10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2004
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For transition period from

Commission File Number: 0-26086

YARDVILLE NATIONAL BANCORP

(Exact name of registrant as specified in its charter)

New Jersey	22-2670267
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

2465 Kuser Road, Hamilton, New Jersey 08690

(Address of principal executive offices)

(609) 585-5100

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed from last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of October 27, 2004, the following class and number of shares were outstanding:

Common Stock, no par value	10,493,852
Class	Number of shares outstanding

INDEX
YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES

	PAGE NO.
PART I            FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Condition September 30, 2004 (unaudited) and December 31, 2003		3
Consolidated Statements of Income Three months ended September 30, 2004 and 2003 (unaudited)		4
Consolidated Statements of Income Nine months ended September 30, 2004 and 2003 (unaudited)		5
Consolidated Statements of Cash Flows Nine months ended September 30, 2004 and 2003 (unaudited)		6
Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		37
Item 4. Controls and Procedures		40
PART II            OTHER INFORMATION
Item 1. Legal Proceedings		40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3. Defaults Upon Senior Securities		40
Item 4. Submission of Matters to a Vote of Security Holders		41
Item 5. Other Information		41
Item 6. Exhibits		42
Signatures		43
Index to Exhibits		44
EMPLOYMENT AGREEMENT - TYLUS
FORM OF 2003 STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DIRECTORS
SECTION 302 CERTIFICATION OF CEO
SECTION 302 CERTIFICATION OF CFO
SECTION 906 CERTIFICATION OF CEO
SECTION 906 CERTIFICATION OF CFO

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Part I: FINANCIAL INFORMATION

Item 1. Financial Statements

Yardville National Bancorp and Subsidiaries

Consolidated Statements of Condition
(Unaudited)

	September 30,			December 31,
(in thousands, except share data)	2004			2003
Assets:
Cash and due from banks	$	25,784		$	25,785
Federal funds sold		11,775			7,370
Cash and Cash Equivalents		37,559			33,155
Interest bearing deposits with banks		45,712			20,552
Securities available for sale		830,430			798,007
Investment securities (market value of $76,302 in 2004 and $70,476 in 2003)		74,684			68,686
Loans		1,702,610			1,443,355
Less: Allowance for loan losses		(19,581	)		(17,295	)
Loans, net		1,683,029			1,426,060
Bank premises and equipment, net		10,574			12,307
Bank owned life insurance		44,221			42,816
Other assets		29,401			29,610
Total Assets	$	2,755,610		$	2,431,193
Liabilities and Stockholders’ Equity:
Deposits
Non-interest bearing	$	202,975		$	163,812
Interest bearing		1,573,488			1,319,997
Total Deposits		1,776,463			1,483,809
Borrowed funds
Securities sold under agreements to repurchase		10,000			10,000
Federal Home Loan Bank advances		726,000			726,000
Obligation for Employee Stock Ownership Plan (ESOP)		472			755
Other		978			1,325
Total Borrowed Funds		737,450			738,080
Subordinated debentures		62,892			47,428
Other liabilities		23,403			18,319
Total Liabilities	$	2,600,208		$	2,287,636
Stockholders’ equity
Preferred stock: no par value
Authorized 1,000,000 shares, none issued
Common stock: no par value
Authorized 20,000,000 shares
Issued 10,672,131 shares in 2004 and 10,619,855 shares in 2003		91,105			90,079
Surplus		2,205			2,205
Undivided profits		66,332			56,152
Treasury stock, at cost: 180,594 shares		(3,160	)		(3,160	)
Unallocated ESOP shares		(472	)		(755	)
Accumulated other comprehensive loss		(608	)		(964	)
Total Stockholders’ Equity		155,402			143,557
Total Liabilities and Stockholders’ Equity	$	2,755,610		$	2,431,193

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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Yardville National Bancorp and Subsidiaries

Consolidated Statements of Income
(Unaudited)

	Three Months Ended
	September 30,
(in thousands, except per share amounts)	2004		2003
INTEREST INCOME:
Interest and fees on loans	$	25,754	$	21,942
Interest on deposits with banks		95		65
Interest on securities available for sale		9,262		7,276
Interest on investment securities:
Taxable		29		53
Exempt from Federal income tax		806		719
Interest on Federal funds sold		102		88
Total Interest Income		36,048		30,143
INTEREST EXPENSE:
Interest on savings account deposits		3,502		2,776
Interest on certificates of deposit of $100,000 or more		1,063		993
Interest on other time deposits		2,879		3,525
Interest on borrowed funds		9,081		8,924
Interest on subordinated debentures		1,004		715
Total Interest Expense		17,529		16,933
Net Interest Income		18,519		13,210
Less provision for loan losses		2,400		1,375
Net Interest Income After Provision for Loan Losses		16,119		11,835
NON-INTEREST INCOME:
Service charges on deposit accounts		750		592
Securities gains, net		618		574
Income on bank owned life insurance		480		523
Other non-interest income		448		415
Total Non-Interest Income		2,296		2,104
NON-INTEREST EXPENSE:
Salaries and employee benefits		6,169		5,579
Occupancy expense, net		1,072		969
Equipment expense		749		721
Other non-interest expense		2,632		2,379
Total Non-Interest Expense		10,622		9,648
Income before income tax expense		7,793		4,291
Income tax expense		2,344		1,129
Net Income	$	5,449	$	3,162
EARNINGS PER SHARE:
Basic	$	0.52	$	0.30
Diluted	$	0.50	$	0.30
Weighted average shares outstanding:
Basic		10,464		10,379
Diluted		10,842		10,653

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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Yardville National Bancorp and Subsidiaries

Consolidated Statements of Income
(Unaudited)

	Nine Months Ended
	September 30,
(in thousands, except per share amounts)	2004		2003
INTEREST INCOME:
Interest and fees on loans	$	73,002	$	62,906
Interest on deposits with banks		205		89
Interest on securities available for sale		26,058		24,327
Interest on investment securities:
Taxable		104		150
Exempt from Federal income tax		2,370		2,048
Interest on Federal funds sold		228		464
Total Interest Income		101,967		89,984
INTEREST EXPENSE:
Interest on savings account deposits		9,054		8,245
Interest on certificates of deposit of $100,000 or more		3,020		3,090
Interest on other time deposits		9,172		11,116
Interest on borrowed funds		26,834		26,855
Interest on subordinated debentures		2,654		2,307
Total Interest Expense		50,734		51,613
Net Interest Income		51,233		38,371
Less provision for loan losses		6,825		3,225
Net Interest Income After Provision for Loan Losses		44,408		35,146
NON-INTEREST INCOME:
Service charges on deposit accounts		2,400		1,711
Securities gains, net		1,204		1,264
Income on bank owned life insurance		1,457		1,554
Other non-interest income		1,325		1,685
Total Non-Interest Income		6,386		6,214
NON-INTEREST EXPENSE:
Salaries and employee benefits		17,644		15,823
Occupancy expense, net		3,239		2,930
Equipment expense		2,359		2,148
Other non-interest expense		8,250		6,560
Total Non-Interest Expense		31,492		27,461
Income before income tax expense		19,302		13,899
Income tax expense		5,513		3,789
Net Income	$	13,789	$	10,110
EARNINGS PER SHARE:
Basic	$	1.32	$	0.97
Diluted	$	1.27	$	0.95
Weighted average shares outstanding:
Basic		10,445		10,390
Diluted		10,847		10,611

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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Yardville National Bancorp and Subsidiaries

Consolidated Statements of Cash Flows
(Unaudited)

	Nine Months Ended
	September 30,
(in thousands)	2004			2003
Cash Flows from Operating Activities:
Net Income	$	13,789		$	10,110
Adjustments:
Provision for loan losses		6,825			3,225
Depreciation		2,409			1,648
ESOP fair value adjustment		95			138
Amortization and accretion		1,404			4,520
Gains on sales of securities available for sale		(1,204	)		(1,264	)
Writedown and loss on sale of other real estate		—			27
Increase in other assets and bank owned life insurance		(1,363	)		(3,816	)
Increase (decrease) in other liabilities		5,084			(5,048	)
Net Cash Provided by Operating Activities		27,039			9,540
Cash Flows From Investing Activities:
Net increase in interest bearing deposits with banks		(25,160	)		(13,088	)
Purchase of securities available for sale		(367,970	)		(667,271	)
Maturities, calls and paydowns of securities available for sale		183,053			537,438
Proceeds from sales of securities available for sale		152,806			158,921
Proceeds from maturities and paydowns of investment securities		5,583			5,103
Purchase of investment securities		(11,568	)		(16,157	)
Net increase in loans		(263,794	)		(199,981	)
Expenditures for bank premises and equipment		(677	)		(1,320	)
Proceeds from sale of other real estate		—			997
Net Cash Used by Investing Activities		(327,727	)		(195,358	)
Cash Flows from Financing Activities:
Net increase in non-interest bearing demand, money market, and savings deposits		237,909			245,028
Net increase (decrease) in certificates of deposit		54,745			(44,803	)
Net decrease in borrowed funds		(630	)		(19,798	)
Proceeds from issuance of subordinated debentures		15,464			25,774
Retirement of subordinated debentures		—			(11,856	)
Proceeds from issuance of common stock		931			362
Treasury shares acquired		—			(6	)
Decrease (increase) in unallocated ESOP shares		283			(455	)
Dividends paid		(3,610	)		(3,590	)
Net Cash Provided by Financing Activities		305,092			190,656
Net increase in cash and cash equivalents		4,404			4,838
Cash and cash equivalents as of beginning of period		33,155			101,093
Cash and Cash Equivalents as of End of Period	$	37,559		$	105,931
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		51,280			54,665
Income taxes		634			10,035
Supplemental Schedule of Non-cash Investing and Financing Activities:
Transfers from loans to other real estate, net of charge offs		—			894

See Accompanying Notes to Unaudited Consolidated Financial Statements

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Yardville National Bancorp and Subsidiaries

Notes to (Unaudited) Consolidated Financial Statements
Three and Nine Months Ended September 30, 2004

1. Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses.

The consolidated financial data as of and for the three and nine months ended September 30, 2004 includes, in the opinion of management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation of such periods. The consolidated financial data for the interim periods presented is not necessarily indicative of the results of operations that might be expected for the entire year ending December 31, 2004.

Consolidation

The consolidated financial statements include the accounts of Yardville National Bancorp and its subsidiary, The Yardville National Bank, and the Bank’s wholly owned subsidiaries (collectively the Corporation). All significant inter-company accounts and transactions have been eliminated in consolidation. Under Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) the following former subsidiaries have been deconsolidated: Yardville Capital Trust, Yardville Capital Trust II, Yardville Capital Trust III, Yardville Capital Trust IV, Yardville Capital Trust V and Yardville Capital Trust VI. All prior periods presented have been reclassified to reflect the deconsolidation.

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 a loan. The provision is based on management’s estimates and actual losses may vary from estimates. 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 and due to the

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factors listed above. 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.

2. Earnings Per Share

Weighted average shares for the basic net income per share computation for the three months ended September 30, 2004 and 2003 were 10,464,000 and 10,379,000, respectively. For the diluted net income per share computation, common stock equivalents of 378,000 and 274,000 are included for the three months ended September 30, 2004 and 2003, respectively. There were no common stock equivalents that were antidilutive for the three months ended September 30, 2004 and 99,500 that were antidilutive for the three months ended September 30, 2003.

Weighted average shares for the basic net income per share computation for the nine months ended September 30, 2004 and 2003 were 10,445,000 and 10,390,000, respectively. For the diluted net income per share computation, common stock equivalents of 402,000 and 221,000 are included for the nine months ended September 30, 2004 and 2003, respectively. There were no common stock equivalents that were antidilutive for the nine months ended September 30, 2004 and 30,000 that were antidilutive for the nine months ended September 30, 2003.

3. Stock-Based Compensation

The Corporation applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized for stock options in the consolidated financial statements. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

	For the three months ended September 30,
(in thousands, except per share amounts)	2004		2003
Net income as reported:	$	5,449	$	3,162
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		134		172
Pro forma net income	$	5,315	$	2,990
Earnings per share:
Basic:
As reported	$	0.52	$	0.30
Pro forma		0.51		0.29
Diluted:
As reported	$	0.50	$	0.30
Pro forma		0.49		0.28

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	For the nine months ended September 30,
(in thousands, except per share amounts)	2004		2003
Net income as reported:	$	13,789	$	10,110
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects		402		516
Pro forma net income	$	13,387	$	9,594
Earnings per share:
Basic:
As reported	$	1.32	$	0.97
Pro forma		1.28		0.92
Diluted:
As reported	$	1.27	$	0.95
Pro forma		1.24		0.90

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 the three and nine months ended September 30, 2004 and 2003:

	Three months						Nine Months
	Ended Sept. 30,						Ended Sept. 30,
	2004			2003			2004			2003
Number of options granted		14,000			44,000			46,500			114,000
Expected annual dividend rate	$	0.46		$	0.46		$	0.46		$	0.46
Risk free rate		3.80	%		2.90	%		3.50	%		2.80	%
Expected average option life (yrs)		7.0			8.0			6.3			7.4
Expected volatility		35.3	%		38.0	%		26.8	%		38.0	%

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4. Comprehensive Income

Below is a summary of comprehensive income for the three and nine months ended September 30, 2004 and 2003.

	For the three months ended September 30,
(in thousands, except per share amounts)	2004		2003
Net income	$	5,449	$	3,162
Other comprehensive income (loss)
Net change in unrealized gain (loss) for the period, net of tax		10,250		(4,227	)
Less reclassification of realized net gain on sale of securities available for sale, net of tax		402		379
Holding gain (loss) arising during the period, net of tax and reclassification		9,848		(4,606	)
Total comprehensive income (loss)	$	15,297	$	(1,444	)

	For the nine months ended September 30,
(in thousands, except per share amounts)	2004		2003
Net income	$	13,789	$	10,110
Other comprehensive income (loss)
Net change in unrealized gain (loss) for the period, net of tax		1,151		(5,757	)
Less reclassification of realized net gain on sale of securities available for sale, net of tax		795		834
Holding gain (loss) arising during the period, net of tax and reclassification		356		(6,591	)
Total comprehensive income	$	14,145	$	3,519

5. Relationships and Transactions with Directors and Officers

Certain directors and officers of the Corporation and their associates are or have in the past been customers of, and have had transactions with, the Bank. All deposit accounts, loans, and commitments comprising such transactions were made in the ordinary course of business of the Bank on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other customers of the Bank. In the opinion of management of the Corporation and the Bank, these loans did not involve more than normal risks of collectibility or present other unfavorable features.

The following table summarizes activity with respect to such loans:

	For the nine		For the nine
	months ended		months ended
(in thousands)	9/30/04		9/30/03
Balance as of beginning of period	$	72,888	$	42,996
Additions		9,645		22,490
Reductions		11,487		17,031
Balance as of end of the period	$	71,046	$	48,455

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None of these loans were past due or on nonaccrual status as of September 30, 2004 and September 30, 2003.

In addition, the Corporation has had, and expects in the future to have, other transactions in the ordinary course of business with a number of its directors, senior officers and other affiliates (and their associates) on substantially the same terms as those prevailing for comparable transactions with others. No new material relationships or transactions were commenced, and no material changes were made to existing relationships or transactions, during the quarter ended September 30, 2004.

6. Postretirement Benefits

The Corporation provides additional postretirement benefits, namely life and health insurance, to retired employees over the age of 62 who have completed 15 years of service. The plan calls for retirees to contribute a portion of the cost of providing these benefits in relation to years of service. The table below lists the components of postretirement benefit expenses for the three and nine months ended September 30, 2004 and 2003.

	3 months			3 months			9 months			9 months
	Ended			Ended			Ended			Ended
(in thousands)	9/30/04			9/30/03			9/30/04			9/30/03
Service cost	$	36		$	31		$	106		$	92
Interest cost		20			18			61			55
Expected return on plan assets		—			—			—			—
Amortization of prior service costs		(1	)		(1	)		(2	)		(2	)
Amortization of the net loss		1			1			4			3
Total	$	56		$	49		$	169		$	148

7. Derivative Financial Instruments

Derivative financial instruments are recorded at fair value as either assets or liabilities on the balance sheet. The accounting for changes in the fair value of a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. Transactions hedging changes in the fair value of a recognized asset, liability, or firm commitment are classified as fair value hedges. Derivative instruments hedging exposure to variable cash flows or recognized assets, liabilities or forecasted transactions are classified as cash flow hedges.

Fair value hedges result in immediate recognition in earnings of gains or losses on the derivative instrument, as well as corresponding losses or gains on the hedged item, to the extent they are attributable to the hedged risk. The effective portion of the gain or loss on a derivative instrument designated as a cash flow hedge is reported in other comprehensive income, and reclassified to earnings in the same period that the hedged transaction affects earnings. The ineffective portion of the gain or loss, if any, is recognized in current earnings for both fair value

11

and cash flow hedges. Derivative instruments not qualifying for hedge accounting treatment are recorded at fair value and classified as trading assets or liabilities with the resultant changes in fair value recognized in current earnings during the period of change.

In the event of early termination of a derivative contract, which had been designated as part of a cash flow hedging relationship, any resulting gain or loss is deferred as an adjustment to the carrying value of the assets or liabilities, against which the hedge had been designated with a corresponding offset to other comprehensive income, and reclassified to current earnings over the shorter of the remaining life of the designated assets or liabilities, or the derivative contract. However, if the hedged item is no longer on balance sheet (i.e. — sold or canceled), the derivative gain or loss is immediately reclassified to current earnings.

As part of the Corporation’s interest rate risk management process, the Corporation has entered into interest rate derivative contracts. These derivative interest rate contracts may include interest rate swaps, caps and floors and are used to modify the repricing characteristics of specific assets and liabilities. At September 30, 2004, the Corporation’s position in derivative contracts consisted entirely of interest rate swaps. The Corporation had no derivative contracts outstanding at December 31, 2003.

The following table details the interest rate swaps and associated hedged liabilities outstanding as of September 30, 2004:

(dollars in thousands)	Hedged	Notional		Swap Fixed	Swap Variable
Maturity	Liability	Amounts		Interest Rates	Interest Rates
Pay Floating Swaps
2006	Time deposits	$	80,000	3.03% - 2.73%	1.87% - 1.71%

During 2004, the Corporation entered into $80.0 million in pay floating swaps designated as fair value hedges that were used to convert fixed rate, 2 year final maturity time deposits to variable rates indexed to one month and three month LIBOR, based on common notional amounts and maturity dates. These transactions reduced interest expense by approximately $237,000 and $270,000 for the three and nine months ended September 30, 2004, respectively. There was less than $1,000 in hedge ineffectiveness recorded in the Consolidated Statements of Income on these transactions for the three and nine-month periods ended September 30, 2004.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This financial review presents management’s discussion and analysis of the financial condition and results of operations. It should be read in conjunction with the 2003 Annual Report to Stockholders and Form 10-K for the fiscal year ended December 31, 2003, as well as the unaudited consolidated financial statements and the accompanying notes in this Form 10-Q. Throughout this report the terms “YNB,” “company,” “we,” “us,” “our,” and “corporation” refer to Yardville National Bancorp, our wholly owned banking subsidiary, The Yardville National Bank (the “Bank”), and other subsidiaries, as a consolidated entity except where noted. The purpose of this discussion and analysis is to assist in the understanding and evaluation of the financial condition, changes in financial condition and results of our operations. Certain reclassifications have been made to prior period financial statements and related information to conform them to the current presentation.

This Form 10-Q contains express and implied statements relating to our future financial condition, results of operations, plans, objectives, performance, and business, which are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements that relate to, among other things, profitability, liquidity, adequacy of the allowance for loan losses, plans for growth, interest rate sensitivity, market risk, regulatory compliance, and financial and other goals. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Actual results may differ materially from those expected or implied as a result of certain risks and uncertainties, including but not limited to, the results of our efforts to implement our retail strategy; adverse changes in our loan portfolio and the resulting credit risk-related losses and expenses, interest rate fluctuations and other economic conditions; continued levels of our loan quality and origination volume; our ability to attract core deposits; continued relationships with major customers; competition in product offerings and product pricing; adverse changes in the economy that could increase credit-related losses and expenses; adverse changes in the market price of our common stock; compliance with laws, regulatory requirements and Nasdaq standards; and other risks and uncertainties detailed from time to time in this report and our other filings with the Securities and Exchange Commission. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Results of Operations

2004 Overview

We are a $2.76 billion financial holding company headquartered in Hamilton, New Jersey. We operate 22 full-service branches through our wholly owned banking subsidiary, The Yardville National Bank, in Mercer, Hunterdon, Somerset, Middlesex and Burlington Counties in New Jersey and Bucks County, Pennsylvania. Our existing and target markets are located in the demographically attractive corridor between New York City and Philadelphia. We provide a broad range of lending and deposit products as well as other financial products and services with

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an emphasis on commercial real estate and commercial and industrial loans to individuals and small to mid-sized businesses.

We generate substantially all of our income from our loan and securities portfolios. Our earning asset base is primarily funded through deposits and, to a lesser degree, borrowed funds. Our primary objective is to increase our net interest income. To accomplish this, we must continue to manage our cost of funds and expand our loan portfolio. Our most difficult challenge is attracting more deposits at a reasonable cost. As our legal lending limit has risen, the size of loans requested has increased as well, exerting pressure on our branch network to provide funds for our growth. Through the implementation of our retail strategy, we have increased the number of branches in our targeted markets, enhanced our brand image and introduced our products and services to an expanded geographic region. This strategy, however, requires investment of resources in people, facilities, marketing and technology. While we have seen many positive results, including a lower cost of funds, we have not yet fully realized all of the benefits of this strategic direction.

In the first nine months of 2004, increased interest income, primarily from commercial loan growth and a lower cost of funds, resulted in notable improvement in our net interest margin, on a tax equivalent basis, and an increase in net income compared to the same period in 2003. All references to the net interest margin are tax equivalent except where noted. We believe that by expanding into new markets and attracting lower cost deposits to fund our growth, we will further enhance profitability and the value of our franchise in 2004 and beyond.

Net Income

We reported net income of $13.8 million for the nine months ended September 30, 2004, an increase of $3.7 million or 36.4% compared to $10.1 million for the same period in 2003. The increase in net income for the first nine months of 2004 compared to the same period in 2003 was primarily attributable to an increase in net interest income partially offset by an increase in non-interest expense and a higher provision for loan losses. Diluted earnings per share for the nine months ended September 30, 2004 increased 33.7% to $1.27 compared to $0.95 for the same period in 2003. The increase in both basic and diluted earnings per share resulted primarily from the aforementioned increase in net interest income in the first nine months of 2004 compared to the same period in 2003.

On a quarterly basis, net income for the third quarter of 2004 was $5.4 million, which represented an increase of $2.3 million or 72.3% compared to $3.2 million in the same period one-year ago. The primary reason for the increase in net income was higher net interest income, partially offset by increased non-interest expense and a higher provision for loan losses. Diluted earnings per share increased $0.20 or 66.7% to $0.50 for the third quarter of 2004 compared to $0.30 for the same period in 2003. The increase in earnings per share was primarily due to higher net interest income in the third quarter of 2004 compared to the same period in 2003.

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Net Interest Income

Net interest income is the largest and most significant component of our operating income. Our net interest income for the first nine months of 2004 was $51.2 million, an increase of $12.9 million or 33.5% from the same period in 2003. The most significant factors in the improvement were an increase in interest and fees on loans, higher earnings on securities and a reduction in interest expense on interest bearing deposits.

We are continuing efforts to improve our net interest margin. The net interest margin is calculated as net interest income divided by average interest earning assets. The tax equivalent adjustment presents net interest income and yields on tax-exempt investments and loans on a comparable basis to those of taxable investments and loans. The tax equivalent adjustment resulted in a 6 basis point increase to the net interest margin for the first nine months of 2004 and 2003. For the first nine months of 2004, the net interest margin was 2.78%, a 43 basis point or 18.3% increase compared to 2.35% for the same period in 2003. The improvement in the net interest margin resulted primarily from a 42 basis point decline in the cost of interest bearing deposits and a 4 basis point higher yield on interest earning assets. The success in expanding the net interest margin resulted from the implementation of several strategies designed to increase net interest income and the net interest margin. By emphasizing our strength as a business-focused lender, we achieved strong commercial loan growth that resulted in an increase in the percentage of our earning asset base consisting of higher yielding loans. The modest extension of the duration of our securities and improved reinvestment rates have improved the securities portfolio yield, and the continued implementation of our retail strategy, which has attracted lower cost core deposits to support our loan growth, have also contributed to higher levels of net interest income and improved net interest margin.

On a quarterly basis, net interest income was $18.5 million, an increase of $5.3 million when compared to net interest income of $13.2 million for the third quarter of 2003. Our net interest margin for the third quarter of 2004 was 2.89% an increase of 52 basis points compared to 2.37% for the third quarter of 2003. The tax equivalent adjustment resulted in a 7 basis point increase to the net interest margin for the third quarter of 2004 and a 6 basis point increase in 2003. The increase in the net interest margin in the third quarter of 2004 when compared to the same period in 2003 was due to a reduction in the cost of interest bearing liabilities by 29 basis points to 2.98% compared to 3.27% for the same period in 2003 and a 23 basis point higher yield on interest earning assets to 5.49% compared to 5.26% for the same period in 2003.

Interest Income

For the first nine months of 2004, total interest income was $102.0 million, an increase of $12.0 million or 13.3% when compared to $90.0 million for the same period in 2003. Higher interest income was primarily due to an increased volume of average loans outstanding for the first nine months of 2004 and an improved securities portfolio yield compared to the same period in 2003, partially offset by a lower yield on loans. The yield on earning assets for the first nine months of 2004 was 5.40%, a 4 basis point increase from 5.36% for the same period in 2003.

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Interest and fees on loans for the nine months ended September 30, 2004 increased $10.1 million or 16.0% to $73.0 million from $62.9 million for the same period in 2003. The increase in interest and fees on loans resulted from an increase of $303.5 million or 23.6% in average loans outstanding, primarily commercial real estate and commercial and industrial loans, partially offset by the yield on loans decreasing 40 basis points to 6.12% for the nine months ended September 30, 2004 from 6.52% for the same period in 2003. The lower loan yield in 2004 reflected our focus on making floating rate loans tied to prime, the continued lower interest rate environment and ongoing competition for loans.

Interest on securities increased $2.0 million to $28.5 million for the nine months ended September 30, 2004 compared to $26.5 million for the same period in 2003. Average securities for the nine months ended September 30, 2004 decreased $9.5 million or 1.1% to $875.5 million when compared to the $885.0 million for the same period in 2003. Over the same period, the yield on the securities portfolio increased 35 basis points to 4.35% from 4.00%. The improvement in interest income on securities for the nine months ended September 30, 2004 resulted primarily from a higher yield on securities partially offset by a lower average balance of securities outstanding for the comparative periods. A reduction in premium amortization on premium purchased mortgage-backed securities, including CMOs, combined with higher yields on modestly longer duration securities purchased in 2004 accounted for the increased yield on the securities portfolio. The reduction in premium amortization resulted from the lower level of premium in the portfolio and slower paydowns on related mortgage-backed securities.

For the third quarter of 2004, total interest income was $36.0 million, an increase of $5.9 million or 19.6% when compared to $30.1 million for the third quarter of 2003. The increase in interest income was primarily due to the higher average balance of loans outstanding and the improved securities portfolio yield.

Interest Expense

Total interest expense decreased $879,000 or 1.7% to $50.7 million for the first nine months of 2004, compared to $51.6 million for the same period in 2003. The decrease in interest expense resulted primarily from lower rates paid on all interest bearing deposits and, to a lesser extent, on subordinated debentures, partially offset by higher average balances on total interest bearing liabilities. Average interest bearing liabilities were $2.26 billion for the nine months ended September 30, 2004 reflecting an increase of $242.9 million or 12.0% when compared to $2.02 billion for the same period in 2003. The average rate paid on interest bearing liabilities for the nine months ended September 30, 2004 decreased 42 basis points to 2.99% from 3.41% for the same period of 2003.

Interest expense on deposits decreased $1.2 million or 5.4% to $21.2 million for the first nine months of 2004 compared to $22.4 million for the same period in 2003. The decline in interest expense on deposits resulted primarily from a $2.0 million decrease in interest expense on time deposits, which includes certificates of deposits of $100,000 or more, to $12.2 million for the first nine months of 2004 compared to $14.2 million for the same period in 2003. Interest expense on savings, money markets and interest bearing demand deposits increased $809,000 to $9.0 million for the first nine months of 2004 compared to $8.2 million for the same period in 2003. The increase in the expense on these deposits resulted from higher average balances

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partially offset by lower average costs. For the first nine months of 2004, the average balance of savings, money markets and interest bearing demand deposits increased $219.1 million or 34.4% to $856.5 million compared to $637.4 million for the same period in 2003. The growth in these deposit accounts reflected our increased focus on expanding our core deposit base as part of our retail strategy, money market balances acquired through an intermediary that places deposits from brokerage clients with banks, the successful acquisition of surrogates’ deposits through a competitive bidding process, and the continued positive reception of our new “Simply Better Checking” product.

The total cost of interest bearing deposits was 1.93% for the first nine months of 2004, a 49 basis point decrease when compared to the 2.42% cost for the same period in 2003. The key factors in the decrease in the cost of interest bearing deposits were a change in the mix of our average deposits and the low interest rate environment, which resulted in lower interest expense on all interest bearing deposit types. Average savings, money markets and interest bearing demand deposits for the first nine months of 2004 represented 58.2% of total average interest bearing deposits compared to 51.5% of total average interest bearing deposits for the same period in 2003. These deposits had a cost of 1.41% in the first nine months of 2004 compared to 1.72% for the same period in 2003. In addition, for the first nine months of 2004, the cost of certificates of deposit of $100,000 or more decreased 41 basis points to 2.55% compared to 2.96% for the same period in 2003. Over the same period, the cost of other time deposits decreased 54 basis points to 2.68% for the first nine months of 2004 compared to 3.22% for the same period in 2003. In June 2004, the Federal Reserve increased the Federal funds rate for the first time since May 2000 and has since increased the Federal funds rates two additional times for a total of 75 basis points with the likelihood of additional future increases. To date, these increases have not yet translated to higher core deposit costs. In this environment, our ability to attract and maintain core deposits, including time deposits, while controlling the increase in our core deposit costs will be critical to our goal of continuing to improve our net interest margin.

Interest expense on borrowed funds decreased $21,000 to $26.8 million for the first nine months of 2004. The decreased interest expense was the result of a decline in the average balance of borrowed funds outstanding in the first nine months of 2004 to $738.4 million when compared to $744.7 million for the same period of 2003, partially offset by a 4 basis point increase in cost for the comparable periods. The growth and success of our retail business has reduced our reliance on borrowed funds. To the extent that our retail strategy continues to attract lower cost core deposits, borrowed funds are expected to gradually become a less important funding source.

The overall cost of subordinated debentures decreased 145 basis points to 6.64% for the first nine months of 2004 compared to 8.09% for the same period in 2003. Over the same period, the average balance of subordinated debentures increased $15.3 million to $53.3 million for the first nine months of 2004 compared to $38.0 million for the same period in 2003. In 2003, we retired $11.9 million in fixed rate subordinated debentures with a cost of 9.25%. We also issued an additional $41.2 million in floating rate-subordinated debentures in 2003 and 2004. These actions and the lower interest rate environment resulted in the lower cost of subordinated debentures in the first nine months of 2004 compared to the same period in 2003. All of the

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floating rate subordinated debentures have rates tied to three month LIBOR. As three month LIBOR has increased, the cost of floating rate-subordinated debentures has also increased.

For the third quarter of 2004, total interest expense increased $596,000 or 3.5% to $17.5 million when compared to the $16.9 million for the same period in 2003. The overall cost of interest bearing liabilities decreased 29 basis points to 2.98% for the third quarter of 2004 compared to 3.27% for the same period in 2003. Limiting the reduction in interest expense was the strong growth in interest bearing liabilities with the average balance of interest bearing liabilities increasing $283.3 million to $2.36 billion for the three months ended September 30, 2004 compared to $2.07 billion for the same period in 2003.

We continue to implement our retail strategy with the goal of attracting additional lower cost core deposit and transaction accounts. This should allow us over time to reduce our historical dependency on higher cost CDs and borrowed funds and improve our net interest margin and generate service fee or non-interest income. To the extent that core deposit growth is not adequate to fund earning asset growth, we would expect to use a combination of CDs and borrowed funds to meet our funding and liquidity needs. Any reliance on higher cost funding sources would limit our ability to continue to effectively manage our cost of funds in the future.

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2004 was $6.8 million, an increase of $3.6 million from the $3.2 million for the same period in 2003. The provision for loan losses for the third quarter of 2004 was $2.4 million, an increase of $1.0 million from the $1.4 million for the third quarter of 2003. The increase in the provision for loan losses was primarily due to the level of net loan charge offs and the strong commercial loan growth experienced.

Under the heading “Allowance for Loan Losses” in this report is a more detailed discussion of our allowance for loan loss methodology.

Non-interest Income

Non-interest income consists of service charges on deposit accounts, net securities gains, income on bank owned life insurance and all other non-interest income. Total non-interest income for the first nine months of 2004 was $6.4 million an increase of $172,000 from the $6.2 million reported for the same period in 2003.

Service charges on deposit accounts increased $689,000 or 40.3% to $2.4 million for the nine months ended September 30, 2004 compared to $1.7 million for the same period in 2003. Service charge income increased in the first nine months of 2004 from a broader base of deposit accounts and a higher collection rate of overdraft fees. We expect to continue to conduct targeted marketing campaigns in the future designed to attract lower cost and interest free demand deposit accounts with the goal of lowering our cost of funds while generating additional service charge and fee income.

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Net gains on the sale of securities totaled $1.2 million in the first nine months of 2004 compared to $1.3 million in net gains on the sale of securities for the same period in 2003. We have continued to reposition securities in 2004 to achieve asset and liability and liquidity objectives.

Income on bank owned life insurance (BOLI) was $1.5 million for the first nine months of 2004 reflecting a decline of $97,000 compared to the same period in 2003. The modest decrease in income on BOLI was due to the lower yield on certain BOLI assets due primarily to the lower interest rate environment. The income earned on these assets is used to offset the benefit costs of deferred compensation programs. Income on BOLI also reduces our overall effective income tax rate. Our BOLI assets are single premium policies. After the initial purchase, there are no additional premiums to be paid on those policies.

Other non-interest income decreased $360,000 to $1.3 million for the nine months ended September 30, 2004 from $1.7 million for the same period in 2003. The primary cause for the decrease was the $429,000 gain on the sale of our former operations building in the second quarter of 2003. Other non-interest income includes a variety of fee-based services, which have increased as we have expanded our retail network and increased our customer base. These include Second Check fees, automated teller machine fees charged to non-customers, safe deposit box rental income and other non-banking service fees.

For the three months ended September 30, 2004, total non-interest income increased $192,000 or 9.1% to $2.3 million from $2.1 million for the same period in 2003. The increase in non-interest income resulted from increased service charges on deposit accounts, net securities gains and other non-interest income partially offset by lower income on bank owned life insurance.

Non-interest Expense

Non-interest expense consists of salaries and employee benefits, occupancy, equipment and all other operating expenses we incur. Non-interest expense totaled $31.5 million in the first nine months of 2004, an increase of $4.0 million or 14.7% compared to the $27.5 million for the same period in 2003. The largest increase in non-interest expense for the first nine months of 2004 compared to the same period of 2003 was in other non-interest expense. Total non-interest expenses, on an annualized basis, as a percentage of average assets were 1.61% for the first nine months of 2004 compared to 1.58% for the same period of 2003. Our efficiency ratio for the nine months of 2004 was 54.66% compared to 61.59% for the same period in 2003. Excluding net securities gains, the efficiency ratio for the first nine months of 2004 was 55.82% compared to 63.39% for the same period in 2003. The efficiency ratio is computed by dividing total operating expenses by the sum of net interest income and non-interest income. A decrease in the efficiency ratio indicates a more efficient allocation of resources while an increase would indicate more resources are being utilized to generate the same volume of income. The improvement in the efficiency ratio was primarily due to higher net interest income partially offset by higher non-interest expenses. Continued improvement to the efficiency ratio will depend on increases in net interest income, non-interest income and controlled growth in non-interest expenses.

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Salaries and employee benefits increased $1.8 million or 11.5% to $17.6 million for the first nine months of 2004 compared to $15.8 million for the same period in 2003. Full time equivalent employees totaled 363 at September 30, 2004 compared to 359 at December 31, 2003, which compared to 351 at September 30, 2003. Salary expense increased $1.4 million and accounted for 75.5% of the increase in salaries and employee benefits expense. The primary increase in salaries for the nine months ended September 30, 2004 was the ongoing development of our northern region, which included the opening of two new branches in 2003 and resulted in the hiring of additional retail, lending and support staff. The staffing obtained from our first branch acquisition in late 2003, additional modest staffing increases throughout the organization and annual merit increases also contributed to the increase in salary expense. Benefit expense increased $447,000 or 11.5% primarily due to higher costs associated with the increased number of employees, as well as higher postretirement costs and increased costs associated with salary continuation plans for executive officers, partially offset by lower ESOP expense. With the planned opening of as many as five branches in 2005, we anticipate that both salary and benefit expense will continue to increase in 2005.

Occupancy expense for the first nine months of 2004 was $3.2 million, an increase of $309,000 or 10.5% compared to $2.9 million for the same period in 2003. The increase in occupancy expense was due to the additional costs, including rent expense, associated with the operation of our branch network. We acquired one branch and opened two new branches in 2003. We continue to explore other branch locations in our targeted markets. With planned expansion, occupancy expense is expected to continue to increase.

Equipment expense increased $211,000 or 9.8% to $2.3 million for the first nine months of 2004 from $2.1 million for the same period in 2003. The increase in equipment expense reflected the ongoing expansion of our branch network and our continuing efforts to maintain and upgrade technology and systems in order to provide quality products and services. We expect equipment expense to continue to increase as our growth continues.

Other non-interest expense increased $1.7 million or 25.8% to $8.3 million for the first nine months of 2004 compared to $6.6 million for the same period in 2003. Directors’ and committee fees, which include the costs associated with the director deferred compensation plan, increased $701,000 and accounted for 41.5% of the total increase in other non-interest expense for the first nine months of 2004 compared to the same period in 2003. A portion of this increase represented increases in directors’ fees and costs associated with changes to the deferred compensation plan, which will be ongoing. However, $479,000 represented a non-recurring expense relating to the directors deferred compensation plan. We therefore believe that while directors’ fees will continue to be higher than last year, the overall increase should moderate over time. The remaining increase in other non-interest expense reflected increased costs associated with attracting new loan and deposit relationships, higher professional fees, loan workout costs and other operating expenses. In addition, the costs associated with operating a public company in the current regulatory environment resulted in increased consulting fees, insurance costs and audit fees. Other non-interest expense will continue to increase in the fourth quarter due to costs associated with Sarbanes-Oxley Section 404 compliance. We have also outsourced services that can be provided more effectively by third party providers. A number of our enhanced services like our website and cash management services for our business customers require arrangements with vendors that result in additional non-interest expense. In addition, by using third party providers we have effectively and efficiently improved

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products and services. Statement rendering and wire transfer processing, for example, have been outsourced, which has resulted in increased service and processing costs while limiting the hiring of additional support staff.

For the three months ended September 30, 2004, total non-interest expense increased $974,000 or 10.1% to $10.6 million from $9.6 million for the same period in 2003. The primary factor for this increase was a $590,000 or 10.6% increase in salaries and employee benefits for the third quarter of 2004 compared to the same period in 2003. Other non-interest expense increased $253,000 primarily due to the factors discussed above. Limiting the increase in other non-interest expense was a $123,000 reduction in other real estate expense. Occupancy and equipment expenses also increased for the same reasons previously discussed.

Income Tax Expense

The provision for income taxes, comprised of Federal and state income taxes, was $5.5 million for the first nine months of 2004 compared to $3.8 million for the same period in 2003. The increase in tax expense was primarily due to the higher level of taxable income in 2004 compared to the same period in 2003 and, to a lesser extent, a higher effective tax rate. The provision for income taxes for the first nine months of 2004 and 2003 were at an effective tax rate of 28.6% and 27.3%, respectively.

The provision for income taxes was $2.3 million for the third quarter of 2004 compared to $1.1 million for the same period in 2003. The increase in tax expense was primarily due to the higher level of taxable income and a higher effective tax rate in 2004 compared to the same period in 2003. The provision for income taxes for the third quarter of 2004 and 2003 were at an effective tax rate of 30.1% and 26.3%, respectively.

Financial Condition

Assets

Total consolidated assets at September 30, 2004 were $2.76 billion, an increase of $324.4 million or 13.3% compared to $2.43 billion at December 31, 2003. The growth in our asset base during the first nine months of 2004 reflected our continuing strength as a business-focused, relationship-oriented community lender as total loans increased $259.3 million. The growth in loans was principally reflected in commercial real estate and commercial and industrial loans. The funding for this asset growth was provided primarily by interest bearing deposits.

Loans

We emphasize commercial real estate and commercial and industrial loans to individuals and small to mid-sized businesses. The loan portfolio represents our largest earning asset class and is our primary source of interest income. Total loans increased $259.3 million or 18.0% to $1.70 billion at September 30, 2004 from $1.44 billion at December 31, 2003. Our broader geographic footprint, the strong real estate market in New Jersey, an improving economic environment and our strength as a commercial business lender were the primary factors that accounted for the

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record growth for the nine months ended September 30, 2004. To supplement our loan growth in 2004, we have purchased approximately $48 million in commercial loan participations from other financial institutions in our market area. Our same loan credit underwriting standards are used in making decisions regarding participations. At September 30, 2004 loan participations represented less than 3% of the total loan portfolio. Our loan portfolio represented 61.8% of total assets at September 30, 2004 compared to 59.4% at December 31, 2003. Continued loan growth is an important part of our strategy to increase our net interest margin and increase our franchise value. Competition from both bank and non-bank lenders, in addition to borrowers’ concerns over the relative strength of the economy, real estate prices and interest rates, among other factors, could adversely impact future loan growth. While the majority of our lending business is with customers located within our core Mercer County, New Jersey market, the continued development of our northern region has resulted in significant new loan relationships. Since a significant portion of our loan portfolio is secured by real estate, the ultimate collectibility of the loan portfolio and the recovery of the carrying amount of real estate collateral are subject to changes in the region’s economic environment and real estate market values.

The table below sets forth YNB’s loan portfolio composition and loan growth by type for the nine months ended September 30, 2004.

(in thousands)	09/30/04		12/31/03		Change			% Change
Commercial real estate
Owner occupied	$	207,022	$	204,539	$	2,483			1.2	%
Investor occupied		553,933		432,571		121,362			28.1
Construction and development		179,696		123,790		55,906			45.2
Residential
1-4 family		159,317		150,733		8,584			5.7
Multi-family		18,680		30,097		(11,417	)		(37.9	)
Commercial and industrial
Term		183,067		169,296		13,771			8.1
Lines of credit		272,383		218,097		54,286			24.9
Demand		789		1,199		(410	)		(34.2	)
Consumer
Home equity		86,069		78,877		7,192			9.1
Installment		29,369		24,165		5,204			21.5
Other		12,285		9,991		2,294			23.0
Total loans	$	1,702,610	$	1,443,355	$	259,255			18.0	%

At September 30, 2004, commercial real estate loans and commercial and industrial loans represented 82.0% of total loans compared to 79.6% at year-end 2003. In underwriting these loans, we first evaluate the cash flow capacity of the borrower to repay the loan as well as the borrower’s business experience. In addition, a majority of commercial loans are secured by real estate and business assets and most are supported by the personal guarantees and other assets of the principals. We also diligently monitor the composition and quality of the overall commercial portfolio including significant credit concentrations by borrower or industry.

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Commercial real estate loans increased $179.8 million or 23.6% in the first nine months of 2004 to $940.7 million from $760.9 million at December 31, 2003. Commercial real estate loans consist of owner occupied, investor occupied, and construction and development loans. The nine month growth was primarily in investor occupied loans and construction and development loans which increased $121.4 million and $55.9 million, respectively. This growth resulted from an improving economy, our broader geographic footprint and the strong real estate market in New Jersey. Growth in commercial real estate loans accounted for 69.3% of the total loan growth in the period. Construction and development loans include residential and commercial projects and are typically made to experienced residential or commercial construction developers. Residential construction loans include single family, multi-family, and condominium projects. Commercial construction loans include office and professional development, retail development and other commercial related projects. Generally, construction loan terms run between one and two years and are interest only, adjustable rate loans indexed to the prime rate of interest.

Real estate underwriting standards include various limits on loan-to-value ratios based on the type of property and consideration of the creditworthiness of the borrower, the location of the real estate, the condition of the security property, the quality of the organization managing the property and the viability of the project including occupancy rates, tenants and lease terms. Additionally, underwriting standards require appraisals, periodic inspections of the properties and ongoing monitoring of operating results. Collateral values are established based upon independently prepared appraisals.

Residential loans include 1-4 family and multi-family loans. This segment of our portfolio totaled $178.0 million at September 30, 2004, decreasing $2.8 million in the first nine months of 2004 from year-end 2003. The decrease was due to a decline in multi-family loans, partially offset by growth in 1-4 family loans. Residential 1-4 family loans represented 89.5% of residential loans at September 30, 2004. Our 1-4 family loans are secured by first liens on the underlying real property. We are a participating seller/servicer with the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) and we generally underwrite our single-family residential mortgage loans to conform to the standards required by these agencies. Multi-family loans, which represented $18.7 million of the total, primarily consist of loans secured by apartment complexes.

Commercial and industrial loans include term loans, lines of credit and demand loans. Commercial and industrial loans increased $67.6 million or 17.4% to $456.2 million at September 30, 2004 compared to $388.6 million at year-end 2003. The growth was primarily in lines of credit, which increased $54.3 million. The increase in commercial and industrial loans resulted primarily from an improving economy and increased business activity in our market area. We anticipate continued growth as the economy continues to strengthen. Commercial and industrial loans are typically loans made to small and mid-sized businesses and consist of loans used to finance inventory, receivables, and other working capital needs. Typically term loans are provided for equipment needs. In our commercial and industrial loan portfolio, we attempt to maintain diversification of risk within industry classifications with the goal of limiting the risk of loss from any single unexpected event or trend.

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Consumer loans increased $14.7 million or 13.0% to $127.7 million at September 30, 2004 compared to $113.0 million at year-end 2003. Consumer loans include fixed rate home equity loans, floating rate home equity lines, indirect auto loans and other types of installment loans. Home equity loans and lines represented 67.4% of total consumer loans at September 30, 2004 compared to 69.8% at year-end 2003. The continuation of generally lower interest rates accounted for the increased activity in the home equity and installment loan portfolios. The expansion of our retail network has generated additional opportunities to increase the size of our consumer loan portfolio.

Substantially all of our business is with customers located within Mercer County and contiguous counties. While we believe we will continue to see strong loan demand for the fourth quarter of 2004 and into 2005, several factors could influence the level of loan demand. These factors include changes in the region’s economic environment, real estate market conditions, competition and future bank consolidation in our market area. Continued loan growth is an important part of our strategy to increase net interest income and the net interest margin.

Asset Quality

We place substantial reliance on real estate as collateral for our loan portfolio. A sharp downturn in real estate values in our market place could leave many of our loans undersecured. If we were required to liquidate the collateral securing a loan to satisfy the debt during periods of reduced real estate values, our earnings could be adversely affected. Adverse economic and business conditions in our market place could reduce our growth and affect our borrowers’ ability to repay their loans, and, consequently, adversely affect our financial condition and performance.

The following table sets forth nonperforming assets in our loan portfolio by type at September 30, 2004, December 31, 2003 and September 30, 2003.

(in thousands)	09/30/04		12/31/03		9/30/03
Nonaccrual loans:
Commercial real estate	$	510	$	1,321	$	3,213
Residential		54		255		793
Commercial and industrial		7,336		8,570		5,694
Consumer		11		35		37
Total		7,911		10,181		9,737
Restructured Loans
Commercial and industrial		1,227		—		—
Total		1,227		—		—
Loans 90 days or more past due:
Residential		214		362		304
Consumer		25		97		84
Total		239		459		388
Total nonperforming loans		9,377		10,640		10,125
Other real estate		—		—		917
Total nonperforming assets	$	9,377	$	10,640	$	11,042

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Over the last several years, we have successfully grown our loan portfolio while maintaining high asset quality standards. Based upon our strict underwriting standards, collateral based approach to lending and depth of lending experience, we anticipate that our overall credit quality will remain strong. Nonperforming assets decreased $1.3 million or 11.9% to $9.4 million at September 30, 2004 compared to $10.6 million at year-end 2003. In addition, nonperforming assets declined $2.5 million from $11.8 million at June 30, 2004. The decline in nonperforming loans was primarily due to the increased level of net charge offs both for the nine months ended September 30, 2004 and the third quarter of 2004. Nonperforming assets represented 0.34% of total assets at September 30, 2004 compared to 0.44% at December 31, 2003. Nonperforming loans represented 0.55% of total loans at September 30, 2004 compared to 0.74% at year-end 2003. The improvement in this ratio is due to the strong loan growth experienced in 2004 as well as the decline in nonperforming loans. Approximately 85.6% of our total nonperforming loans are represented by three commercial lending relationships previously disclosed in our SEC filings. Two of these relationships were nonperforming prior to December 31, 2003 and one became nonperforming in the first quarter of 2004. We incurred charge offs on all three of these relationships in 2004 and expect additional charge offs in the fourth quarter. We continue to work to resolve issues related to these problem loans and believe these credits should soon be resolved either by charge off, restructure or collection.

Nonperforming assets consist of nonperforming loans and other real estate. We had no other real estate owned at September 30, 2004 or December 31, 2003. Nonperforming loans are comprised of loans on a nonaccrual basis, loans which are contractually past due 90 days or more as to interest or principal payments but have not been classified as nonaccrual, and 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. Our policy regarding nonaccrual loans varies by loan type. Generally, commercial loans are placed on nonaccrual 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. Residential mortgage loans are not generally placed on nonaccrual status unless the value of the real estate has deteriorated to the point that a potential loss of principal or interest exists. If principal and interest payments are brought contractually current, and future collectibility is reasonably assured, loans are returned to accrual status.

Nonaccrual loans were $7.9 million at September 30, 2004, a decrease of $2.3 million from the December 31, 2003 level of $10.2 million. The decrease in nonaccrual loans resulted from a portion of one of the previously disclosed commercial loan relationships being restructured in the second quarter of 2004, the level of net loan charge offs and the return to performing status of several loans. Nonaccrual commercial and industrial loans accounted for 92.7% of total nonaccrual loans and 78.2% of total nonperforming loans at September 30, 2004.

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Loans 90 days or more past due but still accruing interest represented $239,000 at September 30, 2004 a decrease of $220,000 compared to the $459,000 in this category at December 31, 2003. The primary reason was a decrease in both residential and consumer loans 90 days or more past due.

Our objective remains to maintain high credit quality standards that are reflected in our financial results. We believe that the relatively low level of nonperforming assets we have experienced over the past five years is indicative of our sound credit culture, which includes strict underwriting standards, active loan review, and strong credit policies. We believe the level of nonperforming assets in 2003 and into the first quarter of 2004 to be isolated events and not representative of a deteriorating asset quality trend. Supporting this belief has been the decline in nonperforming assets from their peak at March 31, 2004. Although we anticipate a return to our traditional loan quality performance in 2005, several factors beyond our control, such as a downturn in real estate values, adverse economic and business conditions and the specific financial condition of our borrowers, could cause nonperforming assets to rise from their current or historical levels which would have a negative impact on our financial condition.

Allowance for Loan Losses

We have identified the allowance for loan losses to be a critical accounting policy. Based on internal reviews and valuations performed by our lending staff, we rate substantially all of our loans based on their respective risk. These evaluations are, in turn, examined by our internal loan review staff. A formal loan review function is in place, independent of loan origination, to identify and monitor risk classifications. Our emphasis on commercial real estate and commercial and industrial loans, while providing higher earnings, entails greater risk than residential mortgage and consumer loans. Accordingly, the primary focus of our risk rating system is on commercial real estate and commercial and industrial loans.

Risk is measured by use of a matrix, which is customized to measure the risk of each loan type. The reserve percentage assigned to each risk-rating category is determined quarterly from historical loan loss rates based on an eight quarter rolling trend using migration analysis. Risk ratings of 1 to 5 are considered to be acceptable and correspond to loans rated as either minimal, modest, better than average, average and acceptable. Loans with acceptable risk were reserved at a range of 0.63% to 0.74% at September 30, 2004. Risk ratings of between 6 and 8 are considered higher than acceptable risk and correspond to loans rated as special mention, substandard, or doubtful. Due to the higher level of risk, these loans were reserved at a range of 3.75% to 100% at September 30, 2004. Loans with a risk rating of 9 are considered to be a loss and would be reserved at 100%. At September 30, 2004, there were no 9 rated loans. Residential mortgage loans are assigned an individual risk reserve percentage of 0.04% due to the strong secured nature of these loans and the low level of losses experienced historically. Consumer loans were assigned reserve percentages of 0.01% for the lowest risk to 8.20% for the highest risk depending on the extent and type of collateral.

In addition to the methodology discussed above, we use our judgment concerning the anticipated impact on credit risk of economic conditions, real estate values, interest rates, level of business activity and other factors. We closely monitor delinquencies and delinquency trends. All

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criticized assets, risk rated 6 or higher, are reviewed on a quarterly basis. Allocations of the allowance for loan losses, both specific and general, are determined after this review.

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The following table provides information regarding the allowance for loan losses for the periods indicated.

	Three Months Ended						Nine Months Ended
(in thousands)	09/30/04			09/30/03			09/30/04			09/30/03
Allowance balance, beginning of period	$	18,545		$	17,508		$	17,295		$	16,821
Charge offs:
Commercial real estate		—			(425	)		—			(625	)
Residential		—			(128	)		(254	)		(142	)
Commercial and industrial		(1,423	)		(270	)		(4,327	)		(1,070	)
Consumer		(80	)		(49	)		(181	)		(270	)
Total charge offs		(1,503	)		(872	)		(4,762	)		(2,107	)
Recoveries:
Commercial and industrial		101			2			153			5
Residential		30			—			30			—
Consumer		8			22			40			91
Total recoveries		139			24			223			96
Net charge offs		(1,364	)		(848	)		(4,539	)		(2,011	)
Provision charged to operations		2,400			1,375			6,825			3,225
Allowance balance, end of period	$	19,581		$	18,035		$	19,581		$	18,035
Allowance for loan losses to total loans								1.15	%		1.30	%
Net charge offs to average loans								0.38			0.21
Nonperforming loans to total loans								0.55			0.73
Allowance for loan losses to nonperforming loans								208.82	%		178.12	%

At September 30, 2004, the allowance for loan losses totaled $19.6 million, an increase of $2.3 million compared to $17.3 million at December 31, 2003. The increase in the allowance reflected the extensive analysis previously discussed. It is our assessment, based on our judgment and analysis, that the allowance for loan losses was appropriate in relation to the credit risk at September 30, 2004. The ratio of the allowance for loan losses to total loans was 1.15% at September 30, 2004 compared to 1.20% at year-end 2003. Another measure of the adequacy of the allowance for loan losses is the ratio of the allowance for loan losses to total nonperforming loans. At September 30, 2004, this ratio was 208.82% compared to 162.55% at December 31, 2003.

Extending credit to businesses and consumers exposes us to credit risk. We manage credit risk in the loan portfolio through adherence to strict underwriting standards, guidelines and limitations. Various approval levels, based on the amount of the loan and other credit considerations, have also been established. We recognize that despite our best efforts to manage credit risk, losses will occur. In times of economic slowdown, either within our markets or nationally, the risk inherent in our loan portfolio may increase. The timing and amount of loan losses that may occur is dependent upon several factors, most notably expected general, regional and local economic conditions and the specific financial condition of our borrowers. Although

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we use the best information available, the level of the allowance for loan losses remains an estimate, which is subject to significant judgment and short-term changes.

The following table describes the allocation of the allowance for loan losses among various categories of loans and certain other information as of the dates indicated. An unallocated allowance is distributed proportionately among each loan category. This unallocated portion of the allowance for loan losses is important to maintain the overall allowance at a level that is adequate to absorb potential credit losses inherent in the total loan portfolio. 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.

	As of September 30, 2004								As of December 31, 2003
			Percent			Percent of					Percent			Percent of
	Reserve		of			loans to			Reserve		of			loans to
(in thousands)	Amount		Allowance			Total loans			Amount		Allowance			Total loans
Commercial real estate	$	9,822		50.1	%		55.2	%	$	7,225		41.8	%		53.3	%
Residential		623		3.2			10.5			719		4.2			12.5
Commercial and industrial		8,239		42.1			26.8			8,611		49.7			26.9
Consumer		897		4.6			7.5			740		4.3			7.3
Total	$	19,581		100.0	%		100.0	%	$	17,295		100.0	%		100.0	%

Federal funds sold and interest bearing deposits with banks

We have used a number of short-term investment vehicles to invest excess funds. Short-term investment vehicles utilized include Federal funds sold and interest bearing deposits with correspondent banks. We have maintained adequate levels of overnight liquidity to meet potential loan demand and normal deposit fluctuations. At September 30, 2004, Federal funds sold and interest bearing balances with banks totaled $57.5 million compared to $27.9 million at December 31, 2003. The increase in Federal funds sold and interest bearing deposits in the first nine months of 2004 resulted from cash flows from the securities portfolio and the growth in deposits. Overnight fund levels have fluctuated as we have strategically moved funds out of these lower yielding earning assets into higher yielding earning assets. With short-term interest rates at historically low levels, we expect to continue to seek opportunities to invest excess funds at yields higher than the yield on overnight Federal funds or other short-term investment alternatives while maintaining adequate liquidity.

Securities

Our securities totaled $905.1 million or 32.8% of assets at September 30, 2004 compared to $866.7 million or 35.6% of assets at December 31, 2003. During 2004, cash flows from the securities portfolio were used to fund the strong commercial loan growth experienced and to enhance our liquidity position resulting in the limited growth in the securities portfolio. Securities provide a reliable source of interest income and a stable liquidity source. There is limited credit risk in our

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securities portfolios. All of our mortgage-backed securities are agency named and obligations of state and political subdivisions are primarily general obligation issues, which typically have additional credit enhancement. Corporate obligations represented less than five percent of all securities outstanding.

Due to our interest rate risk position during 2003 and into 2004, we extended the duration of the securities portfolio, which had the effect of increasing the yield on these assets. This strategy increases market risk but conversely provides stability to interest income were interest rates to decline. Strategies in the securities portfolios are executed within the overall interest rate risk management guidelines of the Bank.

The following tables present the amortized cost and market value of YNB’s securities portfolios as of September 30, 2004 and December 31, 2003.

Securities Available For Sale

	September 30, 2004				December 31, 2003
	Amortized		Market		Amortized		Market
(in thousands)	Cost		Value		Cost		Value
U.S. Treasury securities and obligations of other U.S. government agencies	$	213,576	$	212,434	$	143,013	$	141,898
Mortgage-backed securities		540,262		539,570		581,531		580,493
Corporate obligations		37,676		38,575		35,071		35,765
All other securities		39,851		39,851		39,851		39,851
Total	$	831,365	$	830,430	$	799,466	$	798,007

Investment Securities

	September 30, 2004				December 31, 2003
	Amortized		Market		Amortized		Market
(in thousands)	Cost		Value		Cost		Value
Obligations of state and political subdivisions	$	72,446	$	74,007	$	65,747	$	67,468
Mortgage-backed securities		2,238		2,295		2,939		3,008
Total	$	74,684	$	76,302	$	68,686	$	70,476

The securities available for sale (AFS) portfolio increased $32.4 million to $830.4 million from $798.0 million at December 31, 2003. The AFS portfolio is principally comprised of mortgage-backed securities (MBS) and agency-callable bonds. AFS securities represented 91.7% and 92.1% of total securities at September 30, 2004 and December 31, 2003, respectively. Activity in this portfolio may be undertaken to take advantage of market conditions that create more attractive returns or manage liquidity and interest rate risk. MBS securities made up 65.0% of the AFS portfolio at September 30, 2004 compared to 72.7% at December 31, 2003. MBS, which include CMOs, represent securities guaranteed by FHLMC, GNMA or FNMA. Principal cash flows from our MBS portfolio provide a secondary source of liquidity. However, these cash flows would likely decrease as interest rates rise and increase should interest rates decline. The decline in MBS as a percentage of the total portfolio resulted from increased purchases of US Agency callable and noncallable bonds and a decline in our holdings of MBS due to cash flows.

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AFS securities are reported at market value, with unrealized gains and losses, net of tax, included as a separate component of stockholders’ equity. Volatility in the treasury yield curve and changes in longer-term treasury rates during 2004 has resulted in the fluctuating level of market value depreciation of the AFS portfolio. At September 30, 2004, the AFS portfolio had a net unrealized loss, net of tax, of $608,000 compared to a net unrealized loss of $964,000 at December 31, 2003, which is reported in “Accumulated Other Comprehensive Loss” in stockholders’ equity.

Securities available for sale included in the Investment Growth Strategy totaled $19.5 million at September 30, 2004 compared to $56.6 million at December 31, 2003. This strategy reflected only 0.7% of total assets at September 30, 2004 compared to 2.3% of total assets at year-end 2003. Starting in 2003 and continuing in 2004, the cash flows from this strategy have been reinvested into higher yielding loans or reinvested in securities to achieve asset and liability objectives or to reduce our overall effective tax rate in order to improve our net income.

Investment securities classified as held to maturity increased $6.0 million to $74.7 million at September 30, 2004 from $68.7 million at December 31, 2003. The increase was due to a $6.7 million increase in obligations of state and political subdivisions or municipal bonds, partially offset by a $701,000 decrease in mortgage-backed securities. The municipal bond portfolio reduces our effective tax rate and enhances the tax equivalent yield of our investment securities. We expect to continue to increase our holdings of municipal bonds as part of our strategy to reduce our effective tax rate and increase net income.

Deposits

Deposits represent our primary funding source supporting earning asset growth. The continued strengthening of our brand image and targeted marketing of lower cost core deposits to a geographically larger market has contributed to a lower cost deposit base in 2004. The successful bidding and retention of surrogates’ deposits in several New Jersey counties and the use of money market balances acquired through an independent third party intermediary (Reserve Funds), that places deposits from brokerage clients with banks, has allowed us to fund our loan growth without having to dramatically increase our reliance on higher cost time deposits. Total deposits at September 30, 2004 were $1.78 billion an increase of $292.7 million or 19.7% compared to total deposits of $1.48 billion at December 31, 2003.

During the first nine months of 2004, we marketed several deposit initiatives, which have increased core deposits. Lower cost “Simply Better Checking” and our Chairman’s Choice interest bearing demand deposit products have been marketed in our geographic footprint. In addition, we have conducted CD promotions in the new Somerset County market area and in our core markets to provide additional deposit funding for our loan growth.

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The following table provides information concerning YNB’s deposit base at September 30, 2004 and December 31, 2003.

(in thousands)	9/30/04		12/31/03		Change			% Change
Non-interest bearing demand deposits	$	202,975	$	163,812	$	39,163			23.9	%
Interest bearing demand deposits		488,794		279,569		209,225			74.8
Money market deposits		343,343		352,760		(9,417	)		(2.7	)
Savings deposits		95,740		96,802		(1,062	)		(1.1	)
Certificates of deposit of $100,000 or more		158,120		133,947		24,173			18.1
Other time deposits		487,491		456,919		30,572			6.7
Total	$	1,776,463	$	1,483,809	$	292,654			19.7	%

Interest bearing demand deposits increased $209.2 million or 74.8% to $488.8 million at September 30, 2004 from $279.6 million at year-end 2003. Growth in interest bearing demand deposits accounted for 71.5% of the total growth in deposits in the first nine months of 2004. The strong growth in interest bearing demand deposits resulted primarily from the successful retention and growth of surrogates’ deposits (i.e., Intermingled Minors Trust Funds) from six counties in New Jersey and the introduction of “Simply Better Checking” in our core Mercer County market. Surrogates’ deposits totaled approximately $82.5 million at September 30, 2004. Our Simply Better Checking balances increased $156.2 million to $218.2 million at September 30, 2004 from $61.9 million at year-end 2003 with the majority of the growth taking place in our core Mercer County market. In the second quarter of 2004, we modified our Simply Better Checking product to guarantee the introductory rate for one year instead of six months. We believe this modification has been a key factor in the continuing success of the product. While Simply Better Checking has attracted many new customers to YNB, a portion of the growth has come from funds shifting out of other comparatively lower cost accounts as described below.

We have experienced a runoff in money market balances of $9.4 million or 2.7% to $343.3 million at September 30, 2004 from $352.8 million at December 31, 2003. The decrease in money market balances resulted primarily from declines in personal money market balances of $71.3 million and business money market balances of $29.9 million. The decline in personal money market balances resulted from the shift of balances to higher yielding Simply Better Checking accounts and, to a lesser extent, certificates of deposit. Offsetting the decline in personal and business money market balances was an increase in deposits acquired from Reserve Funds. At September 30, 2004, funds obtained from Reserve Funds totaled $60.4 million. The rate on these funds is tied to the overnight Federal funds rate and these funds were a key factor in our ability to meet the strong loan demand experienced in the first nine months of 2004 and improve our liquidity. We expect to continue to use this source to support our loan growth and improve our liquidity. We believe these deposits to be stable and less expensive then raising deposits through CDs. Savings deposits, another source of low cost or core deposits, have decreased $1.1 million to $95.7 million at September 30, 2004 compared to $96.8 million at December 31, 2003. A portion of this decline represented customers shifting their deposits from savings into our higher yielding Simply Better Checking product.

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We market our CDs through our branch network and through a computer-based service provided by an independent third party, which enables us to place CDs nationally. Total CDs, which include CDs of $100,000 or more and other time deposits, increased $54.7 million or 9.3% to $645.6 million at September 30, 2004 from $590.9 million at December 31, 2003. The increase resulted from a $46.2 million increase in CDs obtained through the nationwide computer-based service and an $8.5 million increase in CDs obtained through our retail network. At September 30, 2004, we had approximately $111.6 million in CDs obtained through this nationwide computer-based service, compared to approximately $65.4 million at December 31, 2003. At September 30, 2004, total CDs represented 36.3% of our total deposits compared to 39.8% at year-end 2003. While CDs are expected to continue to represent an important funding source, we are continuing our efforts through our retail strategy to further increase lower cost core deposits and reduce the need for higher cost funding sources. To help fund our loan growth and maintain retail CD relationships with our customers, we have introduced a competitively priced two-year CD. We have used interest rate swaps to lower our cost of these funds and better match the repricing of the CDs with our loans. We believe that this strategy may continue to be an important funding source for loan growth in the future.

Non-interest bearing demand deposits increased $39.2 million or 23.9% to $203.0 million at September 30, 2004 compared to $163.8 million at December 31, 2003. During 2004, we have redesigned our business checking products to provide accounts to meet the needs of small, mid and large size businesses. These new products have helped account for the growth in non-interest bearing demand deposits. We have seen significant growth in our “Business DDA Plus,” a checking account designed for our small business customers. We believe our enhanced product line of business checking products represents an opportunity to increase our non-interest bearing demand balances as our commercial relationships continue to expand.

It is our strategy to fund earning asset growth with the lowest cost deposits possible. To that end, we continue to promote our Simply Better Checking product throughout our markets and we have continued a targeted marketing campaign to promote our core free checking account products. Both of these campaigns should continue to attract core deposit relationships and contribute to improving our net interest margin. Excluding certificates of deposit, core deposits have historically not been adequate to meet loan demand and are not expected to do so in the future. If interest rates continue to rise, we believe money market balances and “Simply Better Checking” interest bearing demand deposit accounts could shift to higher cost CDs. While such a shift would potentially have a negative impact on our net interest margin, attracting lower cost core deposits through our retail strategy will remain an ongoing strategic objective.

A key part of our strategy to manage our cost of funds involves the opening of additional branches in our targeted markets. We are planning to open one branch in late December 2004 located in Ewing Township, Mercer County, New Jersey and we have several branch locations currently under development for 2005. We have received regulatory approval for a second branch in Pennington, Mercer County, that should open in the first quarter of 2005. We also have plans to open one additional branch in West Windsor in Mercer County and a branch in Morrisville, Bucks County, Pennsylvania, our second branch in Pennsylvania. These two branches are scheduled to open in the second quarter of 2005. The last branch scheduled to open

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as part of our plans for 2005 is located in Readington, Hunterdon County, New Jersey in the fourth quarter of 2005. Our planned Washington Township, Mercer County branch is now expected to open in early 2006. There are several factors that could result in our not opening all these branches. These include our inability to obtain regulatory approval for the new branches, not being able to obtain leases for the sites we have identified, or our inability to attract qualified staff for these new locations.

Borrowed Funds

Our primary funding strategy is to rely on attracting deposits to fund new asset growth. We may utilize borrowed funds as a secondary funding source for earning asset growth as well as for asset and liability management purposes. Borrowed funds consist primarily of Federal Home Loan Bank (FHLB) advances. Borrowed funds totaled $737.5 million at September 30, 2004, a decrease of $630,000 from the $738.1 million outstanding at December 31, 2003. The decrease was due to declines in other borrowed funds and to a lesser extent a decline in the Obligation for Employee Stock Ownership Plan (ESOP). With our focus on increasing lower cost core deposits to fund our asset growth, we anticipate that borrowed funds will be a less important source of funding for YNB in the future. At September 30, 2004, borrowed funds represented 26.8% of total assets compared to 30.4% at December 31, 2003. Within approved policy guidelines, we expect to continue to use borrowed funds as an alternative funding source or to meet desired business, or asset and liability objectives. As a result of the decreasing emphasis on our Investment Growth Strategy, we do not expect new FHLB advances to be used for that purpose in the future.

We had FHLB advances outstanding of $726.0 million at September 30, 2004, unchanged from the year-end 2003 total. Callable borrowings, primarily FHLB advances, totaled $609.0 million or 83.9% of total borrowed funds at September 30, 2004. Callable borrowings have original terms of seven to ten years and are callable after periods ranging from three months to five years. As of September 30, 2004, YNB had $496.0 million in callable borrowings with call dates of one year or less. We anticipate that, at September 30, 2004 interest rate levels, there will be no borrowings called in the next twelve months. In fact, rates would have to increase at least 300 basis points before we would have significant call activity in the next twelve months. At September 30, 2004, there were $113.0 million in floating rate FHLB advances maturing in one year or less. We believe, based on our liquidity position and loan demand, that we will roll the majority of these advances over at maturity. The structure of these advances will be determined based on asset and liability objectives.

Subordinated Debentures (Trust Preferred Securities)

At September 30, 2004 there were $62.9 million in subordinated debentures outstanding, an increase of $15.5 million from the $47.4 million outstanding on December 31, 2003. In June 2004, we completed the private sale of $15.0 million of floating rate trust preferred securities by Yardville Capital Trust VI, a wholly owned subsidiary of Yardville National Bancorp. This floating rate security provides for quarterly distributions at a variable annual coupon rate, which resets quarterly, based on three month LIBOR plus 270 basis points. The net proceeds from this offering were used for general corporate purposes including contributions to the Bank to fund its operations and expansion. A portion of the $15.0 million issued in June 2004 will count as tier 1

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capital immediately with the rest qualifying as tier 2 capital. Of the $61.0 million in outstanding trust preferred securities issued to third parties at September 30, 2004, approximately $52.0 million qualifies as tier 1 capital with the remaining $9.0 million qualifying as tier 2 capital. The amount of trust preferred securities qualifying as tier 1 capital is limited to 25% of all tier 1 capital. As tier 1 capital increases through the retention of earnings the amount of trust-preferred securities qualifying as tier 1 capital should also increase.

At December 31, 2003, we adopted FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”) which addresses how a business should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and, accordingly, should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46 which was issued in January 2003. The adoption of FIN 46 required us to deconsolidate our investment in mandatorily redeemable trust preferred securities of subsidiary trusts in our financial statements.

On May 6, 2004, the Federal Reserve Board requested public comment on a proposed rule that would retain trust preferred securities in tier 1 capital of bank holding companies, but with stricter quantitative limits and clearer qualitative standards. Under the proposal, after a three-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in tier 2 capital subject to restrictions. Based on an analysis of this proposed rule, we believe that our trust preferred securities should continue to qualify as tier 1 capital or tier 2 capital. If YNB was not allowed to include trust preferred securities in tier 1 capital at September 30, 2004, YNB would no longer be considered “well capitalized” but would be considered “adequately capitalized.”

Equity Capital

Stockholders’ equity at September 30, 2004 totaled $155.4 million an increase of $11.9 million from the $143.6 million at December 31, 2003. The increase in stockholders’ equity for the first nine months of 2004 was primarily due to the increase in undivided profits. A more detailed breakdown of the change in stockholders’ equity is listed below:

(i)	YNB earned net income of $13.8 million less cash dividends paid of $3.6 million for the nine months ended September 30, 2004.
(ii)	The net unrealized loss on securities available for sale was $608,000 at September 30, 2004 compared to a net unrealized loss of $964,000 at December 31, 2003. The decrease in the net unrealized loss resulted in a $356,000 increase in stockholders’ equity.
(iii)	Proceeds of $595,000 were received from the exercise of stock options and $336,000 was received in reinvested dividends and optional purchases associated with our Dividend Reinvestment and Stock Purchase Plan. We also recorded a $95,000 increase in stockholders’ equity associated with the fair market value adjustment related to the allocation of shares to employee accounts in our ESOP.

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(iv) Unallocated ESOP shares decreased by $283,000 to $472,000 at September 30, 2004 from $755,000 at December 31, 2003.

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The table below presents the actual capital amounts and ratios of the Holding Company and the Bank at September 30, 2004 and December 31, 2003.

	Amount				Ratios
(amounts in thousands)	9/30/04		12/31/03		9/30/04			12/31/03
Risk-based capital:
Tier 1:
Holding Company	$	206,138	$	188,493		10.2	%		11.1	%
Bank		184,900		172,795		9.2			10.1
Total:
Holding Company		234,716		205,788		11.7			12.1
Bank		204,481		190,090		10.2			11.1
Tier 1 leverage:
Holding Company		206,138		188,493		7.9			8.0
Bank	$	184,900	$	172,795		7.1	%		7.4	%

The minimum regulatory capital requirements for financial institutions require institutions to have a tier 1 leverage ratio of at least 4.0%, a tier 1 risk-based capital ratio of at least 4.0% and a total risk-based capital ratio of at least 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 September 30, 2004, the ratios of the Holding Company and the Bank exceeded the ratios required to be considered well capitalized. It is our goal to maintain adequate capital to continue to support YNB’s asset growth and maintain its status as a well capitalized institution.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

There have been no material changes in our market risk from December 31, 2003, except as discussed below. For information regarding our market risk, please refer to the Company’s Annual Report on Form 10-K, for the year ended December 31, 2003.

The balance sheet has been positioned to perform better in a gradually increasing interest rate environment. In the first nine months of 2004, the majority of our commercial loan growth was floating rate and tied to the prime rate of interest. Many of our floating rate commercial loans have interest rate floors. If rates were to decline further, in-the-money floors would protect interest income streams from decreasing. In the event rates were to rise we would benefit from floating rate loans repricing higher. Further, through our retail strategy we continued to attract lower cost core deposits that are less sensitive to changes in interest rates than certificates of deposit. During the first nine months of 2004, based on our overall interest rate risk position, we lengthened the duration of our investment portfolio and increased current earnings with only a modest impact to our overall interest rate risk profile.

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We manage interest rate risk by identifying and quantifying interest rate risk exposures using simulation analysis, economic value at risk models, and gap analysis. At September 30, 2004, the cumulative one-year gap was a positive $31.6 million or 1.1% of total assets compared to a negative $193.5 million or 8.0% of total assets at December 31, 2003. At December 31, 2003 our gap position included approximately $500.0 million of at-the-money or in-the-money floors on prime related loans. These floors, for gap purposes, effectively converted these floating rate loans to fixed rate loans and resulted in the negative gap position at year-end 2003. The amount of at-the-money or in-the-money floors has decreased to approximately $151.0 at September 30, 2004. The decline in at-the-money or in-the-money floors resulted primarily from the increase in the prime rate of interest. The higher prime rate resulted in loans that were treated as fixed rate loans, for gap purposes, at December 31, 2003, being treated as floating rate loans, for gap purposes, at September 30, 2004. This increase in loans treated as floating rate at September 30, 2004 is the primary cause for the shift in our gap position. In fact, if the prime rate of interest continues to increase, additional loans with floors will be treated as floating rate and not fixed rate for gap purposes resulting in an increasing positive gap position. However, $366.0 million of our floating rate loans have caps and should the prime rate of interest increase beyond 200 basis points, these floating rate loans will be treated as fixed rate loans for gap purposes.

Simulation analysis involves dynamically modeling our interest income and interest expense over a specified time period under various interest rate scenarios and balance sheet structures. We use simulation analysis primarily to measure the sensitivity of net interest income over 12 and 24-month time horizons. In our base case or static balance sheet sensitivity scenario, the model estimates the variance in net interest income with a change in interest rates of plus and minus 200 basis points over a 12-month period. Management utilized a minus 150 basis points scenario due to the interest rate environment that existed at September 30, 2004. The plus and minus base case scenario is measured within a policy guideline of -7% change in net interest income in the first year and -14% change in year two. The following table sets forth the expected change in net interest income from the base case given the below listed change in interest rates.

Changes in market interest	Percentage Change in Net Interest Income
rates (in basis points)	Next 12 months			Next 24 months
+200		2.6	%		0.8	%
Flat		—			—
-150		-0.8	%		1.3	%

These results reflect a lower benefit to net interest income with gradually rising interest rates at September 30, 2004 compared to December 31, 2003. The decline in the benefit to gradually rising rates resulted from the extension of the investment portfolio and the shortening of our funding mix. The benefit of these actions has been higher current period net interest income. Results of our simulation analysis suggest that the minus 150 basis point risk to net interest income over a 12 and 24-month period is limited. When factoring our financial projections (Growth Scenario) into our simulation model we see similar results.

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We measure longer-term interest rate risk through the Economic Value of Equity (“EVE”) model. This model involves projecting future cash flows from our current assets and liabilities over a long time horizon, discounting those cash flows at appropriate interest rates, and then aggregating the discounted cash flows. Our EVE is the estimated net present value of these discounted cash flows. The variance in the economic value of equity is measured as a percentage of the present value of equity. We use the sensitivity of EVE principally to measure the exposure of equity to changes in interest rates over a relatively long time horizon. The following table lists our percentage change in EVE in a plus or minus 200 basis point rate shock at September 30, 2004 and December 31, 2003. Due to the low level of interest rates at both dates, not all interest rates could be shocked down 200 basis points.

Changes in interest rate in	Percentage Change in EVE
basis points (Rate Shock)	9/30/04	12/31/03
+200	-18.8%	-22.1%
-200	-14.4%	-7.8%

At September 30, 2004, our longer-term exposure to rising rates, as measured by the percentage change in EVE, has modestly decreased from the exposure at December 31, 2003 and remained within policy guidelines. The policy guideline is -25%. At the same time, the risk to lower rates as a percentage of EVE has increased, but remains within policy guidelines, due to the actions described previously as well as the fact that the increase in interest rates since year end 2003 now allows for an increased downward rate shock. We will continue to monitor and take actions to mitigate longer-term interest rate risk as we execute balance sheet strategies designed to increase net interest income.

Certain shortcomings are inherent in the methodology used in the previously discussed interest rate risk measurements. Modeling changes in the simulation and EVE analysis require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. There are many factors that we evaluate when constructing the assumptions used in short-term and long-term interest rate risk models. One of the most important assumptions involves deposits without fixed maturity dates. Each assumption reflected some combination of market data, research analysis and business judgment. Accordingly, although the simulation and EVE models provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on YNB’s net interest income or economic value of equity and may differ materially from actual results.

We believe, based on our simulation results, that as of September 30, 2004, YNB is positioned to increase net interest income during a 12 to 24-month period of gradually increasing interest rates while mitigating a decline in net interest income should rates decline. We continue to monitor our gap position and rate shock analyses to detect changes to our exposure to fluctuating interest rates. We have the ability, to a certain extent, to shorten or lengthen maturities on assets, sell securities, enter into derivative financial instruments, or seek funding sources with different repricing characteristics in order to change our asset and liability structure for the purpose of mitigating the effect of short term and longer term interest rate risk.

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Item 4. Controls and Procedures

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the evaluation and subject to the limitations listed below, they concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its subsidiaries) required to be included in this report. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation.

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, provides reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system reflects resource constraints and the benefits of controls must be considered relative to their costs. Because there are inherent limitations in all control systems no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns occur because of error or mistake. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all future conditions; over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

Not Applicable.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3: Defaults Upon Senior Securities

Not Applicable.

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Item 4: Submission of Matters to a Vote of Securities Holders

Not Applicable.

Item 5: Other Information

Not Applicable.

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Item 6: Exhibits

10.1	Employment Agreement between the Registrant and F. Kevin Tylus
10.2	2003 Stock Option Plan for Non-Employee Directors — Form of Stock Option Agreement
31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Vice President and Treasurer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Vice President and Treasurer Pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

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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: November 9, 2004		By: Stephen F. Carman
		Stephen F. Carman
		Vice President and Treasurer

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INDEX TO EXHIBITS

Exhibit
Number	Description
10.1	Employment agreement between the Registrant and F. Kevin Tylus
10.2	2003 Stock Option for Non-employee Directors — Form of Stock Option Agreement
31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Vice President and Treasurer Pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Vice President and Treasurer Pursuant to 18 U.S.C. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

     THIS AGREEMENT (the “Agreement”), made this 28th day of September, 2004 by and among YARDVILLE NATIONAL BANCORP, a New Jersey corporation (the “Company”), YARDVILLE NATIONAL BANK, a wholly owned subsidiary of the Company (the “Bank”), and F. KEVIN TYLUS (the “Executive”).

W I T N E S S E T H

     WHEREAS, the Company and the Bank desire to retain the services of the Executive as Senior Executive Vice President and Chief Administrative Officer of the Bank and the Company; and

     WHEREAS, the Executive and the respective Boards of Directors of the Bank and the Company desire to enter into an employment agreement setting forth the terms and conditions of the Executive’s employment and the related rights and obligations of each of the parties.

     NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is hereby agreed as follows:

     1. Employment. The Executive shall be employed as Senior Executive Vice President and Chief Administrative Officer of the Bank and the Company, reporting directly to the President/CEO. The Executive shall have responsibility for, and shall perform all duties and shall have all powers which are commonly incident to his offices or which, consistent with those offices, are delegated to him by the President/CEO or the Board of Directors of the Company or the Bank. The Executive shall render such administrative and management services as are customarily provided by persons employed in similar executive capacities.

     2. Location and Facilities. The Executive will be furnished with the working facilities and staff customary for executive officers with the title and duties set forth in Section 1 and as are necessary for him to perform his duties. The location of such facilities and staff shall be at the principal administrative offices of the Company and the Bank, or at such other site or sites customary for such offices.

     3. Term.

a.	The term of this Agreement shall be (i) the initial term, consisting of the period commencing on October 1, 2004 (the “Effective Date”) and ending on the third anniversary of the Effective Date, plus (ii) any and all extensions of the initial term made pursuant to this Section 3.
b.	On each anniversary of the Effective Date prior to a termination of the Agreement, the term under this Agreement shall be extended automatically for an additional one (1) year period beyond the then

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effective expiration date without action by any party, provided that neither the Company and the Bank, on the one hand, nor Executive, on the other, shall have given written notice at least sixty (60) days prior to such anniversary date of their or his desire that the term not be extended.

     4. Base Compensation.

a.	The Company and the Bank agree to pay the Executive during the term of this Agreement a base salary at the rate of $257,500 per year, payable in accordance with customary payroll practices.
b.	The Board of Directors of the Bank (or a designated Committee thereof) shall review annually the rate of the Executive’s base salary based upon factors they deem relevant, and may maintain or increase his salary, provided that no such action shall reduce the rate of salary below the rate in effect on the Effective Date.
c.	In the absence of action by the Board of Directors of the Bank (or a designated Committee thereof), the Executive shall continue to receive salary at the annual rate specified on the Effective Date or, if another rate has been established under the provisions of this Section 4, the rate last properly established by action of the Board of Directors of the Bank under the provisions of this Section 4.

     5. Bonuses. The Executive shall be entitled to participate in any compensation programs that the Company or the Bank may award from time to time to senior management employees, pursuant to bonus plans or otherwise. For 2004 and subsequent years, Executive shall have a cash bonus opportunity as set forth in Appendix A to this Agreement.

     6. Benefit Plans.

a. The Executive shall be entitled to participate in such life insurance, medical, dental, pension, profit sharing, and retirement plans, stock compensation plans and other benefit programs and arrangements as may be approved from time to time by the Company and the Bank for the benefit of their employees. As soon as practicable following the first anniversary of the effective date of this Agreement, if the Agreement is still in effect on such date, the Board of the Bank shall take such action as may be necessary to designate the Executive as a participant in the Bank’s Second Amended and Restated Supplemental Executive Retirement Plan (the “SERP”) with a Target Benefit (as defined in the SERP) of 60 percent.

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b.

Upon the October meeting date of the Organization and Compensation Committee, the Executive shall be granted stock options under the Yardville National Bancorp 1997 Stock Option Plan (“Stock Option Plan”) Plan covering 25,000 shares of the Company’s common stock. All such grants shall become exercisable immediately and shall, in all respects, be subject to the terms and conditions of the Stock Option Plan.

c.

Additional compensation by way of restrictive stock grants (if available and approved by the Organization and Compensation Committee) or cash, in the amount of $166,667 per year for three years to be paid in January 2006, January 2007 and January 2008. Since the January 2008 payment referred to above is beyond the initial term of this Agreement, said payment will be due and owing to the Executive in October 2007 in the event the Agreement is not extended beyond that date.

     7. Vacation and Leave.

a.

The Executive shall be entitled to vacations and other leave in accordance with Bank policy for senior executives, or otherwise as approved by the Boards of Directors of the Company or the Bank.

b.

In addition to paid vacations and other leave, the Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his duties for such additional periods of time and for such valid and legitimate reasons as the Boards of Directors of the Company and the Bank may in their discretion determine. Further, the Boards of Directors may grant to the Executive a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as the Boards of Directors, in their discretion, may determine.

     8. Expense Payments and Reimbursements. The Executive shall be reimbursed for or provided with all reasonable out-of-pocket business expenses that he shall incur in connection with his services under this Agreement (including, but not limited to, automobile and club-related expenses) upon substantiation of such expenses in accordance with applicable policies of the Company or the Bank. In addition, the Bank shall reimburse Executive for certain relocation expenses incurred by his immediate prior employer if and when those expenses are paid by the Executive to his prior employer, and the Executive provides the Bank with proof of said payment.

     9. Automobile Allowance. During the term of this Agreement, the Executive shall be entitled to a Company automobile or automobile allowance on terms no less favorable than those in effect immediately prior to the execution of this Agreement. Executive shall comply with reasonable reporting and expense limitations on the use of such automobile as may be established by the Company or the Bank from time to time, and the Company or the Bank shall annually include on Executive’s Form W-2 any amount of income attributable to Executive’s personal use of the automobile.

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     10. Loyalty and Confidentiality.

a.	During the term of this Agreement the Executive: (i) shall devote all his time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, that from time to time, the Executive may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations which will not present any conflict of interest with the Company and the Bank or any of their subsidiaries or affiliates, unfavorably affect the performance of Executive’s duties pursuant to this Agreement, or violate any applicable statute or regulation; and (ii) shall not engage in any business or activity contrary to the business affairs or interests of the Company and the Bank.
b.	Nothing contained in this Agreement shall prevent or limit the Executive’s right to invest in the capital stock or other securities of any business dissimilar from that of the Company and the Bank, or, solely as a passive, minority investor, in any business.
c.	The Executive agrees to maintain the confidentiality of any and all information concerning the operations or financial status of the Company and the Bank; the names or addresses of any borrowers, depositors and other customers; any information concerning or obtained from such customers; and any other information concerning the Company and the Bank to which he may be exposed during the course of his employment. The Executive further agrees that, unless required by law or specifically permitted by the Boards of Directors in writing, he will not disclose to any person or entity, either during or subsequent to his employment, any of the above-mentioned information which is not generally known to the public, nor shall he employ such information in any way other than for the benefit of the Company and the Bank.

     11. Termination and Termination Pay. Subject to Section 12 of this Agreement, the Executive’s employment under this Agreement may be terminated in the following circumstances:

a.	Death. The Executive’s employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event the Executive’s estate shall be entitled to receive the compensation due to the Executive through the last day of the calendar month in which his death occurred.
b.	Retirement. Notwithstanding anything in this Agreement to the contrary, this Agreement shall terminate upon the retirement of the Executive under the retirement benefit plan or plans in which he participates under Section 6 of this Agreement or otherwise.
c.	Disability.

     i. The Company, the Bank, or the Executive may terminate the Executive’s employment after having established the

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Executive’s Disability. For purposes of this Agreement, “Disability” means the Executive’s suffering a sickness, accident or injury which has been determined by the carrier of any individual or group disability insurance policy covering the Executive, or by the Social Security Administration, to be a disability rendering the Executive totally and permanently disabled. The Boards of Directors of the Company and the Bank shall determine in good faith whether or not the Executive is disabled for purposes of this Agreement. As a condition to any benefits, the Board may require the Executive to submit proof of the carrier’s or the Social Security Administration’s determination of disability.

     ii. In the event of the Executive’s termination of employment by reason of Disability, the Executive shall continue to receive one-hundred percent (100%) of his monthly base salary (at the annual rate in effect on his date of termination) through the earlier of the date of the Executive’s death, the date he attains age 65 or the date which is three (3) years after the Executive’s termination date. Such payments shall be reduced by the amount of any short- or long-term disability benefits payable to the Executive under any other disability program sponsored by the Company or the Bank.

     iii. In addition, during any period of the Executive’s Disability in which he is receiving payments under this Section 11(c), the Executive and his dependents shall, to the greatest extent possible, continue to be covered under all benefit plans (including, without limitation, retirement plans and medical, dental and life insurance plans) of the Company and the Bank in which Executive participated prior to his Disability, on the same terms as if Executive were actively employed by the Company and the Bank through the earlier of the date of the Executive’s death, the date he attains age 65 or the date which is three (3) years after the Executive’s termination date.

d. Just Cause.

     i. The Boards of Directors of the Company or the Bank may, by written notice to the Executive in the form and manner specified in this paragraph, immediately terminate his employment with the Company or the Bank, respectively, at any time, for Just Cause. The Executive shall have no right to receive compensation or other benefits for any period after termination for Just Cause, except for previously vested benefits. Termination for “Just Cause” shall mean termination because of, in the good faith determination of the Company’s or the Bank’s Board of Directors, the Executive’s:

(1)	Personal dishonesty;
(2)	Incompetence;

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(3)	Willful misconduct;
(4)	Breach of fiduciary duty involving personal profit;
(5)	Intentional failure to perform duties under this Agreement;
(6)	Willful violation of any law, rule or regulation (other than traffic violations or similar offenses) that reflects adversely on the reputation of the Bank, any felony conviction, any violation of law involving moral turpitude, or any violation of a final cease-and-desist order; or
(7)	Material breach of any provision of this Agreement.

     ii. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Just Cause by the Company or the Bank unless there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds (?) of the entire membership of the Boards of Directors of the Company or the Bank at a meeting of such Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board with counsel), finding that, in the good faith opinion of such Board, the Executive was guilty of conduct described above and specifying the particulars thereof.

e.

Voluntary Termination by Executive. In addition to his other rights to terminate employment under the Agreement, the Executive may voluntarily terminate employment during the term of this Agreement upon at least sixty (60) days prior written notice to the Boards of Directors of the Company and the Bank, in which case the Executive shall receive only his compensation, vested rights and employee benefits up to the date of his termination.

f.

Without Just Cause or With Good Reason.

     i. In addition to termination pursuant to Sections 11(a) through 11(e), (x) the Boards of Directors of the Company or the Bank, may, by written notice to the Executive, immediately terminate his employment at any time for a reason other than Just Cause (a termination “Without Just Cause”) and (y) the Executive may, by written notice to the Boards of the Company and the Bank, immediately terminate this Agreement at any time within ninety (90) days following an event constituting “Good Reason” as defined below (a termination “With Good Reason”).

     ii. Subject to Section 12 hereof, in the event of termination under this Section 11(f), the Executive shall be entitled

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to receive his annual base salary and the bonus that would have been paid for the remaining term of the Agreement, including any renewals or extensions thereof, determined by reference to the highest annual rate of base salary in effect pursuant to Section 4 of this Agreement in any of the twelve (12) months immediately preceding the date of such termination and the highest annual cash bonus paid (or accrued on behalf of) the Executive in any of the three (3) completed calendar years immediately preceding the date of termination. In addition, the Executive shall be entitled to any payments due to him under Section 6(c) of this Agreement. The sum due under this Section 11(f) shall be paid in one lump sum within thirty (30) calendar days of such termination. Also, in such event, the Executive shall, for a thirty-six (36) month period, continue to participate in any benefit plans of the Company and the Bank that provide health (including medical and dental), or life insurance, or similar coverage, upon terms no less favorable than the most favorable terms provided to senior executives of the Company or the Bank during such period. In the event that the Company or the Bank is unable to provide such coverage by reason of the Executive no longer being an employee, the Company or the Bank shall provide the Executive with comparable coverage on an individual policy basis or, if individual coverage is not available, provide a cash payment equivalent to the value of such coverage.

     iii. “Good Reason” shall exist if, without the Executive’s express written consent, the Company or the Bank materially breach any of their respective obligations under this Agreement. Without limitation, such a material breach shall be deemed to occur upon any of the following:

(1)	A material reduction in the Executive’s responsibilities or authority, or a requirement that the Executive report to any person or group other than the Boards of Directors of the Company and the Bank (or any other effective reduction in reporting responsibilities) in connection with his employment with the Company or the Bank;
(2)	Assignment to the Executive of duties of a non-executive nature or duties for which he is not reasonably equipped by his skills and experience;
(3)	Failure of the Executive to be nominated or renominated to the Boards of Directors of the Company or the Bank;
(4)	A reduction in salary or benefits contrary to the terms of this Agreement, or, following a Change in Control

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	as defined in Section 12 of this Agreement, any reduction in salary or material reduction in benefits below the amounts to which he was entitled prior to the Change in Control;
(5)	Termination of incentive and benefit plans, programs or arrangements, or reduction of the Executive’s participation, to such an extent as to materially reduce their aggregate value below their aggregate value as of the Effective Date; or
(6)	A requirement that the Executive relocate his principal business office or his principal place of residence outside of the area consisting of a thirty-five (35) mile radius from the current main office of the Bank, or the assignment to the Executive of duties that would reasonably require such a relocation.

     iv. Notwithstanding the foregoing, a reduction in base salary or a reduction or elimination of the Executive’s participation or benefits under one or more benefit plans maintained by the Company or the Bank as part of a good faith, overall reduction in salary or reduction or elimination of such plan or plans or benefits thereunder, applicable to all participants in a manner that does not discriminate against the Executive (except as such discrimination may be necessary to comply with law), shall not constitute an event of Good Reason or a material breach of this Agreement, provided that benefits of the type or to the general extent as those offered under such plans prior to such reduction or elimination are not available to other officers of the Company or the Bank, or any company that controls either of them, under a plan or plans in or under which the Executive is not entitled to participate.

     v. Notwithstanding anything in this Agreement to the contrary, during the twelve (12) month period beginning on the effective date of a Change in Control (as defined in Section 12(a)), and continuing through the first anniversary of such date, the Executive may voluntarily terminate his employment under this Agreement for any reason and such termination shall constitute termination With Good Reason.

g. Continuing Covenant Not to Compete or Interfere with Relationships. Regardless of anything herein to the contrary, following a termination by the Company, the Bank or the Executive pursuant to Section 11(f) and continuing until the six month anniversary of the effective date of such termination, (i) the obligations of the Executive under Section 10(c) of this Agreement will continue in effect (ii) the Executive shall not serve as an officer, director or employee of any bank holding company, bank, savings

52

association, savings and loan holding company, or mortgage company which offers products or services competing with those offered by the Company or the Bank from any office within fifty (50) miles from the main office or any branch of the Bank and shall not interfere with the relationship of the Company or the Bank and any of its employees, agents, or representatives.

     12. Termination in Connection with a Change in Control.

a. “Change in Control” means any one of the following events occurs:

     i. Merger: the Company merges into or consolidates with another corporation, or merges another corporation into the Company and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation;

     ii. Acquisition of Significant Share Ownership: a report on Schedule 13D or another form or schedule (other than Schedule 13G) is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 25% or more of a class of the Company’s voting securities, but this clause (b) shall not apply to beneficial ownership of Company voting shares held in a fiduciary capacity by an entity of which the Company directly or indirectly beneficially owns fifty percent (50%) or more of its outstanding voting securities;

     iii. Change in Board Composition: during any period of two consecutive years, individuals who constitute the Company’s Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Company’s Board of Directors; provided, however, that for purposes of this clause (c) each director who is first elected by the board (or first nominated by the board for election by stockholders) by a vote of at least three-fourths (3/4) (b) of the directors who were directors at the beginning of the period shall be deemed to have been a director at the beginning of the two-year period; or

     iv. Sale of Assets: The Company sells to a third party all or substantially all of the Company’s assets.

b. If within the period beginning six (6) months prior to and ending three (3) years after a Change in Control, (i) the Company or the Bank shall terminate the Executive’s employment Without Just Cause, or (ii) the Executive shall voluntarily terminate his employment With Good Reason,

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the Company and the Bank shall, within thirty (30) calendar days of the termination of the Executive’s employment, make a lump-sum cash payment to him equal to three (3) times the sum of the Executive’s (x) highest annual rate of base salary during the thirty-six (36) month period preceding the effective date of the Change in Control and (y) the highest annual bonus or similar incentive compensation paid to the Executive or accrued on the Executive’s behalf during the three (3) most recently completed calendar years preceding the effective date of the Change in Control and (z) any payments still due to the Executive under Section 6(c) of this Agreement. This cash payment shall be made in lieu of any payment also required under Section 11(f) of this Agreement because of a termination in such period. Also, in such event, the Executive shall, for a thirty six (36) month period, continue to participate in any benefit plans of the Company and the Bank that provide health (including medical and dental) or life insurance, or similar coverage upon terms no less favorable than the most favorable terms provided to senior executives of the Bank during such period. In the event that the Company or the Bank is unable to provide the coverage referred to in the preceding sentence by reason of the Executive no longer being an employee, the Company and the Bank shall provide the Executive with comparable coverage on an individual policy basis or, if individual coverage is not available, provide a cash payment equivalent to the value of such coverage.

     13. Indemnification and Liability Insurance.

a.

Indemnification. The Company and the Bank agree to indemnify the Executive (and his heirs, executors, and administrators), and to advance expenses related thereto, to the fullest extent permitted under applicable law and regulations against any and all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit, or proceeding in which he may be involved by reason of his having been a director or executive of the Company or the Bank or any of their subsidiaries (whether or not he continues to be a director or Executive at the time of incurring any such expenses or liabilities). Such expenses and liabilities shall include, but shall not be limited to, judgments, court costs, and attorney’s fees and the cost of reasonable settlements, such settlements to be approved by the Boards of Directors of the Company or the Bank, if such action is brought against the Executive in his capacity as an Executive or director of the Company or the Bank or any of their subsidiaries. Indemnification for expenses shall not extend to matters for which the Executive has been terminated for Just Cause. Nothing contained herein shall be deemed to provide indemnification otherwise prohibited by applicable law or regulation. Notwithstanding anything herein to the contrary, the obligations of this Section 13 shall survive the term of this Agreement by a period of six (6) years.

b.

Insurance. During the period in which indemnification of the Executive is required under this Section 13, the Company or the Bank shall provide the

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Executive (and his heirs, executors, and administrators) with coverage under a directors’ and officers’ liability policy at the expense of the Company and the Bank, at least equivalent to such coverage provided to directors and senior Executives of the Company or the Bank.

     14. Reimbursement of Executive’s Expenses to Enforce this Agreement. The Company or the Bank shall reimburse the Executive for all out-of-pocket expenses, including, without limitation, reasonable attorney’s fees, incurred by the Executive in connection with successful enforcement by the Executive of the obligations of the Company or the Bank to the Executive under this Agreement. Successful enforcement shall mean the grant of an award of money or the requirement that the Company or the Bank take some action specified by this Agreement (i) as a result of court order; or (ii) otherwise by the Company or the Bank following an initial failure of the Company or the Bank to pay such money or take such action promptly after written demand therefore from the Executive stating the reason that such money or action is or was due under this Agreement.

     15. Adjustment of Certain Payments and Benefits.

a.

Tax Indemnification. Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment, benefit or distribution made or provided by the Company or the Bank to or for the benefit of the Executive (whether made or provided pursuant to the terms of this Agreement or otherwise) (each referred to herein as a “Payment”), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) or any interest or penalties are incurred by the Executive with respect to such excise tax (the excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

b.

Determination of Gross-Up Payment. Subject to the provisions of Section 15(c), all determinations required to be made under this Section 15, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm reasonably acceptable to the Company and the Bank as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations to the Company, the Bank and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company and the Bank. All fees and expenses of the

55

Accounting Firm shall be borne solely by the Company and the Bank. Any Gross-Up Payment, as determined pursuant to this Section 15, shall be paid by the Company to the Executive within five business days of the later of (i) the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code, at the time of the initial determination by the Accounting Firm hereunder, it is possible that a Gross-Up Payment will not have been made by the Company and the Bank which should have been made (an “Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company and the Bank exhaust their remedies pursuant to Section 15(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company or the Bank to or for the benefit of the Executive.

c.

Treatment of Claims. The Executive shall notify the Company and the Bank in writing of any claim by the Internal Revenue Service that, if successful, would require a Gross-Up Payment to be made. Such notification shall be given as soon as practicable, but no later than ten business days, after the Executive is informed in writing of such claim and shall apprise the Company and the Bank of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which it gives such notice to the Company and the Bank (or any shorter period ending on the date that payment of taxes with respect to such claim is due). If the Company or the Bank notifies the Executive in writing prior to the expiration of this period that it desires to contest such claim, the Executive shall:

i. give the Company and the Bank any information reasonably requested by the Company and the Bank relating to such claim;

ii. take such action in connection with contesting such claim as the Company and the Bank shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company and the Bank;

iii. cooperate with the Company and the Bank in good faith in order to effectively contest such claim; and

iv. permit the Company and the Bank to participate in any proceedings relating to such claim; provided, however, that the Company and the Bank shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and indemnity and hold the Executive harmless, on an after-tax basis, for any Excise Tax or related taxes, interest or penalties imposed as a result of

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such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 15(c), the Company and the Bank shall control all proceedings taken in connection with such contest and, at their option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority with respect to such claim and may, at their option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. Further, the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company and the Bank shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company and the Bank shall advance the amount of such payment to the Executive, on an interest-free basis (including interest or penalties with respect thereto). Furthermore, the Company’s and the Bank’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority.

d. Adjustments to the Gross-Up Payment. If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 15(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s compliance with the requirements of Section 15(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after applicable taxes). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 15(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and such denial of refund occurs prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid.

     16. Injunctive Relief. If there is a breach or threatened breach of Section 11(g) of this Agreement, the Company or the Bank and the Executive agree that there is no adequate remedy at law for such breach, and that the Company and the Bank each shall be entitled to injunctive relief restraining the Executive from such breach or threatened breach, but such relief shall not be the exclusive remedy hereunder for such breach. The parties hereto likewise agree that the Executive, without limitation, shall be entitled to injunctive relief to enforce the obligations of the Company and the Bank under Section 12 of this Agreement.

     17. Successors and Assigns.

a. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company or the Bank that acquires, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Company or the Bank.

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b. Since the Bank and the Company are contracting for the unique and personal skills of the Executive, the Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Bank and the Company.

     18. No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment.

     19. Notices. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or 48 hours after mailing at any general or branch office of the United States Postal Service, by registered or certified mail, postage prepaid, addressed to the Company and/or the Bank at their principal business offices and to the Executive at his home address as maintained in the records of the Company and the Bank.

     20. Joint and Several Liability; Payments by the Company and the Bank. To the extent permitted by law, except as otherwise provided herein, the Company and the Bank shall be jointly and severally liable for the payment of all amounts due under this Agreement. The Company hereby agrees that it shall be jointly and severally liable with the Bank for the payment of all amounts due under this Agreement and shall guarantee the performance of the Bank’s obligations hereunder, provided that the Company shall not be required by this Agreement to pay to the Executive a salary or any bonuses or any other cash payments, except in the event that the Bank does not fulfill its obligations to the Executive for such payments.

     21. No Plan Created by this Agreement. The Executive, the Company and the Bank expressly declare and agree that this Agreement was negotiated among them and that no provisions of this Agreement are intended to, or shall be deemed to, create any “plan” for purposes of the Employee Retirement Income Security Act of 1974 (ERISA) or any other law or regulation, and each party expressly waives any right to assert the contrary. Any assertion in any judicial or administrative filing, hearing, or process that such a plan was created by this Agreement shall be deemed a material breach of this Agreement by the party making such an assertion.

     22. Amendments. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as otherwise specifically provided for herein.

     23. Applicable Law. Except to the extent preempted by federal law, the laws of the State of New Jersey shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise.

     24. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the remaining provisions hereof.

     25. Headings. Headings contained herein are for convenience of reference only.

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     26. Entire Agreement. This Agreement, together with any modifications agreed to in writing by the parties, shall constitute the entire agreement among the parties with respect to the subject matter hereof, other than written agreements with respect to specific plans, programs or arrangements described in Sections 5 and 6. This agreement supercedes and replaces in its entirety any previous employment agreements between or among the Company, the Bank and the Executive.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above.

Attest:		YARDVILLE NATIONAL BANCORP
			Patrick M. Ryan
		By:	Patrick M. Ryan
	Daniel J. O’Donnell, Secretary	Title:	President /CEO
Attest:		YARDVILLE NATIONAL BANK
			Patrick M. Ryan
		By:	Patrick M. Ryan
	Daniel J. O’Donnell, Secretary	Title:	President / CEO
Daniel J. O’Donnell			F. Kevin Tylus
	Witness		F. Kevin Tylus

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APPENDIX A

For year 2004, the Executive shall be entitled to the following bonuses:

1.

Initial sign-on bonus of $50,000 to be paid on October 1, 2004.

2.

Based on the final 2004 fiscal year numbers, the Executive shall be paid a bonus of one quarter of 1.0% of any after tax/prior to shareholders’ dividend profit (the “Profit”) provided the Bank reaches a target Profit of $17,850,000.00. If the target Profit is not reached, then the Executive will be paid a bonus of one quarter of .85% on the lower Profit amount provided, however, that no bonus would be paid if the Profit were less than $10,000,000.00.

For fiscal year 2005, the Executive’s bonus will be determined at the discretion of the Organization and Compensation Committee. It is the intent of the parties to this agreement that if the bonus is calculated similar to year 2004, then the Executive’s bonus for 2005 will not be less than 1% of the Profit, if the 2005 targeted Profit number (whatever it may be) is reached or .85% if the Profit is less than the targeted Profit.

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EX-10.2

Exhibit 10.2

DIRECTOR NAME: EXERCISE PRICE:

NUMBER OF SHARES:

YARDVILLE NATIONAL BANCORP
STOCK OPTION AGREEMENT

     Yardville National Bancorp, a New Jersey corporation (the “Company”), this           day of          ,          , (the “Option Date”), pursuant to its 2003 Stock Option Plan for Non-Employee Directors (the “Plan”) hereby grants to (the “Director”), an option to purchase shares of the Common Stock (“Common Stock”), no par value, of the Company in the amount and on the terms and conditions hereinafter set forth.

1.	Incorporation of Plan by Reference. The provisions of the Plan, a copy of which is being furnished herewith to the Director, are incorporated by reference herein and shall govern as to all matters not expressly provided for in this Agreement. Terms not defined herein have the meanings set forth in the Plan. In the event of any conflict between the terms of this Agreement and the Plan, the terms of the Plan shall govern.
2.	Grant of Option. The Company hereby grants to the Director an option (the “Option”) to purchase all or part of an aggregate of shares of Common Stock on the terms and conditions herein set forth.
3.	Purchase Price. per share subject to adjustment as provided The purchase price            in Section 6 below and subject to the terms of the Common Stock            and conditions of the Plan. subject to the Option shall be $
4.	Terms of Option.

(a) Vesting. This Option shall not be exercisable until the dates shown below except that all options shall vest in the event of any proposed sale or conveyance or any proposed or effected change in control of the Company (as set forth in Section 8(b)(iii) of the Plan):

Page 1 of 4

Number of Shares
As To Which Option
May Be Exercised First Date On
Which Option
May Be Exercised Last Date On Which
Such Portion May Be
Exercised

Any portion of the Option not exercised by its Last Date shall lapse at the close of business on that date and be null and void thereafter.

(b)	Final Termination. Notwithstanding anything to the contrary set forth in Section 4 (a). The Option shall no longer be exercisable five years from the date hereof or such shorter time as is prescribed in the Plan or in this Agreement.
(c)	Restrictions. This Option is subject to all the terms and conditions set forth in the Plan including, but not limited to, the following:

(i)	This Option is not transferable, as provided in Section 8 (d) of the Plan;
(ii)	This Option lapses one year after the termination, for any reason, whatsoever (other than disability or death), of Director’s employment with the Company, as provided in Section 8 (e) of the Plan; and
(iii)	This Option may be exercised by the Director, or his legal representative for a period of twelve months after the Director becomes disabled or after the death of the Director, as provided in Section 8 (f) and (j) of the Plan.

(d)	Exercise. This Option shall be exercised by notice to the Company accompanied by full payment in cash (or             shares of Common Stock of the Company), as set forth in Section 8 (c) of the Plan.
(e)	Securities Law Restrictions. The Company is under no obligation to file a registration statement under the Securities Act of 1933 with respect to the

Page 2 of 4

Common Stock issued upon exercise of the Option. As provided by Section 14 (b) of the Plan, unless a registration statement under the Act has been filed and remains effective with respect to the Common Stock, the Company shall require that the offer and sale of such shares be exempt from the registration provisions of the Act. As a condition of such exemptions, the Company shall require a representation and undertaking, in form and substance satisfactory to the Company Stock, for his own account for investment and not with a view to the distribution or resale thereof and should otherwise require such representations and impose such conditions as shall establish to the Company’s satisfaction that the offer and sale of the Common Stock issuable upon the exercise of the Option will not constitute a violation of the Act or any similar state act affecting the offer and sale of the Common Stock. If the Common stock is issued in an exempt transaction, the shares shall bear the following restrictive legend:

“These shares have not been registered under the Securities Act of 1933. No transfer of the shares may be affected without an opinion of counsel to the company stating that the transfer is exempt from registration under the Act and any applicable state securities laws or that the transfer of the shares is covered by an effective registration statement with respect to the shares.”

5.	Restrictions on Transfer. This Option may not be transferred, assigned, pledged or hypothecated and shall not be subject to execution, attachment or similar process. In the event the terms of this paragraph are not complied with by the Director, or if the Option is subject to execution, attachment or similar process, this Option shall immediately lapse and become null and void.
6.	Anti-Dilution Provisions. If prior to expiration of the Option there shall occur any change in the outstanding Common Stock of the Company by reason of any stock dividend, stock split, combination or exchange of             shares, merger, consolidation, recapitalization, reorganization, liquidation, or the like, and as often as the same shall occur, than the kind and number of shares subject to the Option or purchase price per share of Common Stock, or both, shall be adjusted by the Stock Option Committee in such a manner as it may deem equitable, the determination of which shall be binding and conclusive.
7.	Acceptance of Provisions. The execution of this Agreement by the Director shall constitute the Director’s acceptance of and agreement to all terms and conditions of the Plan and this Agreement.

Page 3 of 4

8.

Notices. All notices and other communications required or permitted under the Plan and this Agreement shall be in writing and shall be given either by (i) personal delivery or regular mail, in each case against receipt, or (ii) first class registered or certified mail, return receipt requested or (iii) FAX transmission. Any such communication shall be deemed to have been given (i) on the date of receipt in the cases referred to in clauses (i) or (iii) of the preceding sentence and (ii) on the second day after the date of mailing in the cases referred to in clause (ii) of the preceding sentence. All such communication to the Company shall be addressed to it, to the attention of its Secretary or Treasurer, at its then principal office and to the Director at his last address appearing on the records of the Company, or in each case, to such other person or address as may be designated by like notice hereunder.

9.

Miscellaneous. This Agreement and the Plan contain a complete statement of all the arrangements between the parties with respect to their subject matter, and this Agreement may not be changed except by writing executed by both parties. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to agreements made and to be performed exclusively in New Jersey. The headings in this Agreement are solely for convenience of reference and shall not affect its meaning or interpretation.

By:
	Patrick My Ryan, President & CEO

Director
 

Acceptance Date
 

Page 4 of 4

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Patrick M. Ryan, President and Chief Executive Officer, certify that:

1. I have reviewed this report on Form 10-Q of Yardville National Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

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5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a.	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information, and
b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 9, 2004	By:	Patrick M. Ryan
	Name:	Patrick M. Ryan
	Title:	President and Chief Executive Officer

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EX-31.2

Exhibit 31. 2

CERTIFICATION

I, Stephen F. Carman, Vice President and Treasurer, certify that:

1. I have reviewed this report on Form 10-Q of Yardville National Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:

a.	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit

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committee of the registrant’s board of directors (or persons performing the equivalent function):

a.	all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information, and
b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 9, 2004	By:	Stephen F. Carman
	Name:	Stephen F. Carman
	Title:	Vice President and Treasurer

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Yardville National Bancorp, (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick M. Ryan, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Patrick M. Ryan

Patrick M. Ryan
President and Chief Executive Officer
November 9, 2004

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EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Yardville National Bancorp, (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen F. Carman, Vice President and Treasurer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Stephen F. Carman

Stephen F. Carman
Vice President and Treasurer
November 9, 2004

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