100.0% $245,054 100.0% $196,910 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Real estate - commercial loans increased by $32,226,000, or 24.0% in 1998
to $166,725,000 from $134,499,000 at December 31, 1997. 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 or
are part of a broader commercial lending relationship.
Real estate - residential loans are primarily comprised of residential
mortgage loans, fixed-rate home equity loans, and business loans secured by
residential real estate. This portion of the portfolio totaled $93,540,000 at
December 31, 1998, up $7,786,000, or 9.1% from the prior year. Residential
mortgage loans represented $53,360,000, or 57.0% of the total. YNB's
residential mortgage loans are secured by first liens on the underlying real
property. At December 31, 1998, approximately 48% of the residential mortgage
loan portfolio had fixed interest rates and 52% had adjustable interest rates.
The home equity credit line portfolio totaled $23,474,000 or 4.8% of YNB's
loan portfolio at December 31, 1998. This compares to $23,805,000, or 6.2% of
the total loan portfolio at December 31, 1997. Aggressive competition for home
equity loans in YNB's markets continued in 1998. In an effort to solidify
outstandings in this
23
<PAGE>
area, YNB lowered its rate on home equity credit lines in the first quarter of
1998 to make the product more competitive in the marketplace. The home equity
credit line portfolio has provided consistent operating income to YNB with
controllable delinquencies and minimal losses.
The largest area of loan growth in 1998 was in commercial and industrial
loans. Commercial and industrial loans increased $45,035,000, or 51.0% at
December 31, 1998 to $133,263,000 from $88,228,000 at December 31, 1997.
Commercial and industrial 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. YNB diversifies risk within this
portfolio by monitoring industry concentration. Diversification is intended to
limit the risk of loss from any single unexpected event or trend.
The following table sets forth the components of commercial and industrial
loans, by industry classification, at December 31, 1998.
<TABLE>
<CAPTION>
Percent Number
Industry Classification Balance of balance of loans
- --------------------------------------------- ----------- ------------ ---------
(dollars in thousands)
<S> <C> <C> <C>
Services .................................... $ 32,587 24.5% 227
Real estate related ......................... 22,426 16.8 82
Retail trade ................................ 19,836 14.9 114
Manufacturing ............................... 17,754 13.3 61
Wholesale trade ............................. 10,121 7.6 44
Construction ................................ 9,929 7.5 60
Individuals ................................. 7,749 5.8 56
Transportation and public utilities ......... 6,449 4.8 49
Trade contractors ........................... 4,001 3.0 27
Other ....................................... 2,411 1.8 24
--------- ----- ---
Total .................................... $ 133,263 100.0% 744
========= ===== ===
</TABLE>
Real estate -- construction loans increased $10,204,000 to $38,386,000 at
December 31, 1998 compared to $28,182,000 at December 31, 1997. These loans
represented 7.8% of the total loan portfolio at December 31, 1998. Generally
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 $24,531,000 at December 31, 1998 compared to
$18,519,000 at December 31, 1997.
Other loans include loans to individuals and businesses for investment
purposes, mortgage warehouse loans, and loans to non-profit organizations.
These loans are generally secured. Other loans increased to $11,730,000 at
December 31, 1998 compared to $6,764,000 at December 31, 1997.
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 economic environment and
real estate market.
24
<PAGE>
The following table provides information concerning the maturity and
interest rate sensitivity of YNB's commercial and industrial and real estate --
construction loan portfolios at December 31, 1998.
<TABLE>
<CAPTION>
After one After
Within but within five
one year five years years Total
---------- ------------ ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Maturities:
Commercial and industrial ........... $ 58,062 $ 56,742 $ 18,459 $ 133,263
Real estate -- construction ......... 16,405 8,310 13,671 38,386
-------- -------- -------- ---------
Total .............................. $ 74,467 $ 65,052 $ 32,130 $ 171,649
======== ======== ======== =========
Type:
Floating Rate Loans ................. $ 66,019 $ 35,462 $ 15,627 $ 117,108
Fixed Rate Loans .................... 8,448 29,590 16,503 54,541
-------- -------- -------- ---------
Total .............................. $ 74,467 $ 65,052 $ 32,130 $ 171,649
======== ======== ======== =========
</TABLE>
Nonperforming Assets
Nonperforming assets consist of nonperforming loans and other real estate
owned. 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 these loans are well secured and in the
process of collection or, regardless of the past due status of the loan, when
management determines that the complete recovery of principal and interest is
in doubt. Consumer loans are generally charged off after they become 120 days
past due. Mortgage loans are not generally placed on a nonaccrual status unless
the value of the real estate has deteriorated to the point that a potential
loss of principal or interest exists. Subsequent payments are credited to
income only if collection of principal is not in doubt.
25
<PAGE>
The following table sets forth nonperforming assets and risk elements in
YNB's loan portfolio by type for the years indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Commercial and industrial ..................... $ 232 $ 515 $ 961 $ -- $ --
Real estate -- mortgage ....................... 570 384 1,451 1,395 1,203
Real estate -- construction ................... 684 2,106 4,659 142 521
Consumer ...................................... 31 38 12 30 --
Other ......................................... 529 312 -- -- --
-------- -------- -------- -------- --------
Total ........................................ 2,046 3,355 7,083 1,567 1,724
-------- -------- -------- -------- --------
Restructured loans ............................... 634 969 -- 612 --
-------- -------- -------- -------- --------
Loans 90 days or more past due:
Real estate -- mortgage ....................... 1,093 886 1,014 588 326
Consumer ...................................... 100 105 43 52 16
-------- -------- -------- -------- --------
Total ........................................ 1,193 991 1,057 640 342
-------- -------- -------- -------- --------
Total nonperforming loans ........................ 3,873 5,315 8,140 2,819 2,066
-------- -------- -------- -------- --------
Other real estate ................................ 4,957 3,171 395 625 314
-------- -------- -------- -------- --------
Total nonperforming assets ....................... $ 8,830 $ 8,486 $ 8,535 $ 3,444 $ 2,380
Nonperforming loans to total loans ............... 0.79% 1.38% 2.46% 1.15% 1.05%
Nonperforming assets to total assets ............. 1.17 1.38 1.74 0.85 0.85
Nonperforming assets to total loans and other real
estate owned, end of year ....................... 1.78 2.18 2.57 1.40 1.21
</TABLE>
Nonperforming assets increased $344,000, to $8,830,000 at December 31,
1998 compared to $8,486,000 at December 31, 1997. YNB continues to aggressively
manage nonperforming assets with the goal of reducing these assets in relation
to the entire portfolio. Nonperforming assets represented 1.17% of total assets
at December 31, 1998 versus 1.38% at December 31, 1997. Nonperforming assets as
a percentage of total loans and other real estate were 1.78% at December 31,
1998, compared to 2.18% at December 31, 1997. The improvement in these ratios
is due to strong asset and loan growth rates, offset by a modest increase in
nonperforming assets.
Nonaccrual loans were $2,046,000, or 0.4% of total loans, at December 31,
1998, a decrease of $1,309,000 from December 31, 1997.
Restructured loans totaled $634,000 at December 31, 1998 and $969,000 at
December 31, 1997. These restructured loans are in compliance with restructured
terms and conditions. No income is being accrued on these loans.
At December 31, 1998, loans that were 90 days or more past due but still
accruing interest income totaled $1,193,000, or 0.2% of total loans compared to
$991,000, or 0.3% of total loans at December 31, 1997. Management's decision to
accrue income on these loans was based on the level of collateral and the
status of collection efforts.
Nonperforming loans totaled $3,873,000 at December 31, 1998, a decrease of
$1,442,000 from the $5,315,000 reported at December 31, 1997. The decrease in
nonperforming loans was primarily the result of nonaccrual loans being
transferred to other real estate owned.
Other real estate (O.R.E.) totaled $4,957,000 at December 31, 1998 and
$3,171,000 at December 31, 1997. O.R.E. represented 1.0% of total loans at
December 31, 1998. Management uses an active strategy to liquidate these assets
and re-deploy the proceeds in YNB's loan portfolio. At December 31, 1998,
O.R.E. balances included two real estate construction loans originally placed
into nonaccrual in late 1996. One of these loans totaling approximately
$2,000,000 is under a contract of sale. Both properties are in the process of
being resolved.
26
<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 assets and
closely monitors all 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,
----------------------------
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
Allowance balance, beginning of year ..................... $ 5,570 $ 4,957
Charge offs:
Commercial and industrial ............................. (547) (212)
Real estate -- mortgage ............................... -- (161)
Real estate -- construction ........................... -- --
Consumer .............................................. (296) (201)
--------- ---------
Total charge offs .................................... (843) (574)
--------- ---------
Recoveries:
Commercial and industrial ............................. 6 7
Real estate -- mortgage ............................... 4 --
Consumer .............................................. 56 55
--------- ---------
Total recoveries ..................................... 66 62
--------- ---------
Net charge offs .......................................... (777) (512)
Provision charged to operations .......................... 1,975 1,125
--------- ---------
Allowance balance, end of year ........................... $ 6,768 $ 5,570
========= =========
Loans, end of year ....................................... $ 491,649 $ 385,751
Average loans outstanding ................................ $ 438,050 $ 355,526
Allowance for loan losses to total loans, end of year 1.38% 1.44%
Net charge offs to average loans outstanding ............. 0.18 0.14
Allowance for loan losses to nonperforming loans,
end of year ............................................. 174.75 104.80
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Allowance balance, beginning of year ..................... $ 3,677 $ 2,912 $ 2,703
Charge offs:
Commercial and industrial ............................. -- -- (47)
Real estate -- mortgage ............................... (72) (26) (51)
Real estate -- construction ........................... (75) (30) (25)
Consumer .............................................. (252) (153) (83)
--------- --------- ---------
Total charge offs .................................... (399) (209) (206)
--------- --------- ---------
Recoveries:
Commercial and industrial ............................. -- -- 20
Real estate -- mortgage ............................... -- 64 43
Consumer .............................................. 39 45 47
--------- --------- ---------
Total recoveries ..................................... 39 109 110
--------- --------- ---------
Net charge offs .......................................... (360) (100) (96)
Provision charged to operations .......................... 1,640 865 305
--------- --------- ---------
Allowance balance, end of year ........................... $ 4,957 $ 3,677 $ 2,912
========= ========= =========
Loans, end of year ....................................... $ 331,237 $ 245,054 $ 196,910
Average loans outstanding ................................ $ 287,289 $ 221,232 $ 157,411
Allowance for loan losses to total loans, end of year 1.50% 1.50% 1.48%
Net charge offs to average loans outstanding ............. 0.13 0.05 0.06
Allowance for loan losses to nonperforming loans,
end of year ............................................. 60.90 130.44 140.95
</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 1998 was $1,975,000, reflective of the continued
substantial growth in the loan portfolio. This compares to a provision for loan
losses of $1,125,000 in 1997 and $1,640,000 in 1996. It is management's
assessment that the allowance for loan losses is adequate in relation to credit
risk exposure levels.
At December 31, 1998, the allowance for loan losses totaled $6,768,000, an
increase of $1,198,000 or 21.5%, from $5,570,000 at December 31, 1997, which
compares to $4,957,000 at December 31, 1996. The ratio of the allowance for
loan losses to total loans was 1.38%, 1.44%, and 1.50% at December 31, 1998,
1997, and 1996, respectively. Another measure of the adequacy of the allowance
for loan losses is the ratio of the allowance to total nonperforming loans. At
December 31, 1998 this ratio was 174.7% versus 104.8% at December 31, 1997.
27
<PAGE>
YNB's gross charge offs in 1998 totaled $843,000, compared with $574,000
in 1997 and $399,000 in 1996. 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 $66,000 in 1998
compared to $62,000 in 1997 and $39,000 in 1996. The balance of the allowance
for loan losses is determined by an overall analysis of the loan portfolio and
reflects an amount, which in management's judgment is adequate to provide for
potential loan losses.
Management has taken the necessary steps to identify potential credit
problems in its loan portfolio by strengthening lending policies and 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 "minimal, modest,
better than average, average, acceptable, 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. A formal loan review function,
independent of loan origination, is used to identify and monitor risk
classifications.
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,
------------------------------------------------------------------------------
1998 1997
-------------------------------------- --------------------------------------
Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to
Amount Allowance Total Loans Amount Allowance Total Loans
--------- ------------ ------------- --------- ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
industrial .......... $1,741 25.7% 27.1% $1,627 29.2% 22.9%
Real estate --
mortgage ............ 2,993 44.2 57.7 1,740 31.2 63.3
Real estate --
construction ........ 1,292 19.1 7.8 1,775 31.9 7.3
Consumer ............. 358 5.3 5.0 283 5.1 4.8
Other loans .......... 384 5.7 2.4 145 2.6 1.7
------ ----- ----- ------ ----- -----
Total .............. $6,768 100.0% 100.0% $5,570 100.0% 100.0%
====== ===== ===== ====== ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996
-------------------------------------
Percent of
Reserve Percent of Loans to
Amount Allowance Total Loans
--------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Commercial and
industrial .......... $1,704 34.4% 19.2%
Real estate --
mortgage ............ 2,064 41.7 66.3
Real estate --
construction ........ 938 18.9 7.8
Consumer ............. 175 3.5 4.5
Other loans .......... 76 1.5 2.2
------ ----- -----
Total .............. $4,957 100.0% 100.0%
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1995 1994
---------------------------------------- ---------------------------------------
Percent of Percent of
Reserve Percent of Loans to Reserve Percent of Loans to
Amount Allowance Total Loans Amount Allowance Total Loans
--------- ------------ ------------- --------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and
industrial ........... $ 983 26.7% 13.6% $1,137 39.0% 13.5%
Real estate --
mortgage ............. 1,816 49.4 70.6 1,152 39.6 70.4
Real estate --
construction ......... 664 18.1 7.9 398 13.7 7.9
Consumer .............. 132 3.6 5.1 141 4.8 5.6
Other loans ........... 82 2.2 2.8 84 2.9 2.6
------ ----- ----- ------ ----- -----
Total ............... $3,677 100.0% 100.0% $2,912 100.0% 100.0%
====== ===== ===== ====== ===== =====
</TABLE>
28
<PAGE>
Deposits
YNB's deposit base is the principal source of funds supporting interest
earning assets. YNB offers a wide range of deposit products, including demand
deposits, savings deposits, insured money market accounts and certificates of
deposit. 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.
The following table provides information concerning average rates and
average balances of deposits for the years indicated:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
% of % of % of
Balance Rate Total Balance Rate Total Balance Rate Total
----------- -------- ---------- ----------- -------- ---------- ----------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits ..... $ 66,857 --% 14.2% $ 56,700 --% 13.9% $ 49,078 --% 15.1%
Interest bearing
demand deposits ..... 47,709 3.41 10.2 44,024 3.46 10.8 23,554 2.50 7.2
Savings and money
market deposits ..... 117,825 2.89 25.1 115,696 3.08 28.3 109,896 3.12 33.7
Time deposits ........ 237,340 5.70 50.5 192,319 5.74 47.0 143,520 5.62 44.0
-------- ---- ----- -------- ---- ----- -------- ---- -----
Total .............. $469,731 3.95% 100.0% $408,739 3.94% 100.0% $326,048 3.70% 100.0%
======== ==== ===== ======== ==== ===== ======== ==== =====
</TABLE>
Total deposits amounted to $519,643,000 at year-end 1998 compared to
$422,944,000 at the end of 1997, an increase of 22.9%. Average total deposits
during 1998 totaled $469,731,000 compared to $408,739,000 during 1997, an
increase of 14.9%.
The growth in YNB's deposit base in 1998 was primarily the result of
aggressive pricing of certificates of deposit (CDs) to fund loan growth. The
continuing trend of increased balances in higher costing time deposits is
indicative of the highly competitive Mercer County deposit marketplace.
In March of 1998, YNB purchased a software program which allowed YNB to
market its certificates of deposit nationwide. This program has become a part
of management's strategy to fund loan growth as well as bolstering liquidity.
At December 31, 1998, YNB had raised approximately $24,400,000 utilizing this
software.
The average balance of non-interest bearing demand deposits was
$66,857,000 during 1998, an increase of $10,157,000, or 17.9% from $56,700,000
during 1997. 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
8.4%, 1.8% and 23.4%, respectively, from 1997 to 1998.
Total average time deposits, which consist of certificates of deposit and
individual retirement accounts, increased $45,021,000 to $237,340,000 from
$192,319,000 in 1997. Time deposits averaged over 50% of total average deposits
as of December 31, 1998. Depositors in 1998 continued to place their funds in
higher yielding CDs.
In the second quarter of 1998, management initiated a program to reduce
reserve levels required to be maintained with the Federal Reserve. The result
of this program was a substantial reduction in required reserve levels. These
funds were then deployed into earning assets.
The average rate paid on YNB's deposit balances in 1998 was 3.95%, a 0.3%
decrease from the 3.94% average rate for 1997.
29
<PAGE>
The following table details amounts and maturities for certificates of
deposit of $100,000 or more for the years indicated:
December 31,
-----------------------
1998 1997
---------- ----------
(in thousands)
Maturity range:
Within three months ........................ $ 6,702 $ 5,742
After three but within six months .......... 9,112 5,232
After six but within twelve months ......... 8,753 7,979
After twelve months ........................ 4,958 2,603
------- --------
Total .................................... $29,525 $ 21,556
======= ========
Certificates of deposit of $100,000 or more totaled $29,525,000, or 5.7%
of deposits, at December 31, 1998 compared to $21,556,000, or 5.1% of deposits,
at December 31, 1997.
Management anticipates that the branching projected for 1999 in the new
markets of Burlington County and Bucks County, Pennsylvania will have positive
results to YNB's deposit base. Management will also continue to explore other
funding options, including brokered deposits.
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, unsecured Federal funds lines of credit
with four of its correspondent banks for daily funding needs.
Borrowed funds totaled $177,888,000 at December 31, 1998 compared to
$134,316,000 at December 31, 1997. FHLB advances with a maturity greater than
one year, with callable options, were utilized for funding growth strategy
securities and loan growth in 1998. These advances lowered borrowing costs.
Repurchase agreements totaling approximately $87,120,000 at year-end 1998 were
used as part of the investment growth strategy.
Borrowed funds averaged $158,106,000 in 1998, an increase of $73,614,000
from the average reported in 1997 of $84,492,000. The average cost of borrowed
funds declined 9 basis points during the year to 5.54% compared with 5.63% in
1997. At year-end 1998 there was $89,316,000 in outstanding borrowings with the
FHLB and no outstanding borrowings with 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 repayments as well as 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 $100,000 and over. Short-term borrowings are also used
as supplemental funding sources when growth in the core deposit base does not
keep pace with that of earning assets.
At December 31, 1998, liquid assets (excluding securities purchased
utilizing borrowed funds) amounted to $56,303,000, as compared to $74,322,000
at December 31, 1997. This represents 9.8% and 15.9% of earning assets, and
9.1% and 14.7% of total assets at December 31, 1998 and 1997, respectively.
30
<PAGE>
YNB has the availability to borrow up to $32,700,000 from the FHLB through
its line of credit program, subject to collateral requirements. 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 four of its correspondent banks.
Strong earning asset growth in 1998 negatively impacted the liquidity
profile of YNB. Management has outlined specific steps to address this issue in
1999. A plan is in place, designed to effectively manage liquidity due to
changes in interest rates, credit markets, or other external risks.
Interest Rate Sensitivity
The objectives of interest rate risk management are to minimize and to the
degree possible, control the effect of interest rate fluctuations on net
interest income. Interest rate risk is derived from timing differences in the
repricing of assets and liabilities, loan prepayments, deposit withdrawals, and
differences in lending and funding rates. YNB's ALCO actively seeks to monitor
and control the mix of interest rate-sensitive assets and interest
rate-sensitive liabilities.
One measure of interest rate risk is the gap ratio, which is defined as
the difference between the dollar volume of interest earning assets and
interest bearing liabilities maturing or repricing within a specified period of
time as a percentage of total assets. A positive gap results when the volume of
interest rate-sensitive assets exceeds that of interest rate-sensitive
liabilities within comparable time periods. A negative gap results when the
volume of interest rate-sensitive liabilities exceeds that of interest
rate-sensitive assets within comparable time periods.
As indicated in the accompanying table, YNB's one-year gap position at
December 31, 1998 was a positive 1.7%. Generally, a financial institution with
a positive gap position will most likely experience an increase in net interest
income during periods of rising rates and decreases in net interest income
during periods of lower interest rates.
The positive gap was brought about in the last year primarily through
increases in convertible advance borrowings in connection with the investment
growth strategy and as a replacement for short-term borrowings. These
liabilities have an expected repricing date beyond the one-year gap interval.
This effect was offset to some degree by increases in fixed rate investments
associated with the strategy, although accelerated prepayments on
mortgage-backed securities effectively shortened the overall investment
duration. While gap analysis represents a useful asset/liability management
tool, it does not necessarily indicate the effect of general interest rate
movements on YNB's net interest income due to discretionary repricing of some
assets and liabilities, balance sheet options, and other competitive pressures.
YNB reports its callable agency securities ($47.0 million at December 31,
1998) at their option adjusted spread modified duration date, as opposed to the
call or maturity date. In management's opinion, using modified duration dates
on callable agency securities provided a better estimate of the option exercise
date at December 31, 1998. The option adjusted spread methodology is an
approach whereby the likelihood of option exercise takes into account the
coupon on the security, the distance to the call date, the maturity date and
the current interest rate volatility. In addition, prepayment assumptions
derived from historical data have been applied to mortgage-related securities,
which are included in investments. Similarly, convertible advance borrowings
and repurchase agreements with options have expected repricing dates between
the option date and the final maturity date, based on the debt instrument's
interest rate and current market rate levels for the same type of debt.
Included in the analysis of YNB's gap position are certain savings deposit
and interest checking accounts, which are less sensitive to fluctuations in
interest rates than other interest bearing sources of funds. In determining the
sensitivity of such deposits, management reviews the movement of its deposit
rates for the past five years relative to market rates. Using regression
analysis, management's ALCO committee has estimated that these deposits are
approximately 50-65% sensitive to interest rate changes (i.e., if short term
rates were to increase 100 basis points, the interest rate on such deposits
would increase 50-65 basis points).
31
<PAGE>
In addition to the utilization of gap for interest rate risk management,
the ALCO utilizes simulation analysis whereby the model estimates the variance
in net interest income with a change of interest rates of plus and minus 300
basis points over a 12 month period (base case sensitivity).
Presented below are the results of the simulation analysis as of December
31, 1998.
$ Change in % Change in
Change in Rates Net Interest Income Net Interest Income
- ----------------- --------------------- --------------------
(dollars in thousands)
+300 bp +1,202 +4.2%
+150 bp + 881 +3.1%
-150 bp -1,307 -4.6%
-300 bp -2,753 -9.7%
Management analyzes a number of different simulation scenarios to
determine the impact to net interest income in various interest rate
environments. Management assigns a higher probability of interest rates
changing plus or minus 150 basis points over a 12 month period. Like the base
case sensitivity, net interest income will be lower in a declining rate
environment as discussed above. YNB would presently benefit in gradually
increasing interest rates over a 12 month period.
Lastly, YNB measures longer-term risks through analyses of the economic
value of our portfolio equity. The present value of asset and liability cash
flows are subjected to rate shocks of plus and minus 200 basis points. The
variance in the residual, or economic value of equity is measured as a
percentage of total assets. This variance is managed within a negative 3%
boundary.
32
<PAGE>
Rate Sensitive Assets and Liabilities
The table below sets forth certain information at December 31, 1998
relating to YNB's assets and liabilities by scheduled repricing for adjustable
assets and liabilities, or by contractual maturity for fixed-rate assets and
liabilities.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
More than
Under Six months one year
six through through
months one year two years
-------------- ------------ -----------
(dollars in thousands)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks ................ $ -- $ -- $ --
Federal funds sold and interest
bearing deposits ...................... 1,013 -- --
Available for sale securities .......... 30,850 17,845 32,471
Investment securities .................. 1,645 1,376 5,225
Loans, net of unearned income .......... 235,211 34,214 36,581
Other assets, net ...................... -- 13,787 --
---------- --------- ---------
Total Assets .......................... $ 268,719 $ 67,222 $ 74,277
========== ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Non-interest bearing demand ............ $ -- $ -- $ --
Savings and interest bearing
demand ................................ 71,957 -- 15,339
Money markets .......................... 35,695 2,185 --
Certificates of deposit of $100,000
or more ............................... 15,814 8,753 3,785
Other time deposits .................... 98,220 67,472 51,917
---------- --------- ---------
Total deposits ........................ 221,686 78,410 71,041
---------- --------- ---------
Borrowed funds ......................... 18,177 4,906 16,513
Trust preferred securities ............. -- -- --
Other liabilities ...................... -- -- --
Stockholders' equity ................... -- -- --
---------- --------- ---------
Total Liabilities and
Stockholders' Equity ................ $ 239,863 $ 83,316 $ 87,554
========== ========= =========
Gap .................................... 28,856 (16,094) (13,277)
Cumulative gap ......................... 28,856 12,762 (515)
Cumulative gap to total assets ......... 3.8% 1.7% -0.1%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------
More than More than More than
two years five years ten years
through through and not
five years ten years repricing Total
-------------- ------------ ------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS:
Cash and due from banks ................ $ -- $ -- $ 16,246 $ 16,246
Federal funds sold and interest
bearing deposits ...................... -- -- -- 1,013
Available for sale securities .......... 60,350 18,816 25,245 185,577
Investment securities .................. 10,172 6,626 11,067 36,111
Loans, net of unearned income .......... 130,728 34,410 20,505 491,649
Other assets, net ...................... -- -- 13,283 27,070
---------- --------- --------- ---------
Total Assets .......................... $ 201,250 $ 59,852 $ 86,346 $ 757,666
========== ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Non-interest bearing demand ............ $ -- $ -- $ 75,426 $ 75,426
Savings and interest bearing
demand ................................ 41,913 -- -- 129,209
Money markets .......................... 6,781 -- -- 44,661
Certificates of deposit of $100,000
or more ............................... 1,173 -- -- 29,525
Other time deposits .................... 23,213 -- -- 240,822
---------- --------- --------- ---------
Total deposits ........................ 73,080 -- 75,426 519,643
---------- --------- --------- ---------
Borrowed funds ......................... 111,792 26,500 -- 177,888
Trust preferred securities ............. -- -- 11,500 11,500
Other liabilities ...................... -- -- 7,879 7,879
Stockholders' equity ................... -- -- 40,756 40,756
---------- --------- --------- ---------
Total Liabilities and
Stockholders' Equity ................ $ 184,872 $ 26,500 $ 135,561 $ 757,666
========== ========= ========= =========
Gap .................................... 16,378 33,352 (49,215)
Cumulative gap ......................... 15,863 49,215 --
Cumulative gap to total assets ......... 2.1% 6.5% --
</TABLE>
Market Risk
For YNB, market risk is defined as the potential loss in the value of
financial instruments due to adverse changes in interest rates. This is
different than accounting losses that may occur over the next one to two years
due to maturity mismatches or spread changes between assets and liabilities,
which are measured through simulation analysis.
As a financial intermediary, YNB assumes market risk by holding both
financial assets (primarily loans, securities, and Fed funds sold) and
financial liabilities (deposits and borrowings) on the balance sheet. Rising
rates have a negative impact on the value of fixed rate assets and a positive
impact on the value of fixed rate and non-maturity deposits, as well as fixed
rate borrowings. Deposits or borrowings acquired at today's market rate levels
are more valuable to YNB as interest rates rise in the future, resulting in an
economic gain. This occurs at the same time fixed rate asset values are
declining.
33
<PAGE>
Expected Repricing of Financial Instruments
The table below shows the expected repricing of YNB's financial
instruments subject to market risks, the weighted average interest rate, and
fair value of the instruments as of December 31, 1998. The expected repricings
take into account amortization and expected prepayments on mortgage-related
securities and probable call dates on U.S. Agency notes and debentures
represented by the option adjusted spread modified duration. The table does not
include prepayments on loans, as they are less predictable than securities with
homogenous coupons and maturity dates. Loan repricings are therefore likely to
be shorter than what is indicated in this table, as some prepayments can be
expected.
<TABLE>
<CAPTION>
1999 2000 2001 2002-2003
----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ -- $ -- $ -- $ --
Average rate .................. -- -- -- --
Federal funds sold and
interest bearing
deposits ...................... 1,013 -- -- --
Average rate .................. 4.75% -- -- --
Available for sale
securities .................... 48,695 32,471 19,538 40,812
Average rate .................. 6.09% 6.06% 6.57% 6.45%
Investment securities .......... 3,021 5,225 3,281 6,891
Average rate .................. 5.62% 5.29% 5.55% 5.49%
Loans, net of unearned
income ........................ 269,425 36,581 54,955 75,773
Average rate .................. 8.46% 8.57% 8.41% 8.26%
FINANCIAL LIABILITIES:
Non-interest demand
deposits ...................... $ -- $ -- $ -- $ --
Average rate .................. -- -- -- --
Savings ........................ 51,974 -- 2,607 22,956
Average rate .................. 2.51% -- 3.00% 2.09%
Interest bearing demand ........ 19,983 15,339 -- 16,350
Average rate .................. 2.25% 5.38% -- 2.25%
Money markets .................. 37,880 -- 6,781 --
Average rate .................. 3.25% -- 2.58% --
CDs of $100,000 or more 24,567 3,785 858 315
Average rate .................. 5.21% 5.55% 5.73% 5.59%
Other time deposits ............ 165,692 51,917 9,079 14,134
Average rate .................. 5.46% 5.69% 5.71% 5.76%
Borrowed funds ................. 23,083 16,513 41,760 70,032
Average rate .................. 5.58% 4.96% 5.20% 4.86%
Trust preferred securities ..... -- -- -- --
Average rate .................. -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Beyond Fair
2004-2008 10 Years Totals Value
----------- ------------- ------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ -- $ 16,246 $ 16,246 $ 16,246
Average rate .................. -- -- --
Federal funds sold and
interest bearing
deposits ...................... -- -- 1,013 1,013
Average rate .................. -- -- 4.75%
Available for sale
securities .................... 18,816 25,245 185,577 185,577
Average rate .................. 6.51% 6.60% 6.33%
Investment securities .......... 6,626 11,067 36,111 36,203
Average rate .................. 5.02% 4.85% 5.20%
Loans, net of unearned
income ........................ 34,410 20,505 491,649 492,712
Average rate .................. 7.72% 6.61% 8.30%
FINANCIAL LIABILITIES:
Non-interest demand
deposits ...................... $ -- $ 75,426 $ 75,426 $ 75,426
Average rate .................. -- -- --
Savings ........................ -- -- 77,537 77,537
Average rate .................. -- -- 2.40%
Interest bearing demand ........ -- -- 51,672 51,944
Average rate .................. -- -- 3.18%
Money markets .................. -- -- 44,661 44,661
Average rate .................. -- -- 3.15%
CDs of $100,000 or more -- -- 29,525 29,693
Average rate .................. -- -- 5.27%
Other time deposits ............ -- -- 240,822 242,160
Average rate .................. -- -- 5.54%
Borrowed funds ................. 26,500 -- 177,888 181,711
Average rate .................. 5.77% -- 5.18%
Trust preferred securities ..... -- 11,500 11,500 12,219
Average rate .................. -- 9.25% 9.25%
</TABLE>
Deposits, other than time deposits and non-interest demand, are shown with
a "rate sensitive" component due in 1999 and a "non-rate sensitive" component
due in subsequent periods. Although these deposits are "payable on demand," YNB
does not anticipate a situation where all of the deposits mature
simultaneously. Therefore, rate sensitivity of non-contractual interest bearing
deposits is measured through a historical regression analysis, which correlates
the changes in the rates paid on these deposits to an external market rate (Fed
funds). Since the regression is based on an historical relationship, it may not
be indicative of how YNB will price these products in the future, but does
provide some basis to determine the market risk of these liabilities.
34
<PAGE>
Stockholders' Equity and Capital Adequacy
The management of capital in a regulated bank environment requires a
balance between maximizing leverage and return on average equity to
stockholders while maintaining sufficient capital levels and related ratios to
satisfy regulatory requirements.
Stockholders' equity at December 31, 1998 totaled $40,756,000 compared to
$39,745,000 at December 31, 1997. This represents an increase of $1,011,000 or
2.5%. This increase resulted from (i) earnings of $5,582,000 (less dividend
payments of $1,449,000) and a negative equity adjustment of $408,000 for the
unrealized loss on securities available for sale, (ii) proceeds of $294,000
from exercised options, and (iii) treasury stock purchased, at cost, of
$3,008,000.
In 1998, as part of YNB's Capital Management Plan, 170,300 shares were
repurchased at a cost of $3,008,000.
As of January 1, 1999, YNB adopted an Employee Stock Ownership Plan (ESOP)
to permit eligible employees of YNB to share in the growth of YNB through stock
ownership. On February 3, 1999, Yardville National Bancorp sold 155,340 shares
to the ESOP for $2,000,000. The ESOP financed the stock purchase with a loan
from a nonaffiliated financial institution. The financing is for a term of five
years with an interest rate of 7.00%. The full balance of the loan will be
repaid in equal installments over the term of the loan. The shares purchased by
the ESOP were used as collateral for the loan. Yardville National Bancorp
guarantees the repayment of the loan. The estimated minimum annual expenses
associated with the ESOP are $540,000 per year for the next five years.
Yardville National Bancorp and its banking subsidiary are subject to
minimum risk-based and leverage capital guidelines issued by the Federal
Reserve Board and Comptroller of the Currency. The measurement of risk-based
capital takes into account the credit risk of both balance sheet assets and
off-balance sheet exposures. These guidelines require minimum risk-based
capital ratios of 4% for Tier 1 capital and 8% for total capital (Tier 1 plus
Tier 2). In addition, the current minimum regulatory guideline for the Tier 1
leverage ratio is 4.0%.
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 1 and total risk-based capital ratios of 6% and 10%,
respectively, and a minimum Tier 1 leverage ratio of 5%.
At December 31, 1998 the capital ratios for YNB exceeded the above ratios
required to be well capitalized. The table below summarizes YNB's capital
ratios for the years indicated:
December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Tier 1 leverage ratio ........... 7.7% 9.5% 7.8%
Tier 1 risk-based ratio ......... 9.9% 12.2% 10.2%
Total risk-based ratio .......... 11.2% 13.5% 11.4%
Company-Obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On October 16, 1997, Yardville Capital Trust (the Trust), a statutory
business trust, and a wholly owned subsidiary of Yardville National Bancorp
issued $11,500,000 of 9.25% trust preferred securities to the public and
$356,000 of 9.25% common securities to Yardville National Bancorp. Proceeds
from the issuance of the trust preferred securities were immediately used by
the Trust to purchase $11,856,000 of 9.25% subordinated debentures maturing
November 1, 2027 from Yardville National Bancorp. The Trust exists for the sole
purpose of issuing trust preferred securities and investing the proceeds into
subordinated debentures of Yardville National Bancorp. These subordinated
debentures constitute the sole assets of the Trust. These subordinated
debentures are redeemable in whole or in part prior to maturity after November
1, 2002. The Trust is obligated to distribute all proceeds of a redemption,
whether voluntary or upon maturity, to holders of the Trust preferred
securities. Yardville National Bancorp's obligation with respect to the trust
preferred securities and the subordinated debentures, when taken together,
provide a full and unconditional guarantee on a subordinated basis by Yardville
National Bancorp of the Trust's obligations to pay amounts when due on the
trust preferred securities.
35
<PAGE>
Year 2000
General
Issues surrounding Year 2000 (Y2K) arise out of the fact that many
existing computer programs use only two digits to identify a year in the date
field. Additionally, Y2K is not just a computer issue, but involves
communication, building and environmental systems as well as office equipment.
Y2K readiness can be affected to the extent that other entities such as loan
customers and key vendors are unsuccessful in addressing this issue. Y2K issues
affect virtually all aspects of YNB's organization. YNB began taking a
proactive approach to this issue in 1997. YNB's approach includes a written
compliance plan. Management believes that the level of resources committed to
the project is adequate and the oversight provided by senior management and the
Board of Directors is appropriate. YNB is on schedule with its Y2K compliance
plan.
State of Readiness
YNB has identified six distinct areas for its Y2K compliance efforts. The
technology committee, which consists of four directors and all of the executive
management team, and the system and operations committee are the primary groups
coordinating YNB's Y2K efforts. The Board of Directors receives monthly
reporting on the progress of YNB's Y2K compliance efforts. In addition, YNB
receives guidance from the Federal Financial Institutions Examination Council,
the formal interagency group responsible for uniform principles, standards, and
procedures for the examination of financial institutions by the Federal
regulatory agencies, and participates in scheduled Federal Year 2000
examinations. These examinations are being conducted to assess each financial
institution's Year 2000 efforts.
Core Computer Systems. YNB utilizes Information Technology, Inc. (ITI)
software for processing all deposits, commercial and consumer loans in addition
to its general ledger activity. Final testing of this area will occur in the
second quarter of 1999. Management does not anticipate any major Y2K compliance
problems with the ITI software.
Significant Alliances. YNB depends on many outside vendors and suppliers
to function efficiently. However, management has identified three systems that
have significant Y2K compliance issues due to their reliance on computer
hardware and software. These systems are the Federal Reserve Bank's Fed Line
wire system, the MAC\R network which supports YNB's automated teller machines,
and Automated Clearing House (ACH) which YNB uses to process direct deposit
activities including payrolls. YNB requires vendors and suppliers to provide
representations that their systems are Y2K compliant and has a system in place
to track vendors' Y2K compliance efforts. Testing of the Fed Line wire system
as well as ACH transactions has been successfully completed. Testing of the MAC
network will occur in the second quarter of 1999.
YNB has also identified our provider of mortgage servicing, Wendover
Financial Services Corporation, as a significant alliance. Wendover is a
subsidiary of Electronic Data Systems, which is one of the largest service
providers of data processing applications in the United States. Wendover
utilizes software provided by ALLTEL Incorporated. YNB has been provided
detailed plans and strategies from both companies regarding Year 2000
compliance. ALLTEL has advised YNB that their systems are Year 2000 compliant
at December 31, 1998. ALLTEL is currently facilitating a client-managed task
force that conducted Year 2000 testing in the first quarter of 1999. Although
YNB must still evaluate the test reports, management does not anticipate any
major Y2K compliance problems with either Wendover Financial Services or
ALLTEL.
End User Computing. YNB's plan to ensure compliance of desktop computers
throughout the corporation includes the replacement of non-compliant computers
and related software. All mission critical personal computers are Y2K
compliant.
Technical Infrastructure. The most critical part of YNB's technical
infrastructure is the communication network hardware and software that links
all of YNB's departments and branches to the ITI system and allows them to
process deposit, loan and general ledger activities. To ensure Y2K compliance
the network components were tested from each location. To date, all but two
locations have been tested with favorable results. Testing of the final branch
locations will occur in the second quarter of 1999. Management does not
anticipate any significant Y2K compliance issues with its network. Any
additional branches opened during 1999 will be tested before opening for
customer business.
36
<PAGE>
Physical Property and Infrastructures. YNB's physical properties and
infrastructures include energy and security systems as well as date sensitive
equipment. Testing in this area has been completed with favorable results.
Commercial Loan Relationships. YNB has identified its commercial loan
customers as a potential area of YNB's Y2K exposure. To the extent that a
borrower's financial position is weakened as a result of Y2K issues, credit
quality could be adversely affected. Management has reviewed the commercial
loan portfolio to identify loan types that have significant Y2K exposure. Loan
officers are in the process of contacting loan customers and assessing their
Y2K exposure and compliance efforts. All significant new commercial loan
applications include an assessment of the Y2K exposure and compliance efforts
of the customer. While YNB continues to closely monitor its commercial loan
customers, management cannot predict whether its customers will be successful
in becoming Y2K compliant.
Y2K Costs
YNB's Y2K related costs for 1998 were approximately $810,000. This
includes approximately $615,000 in equipment related purchases that will be
depreciated over five years. The remaining expense includes additional
compensation expense and costs related to the testing and upgrading of systems.
Management anticipates 1999 expenditures to decline significantly as most of
the significant hardware and software purchases have been completed. Total Y2K
costs are projected to be between $50,000 and $100,000 in 1999. This level
could rise in the event that ongoing testing uncovers unanticipated Y2K
compliance issues.
Y2K Contingency Plans
YNB has established written Y2K contingency plans as part of its overall
disaster recovery plan. These plans identify all mission critical systems and
include strategies to overcome Y2K related problems. These plans continue to be
reviewed and will be modified from time to time based on the results of the
ongoing Y2K compliance efforts. Management believes that the contingency plans
should allow YNB to continue to operate in the event of Y2K related problems
with a minimum of disruption and moderate increased costs.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," established
accounting reporting standards for derivative instruments, and for hedging
activities. SFAS 133 supersedes the disclosure requirements in Statements No.
80, 105, and 119. This statement is effective for periods beginning after June
15, 1999. The adoption of SFAS 133 is not expected to have a material impact on
the financial position or results of operations of the Corporation.
Statement of Financial Accounting Standards No. 134 (SFAS No. 134),
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," amends FASB No.
65, "Accounting for Certain Mortgage Banking Activities," to require that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities
or other retained interest based on its ability and intent to sell or hold
those investments. SFAS 134 is effective January 1, 1999. The adoption of this
statement is not expected to have a material impact on the financial position
of the Corporation.
37
<PAGE>
MANAGEMENT
The following table lists the senior executive officers of the Bank and
our current directors.
<TABLE>
<CAPTION>
Name Age Positions
- ---------------------------- ----- ---------------------------------------
<S> <C> <C>
Jay G. Destribats 64 Director and Chairman of the Board
Patrick M. Ryan 54 President and Chief Executive Officer
Stephen F. Carman 42 Secretary, Treasurer, Executive Vice
President and Chief Financial Officer
Timothy J. Losch 48 Executive Vice President and Chief
Operating Officer
James F. Doran 55 First Senior Vice President and Senior
Loan Officer
Mary C. O'Donnell 51 First Senior Vice President and Chief
Credit Officer
C. West Ayres 71 Director
Elbert G. Basolis, Jr. 37 Director
Lorraine Buklad 63 Director
Anthony M. Giampetro, M.D. 62 Director
Sidney L. Hofing 64 Director
James J. Kelly 64 Director
Gilbert W. Lugossy 63 Director
Louis R. Matlack, Ph.D. 64 Director
Weldon J. McDaniel, Jr. 72 Director
F. Kevin Tylus 44 Director
</TABLE>
Jay G. Destribats has served as the Chairman of the Board of both YNB and
the Bank since 1990. He is also a partner in the law firm of Destribats,
Campbell, DeSantis, Magee and O'Donnell.
Patrick M. Ryan has served as a director and as President and Chief
Executive Officer of both YNB and the Bank since November 1992.
Stephen F. Carman has served as Secretary and Treasurer of YNB and as
Executive Vice President and Chief Financial Officer of the Bank since December
1993.
Timothy J. Losch has served as Executive Vice President and Chief
Operating Officer of the Bank since June 1997. Prior to joining the Bank in
1997, he served as Senior Vice President and Director of Public Affairs and
Governmental Relations for CoreStates Bank NA from February 1993 to May 1997.
James F. Doran has served as First Senior Vice President and Senior Loan
Officer of the Bank since April 1996, Senior Vice President from January 1994
to April 1996, and Vice President from December 1992 to January 1994.
Mary C. O'Donnell has served as First Senior Vice President and Chief
Credit Officer of the Bank since April 1996 and as Senior Vice President from
September 1992 to April 1996.
C. West Ayres has served as a director of YNB and the Bank since 1978. He
is also President of Ayres Pontiac-Cadillac Company, Inc.
Elbert G. Basolis, Jr. has served as a director of YNB and the Bank since
1996. He also owns and serves as President and Chief Financial Officer for Aqua
Controls, Inc. (a water consulting business) and serves as Executive Vice
President of Garrison Enterprises, Inc. (a construction business).
Lorraine Buklad has served as a director of YNB and the Bank since 1988.
She is also a funeral director and President of Buklad Memorial Homes.
38
<PAGE>
Anthony M. Giampetro, M.D. has served as a director of YNB and the Bank
since 1994. He is also a physician in private practice.
Sidney L. Hofing has served as a director of YNB and the Bank since 1997.
He is President and CEO of The Eagle Group, Inc. (a real estate development and
management company) and served as Chairman of General Packaging Services, Inc.
from November 1996 to December 1998.
James J. Kelly has served as a director of YNB and the Bank since 1997. He
is also a private consultant in electrical contracting.
Gilbert W. Lugossy has served as a director of YNB and the Bank since
1991. He served as a member of the New Jersey State Parole Board from April
1990 to April 1997 and is now retired.
Louis R. Matlack, Ph.D. has served as a director of YNB and the Bank since
1997. He is also a Principal of Matlack Mediation (a mediation services firm).
Weldon J. McDaniel, Jr. has served as a director of YNB and the Bank Since
1986. He is also a Technical Assistant - Engineering for USX Corporation.
F. Kevin Tylus has served as a director of YNB and the Bank since 1992. He
has served as Vice President/Director of Prudential Health Care Group since
July 1995 and served as Chief Operating Officer of Eastern Mercy Health System
from September 1992 to July 1995.
STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The table below sets forth the beneficial ownership of our common stock as
of March 18, 1999 and after the offering (assuming no exercise of the
over-allotment option), by each person we know to beneficially own 5% or more
of the common stock, each director and executive officer, and all directors and
executive officers of YNB and the Bank as a group. The number of beneficially
owned shares includes shares over which the named person, directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power (which includes the power to vote, or
direct the voting of, such security) or investment power (which includes the
power to dispose, or to direct the disposition of, such security). All shares
of a named person are deemed to be subject to that person's sole voting and
investment power unless otherwise indicated. Shares subject to stock options
are included as outstanding shares of common stock, unless these options are
not exercisable within 60 days.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to the Offering After the Offering
------------------------ -------------------------
Name of Beneficial Owner Number Percent Number Percent
- --------------------------------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
C. West Ayres(1) 77,999 1.54% 77,999 1.17%
Elbert G. Basolis, Jr.(2) 20,822 * 42,822 *
Lorraine Buklad(3) 130,826 2.52% 130,826 1.97%
Stephen F. Carman(4) 39,474 * 39,474 *
Jay G. Destribats(5) 225,610 4.34% 227,663 3.42%
Anthony M. Giampetro, M.D.(6) 71,680 1.38% 71,680 1.08%
Sidney L. Hofing(7) 70,079 1.35% 90,079 1.35%
James J. Kelly(8) 170,608 3.28% 170,608 2.56%
Timothy J. Losch(9) 16,225 * 20,225 *
Gilbert W. Lugossy(10) 14,071 * 14,071 *
Louis R. Matlack, Ph.D.(11) 160,747 3.09% 161,747 2.43%
Weldon J. McDaniel, Jr.(12) 10,537 * 10,537 *
Patrick M. Ryan(13) 320,574 6.14% 335,574 5.03%
F. Kevin Tylus(14) 182,257 3.51% 184,257 2.77%
Directors and Executive Officers
as a group (22 persons)(15) 1,266,836 23.83% 1,333,889 19.71%
</TABLE>
- ------------
* Less than 1%
39
<PAGE>
(1) Includes 2,152 shares held by Mr. Ayres spouse, and 1,312 shares issuable
upon exercise of options held by Mr. Ayres under our 1994 Stock Option
Plan (the "1994 Plan").
(2) Includes 4,100 shares held by Aqua Control Inc. and 6,232 shares issuable
upon exercise of options held by Mr. Basolis, Jr. under our 1994 Plan.
(3) Includes 1,312 shares issuable upon exercise of options held by Ms. Buklad
under the 1994 Plan.
(4) Includes 27,060 shares issuable upon exercise of options held by Mr.
Carman under our 1988 Stock Option Plan (the "1988 Plan") and our 1997
Stock Option Plan (the "1997 Plan"), 3,037 shares held jointly with Mr.
Carman's wife and 225 shares held by Mr. Carman as custodian for his
daughter.
(5) Includes 8,200 shares issuable upon exercise of options held by Mr.
Destribats under the 1997 Plan, 51,250 shares held in the Destribats
Family Trust where Mr. Destribats is the Trustee, 2,287 shares held
jointly by Mr. Destribats and his spouse, 6,123 shares in the Yardville
National Bank 401(K) plan, and 155,340 shares in the Yardville National
Bank Employee Stock Ownership Plan Trust (the "ESOP") over which Mr.
Destribats, as a trustee, shares voting rights with Mr. Ryan and Mr.
Tylus.
(6) Includes 26,908 shares held in the name of Anthony M, Giampetro, M.D.,
custodian for Anthony Giampetro, John Giampetro, and Celeste Giampetro,
under the Pennsylvania Uniform Gift to Minors Act, 16,400 shares held in
the name of Bellarmino-Giampetro Profit Sharing Fund, 24,190 shares held
in the name of Bellarmino-Giampetro Pension Voluntary Contribution Plan
and 1,312 shares issuable upon exercise of options held by Dr. Giampetro
under the 1994 Plan.
(7) Includes 54,696 shares held by Mr. Hofing's spouse, 10,791 shares held in
the Hofing Family Limited Partnership and 4,592 shares issuable upon
exercise of options held by Mr. Hofing under the 1994 Plan.
(8) Includes 6,232 shares issuable upon exercise of options held by Mr. Kelly
under the 1994 Plan.
(9) Includes 9,977 shares issued upon the exercise of options held by Mr.
Losch under the 1997 Plan, 1,284 shares in the Yardville National Bank
401(K) plan, and 17 shares held by Mr. Losch as custodian for his son.
(10) Includes 1,312 shares issuable upon exercise of options held by Mr.
Lugossy under the 1994 Plan and 2,735 shares held jointly with Mr.
Lugossy's wife.
(11) Includes 1,312 shares issuable upon exercise of options held by Mr.
Matlack under the 1994 Plan, 6,199 shares held in the Matlack Family Trust
where Mr. Matlack is a co-trustee, 12,013 shares in the Estate of Hannah
Hendrickson and 123,823 shares in the Estate of Edward Hendrickson. Mr.
Matlack is a co-executor of both estates.
(12) Includes 1,312 shares issuable upon exercise of options held by Mr.
McDaniel, Jr. under the 1994 Plan and 800 shares held by Mr. McDaniel,
Jr.'s spouse, (as to which Mr. McDaniel, Jr. disclaims beneficial
ownership).
(13) Includes 26,900 shares issuable upon exercise of options held by Mr. Ryan
under our 1988 Plan and the 1997 Plan, 1,858 shares in the Yardville
National Bank 401(K) plan, 51 shares held by Mr. Ryan as custodian for
Brendan Ryan and 155,340 shares in the ESOP over which Mr. Ryan, as a
trustee, shares voting rights with Mr. Destribats and Mr. Tylus.
(14) Includes 1,312 shares issuable upon exercise of options held by Mr. Tylus
under the 1994 Plan, 10,925 shares held jointly with Mr. Tylus's wife and
155,340 shares in the ESOP over which Mr. Tylus, as a trustee, shares
voting rights with Mr. Destribats and Mr. Ryan.
(15) Includes 119,724 shares issuable upon exercise of options held by such
persons as a group under the 1988 Plan, the 1994 Plan, and the 1997 Plan,
and 155,340 ESOP shares over which Mr. Destribats, Mr. Ryan and Mr. Tylus
have shared voting rights as trustees.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description of our capital stock is qualified in its
entirety by reference to our Restated Certificate of Incorporation and By-Laws.
We have filed copies of the Restated Certificate of Incorporation and the
By-Laws as exhibits to the registration statement of which this prospectus is a
part.
Capital Stock
We are authorized to issue 13,000,000 shares of stock, consisting of
12,000,000 shares of common stock and 1,000,000 shares of preferred stock, no
par value per share, with presently unspecified rights. As of March 31, 1999,
there were 5,131,914 shares of common stock outstanding, 1,640 shares issuable
under stock options exercised in the first quarter of 1999, and 478,751 shares
reserved for issuance upon exercise of outstanding stock options. No shares of
preferred stock have been issued.
Preferred Stock
Under the terms of our Restated Certificate of Incorporation, our Board of
Directors may, without stockholder approval, issue shares of preferred stock
from time to time. The Board of Directors may determine the relative rights,
preferences and limitations of the preferred stock including, without
limitation, stated value, dividend rights, rights to convert such shares into
shares of another class or series (such as common stock or another class of
series of preferred stock), voting rights, liquidation preference, redemption
rights, division into classes and into series within any class or classes,
sinking fund provisions and similar matters, and generally to determine all the
characteristics of such preferred stock other than the total number of shares
of preferred stock which the Board has authority to issue. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions, financings and other corporate
purposes, could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, a controlling
interest in YNB. We have no present plans to issue any shares of preferred
stock.
Rights of Holders of Common Stock
Dividend Rights. Subject to the rights of holders of shares, if any,
having preferences with respect to dividends, the holders of our common stock
are entitled to receive dividends when, as and if declared by our Board of
Directors. Dividends must be paid out of funds legally available for the
payment of dividends. The only statutory limitation is that such dividends may
not be paid when YNB is insolvent and may be paid only out of statutory
surplus. In addition, funds for the payment of dividends by YNB must come
primarily from the earnings of the Bank. As a practical matter, any dividend
restrictions on the subsidiaries of YNB act as restrictions on the amount of
funds available for the payment of dividends which can be paid by YNB itself.
See the "Market for Common Stock and Dividends" section of this prospectus.
Voting Rights. Each holder of common stock is entitled to one vote per
share. The quorum for stockholders' meetings is a majority of the outstanding
shares entitled to vote represented in person or by proxy.
Provisions Regarding Certain Business Combinations. Article VIII of the
Restated Certificate of Incorporation requires the affirmative vote of the
holders of at least 80% of the outstanding shares of our capital stock entitled
to vote generally in the election of directors to approve certain mergers and
other business combinations. Such business combinations include those involving
YNB and any holder of 10% or more of the common stock (an "Interested
Stockholder"). There are two exceptions to this provision. First, if a majority
of the Board of Directors who are unaffiliated with an Interested Stockholder
and who were directors before the Interested Stockholder became an Interested
Stockholder approve the transaction, the supermajority stockholder vote is not
required. Second, if certain minimum price, form of consideration and
procedural requirements are met, the supermajority stockholder vote is not
required.
As of March 18, 1999, our directors and executive officers possessed sole
or shared voting power with respect to approximately 22% of the outstanding
common stock. The share ownership of our current directors and executive
officers as of March 18, 1999, will represent approximately 18.3% of the
outstanding common
41
<PAGE>
stock after the completion of this offering. In addition, as of March 18, 1999,
our directors and officers had the right to acquire an additional 119,724
shares of common stock under options that are presently exercisable. See
"Security Ownership of Management and Principal Stockholders." Consequently,
the directors and executive officers, should they act together, possess
sufficient voting power to significantly effect the vote on, and perhaps
prevent, certain mergers and other business combinations.
Election, Classification and Removal of Directors. Our Restated
Certificate of Incorporation provides for a classified Board of Directors, with
approximately one-third of the entire board being elected each year and with
directors serving for terms of three years. Directors are elected by a
plurality of votes cast. Holders of common stock do not have cumulative voting
rights. Our By-Laws provide that any director, or the entire Board of
Directors, may be removed at any time by our stockholders, with or without
cause, but only by the affirmative vote of the holders of at least 80% of the
shares entitled to vote for the election of directors. The effect of these
provisions, coupled with the Board's authority to issue preferred stock, may be
to deter hostile takeovers, to enhance the ability of current management to
remain in control of YNB, and generally to make more difficult the acquisition
of a controlling interest in YNB.
Approval of Major Transactions. Except for mergers and certain business
combinations with Interested Stockholders, we are able to amend our Restated
Certificate of Incorporation (except as otherwise stated in that document), to
merge or consolidate with other corporations, to make a bulk sale of our assets
not in the regular course of business and to dissolve, if the majority of the
votes cast at the stockholders meeting (at which a quorum is present) called
for the purpose of considering any such action are cast in favor of the
proposal.
Liquidation Rights. In the event of liquidation, dissolution or winding up
of YNB, holders of our common stock are entitled to receive equally and pro
rata per share any assets distributable to stockholders, after payment of debts
and liabilities and after the distribution to holders of any outstanding
preferred stock or any other outstanding shares hereafter issued which have
prior rights upon liquidation.
Other Matters. Holders of common stock do not have preemptive rights or
conversion rights with respect to any securities of YNB. Except in connection
with certain business combinations and except as noted below, we can issue new
shares of authorized but unissued common stock and/or preferred stock without
stockholder approval.
The bylaws of the National Association of Securities Dealers, Inc.
governing the Nasdaq National Market, on which the common stock is quoted,
require issuers to obtain stockholder approval for the issuance of secur-ities
in connection with the acquisition of a business, company, assets, property, or
securities representing such interests where the present or potential issuance
of common stock or securities convertible into common stock could result in an
increase of 20% or more in the outstanding shares of common stock. Accordingly,
the future issuance of a series of preferred stock convertible into common
stock may require stockholder approval under those rules.
Transfer Agent
First City Transfer Company serves as the transfer agent of our issued and
outstanding common stock.
42
<PAGE>
UNDERWRITING
Legg Mason Wood Walker, Incorporated and Advest, Inc. have entered into an
underwriting agreement with us to purchase shares of our common stock from us
and to offer the shares to the public as described below. Legg Mason Wood
Walker, Incorporated and Advest, Inc. are referred to below as the
"underwriters." Subject to the terms of this underwriting agreement, each of
the underwriters has agreed to purchase from us the number of shares of common
stock shown opposite its name below.
<TABLE>
<CAPTION>
Underwriters Number of Shares of Common Stock
- -------------------------------------------------------- ---------------------------------
<S> <C>
Legg Mason Wood Walker, Incorporated .......... 700,000
Advest, Inc ................................... 700,000
-------
Total ...................................... 1,400,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters to purchase shares of common stock depend on the satisfaction of
certain conditions contained in the underwriting agreement, and that if any of
the shares of common stock are purchased by the underwriters under the
underwriting agreement, then all of the shares of common stock which the
underwriters have agreed to purchase must be purchased. The conditions
contained in the underwriting agreement include the requirement that the
representations and warranties made by us to the underwriters are true, that we
have performed certain agreements that we have made with respect to this
offering and that there is no material adverse change in the financial markets
or our operations.
The underwriters have advised us that they propose to offer the shares of
common stock directly to the public at the public offering price set forth on
the cover page of this prospectus, and to certain dealers at such public
offering price less a selling concession not in excess of $0.45 per share. The
underwriters may allow, and these dealers may re-allow, a concession not in
excess of $0.10 per share to other brokers and dealers. After the commencement
of the offering, the underwriters may change the offering price and other
selling terms.
In addition to the discounts and commissions shown on the cover page of
this prospectus, we will reimburse the underwriters for their legal expenses in
an amount not to exceed $75,000, and pay to the underwriters a fee of $100,000
for financial advisory services upon the consummation of this offering.
We have granted to the underwriters an option to purchase up to an
aggregate of 210,000 additional shares of common stock, exercisable solely to
cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option at any time until thirty
days after the date of this prospectus. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the initial commitment of that underwriter as indicated
in the preceding table, and we will be obligated to sell the shares of common
stock to the underwriters in accordance with that over-allotment option.
We have agreed that, without the prior consent of the underwriters, we
will not directly or indirectly, offer, sell or otherwise dispose of any shares
of common stock or any securities which may be converted into common stock for
a period of 180 days after the date of this prospectus, except for the grant or
exercise of options under our stock option plans or the issuance of our
securities in connection with a merger, acquisition or similar transaction. All
of our officers and directors have agreed that, without the prior written
consent of the underwriters, they will not, directly or indirectly, offer, sell
or otherwise dispose of any shares of common stock or any securities which may
be converted into or exchanged for such shares for a period ending 180 days
after the date of this prospectus.
At our request, the underwriters have reserved up to 163,000 shares of our
common stock offered by this prospectus for sale to our directors, senior
officers and certain stockholders of YNB at the public offering price set forth
on the cover page of this prospectus. These persons must commit to purchase no
later than the close of business on the day following the date of this
prospectus. The number of shares available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares.
43
<PAGE>
Until the distribution of the common stock is completed, the rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and dealers who participate in the selling group to bid for and purchase shares
of our common stock. As an exception to these rules, the underwriters are
permitted to engage in transactions that stabilize the price of the common
stock. These transactions may take place on the Nasdaq National Market and
consist of bids or purchases for the purposes of pegging, fixing or maintaining
the price of the common stock.
The underwriters may create a "short position" in the common stock in
connection with the offering, which means that they may over-allot or sell more
shares than are set forth on the cover page of this prospectus. If the
underwriters create a short position by such over-allotment, then the
underwriters may reduce that short position by purchasing common stock in the
open market. The underwriters also may elect to reduce any short position by
exercising all or part of the over-allotment option. In general, purchases of a
security for the purpose of stabilization or to reduce a short position could
cause the price of the security to be higher than it might otherwise be in the
absence of such purchases.
Neither we nor either of the underwriters makes any representation or
prediction as to the direction or magnitude of any affect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor either of the underwriters makes any representation that the
underwriters will engage in any such transactions or that such transactions,
once commenced, will not be discontinued without notice.
In connection with this offering, the underwriters, the selling group
members or their respective affiliates who are qualified market makers on the
Nasdaq National Market may engage in passive market making transactions in our
common stock in accordance with the rules of the Securities and Exchange
Commission during the five business days prior to the pricing of the offering
before the commencement of offers and sales of our common stock. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at
a price not in excess of the highest independent bid for such security. If all
independent bids are lowered below the passive market makers bid, however, such
bid must then be lowered when certain purchase limits are exceeded.
We have agreed to indemnify the underwriters and persons who control the
underwriters against liabilities, including liabilities under the Securities
Act and liabilities arising from breaches of the representations and warranties
contained in the underwriting agreement, and to contribute to payments that the
underwriters may be required to make for these liabilities.
44
<PAGE>
LEGAL MATTERS
The validity of the shares of our common stock offered and certain other
legal matters will be passed upon by the law firm of Pepper Hamilton LLP.
Certain legal matters will be passed upon for the underwriters by Morgan, Lewis
& Bockius LLP.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus have been audited by KPMG LLP, independent auditors, as stated
in their report, which is included herein, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information that we file with the SEC at the SEC's public reference room
at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. The SEC
maintains a World Wide Web site on the Internet at "http://www.sec.gov" that
contains reports, proxy and information statements, and other information
regarding companies that file electronically with the SEC, including YNB. You
may also find copies of reports, proxy and information statements we file
electronically with the SEC via a link to "Investor News" from our website at
"http://www.yanb.com".
We filed a Registration Statement on Form S-2 (the "Registration
Statement") to register the common stock to be sold in the offering. This
prospectus is a part of that Registration Statement. As allowed by SEC rules,
this prospectus does not contain all the information you can find in the
Registration Statement or the exhibits to that Registration Statement.
SEC regulations allow us to "incorporate by reference" information into
this prospectus, which means that we can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is considered part of this prospectus.
Information incorporated by reference from earlier documents is superseded by
information that has been incorporated by reference from more recent documents.
This prospectus incorporates by reference our Annual Report on Form 10-K
for the Fiscal Year ended December 31, 1998, as amended, which we have
previously filed with the SEC (File No. 0-26086). That document contains
important information about us and our finances.
You can obtain documents incorporated by reference through YNB and the SEC
or the SEC's Internet web site as described above. Documents incorporated by
reference are available from us without charge, including any exhibits
specifically incorporated by reference therein. You may obtain documents
incorporated by reference in this prospectus by requesting them in writing or
by telephone from YNB at the following address:
Mr. Stephen F. Carman
Secretary and Treasurer
Yardville National Bancorp
4569 South Broad Street
Yardville, NJ 08620
Telephone: (609) 585-5100
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information that is different from what is contained in this prospectus. You
should not assume that the information contained in this prospectus is accurate
as of any date other than the date of this prospectus.
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report ............................................................. F-2
Consolidated Statements of Condition as of December 31, 1998 and December 31, 1997 ....... F-3
Consolidated Statements of Income for Each of the Years in the Three-Year Period Ended
December 31, 1998 ........................................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity for Each of the Years in the
Three-Year Period Ended December 31, 1998 ................................................ F-5
Consolidated Statements of Cash Flows for Each of the Years in the Three- Year Period
Ended December 31, 1998 .................................................................. F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<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 subsidiaries as of December 31, 1998 and 1997,
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, 1998. 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 subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Princeton, New Jersey
January 22, 1999
F-2
<PAGE>
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Condition
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------- -------------
(in thousands, except share
data)
<S> <C> <C>
Assets:
Cash and due from banks ................................................. $ 16,246 $ 18,923
Federal funds sold ...................................................... 280 1,500
--------- ---------
Cash and Cash Equivalents .............................................. 16,526 20,423
--------- ---------
Interest bearing deposits with banks .................................... 733 2,219
Securities available for sale ........................................... 185,577 159,724
Investment securities (market value of $36,203 in 1998 and $26,848 in
1997) .................................................................. 36,111 26,912
Loans ................................................................... 491,649 385,751
Less: Allowance for loan losses ........................................ (6,768) (5,570)
--------- ---------
Loans, net ............................................................. 484,881 380,181
Bank premises and equipment, net ........................................ 6,251 5,192
Other real estate ....................................................... 4,957 3,171
Other assets ............................................................ 22,630 16,864
--------- ---------
Total Assets ........................................................... $ 757,666 $ 614,686
========= =========
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing ................................................... $ 75,426 $ 66,560
Interest bearing ....................................................... 444,217 356,384
--------- ---------
Total Deposits ......................................................... 519,643 422,944
--------- ---------
Borrowed funds
Securities sold under agreements to repurchase ......................... 87,120 100,050
Federal Home Loan Bank advances ........................................ 89,316 29,338
Other .................................................................. 1,452 4,928
--------- ---------
Total Borrowed Funds ................................................... 177,888 134,316
Company - obligated Mandatorily Redeemable Trust Preferred Securi-
ties of Subsidiary Trust holding solely junior Subordinated Deben-
tures of the Company ................................................... 11,500 11,500
Other liabilities ....................................................... 7,879 6,181
--------- ---------
Total Liabilities ...................................................... $ 716,910 $ 574,941
--------- ---------
Commitments and Contingent Liabilities
Stockholders' equity
Preferred stock: no par value
Authorized 1,000,000 shares, none issued ............................. -- --
Common stock: no par value
Authorized 12,000,000 shares
Issued 5,138,474 shares in 1998 and 5,082,050 shares in 1997 ......... 20,364 17,703
Surplus ................................................................ 2,205 2,205
Undivided profits ...................................................... 21,479 19,713
Treasury stock, at cost, 170,300 shares ................................ (3,008) --
Accumulated other comprehensive income ................................. (284) 124
--------- ---------
Total Stockholders' Equity ........................................... 40,756 39,745
--------- ---------
Total Liabilities and Stockholders' Equity ........................... $ 757,666 $ 614,686
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans ........................ $ 38,218 $ 31,511 $ 25,731
Interest on deposits with banks ................... 175 107 98
Interest on securities available for sale ......... 10,788 7,093 6,262
Interest on investment securities:
Taxable .......................................... 783 1,277 1,536
Exempt from Federal income tax ................... 626 400 396
Interest on Federal funds sold .................... 333 380 228
--------- --------- --------
Total Interest Income ............................ 50,923 40,768 34,251
--------- --------- --------
Interest Expense:
Interest on savings account deposits .............. 5,034 5,083 4,014
Interest on certificates of deposit of $100,000 or
more ............................................. 1,386 1,273 922
Interest on other time deposits ................... 12,152 9,759 7,138
Interest on borrowed funds ........................ 8,756 4,761 4,967
Interest on trust preferred securities ............ 1,064 224 --
--------- --------- --------
Total Interest Expense ........................... 28,392 21,100 17,041
--------- --------- --------
Net Interest Income .............................. 22,531 19,668 17,210
Less provision for loan losses .................... 1,975 1,125 1,640
--------- --------- --------
Net Interest Income After Provision for Loan
Losses .......................................... 20,556 18,543 15,570
--------- --------- --------
Non-Interest Income:
Service charges on deposit accounts ............... 1,246 1,174 1,153
Gains on sales of mortgages, net .................. 62 30 21
Securities gains (losses), net .................... 151 24 (136)
Other non-interest income ......................... 1,543 1,316 1,075
--------- --------- --------
Total Non-Interest Income ........................ 3,002 2,544 2,113
--------- --------- --------
Non-Interest Expense:
Salaries and employee benefits .................... 8,115 7,446 6,629
Occupancy expense, net ............................ 1,070 977 920
Equipment expense ................................. 1,299 1,107 695
Other non-interest expense ........................ 4,853 3,811 3,235
--------- --------- --------
Total Non-Interest Expense ....................... 15,337 13,341 11,479
--------- --------- --------
Income before income tax expense ................. 8,221 7,746 6,204
Income tax expense ................................ 2,639 2,740 2,178
--------- --------- --------
Net Income ....................................... $ 5,582 $ 5,006 $ 4,026
========= ========= ========
Earnings Per Share:
Basic ............................................. $ 1.11 $ 0.99 $ 0.82
Diluted ........................................... $ 1.10 $ 0.98 $ 0.80
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Year Ended December 31, 1998, 1997 and
1996
-------------------------------------
Common Common
shares stock Surplus
------------- ----------- ---------
(in thousands, except share amounts)
<S> <C> <C> <C>
BALANCE, December 31, 1995 ........... 4,816,663 $ 16,409 $ 2,205
Net income ...........................
Unrealized loss -- securities
available for sale, net of tax of
$107,000 ............................
Total comprehensive income ........
Cash dividends .......................
Common stock issued:
Exercise of stock options ........... 130,958 562
Exercise of warrants ................ 34,727 275
--------- -------- -------
BALANCE, December 31, 1996 ........... 4,982,348 $ 17,246 $ 2,205
Net income ...........................
Unrealized gain -- securities
available for sale, net of tax of
$83,000 .............................
Total comprehensive income ........
Cash dividends .......................
Common stock issued:
Exercise of stock options ........... 99,702 457
--------- -------- -------
BALANCE, December 31, 1997 ........... 5,082,050 $ 17,703 $ 2,205
Net income ...........................
Unrealized loss -- securities
available for sale, net of tax of
$152,000 ............................
Total comprehensive income ........
Cash dividends .......................
Common stock issued:
Exercise of stock options ........... 56,424 294
2.5% stock dividend ................. 2,367
Treasury shares acquired ............. (170,300)
--------- -------- -------
BALANCE, December 31, 1998 ........... 4,968,174 $ 20,364 $ 2,205
========= ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998, 1997 and 1996
--------------------------------------------------------
Accumulated
other
Undivided Treasury comprehensive
profits stock income Total
------------ ------------- -------------- -----------
(in thousands, except share amounts)
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 ........... $ 12,997 $ 106 $ 31,717
Net income ........................... 4,026 4,026
Unrealized loss -- securities
available for sale, net of tax of
$107,000 ............................ (267) (267)
--------
Total comprehensive income ........ 3,759
--------
Cash dividends ....................... (1,083) (1,083)
Common stock issued:
Exercise of stock options ........... 562
Exercise of warrants ................ 275
-------- ------- --------
BALANCE, December 31, 1996 ........... $ 15,940 $ (161) $ 35,230
Net income ........................... 5,006 5,006
Unrealized gain -- securities
available for sale, net of tax of
$83,000 ............................. 285 285
--------
Total comprehensive income ........ 5,291
--------
Cash dividends ....................... (1,233) (1,233)
Common stock issued:
Exercise of stock options ........... 457
-------- ------- --------
BALANCE, December 31, 1997 ........... $ 19,713 $ 124 $ 39,745
Net income ........................... 5,582 5,582
Unrealized loss -- securities
available for sale, net of tax of
$152,000 ............................ (408) (408)
--------
Total comprehensive income ........ 5,174
--------
Cash dividends ....................... (1,449) (1,449)
Common stock issued:
Exercise of stock options ........... 294
2.5% stock dividend ................. (2,367)
Treasury shares acquired ............. (3,008) (3,008)
-------- --------- ------- --------
BALANCE, December 31, 1998 ........... $ 21,479 $ (3,008) $ (284) $ 40,756
======== ========= ======= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
------------- ------------- ------------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income ...................................................... $ 5,582 $ 5,006 $ 4,026
Adjustments:
Provision for loan losses ...................................... 1,975 1,125 1,640
Depreciation ................................................... 942 832 666
Amortization and accretion ..................................... 943 467 555
(Gain) loss on sales of securities available for sale .......... (151) (24) 136
Writedown of other real estate ................................. 463 532 69
Loss on sale of other real estate .............................. 7 -- --
Increase in other assets ....................................... (5,532) (2,076) (5,434)
Increase in other liabilities .................................. 1,698 1,650 1,326
---------- ---------- ---------
Net Cash Provided by Operating Activities .................... 5,927 7,512 2,984
---------- ---------- ---------
Cash Flows from Investing Activities:
Net decrease (increase) in interest bearing deposits with
banks ........................................................ 1,486 (862) (324)
Purchase of securities available for sale ...................... (168,202) (123,534) (65,492)
Maturities, calls and paydowns of securities available for
sale ......................................................... 93,346 45,928 23,475
Proceeds from sales of securities available for sale ........... 47,725 11,740 45,864
Proceeds from maturities and paydowns of investment
securities ................................................... 11,081 4,757 4,355
Purchase of investment securities .............................. (20,436) (528) (452)
Net increase in loans .......................................... (109,188) (57,984) (86,915)
Expenditures for bank premises and equipment ................... (2,001) (606) (2,058)
Proceeds from sale of other real estate ........................ 257 -- 533
Capital improvements to other real estate ...................... -- (350) --
---------- ---------- ---------
Net Cash Used by Investing Activities ......................... (145,932) (121,439) (81,014)
---------- ---------- ---------
Cash Flows from Financing Activities:
Net increase in non-interest bearing demand, money
market, and savings deposits ................................. 23,232 36,188 15,704
Net increase in certificates of deposit ........................ 73,467 22,311 45,769
Net increase in borrowed funds ................................. 43,572 47,977 21,118
Proceeds from issuance of common stock ......................... 294 457 837
Treasury shares acquired ....................................... (3,008) -- --
Proceeds from issuance of trust preferred securities ........... -- 11,500 --
Dividends paid ................................................. (1,449) (1,233) (1,083)
---------- ---------- ---------
Net Cash Provided by Financing Activities .................... 136,108 117,200 82,345
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents ......... (3,897) 3,273 4,315
Cash and cash equivalents as of beginning of year ............ 20,423 17,150 12,835
---------- ---------- ---------
Cash and Cash Equivalents as of End of Year ..................... $ 16,526 $ 20,423 $ 17,150
========== ========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for: Interest ......................... $ 25,714 $ 19,239 $ 16,338
Income taxes .................................................... 3,140 3,642 2,324
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
The Corporation transferred from loans to other real estate, net of charge
offs, $2,513, $2,958, and $372 in 1998, 1997, and 1996, respectively.
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996
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 and contiguous counties. 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 subsidiaries, Yardville Capital
Trust and the Bank and the Bank's wholly owned subsidiaries, the Yardville
National Investment Corporation, Brendan, Nancy Beth, Jim Mary, Yardville Real
Estate Corporation, and YNB Realty Inc. (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.
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.
Trading securities are purchased specifically for short-term appreciation
with the intent of selling in the near future. Trading securities are carried
at fair value with realized and unrealized gains and losses reported in
non-interest income.
D. Loans. Interest on loans is recognized based upon the principal amount
outstanding. Loans are stated at face value, less unearned income and net
deferred fees. 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 120 days
past due. Mortgage loans are not generally placed on a nonaccrual status unless
the value of the real estate has deteriorated to the
F-7
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
1. Summary of Significant Accounting Policies -- (Continued)
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. Allowance for Loan Losses. The provision for loan losses charged to
operating expense is determined by management and is based upon a periodic
review of the loan portfolio, past experience, the economy, and other factors
that may affect a borrower's ability to repay the loan. This provision is based
on management's estimates, and actual losses may vary from these estimates.
These estimates are reviewed and adjustments, as they become necessary, are
reported in the periods in which they become known. Management believes that
the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allow-ance
may be necessary based on changes in economic conditions, particularly in New
Jersey. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses and the valuation of other real estate. Such agencies may require the
Corporation to recognize additions to the allowance or adjustments to the
carrying value of other real estate based on their judgments about information
available to them at the time of their examination.
Management, 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 income.
F. 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.
G. 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.
H. 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.
I. Stock Based Compensation. The Corporation applies 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,
"Accounting for Stock Based Compensation," have been included for awards
granted after January 1, 1995 (see note 10).
J. Earnings Per Share. On March 25, 1998, the Board of Directors of the
Corporation approved a 2.5% stock dividend payable on April 21, 1998 to
shareholders of record April 7, 1998. On December 23, 1997, the Board of
Directors of the Corporation approved a two-for-one stock split effected in the
form of a stock dividend payable on January 20, 1998 to shareholders of record
January 5, 1998. All share data has been adjusted to reflect these two actions.
F-8
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
1. Summary of Significant Accounting Policies -- (Continued)
Basic net income per common share is calculated by dividing net income,
less the dividends on preferred stock, if any, by the weighted average common
shares outstanding during the period.
Diluted net income per common share is computed similar to that of basic
net income per common share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if all
potentially dilutive common shares, principally stock options, were issued
during the reporting period.
Weighted average shares for the basic net income per share computation for
the year ended December 31, 1998, 1997, and 1996 were 5,017,000, 5,052,000, and
4,938,000, respectively. For the diluted net income per share computation
common stock equivalents of 42,000, 65,000, and 102,000 are included for the
years ended December 31, 1998, 1997, and 1996, respectively.
K. Comprehensive Income. On January 1, 1998, the Corporation adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholders' equity. SFAS No. 130 requires only additional
disclosures in the consolidated financial statements; it does not affect the
Corporation's financial postition or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130. The unrealized holding gains (losses) that arise during a year
are equal to the net unrealized gains (losses) on securities available for sale
included in total comprehensive income in the consolidated statements of
changes in stockholders' equity plus a reclassification adjustment for gains
(losses) realized in income. This reclassification adjustment is equal to the
security gains (losses) included in the consolidated statements of income for
all years presented.
2. Cash and Due From Banks
The Corporation maintains various deposits with other banks. As of
December 31, 1998 and 1997, the Corporation maintained sufficient cash on hand
to satisfy Federal regulatory requirements.
3. Securities
The amortized cost and estimated market value of securities available for
sale are as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
other U.S. govern-
ment agencies ............ $ 55,051 $ 149 $ (161) $ 55,039
Mortgage-backed
securities ............... 120,410 157 (581) 119,986
Corporate obligations ..... 2,867 8 (8) 2,867
Federal Reserve Bank
Stock .................... 812 -- -- 812
Federal Home Loan
Bank Stock ............... 6,873 -- -- 6,873
--------- ----- -------- ---------
Total ..................... $ 186,013 $ 314 $ (750) $ 185,577
========= ===== ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
other U.S. govern-
ment agencies ............ $ 62,465 $ 117 $ (42) $ 62,540
Mortgage-backed
securities ............... 91,193 329 (206) 91,316
Corporate obligations ..... 3,297 15 (6) 3,306
Federal Reserve Bank
Stock .................... 587 -- -- 587
Federal Home Loan
Bank Stock ............... 1,975 -- -- 1,975
--------- ----- ------- ---------
Total ..................... $ 159,517 $ 461 (254) $ 159,724
========= ===== ======= =========
</TABLE>
F-9
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
3. Securities -- (Continued)
The amortized cost and estimated market value of investment securities are
as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1998
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Obligations of other U.S.
government agencies $ 4,994 $ -- $ (59) $ 4,935
Obligations of state and
political subdivisions 20,773 302 (93) 20,982
Mortgage-backed securities 10,344 -- (58) 10,286
-------- ----- ------- --------
Total $ 36,111 $ 302 $ (210) $ 36,203
======== ===== ======= ========
<CAPTION>
December 31,
---------------------------------------------------
1997
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Obligations of other U.S.
government agencies $ -- $ -- $ -- $ --
Obligations of state and
political subdivisions 8,819 138 -- 8,957
Mortgage-backed securities 18,093 -- (202) 17,891
-------- ----- ------- --------
Total $ 26,912 $ 138 (202) $ 26,848
======== ===== ======= ========
</TABLE>
The amortized cost and estimated market value of securities available for
sale and investment securities as of December 31, 1998 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
Cost Value
----------- ----------
(in thousands)
Due in 1 year or less ...................... $ 2,999 $ 3,010
Due after 1 year through 5 years ........... 8,953 8,995
Due after 5 years through 10 years ......... 35,000 34,972
Due after 10 years ......................... 18,651 18,614
--------- --------
Subtotal ........................ ......... 65,603 65,591
Mortgage-backed securities ................. 120,410 119,986
--------- --------
Total ...................................... $ 186,013 $185,577
========= ========
<PAGE>
Investment securities
Estimated
Amortized Market
Cost Value
----------- ----------
(in thousands)
Due after 1 year through 5 years ........... $ 3,812 $ 3,888
Due after 5 years through 10 years ......... 4,676 4,761
Due after 10 years ......................... 17,279 17,268
-------- --------
Subtotal ........................ ......... 25,767 25,917
Mortgage-backed securities ................. 10,344 10,286
-------- --------
Total ...................................... $ 36,111 $ 36,203
======== ========
Proceeds from sale of available for sale securities during 1998, 1997, and
1996 were $47,725,000, $11,740,000 and $45,864,000, respectively. Gross gains
of $242,000, $24,000 and $43,000 were realized on those sales in 1998, 1997,
and 1996, respectively. Gross losses of $91,000 and $179,000 were realized on
those sales in 1998 and 1996, respectively. There were no losses in 1997.
F-10
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
3. Securities -- (Continued)
Securities with a carrying value of approximately $164,358,000 as of
December 31, 1998 were pledged to secure public deposits and for other purposes
as required or permitted by law. As of December 31, 1998, Federal Home Loan
Bank (FHLB) stock with a carrying value of $6,873,000 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,
--------------------------
1998 1997
------------ -----------
(in thousands)
Commercial and industrial loans ........... $ 133,263 $ 88,228
Real estate loans -- mortgage ............. 283,739 244,058
Real estate loans -- construction ......... 38,386 28,182
Consumer loans ............................ 24,531 18,519
Other loans ............................... 11,730 6,764
--------- ---------
Total loans ............................... $ 491,649 $ 385,751
========= =========
Residential mortgage loans held for sale amounted to $3,084,000 and
$2,773,000 as of December 31, 1998 and 1997, 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, 1998 and 1997, loans serviced for Freddie Mac were $33,476,000 and
$39,025,000, respectively. Loans serviced for FNMA were $10,503,000 and
$5,114,000, respectively, as of December 31, 1998 and 1997.
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,
-----------------------
1998 1997
---------- ----------
(in thousands)
Balance as of beginning of year ......... $ 6,387 $ 3,330
Additions ............................... 3,347 5,399
Repayments and resignations ............. 4,029 2,342
------- -------
Balance as of end of year ............... $ 5,705 $ 6,387
======= =======
The majority of the Corporation's business is with customers located
within Mercer County, New Jersey and contiguous counties. Accordingly, the
ultimate collectibility of the loan portfolio and the recovery of the carrying
amount of real estate are subject to changes in the region's economic
environment and real estate market. A portion of the total portfolio is secured
by real estate. The principal areas of exposure are construction and
development loans, which are primarily commercial and residential projects, and
commercial mortgage loans. Commercial mortgage loans are completed projects and
are generally owner-occupied, creating cash flow.
F-11
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
4. Loans and Allowance for Loan Losses -- (Continued)
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Balance as of beginning of year ......... $ 5,570 $ 4,957 $ 3,677
Loans charged off ....................... (843) (574) (399)
Recoveries of loans charged off ......... 66 62 39
------- ------- -------
Net charge offs ......................... (777) (512) (360)
Provision charged to operations ......... 1,975 1,125 1,640
------- ------- -------
Balance as of end of year ............... $ 6,768 $ 5,570 $ 4,957
======= ======= =======
</TABLE>
The detail of loans charged off is as follows:
Year Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- -------
(in thousands)
Commercial and industrial ................. $ 547 $ 212 $ --
Real estate loans -- mortgage ............. -- 161 72
Real estate loans -- construction ......... -- -- 75
Consumer loans ............................ 296 201 252
----- ----- -----
Total ..................................... $ 843 $ 574 $ 399
===== ===== =====
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 0.79% as of
December 31, 1998 and 1.38% as of December 31, 1997.
A summary of nonperforming assets follows:
December 31,
-------------------
1998 1997
-------- --------
(in thousands)
Nonaccruing loans:
Commercial and industrial loans ........... $ 232 $ 515
Real estate loans -- mortgage ............. 570 384
Real estate loans -- construction ......... 684 2,106
Consumer loans ............................ 31 38
Other loans ............................... 529 312
------ ------
Total nonaccruing loans ...................... $2,046 $3,355
------ ------
Restructured loans ........................... $ 634 $ 969
------ ------
Past due 90 days or more:
Real estate loans -- mortgage ............... $1,093 $ 886
Consumer loans .............................. 100 105
------ ------
Total past due 90 days or more .............. 1,193 991
------ ------
Total nonperforming loans ................... 3,873 5,315
Other real estate ........................... 4,957 3,171
------ ------
Total nonperforming assets .................. $8,830 $8,486
====== ======
F-12
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
4. Loans and Allowance for Loan Losses -- (Continued)
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, 1998 and 1997 was $2,438,000 and $4,213,000,
respectively. The related allowance for loan losses on these loans as of
December 31, 1998 and 1997 was $519,000 and $716,000, respectively. The average
recorded investment in impaired loans during 1998 and 1997 was $3,252,000 and
$5,485,000, respectively. There was no interest income recognized on impaired
loans in 1998 or 1997.
Additional income before income taxes amounting to approximately $249,000
in 1998, $254,000 in 1997, and $351,000 in 1996 would have been recognized if
interest on all loans had been recorded based upon original contract terms.
There were two restructured loans to one borrower as of December 31, 1998
and 1997.
5. Bank Premises and Equipment
The following table represents comparative information for premises and
equipment:
December 31,
-----------------------
1998 1997
---------- ----------
(in thousands)
Land and improvements .................... $ 773 $ 528
Buildings and improvements ............... 4,413 4,308
Furniture and equipment .................. 7,373 5,722
------- -------
Total .................................... 12,559 10,558
Less accumulated depreciation ............ 6,308 5,366
------- -------
Bank premises and equipment, net ......... $ 6,251 $ 5,192
======= =======
6. Deposits
Total deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- -----------
(in thousands)
<S> <C> <C>
Non-interest bearing demand deposits ................. $ 75,426 $ 66,560
Interest bearing demand deposits ..................... 51,672 44,520
Money market deposits ................................ 44,661 39,937
Savings deposits ..................................... 77,537 75,047
Certificates of deposit of $100,000 and over ......... 29,525 21,556
Other time deposits .................................. 240,822 175,324
--------- --------
Total ................................................ $ 519,643 $422,944
========= ========
</TABLE>
F-13
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
6. Deposits -- (Continued)
A summary of certificates of deposit by maturity is as follows:
December 31,
---------------------------
1998 1997
------------ ------------
(in thousands)
Within one year ............. $ 190,259 $ 141,183
One to two years ............ 55,702 34,522
Two to three years .......... 9,935 13,327
Three to four years ......... 9,340 5,366
Four to five years .......... 5,111 2,482
--------- ---------
Total ....................... $ 270,347 $ 196,880
========= =========
7. Borrowed Funds
Borrowed funds include securities sold under agreements to repurchase and
Federal Home Loan Bank (FHLB) advances. Other borrowed funds consist of Federal
funds purchased and Treasury tax and loan deposits.
The following table presents comparative data related to borrowed funds of
the Corporation as of and for the years ended December 31, 1998, 1997, and
1996.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase ......... $ 87,120 $ 100,050 $ 64,185
FHLB advances .......................................... 89,316 29,338 20,813
Other .................................................. 1,452 4,928 1,341
--------- --------- ---------
Total .................................................. $ 177,888 $ 134,316 $ 86,339
========= ========= =========
Maximum amount outstanding at any month end ............ $ 182,354 $ 134,316 $ 105,577
Average interest rate on year end balance .............. 5.25% 5.94% 5.72%
Average amount outstanding during the year ............. $ 158,106 $ 84,492 $ 87,065
Average interest rate for the year ..................... 5.54% 5.63% 5.70%
</TABLE>
The following is a summary of securities sold under agreements to
repurchase and their expected maturities as of December 31, 1998:
(in thousands)
---------------
Up to 30 days .......... $ 6,320
30 to 90 days .......... 9,400
Over 90 days ........... 71,400
--------
Total .................. $ 87,120
========
The outstanding amount includes $61,500,000 in callable repurchase
agreements with maturities ranging from five to ten years and call dates of one
to two years. Due to the call provisions, expected maturities could differ from
contractual maturities.
F-14
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
7. Borrowed Funds -- (Continued)
The FHLB advances as of December 31, 1998 mature as follows:
(in thousands)
---------------
Within one year ................... $ 1,000
Over two to three years ........... 784
Over three to four years .......... 32
Over five years ................... 87,500
--------
Total ............................. $ 89,316
========
The outstanding amount includes $83,500,000 in callable advances with ten
year maturities and call dates of one to five years. Due to the call
provisions, expected maturities could differ from contractual maturities.
Interest expense on borrowed funds is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase ......... $5,851 $3,627 $3,792
FHLB advances .......................................... 2,816 1,081 1,116
Other .................................................. 89 53 59
------ ------ ------
Total .................................................. $8,756 $4,761 $4,967
====== ====== ======
</TABLE>
8. Company-obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust Holding solely junior Subordinated Debentures of the
Company (Trust Preferred Securities)
On October 16, 1997, Yardville Capital Trust (the Trust), a statutory
business trust, and a wholly owned subsidiary of Yardville National Bancorp,
issued $11,500,000 of 9.25% Trust Preferred Securities to the public and
$356,000 of 9.25% Common Securities to Yardville National Bancorp. Proceeds
from the issuance of the Trust Preferred Securities were immediately used by
the Trust to purchase $11,856,000 of 9.25% Subordinated Debentures maturing
November 1, 2027 from Yardville National Bancorp. The Trust exists for the sole
purpose of issuing Trust Preferred Securities and investing the proceeds into
Subordinated Debentures of Yardville National Bancorp. These Subordinated
Debentures constitute the sole assets of the Trust. These Subordinated
Debentures are redeemable in whole or part prior to maturity after November 1,
2002. The Trust is obligated to distribute all proceeds of a redemption,
whether voluntary or upon maturity, to holders of the Trust Preferred
Securities. Yardville National Bancorp's obligation with respect to the Trust
Preferred Securities and the Subordinated Debentures, when taken together,
provide a full and unconditional guarantee on a subordinated basis by Yardville
National Bancorp of the Trust's obligations to pay amounts when due on the
Trust Preferred Securities.
F-15
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
9. Income Taxes
Income taxes reflected in the consolidated financial statements for 1998,
1997, and 1996 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Statements of Income:
Federal:
Current .............................................. $ 2,625 $ 2,440 $ 2,281
Deferred ............................................. (358) (294) (521)
State:
Current .............................................. 512 675 560
Deferred ............................................. (140) (81) (142)
------- ------- -------
Total tax expense ..................................... $ 2,639 $ 2,740 $ 2,178
======= ======= =======
Statements of Condition:
Deferred tax on securities available for sale ......... $ (236) $ 190 $ (178)
======= ======= =======
</TABLE>
Deferred income taxes reflect the impact of "temporary differences"
between amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. Temporary differences which give rise to
a significant portion of deferred tax assets and liabilities for 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan fees ....................................... $ 58 $ 38
Allowance for loan losses ................................ 2,462 1,965
Writedown of basis of O.R.E. properties .................. 118 22
Deferred income .......................................... 16 2
Nonaccrual loans ......................................... -- 40
Net state operating loss carryforwards ................... 52 --
Unrealized loss on securities available for sale ......... 152 --
Deferred compensation .................................... 474 458
------- -------
Total deferred tax assets ................................ $ 3,332 $ 2,525
------- -------
Valuation allowance ...................................... (78) (78)
------- -------
Deferred tax liabilities:
Unrealized gain on securities available for sale ......... -- (83)
Deferred income .......................................... (168) --
Unamortized discount accretion ........................... (75) (71)
Depreciation ............................................. (166) (195)
Other .................................................... (13) --
------- -------
Net deferred tax assets .................................. $ 2,832 $ 2,098
======= =======
</TABLE>
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.
F-16
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
9. Income Taxes -- (Continued)
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:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Income tax expense at statutory rate ............... $ 2,795 $ 2,634 $ 2,105
State income taxes, net of Federal benefit ......... 245 392 276
Changes in taxes resulting from:
Tax exempt interest ............................... (239) (155) (122)
Tax exempt income ................................. (227) (184) (142)
Non-deductible expenses ........................... 65 53 61
------- ------- -------
Total .............................................. $ 2,639 $ 2,740 $ 2,178
======= ======= =======
</TABLE>
10. Benefit Plans
Retirement Savings Plan
The Corporation has a 401(K) plan which covers substantially all employees
with one or more years of service. The plan permits all eligible employees to
make basic contributions to the plan up to 12% of base compensation. Under the
plan, the Corporation provided a matching contribution of 50% in 1998, 1997,
and 1996 up to 6% of base compensation. Employer contributions to the plan
amounted to $107,000 in 1998, $93,000 in 1997, and $83,000 in 1996.
Postretirement Benefits
In 1997, the Corporation modified its postretirement benefits plan. The
Corporation provides additional postretirement benefits, namely life and health
insurance, to retired employees over the age of 62 who have completed 15 years
of service. The plan calls for retirees to contribute a portion of the cost of
providing these benefits in relation to years of service.
The cost of retiree health and life insurance benefits is recognized over
the employees' period of service. There were no periodic postretirement benefit
costs under SFAS 106 in 1998. Those costs were $64,000 and $205,000 in 1997 and
1996, respectively. The actuarial present value of benefit obligations was
$604,000 in 1998, and $568,000 in 1997.
Stock Option Plans
The Corporation maintains stock option plans for both officers and
directors. The purpose of these plans is to assist the Corporation in
attracting and retaining highly qualified officers and directors and to provide
such with incentive to contribute to the growth and development of the
Corporation.
These options are intended to be either incentive or non-qualified stock
options. Options have been granted to purchase common stock at the fair value
of the stock at the date of grant. A committee appointed by the Board of
Directors sets the vesting schedule and terms of stock options.
F-17
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
10. Benefit Plans -- (Continued)
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
--------- -----------------
<S> <C> <C>
Balance, December 31, 1995 ......................... 333,202 $ 4.26
------- --------
Shares:
Granted ........................................... 6,560 7.68
Exercised ......................................... 130,958 4.30
Expired ........................................... 7,403 5.00
------- --------
Balance, December 31, 1996 ......................... 201,401 $ 4.32
------- --------
Shares:
Granted ........................................... 29,930 10.64
Exercised ......................................... 99,702 4.64
Expired ........................................... 1,322 4.95
------- --------
Balance, December 31, 1997 ......................... 130,307 $ 5.52
------- --------
Shares:
Granted ........................................... 419,288 17.20
Exercised ......................................... 57,575 5.03
Expired ........................................... 1,529 8.43
------- --------
Balance, December 31, 1998 ......................... 490,491 $ 15.55
======= ========
Shares exercisable as of December 31, 1998 ......... 64,862 $ 5.38
</TABLE>
The fair value of options granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997, and 1996, respectively: (1) an
expected annual dividend rate of $0.32, $0.28, and $0.23. (2) risk free rate of
5.6%, 5.5%, and 5.2%. (3) expected life of approximately 5 years in 1998, and 1
year for 1997 and 1996.
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.
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 1998,
1997, and 1996 net income would have been reduced to the pro forma amounts
indicated below:
1998 1997 1996
------------ ------------ ------------
(in thousands)
Net income:
As reported ......... $ 5,582 $ 5,006 $ 4,026
Pro forma ........... 3,567 4,976 4,021
Earnings per share:
Basic:
As reported ......... $ 1.11 $ 0.99 $ 0.82
Pro forma ........... 0.71 0.99 0.81
Diluted:
As reported ......... $ 1.10 $ 0.98 $ 0.80
Pro forma ........... 0.71 0.97 0.80
Benefit Plans. The Corporation has a salary continuation plan for key
executives and a director deferred compensation plan for its board members. The
plans provide for yearly retirement benefits to be paid over a specified
period. The present value of the benefits accrued under these plans as of
December 31, 1998 and 1997
F-18
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
10. Benefit Plans -- (Continued)
is approximately $493,000 and $342,000, respectively, and is included in other
liabilities in the accompanying consolidated statements of condition.
Compensation expense of approximately $138,000, $120,000, and $120,000 is
included in the accompanying consolidated statements of income for the years
ended December 31, 1998, 1997, and 1996, 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 $9,595,000 and $5,797,000 as of
December 31, 1998 and 1997, respectively, and are included in other assets in
the accompanying consolidated statements of condition.
The Corporation implemented an officer group term replacement plan for
divisional officers in 1996. This plan replaces group term life insurance for
these officers. 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 $4,192,000 and $3,441,000 as of December 31, 1998 and
1997, and is included in other assets in the accompanying consolidated
statements of condition.
11. Common Stock
On October 28, 1997, the Corporation's Board of Directors authorized the
repurchase of up to 172,000 shares in aggregate of the Corporation's common
stock. There were no shares repurchased in 1997. At various times in 1998, the
Corporation repurchased shares totaling 170,300 at an average price of $17.67.
12. Other Non-Interest Expense
Other non-interest expense included the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Audit and examination fees ....................... $ 306 $ 227 $ 216
Attorneys' fees .................................. 379 373 153
O.R.E. expenses .................................. 573 378 163
Outside services and processing .................. 328 332 325
Stationery and supplies .......................... 403 347 388
Communication and postage ........................ 434 373 354
FDIC insurance premium ........................... 53 47 1
Insurance (other) ................................ 101 127 102
Marketing ........................................ 747 575 522
Amortization of trust preferred expenses ......... 160 27 --
Other ............................................ 1,369 1,005 1,011
------ ------ ------
Total ......................................... $4,853 $3,811 $3,235
====== ====== ======
</TABLE>
13. 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
F-19
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
13. Other Commitments and Contingent Liabilities -- (Continued)
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, 1998 and 1997 for commitments to extend credit were $114,077,000
and $77,943,000, respectively. For standby letters of credit, the contract
amounts were $8,208,000 and $6,501,000, respectively.
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 four of its
correspondent banks. There were approximately $28,700,000 in lines of credit
available as of December 31, 1998. The Corporation maintains repurchase
agreement lines of credit with two brokerage firms. There were approximately
$108,230,000 in lines available at December 31, 1998.
The Corporation leases its banking offices in Ewing Township, East Windsor
Township, Trenton, Hamilton Square, Pennington, and its Telephone Help Center.
In 1998, the Corporation began paying rent on a future branch site in Newtown
Township, Pennsylvania. In addition, the Corporation signed a lease for a new
corporate headquarters building to be located in Hamilton Township. It is
anticipated that rental payments will begin in the third quarter of 1999. Total
lease rental expense was $298,234, $236,912 and $186,305 for the years ended
December 31, 1998, 1997, and 1996, respectively. Minimum rentals under the
terms of these leases are approximately $621,000 in 1999, $1,100,000 in 2000,
and $1,200,000 for years 2001 through 2003.
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.
14. 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, 1998, that
the Bank meets all capital adequacy requirements to which it is subject.
F-20
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
14. Regulatory Matters -- (Continued)
The following table presents the Corporation's and Bank's actual capital
amounts and ratios:
<TABLE>
<CAPTION>
Per Regulatory Guidelines
--------------------------------------------------------------------------
Actual Minimum "Well Capitalized"
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Corporation
Total capital (to risk-weighted assets) .......... $59,151 11.2% $42,394 8.0% $52,993 10.0%
Tier I capital (to risk-weighted assets) ......... 52,531 9.9 21,197 4.0 31,796 6.0
Tier I capital (to average assets) ............... 52,531 7.7 27,367 4.0 34,208 5.0
Bank ..............................................
Total capital (to risk-weighted assets) .......... $57,590 10.8% $42,500 8.0% $53,125 10.0%
Tier I capital (to risk-weighted assets) ......... 50,948 9.6 21,250 4.0 31,875 6.0
Tier I capital (to average assets) ............... 50,948 8.5 27,251 4.0 34,064 5.0
As of December 31, 1997:
Corporation
Total capital (to risk-weighted assets) .......... $56,341 13.5% $33,414 8.0% $41,767 10.0%
Tier I capital (to risk-weighted assets) ......... 51,116 12.2 16,707 4.0 25,060 6.0
Tier I capital (to average assets) ............... 51,116 9.5 21,465 4.0 26,832 5.0
Bank ..............................................
Total capital (to risk-weighted assets) .......... $51,675 12.5% $33,114 8.0% $41,393 10.0%
Tier I capital (to risk-weighted assets) ......... 46,496 11.2 16,557 4.0 24,836 6.0
Tier I capital (to average assets) ............... 46,496 8.7 21,279 4.0 26,598 5.0
</TABLE>
As of December 31, 1998, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
Permission from the Comptroller of the Currency is required if the total
of dividends declared in a calendar year exceeds the total of the Bank's net
profits, as defined by the Comptroller, for that year, combined with its
retained net profits of the two preceding years. The retained net profits of
the Bank available for dividends are approximately $7,952,000 as of December
31, 1998.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "FDIC Improve-ment 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.
F-21
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
15. 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 fair value of 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, interest bearing demand deposits, money market, and
savings deposits, is considered to be equal to the amount payable on demand.
The fair value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowed Funds:
For securities sold under agreements to repurchase and FHLB advances, fair
value was based on rates currently available to the Corporation for agreements
with similar terms and remaining maturities. For other borrowed funds, the
carrying amount was considered to be a reasonable estimate of fair values.
F-22
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
15. Fair Value of Financial Instruments -- (Continued)
The estimated fair values of the Corporation's financial instruments are
as follows:
December 31, 1998
------------------------
Carrying Fair
Value Value
---------- -----------
(in thousands)
Financial Assets:
Cash and cash equivalents .................... $ 16,526 $ 16,526
Interest bearing deposits with banks ......... 733 733
Securities available for sale ................ 185,577 185,577
Investment securities ........................ 36,311 36,203
Loans, net ................................... 484,881 485,944
Financial Liabilities:
Deposits ..................................... 519,643 521,421
Borrowed funds ............................... 177,888 181,711
Trust preferred securities ................... 11,500 12,219
December 31, 1997
------------------------
Carrying Fair
Value Value
---------- -----------
(in thousands)
Financial Assets:
Cash and cash equivalents .................... $ 20,423 $ 20,423
Interest bearing deposits with banks ......... 2,219 2,219
Securities available for sale ................ 159,724 159,724
Investment securities ........................ 26,912 26,848
Loans, net ................................... 380,181 383,200
Financial Liabilities:
Deposits ..................................... 422,944 423,082
Borrowed funds ............................... 134,316 134,248
Trust preferred securities ................... 11,500 12,075
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, and as the fair value for
these financial instruments was not material, these disclosures are not
included above.
Limitations:
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
F-23
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
15. Fair Value of Financial Instruments -- (Continued)
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.
16. Parent Corporation Information
The condensed financial statements of the parent company only are
presented below:
YARDVILLE NATIONAL BANCORP (Parent Corporation)
Condensed Statements of Condition
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C> <C>
Assets:
Cash ............................................... $ 200 $ 815
Securities available for sale ...................... 105 3,297
Investment in subsidiaries ......................... 51,020 46,971
Other assets ....................................... 1,296 527
------- -------
Total Assets ....................................... $52,621 $51,610
======= =======
Liabilities and Stockholders' Equity:
Other liabilities .................................. $ 9 $ 9
Subordinated debentures ............................ 11,856 11,856
Stockholders' equity ............................... 40,756 39,745
------- -------
Total Liabilities and Stockholders' Equity ......... $52,621 $51,610
======= =======
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Operating Income:
Dividends from subsidiary ............................. $1,982 $1,765 $1,083
Interest income ....................................... 42 -- --
Other income .......................................... 63 -- --
------ ------ ------
Total Operating Income ................................ 2,087 1,765 1,083
------ ------ ------
Operating Expense:
Interest expense ...................................... 1,064 224 --
Other expense ......................................... 340 144 114
------ ------ ------
Total Operating Expense ............................... 1,404 368 114
------ ------ ------
Income before income taxes and equity in
undistributed income of subsidiaries .................. 683 1,397 969
Federal income tax benefit ............................. (441) (114) (40)
------ ------ ------
Income before equity in undistributed income of
subsidiaries .......................................... 1,124 1,511 1,009
Equity in undistributed income of subsidiaries ......... 4,458 3,495 3,017
------ ------ ------
Net Income ............................................ $5,582 $5,006 $4,026
====== ====== ======
</TABLE>
F-24
<PAGE>
Notes to Consolidated Financial Statements Years ended
December 31, 1998, 1997, and 1996 -- (Continued)
16. Parent Corporation Information -- (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income Adjustments: .............................. $ 5,582 $ 5,006 $ 4,026
Increase in other assets ............................ (769) (448) (40)
Equity in undistributed income of subsidiaries ...... (4,458) (3,495) (3,017)
Increase in other liabilities ....................... -- 9 --
-------- --------- --------
Net Cash Provided by Operating Activities ............ 355 1,072 969
-------- --------- --------
Cash Flows from Investing Activities:
Purchases of securities available for sale .......... -- (3,297) --
Proceeds from sales of securities available for sale 3,192 -- --
Investing in subsidiaries ........................... 1 (8,356) (749)
-------- --------- --------
Net Cash Provided (Used) by Investing Activities ..... 3,193 (11,653) (749)
-------- --------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of subordinated debentures -- 11,856 --
Proceeds from shares issued ......................... 294 457 837
Purchase of treasury shares ......................... (3,008) -- --
Dividends paid ...................................... (1,449) (1,233) (1,083)
-------- --------- --------
Net Cash (Used) Provided by Financing Activities ..... (4,163) 11,080 (246)
-------- --------- --------
Net (decrease) increase in cash ...................... (615) 499 (26)
Cash as of beginning of year ......................... 815 316 342
-------- --------- --------
Cash as of end of year ............................... $ 200 $ 815 $ 316
======== ========= ========
</TABLE>
F-25
<PAGE>
================================================================================
1,400,000 Shares
[GRAPHIC OMITTED]
Common Stock
----------------
PROSPECTUS
----------------
Legg Mason Wood Walker
Incorporated
Advest, Inc.
May 13, 1999
================================================================================
