<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For transition period from
Commission File Number: 0-26086
YARDVILLE NATIONAL BANCORP
--------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2670267
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3111 Quakerbridge Road, Mercerville, New Jersey 08619
-----------------------------------------------------
(Address of principal executive offices)
(609) 585-5100
--------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed from last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 10, 1999
Common Stock, no par value 5,303,914
- -------------------------- ----------------------------
Class Number of shares outstanding
1
<PAGE>
INDEX
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION PAGE NO.
- --------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Statements of Condition
March 31, 1999 and December 31, 1998
Consolidated Statements of Income
Three months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART 2 OTHER INFORMATION
- --------------------------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit 27.1 Financial Data Schedule
2
<PAGE>
Item 1. Financial Statements
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
- ----------------------------------------------------------------------------------------------------------
(in thousands, except for share data) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 14,640 16,246
Federal funds sold 13,810 280
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents 28,450 16,526
- ----------------------------------------------------------------------------------------------------------
Interest bearing deposits with banks 1,784 733
Securities available for sale 209,077 185,577
Investment securities (market value of $80,707 in 1999 and
$36,203 in 1998) 81,721 36,111
Loans 544,255 491,649
Less: Allowance for loan losses (7,172) (6,768)
- ----------------------------------------------------------------------------------------------------------
Loans, net 537,083 484,881
Bank premises and equipment, net 6,638 6,251
Other real estate 4,857 4,957
Other assets 25,239 22,630
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 894,849 $ 757,666
- ----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing $ 74,350 $ 75,426
Interest bearing 529,315 444,217
- ----------------------------------------------------------------------------------------------------------
Total Deposits 603,665 519,643
- ----------------------------------------------------------------------------------------------------------
Borrowed funds
Securities sold under agreements to repurchase 117,927 87,120
Federal Home Loan Bank advances 109,311 89,316
Obligation to Employee Stock Ownership Plan (ES0P) 1,900 --
Other 700 1,452
- ----------------------------------------------------------------------------------------------------------
Total Borrowed Funds 229,838 177,888
Company - obligated Mandatorily Redeemable Trust Preferred
Securities of Subsidiary Trust holding solely junior
Subordinated Debentures of the Company 11,500 11,500
Other liabilities 8,456 7,879
- ----------------------------------------------------------------------------------------------------------
Total Liabilities $ 853,459 $ 716,910
- ----------------------------------------------------------------------------------------------------------
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 5,303,914 in 1999
and 5,138,474 shares in 1998 22,417 20,364
Surplus 2,205 2,205
Undivided profits 22,622 21,479
Treasury stock, at cost, 172,000 shares in 1999 and
170,300 shares in 1998 (3,030) (3,008)
Unallocated ESOP shares (1,900) --
Accumulated other comprehensive income (924) (284)
- ----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 41,390 40,756
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 894,849 $ 757,666
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
3
<PAGE>
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
- -----------------------------------------------------------------------------------------------
(in thousands, except for share data) 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $10,711 $ 8,748
Interest on deposits with banks 19 55
Interest on securities available for sale 2,853 2,440
Interest on investment securities:
Taxable 597 277
Exempt from Federal income tax 258 102
Interest on Federal funds sold 160 69
- -----------------------------------------------------------------------------------------------
Total Interest Income 14,598 11,691
- -----------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on savings account deposits 1,095 1,255
Interest on certificates of deposit of $100,000 or more 491 301
Interest on other time deposits 3,801 2,673
Interest on borrowed funds 2,528 1,917
Interest on trust preferred securities 266 266
- -----------------------------------------------------------------------------------------------
Total Interest Expense 8,181 6,412
- -----------------------------------------------------------------------------------------------
Net Interest Income 6,417 5,279
Less provision for loan losses 650 400
- -----------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 5,767 4,879
- -----------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges on deposit accounts 308 306
Gains on sales of mortgages, net 15 17
Securities gains, net 15 9
Other non-interest income 390 356
- -----------------------------------------------------------------------------------------------
Total Non-Interest Income 728 688
- -----------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,291 1,943
Occupancy expense, net 313 233
Equipment expense 362 296
Other non-interest expense 1,379 1,032
- -----------------------------------------------------------------------------------------------
Total Non-Interest Expense 4,345 3,504
- -----------------------------------------------------------------------------------------------
Income before income tax expense 2,150 2,063
Income tax expense 596 729
- -----------------------------------------------------------------------------------------------
Net Income $ 1,554 $ 1,334
- -----------------------------------------------------------------------------------------------
EARNINGS PER SHARE:
Basic $ 0.31 $ 0.26
Diluted $ 0.31 $ 0.26
- -----------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 5,003 5,073
Diluted 5,030 5,117
- -----------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
4
<PAGE>
Yardville National Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 30,
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,554 $ 1,334
Adjustments:
Provision for loan losses 650 400
Depreciation 269 226
Amortization and accretion 196 144
Gains on sales of securities available for sale (15) (9)
Loss on sales of other real estate 1 1
Writedown of other real estate 250 3
Increase in other assets (2,266) (2,975)
Increase in other liabilities 577 51
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 1,216 (825)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net increase in interest bearing deposits with banks (1,051) (1,903)
Purchase of securities available for sale (45,771) (22,287)
Maturities, calls, and paydowns of securities available for sale 13,106 18,021
Proceeds from sales of securities available for sale 8,027 12,161
Proceeds from maturities and paydowns of investment
securities 1,036 1,278
Purchase of investment securities (46,673) (500)
Net increase in loans (53,377) (23,819)
Expenditures for bank premises and equipment (656) (439)
Proceeds from sale of other real estate 374 83
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (124,985) (17,405)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase in non-interest bearing demand,
money market, and savings deposits 122 1,557
Net increase in certificates of deposit 83,900 27,275
Net increase in borrowed funds 51,950 11,330
Proceeds from issuance of common stock 2,053 178
Increase in unallocated ESOP shares (1,900) --
Treasury shares acquired (22) (723)
Dividends paid (410) (347)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 135,693 39,270
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 11,924 21,040
Cash and cash equivalents as of beginning of period 16,526 20,423
- -----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents as of End of Period $ 28,450 $ 41,463
- -----------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during period for:
Interest expense 8,503 6,551
Income taxes 301 1,309
- -----------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Non-cash Investing and Financing
Activities:
Transfers to other real estate from loans, net of charge offs 525 407
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
5
<PAGE>
Yardville National Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended March 31, 1999
(Unaudited)
1. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation:
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenue and expenses for the period. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near-term relate to the determination
of the allowance for loan losses and the valuation reserve of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and other
real estate, management obtains independent appraisals for significant
properties.
The consolidated financial data as of and for the three months ended March 31,
1999 includes, in the opinion of management, all adjustments, consisting of only
normal recurring accruals necessary for a fair presentation of such periods. The
consolidated financial data for the interim periods presented is not necessarily
indicative of the result of operations that might be expected for the entire
year ending December 31, 1999.
Consolidation
The consolidated financial statements include the accounts of Yardville National
Bancorp (the "Holding Company") and its subsidiaries, Yardville Capital Trust
(the "Trust") and The Yardville National Bank (the "Bank"), and the Bank's
wholly owned subsidiaries, Yardville National Investment Corporation, Brendan
Inc., Nancy Beth Inc., Jim Mary Inc., Yardville Real Estate Holding Co., Inc.,
YNB Financial Services, Inc., and YNB Realty Inc., (collectively, "YNB"). All
significant inter-company accounts and transactions have been eliminated.
Brendan Inc., Nancy Beth Inc. and Jim Mary Inc. are utilized for the control and
disposal of other real estate properties. Yardville Real Estate Holding Co.,
Inc. is utilized to hold Bank branch properties. YNB Financial Services, Inc.,
provides alternative investment services and YNB Realty, Inc. a real estate
investment trust, and is utilized to more effectively manage a portion of the
Bank's real estate related loans.
Allowance for Loan Losses
For financial reporting purposes, the provision for loan losses charged to
operating expense is determined by management and based upon a periodic review
of the loan portfolio, past experience, the economy, and other factors that may
affect a borrower's ability to repay the loan. This provision is based on
management's estimates, and actual losses may vary from these
6
<PAGE>
estimates. These estimates are reviewed and adjustments, as they become
necessary, are reported in the periods in which they become known. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions, particularly
in New Jersey. In addition, various regulatory agencies, as an integral part of
their examination process periodically review the Bank's allowance for loan
losses and the valuation of other real estate. Such agencies may require the
Bank to recognize additions to the allowance or adjustments to the carrying
value of other real estate based on their judgement about information available
at the time of their examination.
Company - Obligated Mandatorily Redeemable Trust Preferred Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company
(Trust Preferred Securities)
On October 16, 1997, Yardville Capital Trust, a statutory business trust and a
wholly owned subsidiary of the Holding Company, issued $11,500,000 of 9.25%
Trust Preferred Securities to the public and $356,000 of 9.25% Common Securities
to the Holding Company. Proceeds from the issuance of the Trust Preferred
Securities were immediately used by the Trust to purchase $11,856,000 of 9.25%
Subordinated Debentures maturing November 1, 2027 from the Holding Company. The
Trust exists for the sole purpose of issuing Trust Preferred Securities and
investing the proceeds into Subordinated Debentures of the Holding Company.
These Subordinated Debentures constitute the sole assets of the Trust.
2. Earnings Per Share
Weighted average shares for the basic net income per share calculation for the
three months ended March 31, 1999 and 1998 were 5,003,000 and 5,073,000
respectively. For the diluted net income per share computation, potential common
stock of 27,000 and 44,000 are included for the three months ended March 31,
1999 and 1998, respectively.
7
<PAGE>
3. Comprehensive Income
Listed below is the statement of comprehensive income for March 31,
1999 and 1998.
<TABLE>
<CAPTION>
Comprehensive Income Three Months Ended March 31,
--------------------------------------------------------------------------------------------
(in thousands) 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $ 1,554 $ 1,334
--------------------------------------------------------------------------------------------
Other comprehensive income
Net change in unrealized loss for the
period, net of tax (640) (249)
Reclassification of realized net gain on sale of
securities available for sale, net of tax 10 6
--------------------------------------------------------------------------------------------
Holding loss arising during the period,
net of tax and reclassification (630) (243)
Reclassification adjustment for realized net
loss, net of tax (10) (6)
--------------------------------------------------------------------------------------------
Other comprehensive income for the period net of tax (640) (249)
--------------------------------------------------------------------------------------------
Total comprehensive income $ 914 $ 1,085
--------------------------------------------------------------------------------------------
</TABLE>
Employee Stock Ownership Plan
The Bank established an Employee Stock Ownership Plan and related trust ("ESOP")
for eligible employees. The ESOP is a tax-qualified plan subject to the
requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Employees with twelve months of employment with the bank and who have worked at
least 1,000 hours are eligible to participate. The ESOP borrowed $2,000,000 from
an unaffiliated financial institution and purchased 155,340 common shares.
Shares purchased by the ESOP are held in a suspense account for allocation among
participants as the loan is repaid. All shares in the plan are accounted for
under SOP 93-6.
Compensation cost is recognized based on the fair value of the stock when it is
committed to be released. The fair value of unearned shares at March 31, 1999 is
$1,922,333. Compensation expense amounted to $88,000 for the three months ended
March 31, 1999.
Unallocated shares are deducted from common shares outstanding for earnings per
share purposes with shares which are committed to be released during the year
added back into weighted average shares outstanding.
8
<PAGE>
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This financial review presents management's discussion and analysis of the
financial condition and results of operation. It should be read in conjunction
with the 1998 Annual Report to stockholders and Form 10-K for the fiscal year
ended December 31, 1998 as well as with the unaudited consolidated financial
statements and the accompanying notes in this Form 10-Q.
This Form 10-Q report contains express and implied statements relating to the
future financial condition, results of operations, plans, objectives,
performance, and business of YNB, which are considered forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These include statements that relate to, among other things,
profitability, liquidity, loan loss reserve adequacy, plans for growth, interest
rate sensitivity, market risk, and year 2000 issues, and financial and other
goals. Actual results may differ materially from those expected or implied as a
result of certain risks and uncertainties, including, but not limited to,
changes in economic conditions, interest rate fluctuations, continued levels of
loan quality and origination volume, successful implementation of year 2000
technology changes by YNB, its vendors and suppliers, competitive product and
pricing pressures within YNB's markets, continued relationships with major
customers including sources for loans and deposits, personal and corporate
customers' bankruptcies, legal and regulatory barriers and structure, inflation,
and technological changes, as well as other risks and uncertainties detailed
from time to time in the filings of YNB with the Securities and Exchange
Commission.
Financial Condition
On May 12, 1999 the Holding Company announced the pricing of 1,400,000 shares of
its common stock in a underwritten secondary public offering. The common stock
was offered to the public at a price of $12.00 per share and will generate gross
proceeds of approximately $16.8 million.
Assets
Total consolidated assets at March 31, 1999 were $894,849,000 an increase of
$137,183,000 or 18.1% compared to $757,666,000 at December 31, 1998. The growth
in YNB's asset base, during the first three months of 1999, was primarily due to
increases in loans (primarily commercial), available for sale securities, and
investment securities. The increase in the loan portfolio was the product of an
ongoing consistent strategy to improve the profitability of the organization
through relationship banking. The pace of consolidation in YNB's market place
continues at a rapid rate. Management anticipates continued loan opportunities
due to this consolidation. YNB's asset base includes securities of approximately
$191,800,000 purchased utilizing primarily repurchase agreements and Federal
Home Loan Bank advances (Investment Growth Strategy). The Investment Growth
Strategy at March 31, 1999 increased $49,600,000 or 34.9% from the reported
total of $142,200,000 at December 31, 1998. The primary goals of the Investment
Growth Strategy, improving return on equity and earnings per share continue to
be achieved.
9
<PAGE>
Cash and due from banks
Cash and due from bank balances decreased $1,606,000 to $14,640,000 at March 31,
1999 when compared to the $16,246,000 balance at December 31, 1998. In April of
1998, YNB began a reserve requirement reduction program. This program allows the
Bank to reduce the amount of demand and interest bearing demand balances subject
to reserve requirements. Prior to starting the program, the Bank maintained
non-interest bearing reserve balances at the Federal Reserve Bank of
Philadelphia of between $3,000,000 and $4,000,000. With the implementation of
the program, the Bank has been able to reduce to zero the amount of funds
required to be maintained at the Federal Reserve Bank of Philadelphia, for
reserve requirements. These funds are now available to be invested in earning
assets.
Federal funds sold
At March 31, 1999 Federal funds sold totaled $13,810,000 compared to $280,000 at
December 31, 1998. Average Federal funds sold for the first three months was
$14,000,000 compared to $4,992,000 for the same period in 1998. The higher
amount of Federal funds sold at March 31, 1999 was due to increased certificate
of deposit (CD) balances raised to fund loan growth and effectively manage
liquidity. Management remains focused on maintaining adequate liquidity to fund
loan growth and to meet daily liquidity requirements.
Securities
The following tables present the amortized cost and market values of YNB's
securities portfolios as of March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Available For Sale Securities March 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agency securities $ 82,506 $ 81,871 $ 55,051 $ 55,039
Mortgage-backed securities 115,901 115,183 120,410 119,986
Corporate obligations 2,867 2,799 2,867 2,867
All other securities 9,224 9,224 7,685 7,685
- ----------------------------------------------------------------------------------------------------------------
Total $210,498 $209,077 $186,013 $185,577
- ----------------------------------------------------------------------------------------------------------------
Investment Securities March 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Amortized Market Amortized Market
(in thousands) Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
Obligations of U.S. government
agencies $ 48,184 $ 47,226 $ 4,994 $ 4,935
Obligations of state and
political subdivisions 24,235 24,223 20,773 20,982
Mortgage-backed securities 9,302 9,258 10,344 10,286
- ----------------------------------------------------------------------------------------------------------------
Total $ 81,721 $ 80,707 $ 36,111 $ 36,203
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Securities represented 32.5% of total assets at March 31, 1999 and 29.3% at
December 31, 1998. Total securities increased $69,110,000 or 31.2% at March 31,
1999 to $290,798,000 compared to $221,688,000 at year-end 1998. The available
for sale portfolio represents 71.9% of the total security holdings of YNB at
March 31, 1999, compared to 83.7% at year-end 1998.
The net unrealized loss on available for sale securities as of March 31, 1999
was $1,421,000, compared to a net unrealized loss of $436,000 at December 31,
1998. Net unrealized loss, net of tax effect, totaling $924,000 was reported in
Accumulated Other Comprehensive Income in Stockholders' Equity at March 31,
1999, compared to a net unrealized loss of $284,000 reported at December 31,
1998. The increase in the unrealized loss on available for sale securities is
primarily due to the rise in interest rates from December 31, 1998 to March 31,
1999 and the increased size of the available for sale securities portfolio.
Securities available for sale increased $23,500,000 or 12.7% at March 31, 1999
when compared to the December 31, 1998 balance of $185,577,000. The largest area
of increase was in U.S. Treasury and U.S. agency bonds, which increased
$26,832,000 and are the major factor for the increase in securities available
for sale. The increase was primarily due to the purchase of U.S. Agency callable
bonds associated with the Investment Growth Strategy and shorter-term callable
bonds purchased to enhance liquidity. Offsetting the increase discussed above
were paydowns on mortgage-backed securities, which decreased $4,803,000.
The Investment Growth Strategy increased $49,599,000 over the year-end 1998
level. The growth was in callable bonds, which increased $55,190,000. Offsetting
this increase were declines in fixed and floating rate mortgage-backed
securities of $2,574,000 and $3,037,000, respectively.
Investment securities increased $45,610,000 or 126.3% to $81,721,000 at March
31, 1999 from $36,111,000 at December 31, 1998. The increase was due to a
$43,190,000 increase in U.S. agency callable bonds primarily related to the
Investment Growth Strategy and a $3,462,000 increase in tax free municipal
bonds. Offsetting these increases was a $1,042,000 reduction in mortgage-backed
securities reflecting paydowns.
Loans
Total loans, net of unearned income, increased $52,606,000 or 10.7% at March 31,
1999 to $544,255,000 from $491,649,000 at December 31, 1998. YNB's loan
portfolio represented 60.8% of total assets at March 31, 1999 compared to 64.9%
at December 31, 1998. YNB's lending focus continues to be on commercial and
industrial loans, and commercial real estate loans. The consolidation in YNB's
market place, and management's philosophy of relationship banking are key
factors in continued strong loan growth. Strong competition from both bank and
nonbank competitors coupled with a falling prime rate of interest could result
in comparatively lower yields on new and established lending relationships. In
addition, borrowers' concerns over
11
<PAGE>
the economy, real estate prices and interest rates could all be factors in
future loan growth levels. Continued profitable loan growth is a key factor in
meeting earnings growth goals.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(in thousands) 3/31/99 12/31/98 Change % change
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate - mortgage
Commercial $168,511 $166,725 $ 1,786 1.1%
- -------------------------------------------------------------------------------------------
Residential 101,758 93,540 8,218 8.8
- -------------------------------------------------------------------------------------------
Home equity 23,922 23,474 448 1.9
- -------------------------------------------------------------------------------------------
Commercial and industrial 159,627 133,263 26,364 19.8
- -------------------------------------------------------------------------------------------
Real estate - construction 53,860 38,386 15,474 40.3
- -------------------------------------------------------------------------------------------
Consumer 25,690 24,531 1,159 4.7
- -------------------------------------------------------------------------------------------
Other loans 10,887 11,730 (843) (7.2)
- -------------------------------------------------------------------------------------------
Total loans $544,255 $491,649 $ 52,606 10.7%
- -------------------------------------------------------------------------------------------
</TABLE>
The table above lists the loan growth by type for the period of December 31,
1998 to March 31, 1999. Commercial and industrial loans had the greatest growth
increasing $26,364,000 in the period and accounting for 50.1% of the total
increase in outstanding loans. Real estate - construction loans had the second
greatest growth increasing $15,747,000 and accounted for 29.4% of the increase
in total loans. All other loan types increased with the exception of Other
Loans, which decreased $843,000. The strong loan growth recorded in the first
quarter of 1999 was the result of the continuing opportunities available to YNB
due to consolidation in the market place. While it is anticipated that loan
growth will continue in 1999, management does not believe that future growth
rates will be at the same level as seen in the first quarter.
Liabilities
The following table provides information concerning YNB' deposit base at March
31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(in thousands) 3/31/99 12/31/98 Change % Change
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest bearing demand
deposits $ 74,350 $ 75,426 $ (1,076) (1.4%)
- -------------------------------------------------------------------------------------------------
Interest bearing demand deposits 51,989 51,672 317 0.6
- -------------------------------------------------------------------------------------------------
Money market deposits 44,918 44,661 257 0.6
- -------------------------------------------------------------------------------------------------
Savings deposits 78,161 77,537 624 0.8
- -------------------------------------------------------------------------------------------------
Certificates of deposit of $100,000
or over 45,649 29,525 16,124 54.6
- -------------------------------------------------------------------------------------------------
Other time deposits 308,598 240,822 67,776 28.1
- -------------------------------------------------------------------------------------------------
Total $603,665 $519,643 $ 84,022 16.2%
- -------------------------------------------------------------------------------------------------
</TABLE>
YNB's deposit base is the principal source of funds supporting interest-earning
assets. Total deposits increased $84,022,000 or 16.2% to $603,665,000 at March
31, 1999 compared to $519,643,000 at December 31, 1998. Certificates of deposit
were competitively priced throughout the first three months of 1999 to fund new
loan growth and improve liquidity. Growth in YNB's deposit base in 1999
continued to be principally in higher costing certificates of deposit, which
account for 99.8% of the increase in deposits. In March of 1998, YNB began
12
<PAGE>
to market its certificates of deposit through a nationwide computer based
service. This service allows YNB to have access to a wider market to raise
needed funding. YNB has raised approximately $65,000,000 from this market with
approximately $40,600,000 raised in the first quarter of 1999.
Noninterest bearing demand deposits decreased $1,076,000 to $74,350,000 when
compared to $75,426,000 at December 31, 1998. This reduction was due to the
normal changes in balances. A more accurate reflection of noninterest deposits
is comparing average balances. For the three months ended March 31, 1999 average
noninterest bearing demand deposits were $71,506,000 an increase of $8,819,000
when compared to the average from the $62,687,000 for the three months ended
March 31, 1998. Modest growth was also reflected in the lower cost funding
sources of interest bearing demand, money market deposits and savings deposits.
However, lower cost deposit growth levels are not adequate to meet current or
projected loan demand. This has resulted in an increased reliance on higher rate
certificates of deposit to provide the required funding. As a result,
certificates of deposit, the most expensive deposit-funding source available to
YNB, increased to 58.7% of total deposits at March 31, 1999 from 52.0% at
December 31, 1998. YNB continues to seek lower cost funding sources. One source
is opening new branches to serve a wider market area. In April 1999, YNB opened
its 11th branch located in Newtown, Bucks County, Pennsylvania, this branch
opens a new market for YNB. Bucks County, Pennsylvania is located directly
across the Delaware River from Mercer County, New Jersey, where all of YNB's
branches are currently located. There are also plans to open a branch in
Burlington County, New Jersey which is located directly south of Mercer County.
In addition, a third new branch is planned in 1999. This branch will be located
in the YNB Corporate headquarters building. The headquarters building is to be
located in Hamilton Township, Mercer County New Jersey. We expect that these new
branches will improve YNB's ability to generate lower cost deposits and create
additional lending opportunities. With the ongoing consolidation in YNB's market
place additional opportunities for new branches in both Pennsylvania and New
Jersey are possible.
Borrowed Funds
Borrowed funds totaled $229,838,000 at March 31, 1999 compared to $177,888,000
at December 31, 1998. Approximately $188,928,000 or 82.2% of borrowed funds at
March 31, 1999 are related to the Investment Growth Strategy. The increase for
the first three months of 1999 was $51,950,000 or 29.2%. The majority of the
increase was in securities sold under agreements to repurchase and Federal Home
Loan Bank advances that increased $30,807,000 and $19,995,000, respectively and
was used to fund the purchase of investment growth strategy assets purchased
during the quarter. Management continues to closely monitor the mix of funding
used to support the Investment Growth Strategy. To reduce the overall interest
rate risk profile of YNB and improve simulation results, YNB has shifted funding
towards shorter term borrowing and away from callable funding. At March 31, 1999
$132,500,000 or 70.1% of the investment growth strategy funding was in callable
funding compared to $76,500,000 or 81.2% at December 31, 1998.
Securities sold under agreement to repurchase totaled $117,927,000 at March 31,
1999 compared to $87,120,000 at December 31, 1998. $61,500,000 or 52.2% of the
repurchase agreements.
13
<PAGE>
outstanding at March 31, 1999 were callable compared to $61,500,000 or 70.6% at
December 31, 1998. Callable repurchase agreements have terms of five to ten
years and call dates of one year. All of the growth recorded in repurchase
agreements in the first quarter were in repurchase agreements with terms of less
than one year.
YNB had Federal Home Loan Bank of New York (FHLB) advances outstanding of
$109,311,000 at March 31, 1999 compared to $89,316,000 at December 31, 1998. YNB
continues to utilize callable FHLB advances. At March 31, 1999 callable advances
totaled $103,500,000 or 94.7% of advances outstanding compared to $83,500,000 or
93.4% at December 31, 1998. Callable FHLB advances have terms of ten years and
are callable after periods ranging from one to five years.
The callable FHLB Advances and repurchase agreements have allowed YNB to lower
its borrowing costs, while at the same time extending the maturity of
borrowings. In the event that rates rise, the callable borrowings will be
called. In the event of falling interest rates, callable borrowings will not be
called and could remain outstanding until maturity.
Borrowed funds included $1,900,000 related to Yardville National Bank's ESOP.
The ESOP purchased 155,340 shares of common stock of the Holding Company with a
loan from a nonaffiliated financial institution. The financing is for a term of
five years with an interest rate of 7.00%. The interest rate is fixed for the
period of the loan and the loan will be repaid in equal monthly installments
over the term of the loan. The shares purchased by the ESOP were used as
collateral for the loan. The Holding Company guarantees the repayment of the
loan.
YNB has the ability to borrow up to $32,684,000 from the FHLB through its line
of credit program, subject to collateral requirements. In addition, YNB is
eligible to borrow up to 30% of assets under the FHLB advance program subject to
FHLB stock requirements, collateral requirements and other restrictions. YNB
also maintains unsecured federal funds lines with four commercial banks totaling
$23,000,000 for daily funding needs. YNB's funding strategy is to rely on
deposits to fund new loan growth whenever possible and to rely on borrowed funds
as a secondary funding source for loans.
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, YNB through its subsidiary Yardville Capital Trust
completed the sale of $11,500,000 9.25%, Trust Preferred Securities to the
public. For regulatory capital purposes the entire amount of the issue is
treated as Tier 1 capital at the Holding Company level.
14
<PAGE>
Capital
On May 12, 1999 the Holding Company announced the pricing of 1,400,000 shares of
its common stock in a underwritten Secondary Public Offering. The common stock
was offered to the public at a price of $12.00 per share and will generate gross
proceeds of approximately $16.8 million.
Stockholders' equity at March 31, 1999 totaled $41,390,000, an increase of
$634,000 or 1.6% compared to $40,756,000 at December 31, 1998. This net increase
resulted from the following factors:
(i) Net income of $1,554,000 less cash dividend payment of $411,000.
(ii) The unrealized loss on available for sale securities was $284,000 at
December 31, 1998 compared to an unrealized loss of $924,000 at March
31, 1999. This shift resulted in a $640,000 reduction in stockholders'
equity.
(iii) Proceeds of $53,000 from exercised options and $2,000,000 from the
issuance of common shares to the ESOP.
(iv) Repurchase of 1,700 shares of common stock for $22,000, which increased
treasury shares to 172,000 and the cost of total stock repurchases to
$3,030,000.
(v) Commitment to ESOP of $1,900,000 representing the balance of the loan
used to finance the purchase of common stock by the ESOP.
The decline in the capital ratios from December 31, 1998 to March 31, 1999 was
caused by asset growth rates exceeding the rate of capital formation. Management
remains committed to keeping YNB a well-capitalized institution under the prompt
corrective action rules.
The following table sets forth regulatory capital ratios for the Holding Company
and the Bank as of March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
Amount Ratios
- --------------------------------------------------------------------------------------------------------
dollars in thousands 3/31/99 12/31/98 3/31/99 12/31/98
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-based capital:
Tier 1
the Holding Company $53,804 $52,531 8.9% 9.9%
the Bank 54,507 50,948 9.0 9.6
- --------------------------------------------------------------------------------------------------------
Total
the Holding Company 60,976 59,151 10.1 11.2
the Bank 61,229 56,341 10.2 10.8
- --------------------------------------------------------------------------------------------------------
Tier 1 leverage:
the Holding Company 53,804 52,531 6.6 7.7
the Bank $54,057 $50,948 6.6% 8.5%
- --------------------------------------------------------------------------------------------------------
</TABLE>
The minimum regulatory capital requirements for financial institutions require
institutions to have a Tier 1 leverage ratio of 4.0%; a Tier 1 risk-based asset
capital ratio of 4.0% and a total risked based capital ratio of 8.0%. To be
considered "well capitalized" an institution must have a minimum Tier 1 capital
and total risk-based capital ratio of 6.0% and 10.0%, respectively, and a
minimum Tier 1 leverage ratio of 5.0%. At March 31, 1999, the ratios of both the
Holding Company and the Bank exceeded the ratios required to be considered well
capitalized.
On October 28, 1997, the Holding Company's Board of Directors authorized
management to repurchase up to 172,000 shares of the Holding Company's common
stock in the open market in compliance
15
<PAGE>
with Rule 10b-18 under the Securities Exchange Act of 1934. As of March 31,
1999, as part of an overall capital plan, 172,000 shares were repurchased at an
average price of $17.62.
Credit Quality
The following table sets forth nonperforming assets and risk elements in YNB's
loan portfolio by type as of March 31, 1999 and December 31, 1998.
Nonperforming Assets
- --------------------------------------------------------------------
(in thousands) 3/31/99 12/31/98
- --------------------------------------------------------------------
Nonaccrual loans:
- --------------------------------------------------------------------
Commercial and industrial $ 201 $ 232
- --------------------------------------------------------------------
Real estate - mortgage 570 570
- --------------------------------------------------------------------
Real estate - construction -- 684
- --------------------------------------------------------------------
Consumer 71 31
- --------------------------------------------------------------------
Other 495 529
- --------------------------------------------------------------------
Total 1,337 2,046
- --------------------------------------------------------------------
Restructured loans 622 634
- --------------------------------------------------------------------
Loans 90 days or more past due:
- --------------------------------------------------------------------
Real estate - mortgage 1,217 1,093
- --------------------------------------------------------------------
Consumer 112 100
- --------------------------------------------------------------------
Total 1,329 1,193
- --------------------------------------------------------------------
Total nonperforming loans 3,288 3,873
- --------------------------------------------------------------------
Other real estate 4,857 4,957
- --------------------------------------------------------------------
Total nonperforming assets $8,145 $8,830
- --------------------------------------------------------------------
At March 31, 1999, nonperforming loans, consisting of loans 90 days and more
past due, restructured loans and nonaccrual loans, totaled $3,288,000 compared
to $3,873,000 at December 31, 1998. Other real estate at March 31, 1999 totaled
$4,857,000 compared to $4,957,000 at December 31, 1998. Total nonperforming
assets at March 31, 1999 were $8,145,000, which is $685,000 or 7.8% lower than
nonperforming asset levels at December 31, 1998. Nonperforming assets as a
percentage of total assets were 0.91% at March 31, 1999 compared to 1.17% at
December 31, 1998. The improvement in this ratio was due to strong asset growth
rates and a decrease in both nonperforming loans and other real estate. YNB
continues to actively manage nonperforming assets with the goal of reducing
these assets in relationship to the total loan portfolio. Whenever possible,
existing loan relationships are being restructured in an effort to return these
loans to performing status. At March 31, 1999 other real estate included two
real estate construction loans originally placed into nonaccrual status in 1996.
Both properties are in the process of being resolved with one of these loans
totaling approximately $1,800,000 under a contract for sale.
The allowance for loan losses totaled $7,172,000 or 1.32% of total loans at
March 31, 1999 compared to $6,768,000 or 1.38% of total loans at December 31,
1998. The provision for loan losses for the first three months of 1999 was
$650,000 with net charge-offs totaling $246,000. The allowance for loan losses
as a percentage of nonperforming loans was 218.1% at March 31, 1999 compared to
174.7% at December 31, 1998. At March 31, 1999 the allowance for loan
16
<PAGE>
losses in management's judgement is considered adequate in relation to credit
risk exposure levels.
Results of Operations
Net Income
YNB reported net income of $1,554,000 for the three months ended March 31, 1999,
an increase of $220,000 or 16.5% over the same period in 1998. The increase in
net income for the three months ended March 31, 1999, compared to the same
period in 1998, is primarily attributed to higher net interest income, offset by
a higher provision for loan losses, and increased non-interest expense. On a per
share basis, both basic and diluted earnings per share increased $0.05 or 19.2%
to $0.31 for the three months ended March 31, 1999 compared to $0.26 for both
basic and diluted earnings per share for the three months ended March 31, 1998.
Net Interest Income
YNB's net interest income for the first three months of 1999 was $6,417,000 an
increase of $1,138,000 or 21.6% from the same period in 1998. The principal
factor contributing to this increase was an increase in interest income of
$2,907,000 resulting from increased loan and security balances offset by an
increase of $1,769,000 in interest expense. This increase in interest expense
was primarily due to higher volume of time deposits and increased levels of
borrowed funds.
The net interest margin (tax equivalent basis) between the yield on average
earning assets and the cost of average funding liabilities, for the three months
ended March 31, 1999, was 3.35% a 32 basis point or 8.7% decline compared to
3.67% for the same period in 1998. The principal factors causing the narrowing
of the net interest margin were lower yields on securities and loans, and higher
volume and costs of certificates of deposit.
The net interest margin for the 1999 and 1998 comparative periods is negatively
impacted by the Investment Growth Strategy. The targeted spread on this strategy
is 75 basis points after tax. Because of the targeted spread on this strategy,
there will be a negative impact to the net interest margin and return on assets.
The balance outstanding in the Investment Growth Strategy at March 31, 1999, was
approximately $191,800,000 compared to $111,200,000 at March 31, 1998.
Conversely, this strategy increases both return on average equity and earnings
per share, the primary goals of the strategy.
Interest Income
For the three months ended March 31, 1999 total interest income was $14,598,000
an increase of $2,907,000, or 24.9% when compared to interest income of
$11,691,000 for the same period in 1998. This increase is due to higher average
balances in both loans and securities, which is partially offset by lower yields
on both asset types. Average loans increased $118,631,000 or 29.6% while the
yield declined 48 basis points to 8.25% from 8.73%. The decline in loan yields
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<PAGE>
reflects strong competition for loans in YNB's market as well as a 75 basis
point drop in the prime rate in the last four months of 1998. A substantial
portion of YNB's commercial loans has interest rates indexed to the prime rate.
Interest and fees on loans for the three months ended March 31, 1999 increasing
$1,963,000 or 22.4% to $10,711,000 from $8,748,000 for the same period in 1998.
Average securities outstanding for the three months ended March 31, 1999
increased $72,407,000 or 41.3% to $247,633,000 when compared to the $175,226,000
for the same period of 1998. Over the same period, the yield on the securities
portfolio decreased 45 basis points to 5.99% from 6.44%. These factors resulted
in interest on securities increasing $889,000 to $3,708,000 for the three months
ended March 31, 1999 compared to $2,819,000 for the same period in 1998.
Overall, the yield on YNB's interest earning asset portfolio decreased 53 basis
points to 7.46% for the three months ended March 31, 1999 from the 7.99% for the
same period in 1998.
Interest Expense
Total interest expense increased $1,769,000 or 27.6% to $8,181,000 for the first
three months of 1999 compared to $6,412,000 for the same period in 1998. The
increase in interest expense for the comparable time period resulted from a
larger deposit base, specifically time deposits, and an increase in borrowed
funds. Offsetting these higher balances were lower rates on deposits and
borrowed funds. The average rate paid on interest bearing liabilities for the
three months ended March 31, 1999 decreased 30 basis points to 4.66% from 4.96%
for the same period of 1998.
Interest on other time deposits under $100,000 increased $1,128,000 to
$3,801,000 for the three months ended March 31, 1999 from $2,673,000 for the
same period in 1998. This increase was caused by an increase in the average
outstanding balance of $90,735,000 to $277,851,000 for the three months ended
March 31, 1999, when compared to the outstanding average balance of $187,116,000
for the three months ended March 31, 1998. Offsetting this increase was a 24
basis point drop in the cost of time deposits under $100,000 to 5.47% for the
first three months of 1999 from 5.71% for the same period of 1998. Interest
expense on certificates of deposit under $100,000 accounted for 46.5% of total
interest expense and 63.8% of the total increase in interest expense. During the
first three months of 1999, YNB offered attractive rates on CDs locally and
nationwide, to fund loan growth and improve liquidity.
Interest expense on borrowed funds increased $611,000 to $2,528,000 for the
first three months of 1999 when compared to the $1,917,000 for the same period
in 1998. The increase was caused by a $64,077,000 increase in the average
balance outstanding for the three months ended March 31, 1999 when compared to
the same period in 1998. The rate paid on borrowed funds declined 60 basis
points for the three months ended March 31, 1999 to 5.07% from the 5.67% for the
same period last year. The primary cause for the increase in interest expense on
borrowed funds is the higher level of borrowings used to fund the Investment
Growth Strategy. The shifting of borrowed funds out of fixed term products into
convertible products at lower interest rates, and to a lesser extent, lower
yields on term repurchase agreements, caused the overall decrease in rate.
While YNB desires to fund asset growth with lower cost savings, money market,
interest bearing checking and non-interest bearing demand deposits, this is not
always possible, as asset
18
<PAGE>
growth rates continue to exceed the growth rate in these deposit types. To meet
the required funding needs, YNB anticipates continued reliance on higher cost
retail CDs and, to a lesser extent, borrowed funds.
Provision for Loan Losses
YNB provides for possible loan losses by a charge to current operations. The
provision for loan losses for the three months ended March 31, 1999 was
$650,000, a 62.5% increase over the $400,000 provision recorded for the same
period of 1997. The increase in the provision was primarily due to the strong
loan growth in first three months of 1998. Management believes that the reserve
for loan losses is adequate in relation to the credit risk exposure levels.
Non-interest Income
Total non-interest income for the first three months of 1999 was $728,000, an
increase of $40,000 or 5.8% over non-interest income of $688,000 for the same
period in 1998. The increase is primarily due to increases in other non-interest
income.
Other non-interest income increased $34,000 or 9.6% for the first three months
of 1999 compared to the same period in 1998. The increase is principally due to
additional income derived from life insurance assets, which totaled $188,000 and
represents a $25,000 or 15.3% increase over the $163,000 for the same period
last year and accounts for 62.5% of the increase in total non-interest income.
The increase is due to higher average balances of life insurance assets offset
by a lower yield. The income earned on these assets is used to offset expenses
on deferred compensation programs. Management continues to closely evaluate both
traditional and non-traditional sources of new non-interest income as part of a
longer-term strategy to increase earnings.
Non-interest Expense
Total non-interest expense increased $841,000 or 24.0% to $4,345,000 for the
first three months of 1999 compared to $3,504,000 for the same period in 1998.
The increase in non-interest expenses was primarily due to increases in salary
and employee benefits, equipment expense and other non-interest expense. Total
non-interest expenses, on an annualized basis, as a percentage of average assets
were 2.12% for the first three months of 1999 compared to 2.25% for the same
period of 1998. The improvement in this ratio is due to the strong asset growth
in the first quarter. YNB's efficiency ratio for the first three months of 1999
was 60.8%, an increase from the 58.7% for the same period in 1998. The
efficiency ratio is computed by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio indicates
that more resources are being utilized to generate the same or greater volume of
income while a decrease would indicate a more efficient allocation of resources.
Salary and employee benefits increased $348,000 or 17.9% to $2,291,000 for the
first three months of 1999 compared to $1,943,000 for the same period in 1998.
Salary and benefits expense accounted for 52.7% of total noninterest expenses
for the first quarter of 1999 compared to 55.4% for the same period in 1998.
Salary expense increased $304,000 reflecting increased
19
<PAGE>
staffing levels associated with the Pennington and Newtown Branches and new
hires in other areas of YNB and normal salary increases. Benefit expense
increased $44,000 or 36.5%. In 1999, YNB adopted the ESOP for the benefit of
employees. The compensation expense portion of the ESOP was $88,000 and
accounted for 22.5% of the total increase in salary and employee benefits for
the quarter.
Equipment expense increased $66,000 or 22.3% to $362,000 for the first three
months of 1999 from $296,000 for the same period in 1998. The equipment costs
increase reflects the continuing efforts of YNB to maintain and upgrade
technology in order to provide the highest quality service, increase
productivity, and address Year 2000 issues. Equipment costs includes
depreciation on equipment which increased $50,000 and accounted for 75.8% of the
total increase in equipment expense for the period.
Occupancy expense for the first three months of 1999 was $313,000, an increase
of $80,000 or 34.3% compared to $233,000 for the same period in 1998. The
increase was due to the leasing of additional space for the East Windsor branch,
lease payments on the new Pennington and Newtown branches, routine rent
increases, and increased utility costs related to the operation of YNB's various
facilities
Other non-interest expenses increased $347,000 or 33.6% to $1,379,000 for the
three months of 1999 when compared to the $1,032,000 for the same period in
1998. The increase in other non-interest expenses accounts for 41.3% of the
increase in total non-interest expenses. Expenses, including write downs,
related to other real estate owned increased $219,000 in the first quarter of
1999 when compared to the same period in 1998. This increase accounted for 63.1%
of the increase in other non-interest expenses and 26.0% of the increase in
total non-interest expense. A key focus of YNB remains controlling the increase
in non-interest expenses.
Income Tax Expense
The effective income tax rate was 27.7% for the three months ended March 31,
1999 compared to 35.3% for the same periods in 1997. The decrease in the
effective tax rate was primarily due to the use of a state income tax planning
strategy. Management anticipates that this strategy will continue to reduce
state income tax in 1999. Higher levels of tax-free income also reduced Federal
income tax in 1999 when compared to 1998. Total income tax decreased $133,000 or
18.2% to $596,000 for the first three months of 1999 when compared to the
$729,000 for the same period in 1998.
Year 2000 (Y2K)
General
Issues surrounding the 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
20
<PAGE>
organization. YNB began taking a proactive approach to this issue in 1997. YNB's
response 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 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
(FFIEC), 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 System's (ITI)
software for processing all deposit, loan and general ledger activity. In June
1998, YNB completed preliminary testing of all loan and deposit functions at a
remote disaster recovery site utilizing Y2K testing software purchased from ITI.
Results of the preliminary testing were satisfactory. Due to the recent hardware
upgrades, YNB successfully completed testing on deposit, loan functions and
general ledger in April of 1999. Management does not anticipate any major Y2K
compliance problems with the ITI system.
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 automatic teller machines (ATM) 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,
the MAC network and ACH transactions has been successfully completed.
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 Y2K compliance. ALLTEL has advised YNB
that their systems are Y2K compliant at December 31, 1998. ALLTEL is currently
facilitating a client-managed task force that conducted Y2K 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.
21
<PAGE>
End User Computing: YNB's plan to ensure compliance of desktop computers
throughout the company includes the replacement of non-compliant computers and
related software. All mission critical personal computers are now Y2K complaint.
YNB is in the process of testing non-mission critical personal computers and
replacing when required.
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 is tested from each location. Management does not anticipate any
significant Y2K compliance issues with its network.
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 continues and management does not anticipate any
significant Y2K issues resulting from this area.
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 having significant Y2K exposure. Loan calling 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 complaint.
22
<PAGE>
Y2K Program Status
Core Computer Systems Plan: 100% compliant by 3/31/99.
Present Status: 100% completed.
Significant Alliances Plan: 100% ready* by 6/30/99.
Present Status: 95% completed.
End User Computing Plan: 100% compliant by 6/30/99.
Present Status: 95% completed.
Technical Infrastructure Plan: 100% compliant by 6/30/99.
Present Status: 100% completed.
Physical Properties and Plan: 100% compliant by 3/31/99.
Infrastructure Present Status: 100% completed.
Commercial Loan Customers Plan: 100% ready* by 6/30/99.
Present Status: 85% completed.
*Ready means having a comprehensive Y2K program in place and a plan that will
achieve compliance before January 1, 2000.
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 testing and upgrading 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 ongoing
testing uncovers unanticipated Y2K compliance issues.
Y2K Contingency Plans
YNB has established 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 disruptions with a minimum of
disruption and moderate increased costs.
23
<PAGE>
Y2K Risks
The most reasonable worst case scenario for YNB with respect to the Y2K problem
is an adverse affect on the credit quality of its commercial loan portfolio.
This could be caused by the inability of customers to service their bank debt
due to their own Y2K problems or that of their key customers or suppliers. This
could result in lower interest income and higher loan chargeoffs should the Y2K
problems become very serious. Management cannot predict the number of customers
that will experience Y2K related problems or the amount of revenue that could be
lost due to them. In addition, without electrical power and telephone
communication it would be very difficult for YNB to effectively operate.
Item 3: Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in YNB's market risk from December 31, 1998
except as discussed below. For information regarding YNB's market risk refer to
the Company's 1998 Annual Report to stockholders.
Changes in Earning Risk
Net interest income over the next twelve-month period indicates a larger risk to
lower rates (-300 basis points) at March 31, 1999 than reported at December 31,
1998. Comparing the simulation results of this low rate scenario to the flat
rate interest rate scenario indicates a -10.9% change in net interest income
compared to -9.7% at year end 1998. The cumulative one-year gap turned negative
$43,464,000 gap or -4.9% of assets at March 31, 1999 compared to positive
$12,718,000 or 1.7% of assets at year-end 1998. The dollar change in the gap was
$56,182,000. The reasons for this change in short term earnings risk profile
include:
1. The addition of $68,951,000 in securities with repricing or maturity dates
beyond one year.
2. The origination of $20,312,000 in loans with repricing or maturity dates
beyond one year.
3. The addition of certificates of deposit of $13,004,000 with maturity dates of
one year or less.
4. An increase of $19,996,000 in borrowed funds with maturity dates of less
than one year.
Changes in Market risk
Management measures market risk by changes in the Economic Value of Portfolio
Equity (EVPE) as a percentage of total assets with rate shifts of +/- 200 basis
points.
EVPE analysis is an indication of long-term market risks in the balance sheet.
It measures the present value of asset and liability cash flows based on current
inventory and market rates to determine the present value of equity. The present
value of equity is subsequently measured by shifting interest rates by +/- 200
basis points to observe the variances as a percentage of total assets. It is
management's intention to maintain modest changes in this measure with a target
of below 3%.
24
<PAGE>
At March 31, 1999, the EVPE changes by -3.82% for rate shifts of +200 and
- --2.06% for rate shifts of -200 basis points. The non-symmetry of the results is
indicative of the callable funding booked in 1998. This compares to changes of
- -2.35% and -2.74% respectively at December 31, 1998.
The primary causes for this increase to rising rates are listed below:
Liability durations had a significant impact falling to 1.68 years at March 31,
1999 from 1.84 years at December 31, 1998. This resulted from increased use of
shorter-term repurchase agreements to hedge income risks to lower interest rates
and higher interest rates shortening the conversion dates of callable funding.
Asset durations increased to 2.16 years at March 31, 1999 from 1.99 years at
December 31, 1998. The primary cause of this lengthening of assets was an
increase in the investment duration to 4.36 years from 4.12 years. This
lengthening resulted from purchases of long-term tax-free municipal bonds,
callable bonds and slower prepayment speeds extending the average lives of
mortgage backed securities.
The EVPE change to rising rates of -3.82% exceeds the target limit of 3.0%.
Management is currently implementing a strategy to lower the ratio below the
3.0% limit by the end of the third quarter of 1999.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Not Applicable.
Item 2: Changes in Securities and Use of Proceeds
Not Applicable.
Item 3: Defaults Upon Senior Securities
Not Applicable.
Item 4: Submission of Matters to a Vote of Securities Holders
The annual stockholders meeting of Yardville National Bancorp was held Tuesday,
April 27, 1999.
The following matter was submitted to a vote at the meeting:
The election of the following nominees as directors, the vote with respect to
each nominee was as followed:
25
<PAGE>
Nominee Votes for Votes withheld
C. West Ayres 4,026,404 31,596
Jay G. Destribats, Chairman of the Board 4,035,407 22,593
Gilbert W. Lugossy 4,031,354 26,159
Weldon J. McDaniel, Jr. 4,024,354 33,646
Directors whose terms continue beyond the Annual Stockholders Meeting:
Elbert G. Basolis, Jr. Lorraine Buklad
Anthony M. Giampetro Sidney L. Hofing
James J. Kelly Louis R. Matlack
Patrick M. Ryan F. Kevin Tylus
Item 5: Other Information
Not Applicable
Item 6: Exhibits and Reports on Form 8-K
See attached exhibits. There were no Form 8-K reports filed during the quarter
for which this report is filed.
26
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- --------------------------------------------------------------------------------
(G) 3.1 Restated Certificate of Incorporation of the Company, as
amended by the Certificate of Amendment thereto filed on March
6, 1998.
(B) 3.2 By-Laws of the Company
(B) 4.1 Specimen Share of Common Stock
(I) 4.2 See Exhibits 3.1 and 3.2 for the Registrant's Certificate of
Incorporation and By-Laws, which contain provisions defining
the rights of stockholders of the Registrant.
(I) 4.3 Amended and Restated Trust Agreement dated October 16, 1997,
among the Registrant, as depositor, Wilmington Trust Company,
as property trustee, and the Administrative Trustees of
Yardville Capital Trust.
(I) 4.4 Indenture dated October 16, 1997, between the Registrant and
Wilmington Trust Company, as trustee, relating to the
Registrant's 9.25% Subordinated Debentures due 2027.
(I) 4.5 Preferred Securities Guarantee Agreement dated as of October
16, 1997, between the Registrant and Wilmington Trust Company,
as trustee, relating to the Preferred Securities of Yardville
Capital Trust.
(L) 10.1 Employment Contract between Registrant and Patrick M. Ryan.
(L) 10.2 Employment Contract between Registrant and Jay G. Destribats
(L) 10.3 Employment Contract between Registrant and Stephen F. Carman
(L) 10.4 Employment Contract between Registrant and James F. Doran
(L) 10.5 Employment Contract between Registrant and Richard A. Kauffman
(L) 10.6 Employment Contract between Registrant and Mary C. O'Donnell
(L) 10.7 Employment Contract between Registrant and Frank Durand III
(D) 10.8 Salary Continuation Plan for the Benefit of Patrick M. Ryan
27
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- --------------------------------------------------------------------------------
(D) 10.9 Salary Continuation Plan for the Benefit of Jay G. Destribats
(E) 10.10 1988 Stock Option Plan
(L) 10.11 Employment contract between Registrant and Thomas L. Nash
(A) 10.12 Directors' Deferred Compensation Plan
(B) 10.13 Lease Agreement between Jim Cramer and the Bank dated November
3, 1993
(L) 10.14 Lease between Carduners Property Partnership and the Bank
(A) 10.15 Agreement between the Lalor Urban Renewal Limited Partnership
and the Bank dated October, 1994
(C) 10.16 Survivor Income Plan for the Benefit of Stephen F. Carman
(C) 10.17 Lease Agreement between Devon Inc. and the Bank dated as of
February 9, 1996
(F) 10.18 1997 Stock Option Plan
(L) 10.19 Employment contract between Registrant and Howard N. Hall
(L) 10.20 Employment contract between Registrant and Sarah J. Strout
(L) 10.21 Employment contract between Registrant and Nina D. Melker
(L) 10.22 Employment contract between Registrant and Timothy J. Losch
(G) 10.23 Survivor Income Plan for the Benefit of Timothy J. Losch
(G) 10.24 Lease Agreement between the Ibis Group and the Bank dated
July 1997
(H) 10.25 Lease agreement between Hilton Realty Co. of Princeton and
the bank dated March 31, 1998.
28
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
- --------------------------------------------------------------------------------
(H) 10.26 1994 Stock Option Plan.
(J) 10.27 Lease agreement between Crestwood Construction and the
Bank dated May 25, 1998
(K) 10.29 Yardville National Bank Employee Stock Ownership Plan
(L) 10.30 Lease agreement between Sycamore Street
Associates and the Bank dated October 30, 1998
(L) List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
(A) Incorporated by reference to the Registrant's Annual
Report on Form 10-KSB/A filed on July 25, 1995
(B) Incorporated by reference to the Registrant's
Registration Statement on Form SB-2 (Registration
No. 33-78050)
(C) Incorporated by reference to the Registrant's Annual
Report on Form 10-KSB for fiscal year ended December
31, 1995
(D) Incorporate by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1996
(E) Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June
30, 1997, as amended by Form 10-Q/A filed on August 15,
1997
(F) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 (Registration NO. 333-28193)
(G) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997
(H) Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended March
31, 1998, as amended by Form 10-Q/A filed June 9, 1998
(I) Incorporated by reference to the Registrant's Registration
Statement on Form S-2 (Registration Nos. 333-35061 and
333-35061-01)
(J) Incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June
30, 1998.
(K) Incorporated by reference to the Registration Statement
on Form S-8 (Registration No. 333-71741).
(L) Incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1998 as amended by Form 10-K/A filed on April 20,
1999.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YARDVILLE NATIONAL BANCORP
(Registrant)
Date: May 17, 1999 By: /s/ Stephen F. Carman
------------ ------------------------------
Stephen F. Carman
Executive Vice President and
Chief Financial Officer
30
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