-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QEmSpPfjhPEHKjlRKkAh6OS1GfKtzEuKOMh+IHTzaVWdGbsbhXgaLnggW0OivPug c0dCFgKKsm2Nnw8H3jDAwg== 0000950116-99-000651.txt : 19990409 0000950116-99-000651.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950116-99-000651 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YARDVILLE NATIONAL BANCORP CENTRAL INDEX KEY: 0000787849 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 222670267 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26086 FILM NUMBER: 99584300 BUSINESS ADDRESS: STREET 1: 3111 QUAKERBRIDGE RD CITY: MERCERVILLE STATE: NJ ZIP: 08619 BUSINESS PHONE: 6095855100 MAIL ADDRESS: STREET 1: 3111 QUAKERBRIDGE RD CITY: MERCERVILLE STATE: NJ ZIP: 08619 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ---------------- Commission file number 0-26086 YARDVILLE NATIONAL BANCORP -------------------------- (Exact Name of Registrant as specified in its Charter) New Jersey 22-2670267 ---------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3111 Quakerbridge Road, Trenton, New Jersey 08619 ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (609) 585-5100 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by checkmark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K[ ] Aggregate market value of voting stock held by non-affiliates (computed by using the average of the closing bid and asked prices on March 18, 1999, in the NASDAQ National Market System: $52,881,716 Number of shares of common stock, no par value, outstanding as of March 18, 1999: 5,195,473 (Continued) DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Part of Form 10-K into DOCUMENT which Document is Incorporated -------- ------------------------------ Annual Report to Stockholders for fiscal year ended December 31, 1998 II Definitive proxy statement for the 1999 Annual Meeting of Stockholders to be held on April 27, 1999 III FORM 10-K INDEX PART I PAGE Item 1. Business 1 Item 2. Properties 16 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters 17 Item 6. Selected Financial Data 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17 Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 18 Item 12. Security Ownership of Certain Beneficial Owners and Management 18 Item 13. Certain Relationships and Related Transactions 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 18 Signatures 19 Index to Exhibits E-1 YARDVILLE NATIONAL BANCORP FORM 10-K PART I ITEM 1. BUSINESS. General Yardville National Bancorp (the "Company") is a bank holding company registered with the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956 (the "Bank Holding Company Act"). The Company's business is the ownership and management of The Yardville National Bank, a national banking association and the Company's sole banking subsidiary (the "Bank"). The Company was incorporated under the laws of New Jersey and became the holding company of the Bank in 1985. At December 31, 1998, the Company had total assets of approximately $757,666,000, deposits of approximately $519,643,000 and stockholders' equity of approximately $40,756,000. The Bank The Bank received its charter from The Office of the Comptroller of the Currency (the "OCC") in 1924 and commenced operations as a commercial bank in 1925. The Bank currently operates ten full-service banking offices in Mercer County, New Jersey, five in Hamilton Township, two in Ewing Township, one in East Windsor Township, one in Hopewell Township and one in Trenton. In addition, the Bank operates a Telephone Help Center which serves as a centralized sales and information center for all of the banking offices. In the last quarter of 1998, the Bank began lease payments on its Newtown, Pennsylvania branch, which is scheduled to open in late March, 1999. This is the Bank's first branch office in Pennsylvania. In 1998, the Bank also signed a lease for a 45,000 square foot building located in Hamilton Township. This location will serve as the headquarters for the Company and the Bank and will include a full service bank branch. Lease payments will not commence until the completion of the building, which is projected to be in the third quarter of 1999. The Bank's principal executive offices are located at 3111 Quakerbridge Road, Trenton, New Jersey. The Bank conducts a general commercial and retail banking business. The principal focus of the Bank has been to provide a full range of traditional commercial and retail banking services, including savings and time deposits, letters of credit, checking accounts and commercial, real estate and consumer loans, for individuals and small and medium size businesses in each of the local communities that it serves. In 1998, the Bank also began offering mutual funds and annuity products. The Bank has seven wholly-owned non-bank subsidiaries. Yardville National Investment Corporation, which was incorporated in 1985, was formed to separate a portion of the Bank's investment portfolio functions and responsibilities from its regular banking operations and to increase the net yield of the investment portfolio. YNB Real Estate Holding Company is utilized to hold Bank branch properties. YNB Realty, Inc. is utilized to more effectively manage certain commercial mortgage loans originated by the Bank. Brendan, Inc., Nancy-Beth, Inc. and Jim Mary, Inc. are utilized for the control and disposal of other real estate properties. YNB Financial, Inc. is engaged in the business of selling investment products offered by insurance companies. Yardville Capital Trust Yardville Capital Trust, a wholly-owned subsidiary of the Company, was formed on August 28, 1997 for the exclusive purposes of (i) issuing and selling trust preferred securities, (ii) using the proceeds from the sale of the trust preferred securities to acquire subordinated debentures issued by the Company and (iii) engaging in only those other activities necessary, advisable or incidental thereto. Supervision and Regulation General Bank holding companies and banks are extensively regulated under both Federal and state laws. Because the Company is a "bank holding company" under the Bank Holding Company Act, the FRB, acting through the Federal Reserve Bank of Philadelphia ("FRBP") is the primary supervisory authority for, and examines, the Company and any non-bank subsidiaries which are not subsidiaries of the Bank. Because the Bank is a national bank, the primary supervisory authority for the Bank and its subsidiaries is the OCC, which regularly examines the Bank. The FDIC and the FRB (because the Bank is a member of the Federal Reserve System) also regulate, supervise and have power to examine the Bank and its subsidiaries. The regulation and supervision of the Company and the Bank are designed primarily for the protection of depositors and the FDIC, and not the Company or its stockholders. Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance on deposits, the imposition of civil money penalties and removal and prohibition orders. If any enforcement action is taken by a banking regulator, the value of an equity investment in the Company could be substantially reduced or eliminated. Bank Holding Company Act The Bank Holding Company Act requires a "bank holding company" such as the Company to secure the prior approval of the FRB before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any bank. In addition, a bank holding company is generally prohibited from engaging in or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in non-banking activities unless the FRB, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the FRB considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh possible adverse effects. Applications under the Bank Holding Company Act and the Change in Control Act (see discussion below) are subject to review based upon the record of compliance of the applicant with the Community Reinvestment Act of 1977 ("CRA") as discussed below. The Company is required to file an annual report with the FRB and any additional information that the FRB may require pursuant to the Bank Holding Company Act. The FRB may also make examinations of the Company and any or all of its subsidiaries. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or provision of any property or services. The so-called 'anti-tie-in' provisions state generally that a bank may not condition the pricing or provision of certain products and services on a requirement that the customer provide certain products or services to the bank holding company or bank, or any other subsidiary of the bank holding company, or that the customer not obtain certain products or services from competitors, or that the customer also obtain certain other products or services from the bank, its bank holding company or any other subsidiary of the bank holding company. There is an exception to the tie-in prohibition for "traditional" banking products and services. The FRB permits bank holding companies to engage in non-banking activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. A number of activities are authorized by FRB regulation, while other activities require prior FRB approval. The types of permissible activities are subject to change by the FRB. FRB regulations require a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. The FRB has, in some cases, entered orders for bank holding companies to take affirmative action to strengthen the finances or management of subsidiary banks. Change in Bank Control Act Under the Change in Bank Control Act of 1978 ("Change in Control Act"), no person, acting directly or indirectly or through or in concert with one or more other persons, may acquire "control" of any federally insured depository institution unless the appropriate Federal banking agency has been given 60 days' prior written notice of the proposed acquisition and within that period has not issued a notice disapproving of the proposed acquisition or has issued written notice of its intent not to disapprove the action. For this purpose, "control" is generally defined as the power, directly, or indirectly, to direct the management or policies of an institution or to vote 25% or more of any class of its voting securities. Under applicable regulations, control is presumed to exist in certain circumstances, including ownership of more than 10% of any class of voting shares of a public company such as the Company. The period for the agency's disapproval may be extended by the agency. Upon receiving such notice, the Federal agency is required to provide a copy to the appropriate state regulatory agency if the institution of which control is to be acquired is state chartered, and the Federal agency is obligated to give due consideration to the views and recommendations of the state agency. Upon receiving a notice, the Federal agency is also required to conduct an investigation of each person involved in the proposed acquisition. Notice of such proposal is to be published and public comment solicited thereon. A proposal may be disapproved by the Federal agency if the proposal would have anti-competitive effects, if the proposal would jeopardize the financial stability of the institution to be acquired or prejudice the interests of its depositors, if the competence, experience or integrity of any acquiring person or proposed management personnel indicates that it would not be in the interest of depositors or the public to permit such person to control the institution, if any acquiring person fails to furnish the Federal agency with all information required by the agency, or if the Federal agency determines that the proposed transaction would result in an adverse effect on a deposit insurance fund. In addition, the Change in Control Act requires that, whenever any federally insured depository institution makes a loan or loans secured, or to be secured, by 25% or more of the outstanding voting stock of a federally insured depository institution, the president or chief executive officer of the lending bank must promptly report such fact to the appropriate Federal banking agency regulating the institution whose stock secures the loan or loans. Supervision and Regulation of the Bank The operations of the Bank are subject to Federal and state statutes and regulations applicable to banks chartered under the banking laws of the United States, to members of the Federal Reserve System and to banks whose deposits are insured by the FDIC. The primary supervisory authority of the Bank is the OCC (also its primary Federal regulator), which regularly examines the Bank. The OCC has the authority to prevent a national bank from engaging in an unsafe or unsound practice in conducting its business. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches. All nationally and state-chartered banks in New Jersey are permitted to maintain branch offices in any county of the state. Branching outside of New Jersey is also permitted under certain circumstances. See "Interstate banking." National bank branches may be established only after approval by the OCC. It is the general policy of the OCC to approve applications to establish and operate domestic branches provided that approval would not violate applicable Federal or state laws regarding the establishment of such branches. The OCC reserves the right to deny an application or grant approval subject to conditions if (1) there are significant supervisory concerns with respect to the application or affiliated organizations, (2) in accordance with CRA, the applicant's record of helping meet the credit needs of its entire community, including low and moderate income neighborhoods, consistent with safe and sound operation, is less than satisfactory, or (3) any financial or other business arrangement, direct or indirect, involving the proposed branch or device and bank "insiders" (directors, officers, employees and 10%-or-greater stockholders) involves terms and conditions more favorable to the insiders than would be available in a comparable transaction with unrelated parties. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the FDIC's prior approval is also required for any new branch application of a bank which is ranked in any of the three "undercapitalized" categories established by FDICIA. See "Prompt Corrective Action." Under the Federal Deposit Insurance Act, the OCC possesses the power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that would be an unsafe and unsound banking practice and in violation of the law. Moreover, Federal law enactment's have expanded the circumstances under which officers or directors of a bank may be removed by the institution's Federal supervisory agency, restricted and further regulated lending by a bank to its executive officers, directors, principal stockholders or related interests thereof and restricted management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area, and restricts management personnel from borrowing from another institution that has a correspondent relationship with their bank. The Bank, as a member of the Federal Reserve System, is subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or its subsidiaries, on investments in the stock or other securities of the bank holding company or its subsidiaries and on taking such stock or securities as collateral for loans. The Federal Reserve Act and FRB regulations also place certain limitations and reporting requirements on extensions of credit by the Bank to principal stockholders of its parent holding company, among others, and to related interests of such principal stockholders. Such legislation and regulations may affect the terms upon which any person becoming a principal stockholder of a holding company may obtain credit from banks with which the subsidiary bank maintains a correspondent relationship. In addition, as a bank whose deposits are insured by the FDIC, the Bank may not pay dividends or distribute any of its capital assets while it remains in default of any assessment due to the FDIC. The Bank is not in default under any of its obligations to the FDIC. The FDIC also has authority under the Federal Deposit Insurance Act to prohibit an insured bank from engaging in conduct which, in the FDIC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the Bank and other factors, that the FDIC could claim that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound banking practice. Under CRA, the record of a bank holding company and its subsidiary banks must be considered by the appropriate Federal banking agencies in reviewing and approving or disapproving a variety of regulatory applications including approval of a branch or other deposit facility, office relocation, a merger and certain acquisitions of bank shares. Regulators are required to assess the record of the Company and the Bank to determine if they are meeting the credit needs of the community (including low and moderate neighborhoods) they serve. Regulators make publicly available an evaluation of banks' records in meeting credit needs in their communities, including a descriptive rating and a statement describing the basis for the rating. In addition, the Bank is subject to a variety of banking laws and regulations governing consumer protection (including the Truth in Lending Act ("TILA"), the Truth in Savings Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, and the Real Estate Settlement Procedures Act ("RESPA"), FDIC deposit insurance regulations, and FRB regulations governing such matters as reserve requirements for deposits, securities margin lending, collection of checks and other items and availability of deposits for withdrawal by customers, security procedures, and prohibitions of payment of interest on demand deposits. Under the Americans With Disabilities Act ("ADA"), certain bank facilities are identified as "public accommodations" and are subject to regulation to promote accessibility of their facilities for disabled persons. Capital Rules Under risk-based capital requirements for bank holding companies, the Company is required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) of eight percent. At least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less goodwill ("tier 1 capital" and together with tier 2 capital "total capital"). The remainder may consist of subordinated debt, nonqualifying preferred stock and a limited amount of the loan loss allowance ("tier 2 capital"). At December 31, 1998, the Company's tier 1 capital and total capital ratios were 9.9 percent and 11.2 percent, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio requirements for bank holding companies. These requirements provide for a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets ("leverage ratio") equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a leverage ratio of from at least four to five percent. The Company's leverage ratio at December 31, 1998, was 7.7 percent. The requirements also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the requirements indicate that the Federal Reserve Board will continue to consider a "tangible tier 1 leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve Board has not advised the Company of any specific minimum tier 1 leverage ratio applicable to it. The Bank is subject to similar capital requirements adopted by the OCC. The OCC has not advised the Bank of any specific minimum leverage ratios applicable to it. The capital ratios of the Bank are set forth below under the discussion of Prompt Corrective Action. Banking regulators continue to indicate their desire to raise capital requirements applicable to banking organizations, including a proposal to add an interest rate risk component to risk-based capital requirements. Prompt Corrective Action In addition to the required minimum capital levels described above, federal law establishes a system of "prompt corrective actions" which Federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a federally regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution which is not adequately capitalized. Under the rules, an institution will be deemed to be "adequately capitalized" or better if it exceeds the minimum Federal regulatory capital requirements. However, it will be deemed "undercapitalized" if it fails to meet the minimum capital requirements, "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6.0 percent, a Tier 1 risk-based capital ratio that is less than 3.0 percent, or a leverage ratio that is less than 3.0 percent, and "critically undercapitalized" if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0 percent. The following table sets forth the minimum capital ratios that a bank must satisfy in order to be considered adequately capitalized or well capitalized under the prompt corrective action regulations, and the Bank's capital ratios at December 31, 1998: Adequately Well Bank ratios at Capitalized Capitalized December 31, 1998 ----------- ----------- ----------------- Total Risk-Based Capital Ratio 8.00% 10.00% 10.8% Tier 1 Risk-Based Capital Ratio 4.00% 6.00% 9.6% Leverage Ratio 4.00% 5.00% 8.5% The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on payment of dividends, a limitation on asset growth and expansion, in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain "management fees" to any "controlling person". Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring, a limitation on the institution's ability to make acquisitions, open new branch offices, or engage in new lines of business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be "critically undercapitalized" and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership. Deposit Insurance Assessments Deposits of the Bank are insured by the FDIC through the Bank Insurance Fund ("BIF"). Deposits of certain savings associations are insured by the FDIC through the Savings Association Insurance Fund ("SAIF"). The FDIC sets deposit insurance assessment rates on a semiannual basis and will increase deposit insurance assessments whenever the ratio of reserves to insured deposits in a fund is less than 1.25. The insurance assessments paid by an institution are to be based on the probability that the fund will incur a loss with respect to the institution. The FDIC has adopted deposit insurance regulations under which insured institutions are assigned to one of the following three capital groups based on their capital levels: "well-capitalized," "adequately capitalized" and "undercapitalized." Banks in each of these three groups are further classified into three subgroups based upon the level of supervisory concern with respect to each bank. The resulting matrix creates nine assessment risk classifications to which are assigned deposit insurance premiums ranging from 0.00% for the best capitalized, healthiest institutions, to 0.27% for undercapitalized institutions with substantial supervisory concerns. In addition, the Bank is subject to quarterly assessments relating to interest payments on Financing Corporation (FICO) bonds issued in connection with the resolution of the thrift industry crisis. The FICO assessment rate is adjusted quarterly to reflect changes in the assessment bases of the BIF and SAIF. The FICO assessments on BIF-insured deposits are set at an annual rate of 0.0122% of assessable deposits. This is one-fifth the rate currently applicable to SAIF-insured deposits. It is expected that after December 31, 1999 (or when the last savings association ceases to exist, if earlier), all assessable deposits at all institutions will be assessed at the same rates in order to pay FICO bond interest. Limitations on Payment of Dividends; Regulatory Agreement Under applicable New Jersey law, the Company is not permitted to pay dividends on its capital stock if, following the payment of the dividend, (i) the corporation would be unable to pay its debts as they become due in the usual course of business or (ii) the corporation's total assets would be less than its total liabilities. Determinations under clause (ii) above may be based upon (i) financial statements prepared on the basis of generally accepted accounting principles, (ii) financial statements prepared on the basis of other accounting principles that are reasonable under the circumstances, or (iii) a fair valuation or other method that is reasonable in the circumstances. Since it has no significant independent sources of income, the ability of the Company to pay dividends is dependent on its ability to receive dividends from the Bank. Under national banking laws, a national bank must obtain the approval of the OCC before declaring any dividend which, together with all other dividends declared by the national bank in the same calendar year will exceed the total of the bank's net profits of that year combined with its retained net profits of the preceding 2 years, less any required transfers to surplus or a fund for the retirement of any preferred stock. Net profits are to be calculated without adding back any provision to the bank's allowance for loan and lease losses. These restrictions would not prevent the Bank from paying dividends from current earnings to the Company at this time. FDICIA prohibits FDIC- insured institutions from paying dividends or making capital distributions that would cause the institution to fail to meet minimum capital requirements. The FDICIA restrictions would not prevent the Bank from paying dividends from current earnings to the Company at this time. The Bank in 1991 entered into a written agreement with the OCC (the "Regulatory Agreement") to, among other things, create a Compliance Committee, implement a plan to correct any compliance deficiencies, and reduce its classified assets and to maintain the Bank's common stockholders' equity at 5% of total assets. In 1991, in connection with the Regulatory Agreement and at the recommendation of the FRBP, the Board of Directors of the Company adopted a resolution, under which the Board could not declare a dividend to the Company's stockholders except with 10 days' prior written notice to the FRBP. The Regulatory Agreement was terminated on October 18, 1993, and on December 21, 1994, the Board of Directors of the Company rescinded its resolution with the permission of the FRBP, which was granted on November 30, 1994. New Jersey Banking Laws Provisions of the New Jersey Banking Act of 1948 with supplements (the "New Jersey Banking Act") may apply to national banking associations with their principal offices in New Jersey, subject to pre-emption by applicable Federal laws. The merger of a national bank into a state bank requires approval of the New Jersey Commissioner of Banking; however, a state bank may merge into a national bank without such prior approval. The New Jersey Banking Act also purports to regulate certain aspects of bank business, including small loans and certain deposit accounts. New Jersey law permits interstate banking and branching, subject to certain limitations. See the discussion under "Interstate Banking", below. Interstate Banking Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"), beginning on September 29, 1995, bank holding companies are now permitted to acquire banks in any state without regard to state law, except that state laws which require the acquiror to have been in existence for a specified minimum period of time are preserved, up to a maximum existence requirement of 5 years. Except for initial entry into a state, after an acquisition the acquiror may not control more than 10% of total insured deposits in the U. S. or more than 30% of insured deposits in the acquiror's home state. Stricter state deposit concentration caps apply if they are nondiscriminatory. In addition, effective June 1, 1997, banks in different states may be merged into a single bank with interstate branches, subject to any necessary regulatory approvals and provided the banks are adequately capitalized, unless the state in which such branches would be located has enacted legislation prohibiting such transactions. Once a bank has established branches in a host state through an interstate merger transaction, it may establish and acquire additional branches anywhere in the host state where the acquiree could have branched. The establishment of de novo branches or acquisition of one or more branches in another state without acquisition of the entire bank are only permitted if the other state has enacted legislation authorizing such branching in that state. On April 17, 1996, New Jersey enacted legislation authorizing interstate mergers and acquisitions of branches. The New Jersey legislation does not authorize de novo branching into the state. Because of reciprocity rules adopted by other states (such as Pennsylvania) the lack of authorization for de novo branching into New Jersey may also affect the ability of the Bank to branch into other states. Bank management anticipates that the Interstate Banking Act will increase competitive pressures in the Bank's market by permitting entry of additional competitors. 1996 Federal Banking Legislation The Economic Growth And Regulatory Paperwork Reduction Act of 1996 (the "1996 Banking Law"), enacted as Title II of the Omnibus Consolidated Appropriations Act for Fiscal Year 1997 was signed into Law on September 30, 1996, implemented a wide range of regulatory relief provisions affecting federal insured depository institutions. Among the supervisory provisions of the 1996 Banking Law which may affect the Bank, the 1996 Banking Law included the following: per branch capital requirement for national banks were eliminated; ATM's and other remote service units were excluded from the definition of "branch" for purposes of certain branch approval requirements and geographic restrictions; the law permits well-capitalized banks rated CAMEL 1 or 2 to invest in bank premises in amounts up to 150 percent of the bank's capital and surplus with only a 30-day after-the-fact notice and establishes expedited procedures to permit certain bank holding companies to engage in permissible nonbanking activities, except for acquisitions of thrifts; exempted from the insider lending restrictions a bank's company-wide benefit or compensation plans that are widely available to employees of the bank and that do not give preference to any officer, director, or principal shareholder (or related interests) over other employees of the bank; permits the Federal banking agencies to raise the asset limit for an 18-month examination cycle from $175,000,000 to $250,000,000 for banks with a CAMEL 2 rating; permits the OCC to waive the State residency requirement for directors of national banks; eliminates the independent auditor attestation requirement for compliance with safety and soundness laws; authorizes the Federal banking agencies to permit a bank's independent audit committee to include some inside directors if the bank is unable to find competent outside directors, provided a majority of the committee is still made up of outside directors; requires FRB and the U.S. Department of Housing and Urban Development, within 6 months of enactment, to simplify and improve RESPA and TILA disclosures and provide a single format for such disclosures; makes a number of changes to RESPA's disclosure requirements; generally provides that, if a bank or a third party self-tests for compliance under the Equal Credit Opportunity Act and the Fair Housing Act, the test results will not be used against the bank if the bank identifies possible violations and is taking appropriate corrective actions, and if the bank is not using the results in its defense; sunsets the Truth-in-Savings Act's civil liability provision in five years; recapitalizes the Savings Association Insurance Fund ("SAIF") as of October 1, 1996; requires banks after December 31, 1996 to pay 20% of the interest on the bonds that funded the initial capitalization of SAIF ("FICO bonds") but banks would be required to pay a full pro-rata share of the interest obligation beginning after the earlier of December 31, 1999 or the date on which the last savings association ceases to exist; merges SAIF and the Bank Insurance Fund ("BIF") on January 1, 1999, but only if no insured depository institution is a savings association on that date; requires the Department of Treasury to conduct a study by March 31, 1997 on the development of a common charter for all insured depository institutions; substantially amends the Fair Credit Reporting Act ("FCRA"); prohibits the Federal banking agencies from examining for compliance with FCRA unless there has been a complaint about a violation or the agency otherwise has knowledge of a violation; and amends the Comprehensive Environmental Response, Compensation, and Liability Act to clarify that a lender is not liable for environmental cleanups of property securing a loan unless the lender, among other things, participates in day-to-day decision making over the operations of the property or has control over environmental compliance and provides that lenders that foreclose on property may take certain post-foreclosure actions without incurring liability for environmental cleanup if the lender did not participate in management of the property prior to foreclosure and the lender seeks to dispose of the property as soon as it is commercially reasonable. Other Laws and Regulations The Company and the Bank are subject to a variety of laws and regulations which are not limited to banking organizations. In lending to commercial and consumer borrowers, and in owning and operating its own property, the Bank is subject to regulations and risks under state and Federal environmental laws. Legislation and Regulatory Changes Legislation and regulations may be enacted which increase the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions are frequently made in Congress and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Company and the Bank. Effect of Government Monetary Policies The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The FRB has had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member banks' deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies. Competition The Bank faces significant competition both in generating loans and in attracting deposits. The central New Jersey area is a highly competitive market. The Bank is subject to vigorous competition in all aspects of its business from other financial institutions such as commercial banks, savings banks, savings and loan associations, credit unions, insurance companies and finance and mortgage companies. Within the direct market area of the Bank there are a significant number of offices of competing financial institutions. The Bank competes in its market area with a number of larger commercial banks that have substantially greater resources, higher lending limits, larger branch systems and provide a wider array of banking services. The effect of liberalized branching and acquisition laws has been to lower barriers to entry into the banking business and increase competition for banking business, as well as to increase both competition for and opportunities to acquire other financial institutions. Savings banks, savings and loan associations and credit unions also actively compete for deposits and for various types of loans. In its lending business, the Bank is subject to increasing competition from consumer finance companies and mortgage companies, which are not subject to the same kind of regulatory restrictions as banks and can often offer lower loan rates than banks. Financial institutions are intensely competitive in the interest rates they offer on deposits. In addition, the Bank faces competition for deposits from non-bank institutions such as brokerage firms and insurance companies in such instruments as short-term money market funds, corporate and government securities funds, mutual funds and annuities. Finally, a number of the Bank's competitors provide a wider array of services (such as trust and international services, which the Bank does not provide) and, by virtue of their greater financial resources, have higher lending limits and larger branch systems. Employees At December 31, 1998, the Company employed 188 full-time employees and 13 part-time employees. Statistical Disclosure Statistical disclosure information regarding the Company is included in "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," which is incorporated by reference to the Company's 1998 Annual Report to Stockholders. ITEM 2. PROPERTIES. The principal executive offices of the Company are located at 3111 Quakerbridge Road, Trenton, New Jersey in a building owned by the Bank and the management and staff of the Company utilize the facilities and equipment of the Bank. The Bank owns its principal executive offices, where it also has a banking office, in Yardville, New Jersey, and three additional banking offices in Hamilton Township, New Jersey. The Bank leases its banking office in Ewing Township, New Jersey. The lease provides for a term of five years ending in 2004, renewable for two 5-year periods, and a base monthly rental of $2,520.00 during the initial term. The Bank also leases its banking office in East Windsor Township, New Jersey. In April 1998 the Bank renegotiated its lease at East Windsor. The Bank now leases the entire space in this building. The lease provides for a term of six years seven months ending in 2004, renewable for two 5-year periods and provides for a base monthly rental of $5,416.66 during the initial term. The Bank also leases its banking office in Trenton. The lease provides for a term of five years ending in 1999, renewable for three 5-year periods, and provides for a base monthly rental of $1,875.00 during the initial term. The Bank intends to renew this lease in 1999 with a new base monthly rent of $2,003.33. The Bank also leases its banking office in Hamilton Square, New Jersey, which opened in the second quarter of 1996. The Bank assumed a 20 year lease effective April 1, 1996. The lease commenced on October 1, 1991 and ends on September 30, 2011 and is renewable for six 5-year periods, and provides for a base monthly rental of $5,573.53 during the initial term. The Bank purchased a building and property in Ewing Township and opened its ninth branch in the third quarter of 1996. In 1998 the Bank opened its tenth branch office in Pennington, New Jersey. The Bank leases this office. The lease provides for a term of 5 years ending in 2003, renewable for three 5-year periods, and provides for a base monthly rental of $1,730.33 during the initial term. In the last quarter of 1998, the Bank began lease payments on its Newtown, Pennsylvania branch scheduled to open in the first quarter of 1999. The lease provides for a term of 5 years ending in 2003, renewable for three 5-year periods and provides for a base monthly rental of $4,670.83. during the initial term. In 1998, the Company also signed a lease for a 45,000 square foot corporate headquarters building. This new location will include a full service bank branch. Lease payments will not commence until the completion of the building, which is projected to be in the third quarter of 1999. The lease provides for an initial term of 14 years renewable for two 5-year periods. The obligation to pay rent shall commence 60 days after substantial completion or upon occupancy by the Company whichever is earlier. The base monthly rent is estimated to be $68,300. The Company has a continuing option to purchase the building after the end of the fifth year lease equal to the then fair market value of the premises. Yardville National Investment Corporation leases space from the Bank at the Bank's principal executive offices. The Bank also leases its Telephone Help Center located in Hamilton Township. The lease provides for a term of two years ending in August 31, 1999, renewable for a one year period and provides for a base monthly rental of $3,250. The Telephone Help Center will be relocating to the new corporate headquarters building. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to various legal actions as of December 31, 1998, arising out of the ordinary course of business. Management of the Company does not deem any of the claims against the Company in such matters are material in relation to the Company's financial condition, results of operations or liquidity based on information currently available to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1998, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information The Common Stock is traded in the Nasdaq National Market System. The following table shows the range of high and low closing bid prices of the Common Stock in the Nasdaq National Market System during 1997 and 1998. The prices below reflect the 2.5% stock dividend declared in March 1998 and the two-for-one stock split effected in the form of a stock dividend declared in December 1997. The price quotations reflect inter-dealer quotations without adjustment for retail markup, markdown or commission, and may not represent actual transactions. Bid Price High Low Year Ended December 31, 1997: - - ----------------------------- First Quarter $11.22 $ 9.39 Second Quarter 12.19 9.64 Third Quarter 13.84 11.95 Fourth Quarter 17.78 13.91 Year Ended December 31, 1998: - - ----------------------------- First Quarter $19.03 $17.08 Second Quarter 19.75 16.38 Third Quarter 16.75 12.00 Fourth Quarter 14.25 12.00 Holders As of December 31, 1998, the Company had approximately 580 holders of record of the Common Stock. Dividends In 1997, the Company paid four quarterly cash dividends on the Common Stock in the aggregate amount of $1,233,000. Dividends paid per share in 1997 totaled $0.24. In 1998, the Company paid four quarterly cash dividends on the Common Stock in the aggregate amount of $1,449,000. Dividends paid per share in 1998 totaled $0.29. Cash dividends are generally paid quarerly or four times a year. All dividend data has been restated to reflect the 2.5% stock dividend declared in March 1998 and the two-for-one stock split effected in the form of a stock dividend declared in December 1997. In the first quarter of 1999, the Company paid a cash dividend in the amount of $.08 per share on the Common Stock. Because substantially all of the funds available for the payment of cash dividends are derived from the Bank, future cash dividends will depend primarily upon the Bank's earnings, financial condition, need for funds, and government policies and regulations applicable to both the Bank and the Company. As of December 31, 1998, the net profits of the Bank available for distribution to the Company as dividends without regulatory approval were approximately $7,952,000. The Company expects to pay quarterly cash dividends for the remaining three quarters in 1999 to holders of Common Stock, subject to the Company's financial condition. ITEMS 6, 7, 7A AND 8 Information required by items 6, 7, 7A and 8 is provided in the Company's 1998 Annual Report to Stockholders under the captions and on the pages indicated below, and is incorporated by reference: PAGES IN 1998 ANNUAL REPORT CAPTION IN 1998 ANNUAL REPORT TO STOCKHOLDERS TO STOCKHOLDERS MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-36 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37-52 INDEPENDENT AUDITORS' REPORT 53 The Company is not required to provide selected quarterly financial data in response to Item 8 and, therefore, such data has been omitted from the 1998 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEMS 10 THROUGH 13 Information required by Items 10 through 13 is provided in the Company's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its annual meeting of stockholders to be held April 27, 1999. Such information is incorporated by reference. The information contained in the Company's definitive proxy statement under the caption "Organization and Compensation Committee Report" shall not be deemed to be incorporated by reference herein. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits and Financial Statement Schedules 1. Financial Statements The following financial statements are incorporated herein by reference to the Company's 1998 Annual Report to Stockholders: o Consolidated Statements of Condition o Consolidated Statements of Income o Consolidated Statements of changes in Stockholder's Equity o Consolidated Statement of Cash Flows o Notes to Consolidated Financial Statements o Independent Auditor's Report 2. Financial Statement Schedules None 3. Exhibits The exhibits filed or incorporated by reference as a part of this report are listed in the Index to Exhibits which appears at page E-1. (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 1998. SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized on March 24, 1999. YARDVILLE NATIONAL BANCORP By: /s/ Patrick M. Ryan ---------------------------------- Patrick M. Ryan, President and Chief Executive Officer Signatures Title ---------- ----- /s/ Jay G. Destribats - - ----------------------------- Chairman of the Board Jay G. Destribats and Director /s/ Patrick M. Ryan - - ------------------------------ Director, President and Patrick M. Ryan Chief Executive Officer /s/ Stephen F. Carman - - ------------------------------ Treasurer, Secretary, Stephen F. Carman Principal Financial Officer and Principal Accounting Officer /s/ C. West Ayres - - ----------------------------- Director C. West Ayres /s/ Elbert G. Basolis, Jr. - - ----------------------------- Director Elbert G. Basolis, Jr. /s/ Lorraine Buklad - - ---------------------------- Director Lorraine Buklad /s/ Anthony M. Giampetro - - ----------------------------- Director Anthony M. Giampetro Signatures Title ---------- ----- /s/ Sidney L. Hofing - - ----------------------------- Director Sidney L. Hofing /s/ James J. Kelly - - ----------------------------- Director James J. Kelly /s/ Gilbert W. Lugossy - - ----------------------------- Director Gilbert W. Lugossy /s/ Louis R. Matlack - - ----------------------------- Director Louis R. Matlack /s/ Weldon J. McDaniel, Jr. - - ----------------------------- Director Weldon J. McDaniel, Jr. /s/ F. Kevin Tylus - - ----------------------------- Director F. Kevin Tylus INDEX TO EXHIBITS
Exhibit Number Description Page - - ---------------------------------------------------------------------------------------------------------------------------------- (H) 3.1 Restated Certificate of Incorporation of the Company, as amended by the Certificate of Amendment thereto filed on March 6, 1998. (B) 3.2 By-Laws of the Company (B) 4.1 Specimen Share of Common Stock (I) 4.2 See Exhibits 3.1 and 3.2 for the Registrant's Certificate of Incorporation and By-Laws, which contain provisions defining the rights of stockholders of the Registrant. (I) 4.3 Amended and Restated Trust Agreement dated October 16, 1997, among the Registrant, as depositor, Wilmington Trust Company, as property trustee, and the Administrative Trustees of Yardville Capital Trust. (I) 4.4 Indenture dated October 16, 1997, between the Registrant and Wilmington Trust Company, as trustee, relating to the Registrant's 9.25% Subordinated Debentures due 2027. (I) 4.5 Preferred Securities Guarantee Agreement dated as of October 16, 1997, between the Registrant and Wilmington Trust Company, as trustee, relating to the Preferred Securities of Yardville Capital Trust. 10.1 Employment Contract between Registrant and Patrick M. Ryan. 10.2 Employment Contract between Registrant and Jay G. Destribats 10.3 Employment Contract between Registrant and Stephen F. Carman 10.4 Employment Contract between Registrant and James F. Doran 10.5 Employment Contract between Registrant and Richard A. Kauffman 10.6 Employment Contract between Registrant and Mary C. O'Donnell
INDEX TO EXHIBITS (continued)
Exhibit Number Description Page - - ---------------------------------------------------------------------------------------------------------------------------------- 10.7 Employment Contract between Registrant and Frank Durand III (D) 10.8 Salary Continuation Plan for the Benefit of Patrick M. Ryan (D) 10.9 Salary Continuation Plan for the Benefit of Jay G. Destribats (E) 10.10 1988 Stock Option Plan 10.11 Employment contract between Registrant and Thomas L. Nash (A) 10.12 Directors' Deferred Compensation Plan (B) 10.13 Lease Agreement between Jim Cramer and the Bank dated November 3, 1993 (A) 10.15 Agreement between the Lalor Urban Renewal Limited Partnership and the Bank dated October, 1994 (C) 10.16 Survivor Income Plan for the Benefit of Stephen F. Carman (C) 10.17 Lease Agreement between Devon Inc. and the Bank dated as of February 9, 1996 (F) 10.18 1997 Stock Option Plan 10.19 Employment contract between Registrant and Howard N. Hall 10.20 Employment contract between Registrant and Sarah J. Strout 10.21 Employment contract between Registrant and Nina D. Melker
INDEX TO EXHIBITS (continued)
Exhibit Number Description Page - - ---------------------------------------------------------------------------------------------------------------------------------- 10.22 Employment contract between Registrant and Timothy J. Losch (G) 10.23 Survivor Income Plan for the Benefit of Timothy J. Losch (G) 10.24 Lease agreement between the Ibis Group and the Bank dated July 1997 (H) 10.25 Lease agreement between Hilton Realty Co. of Princeton and the bank dated March 31, 1998. (H) 10.26 1994 Stock Option Plan. (J) 10.27 Lease agreement between Crestwood Construction and the Bank dated May 25, 1998 (J) 10.28 Lease between Carduners Property Partnership and the bank dated March 1998. (K) 10.29 Yardville National Bank Employee Stock Ownership Plan 10.30 Lease agreement between Sycamore Street Associates and the Bank dated October 30, 1998 13.1 1998 Annual Report to Stockholders 21 List of Subsidiaries of the Registrant 23.1 Consent of KPMG, LLP 27.1 Financial Data Schedule (A) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB/A filed on July 25, 1995 (B) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-78050)
INDEX TO EXHIBITS
Exhibit Number Description Page - - ---------------------------------------------------------------------------------------------------------------------------------- (C) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (D) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (E) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997, as amended by Form 10-Q/A filed on August 15, 1997 (F) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-28193) (G) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (H) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998, as amended by Form 10-Q/A filed June 9, 1998 (I) Incorporated by reference to the Registrant's Registration Statement on Form S-2 (Registration Nos. 333-35061 and 333-35061-01) (J) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (K) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-71741).
DEVELOPING A SUPERCOMMUNITY BANK [PICTURES] 1998 ANNUAL REPORT YNB LOGO Yardville National Bank TABLE OF CONTENTS Financial Highlights 1 - - ----------------------------------------------------------------- Management Letter 3 - - ----------------------------------------------------------------- Building a Supercommunity Bank 7 - - ----------------------------------------------------------------- Selected Historical Consolidated Financial Data 11 - - ----------------------------------------------------------------- Management's Financial Discussion and Analysis 13 - - ----------------------------------------------------------------- Financial Statements 37 - - ----------------------------------------------------------------- Notes to Consolidated Financial Statements 41 - - ----------------------------------------------------------------- Independent Auditors' Report 53 - - ----------------------------------------------------------------- Officers 54 - - ----------------------------------------------------------------- Board of Directors 55 - - ----------------------------------------------------------------- Shareholder Information 56 - - ----------------------------------------------------------------- YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES Financial Highlights
- - --------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1998 1997 % Increase - - --------------------------------------------------------------------------------------------- For the Year Ended December 31 Net income $ 5,582 $ 5,006 11.5% Earnings per share-- diluted 1.10 0.98 12.2 Cash dividends declared per common share 0.29 0.24 20.8 - - --------------------------------------------------------------------------------------------- Balance Sheet Data as of December 31 Total assets $757,666 $614,686 23.3% Total deposits 519,643 422,944 22.9 Total loans 491,649 385,751 27.5 Stockholders' equity 40,756 39,745 2.5 Book value per share 8.20 7.82 4.9 - - --------------------------------------------------------------------------------------------- Consolidated Ratios Return on average assets 0.82% 0.93% Return on average stockholders' equity 13.96 13.32 Net interest margin 3.55 3.95 Total equity to total assets 5.38 6.47 Tier I capital to risk-weighted assets 9.91 12.24 Total capital to risk-weighted assets 11.17 13.49 Nonperforming assets to total assets 1.17 1.38 Net loan charge offs to average total loans 0.18 0.14 =============================================================================================
Net Income (Dollars in thousands) 6,000 800 5,582 758 5,006 5,000 700 4,026 615 4,000 600 3,403 3,000 500 2,523 491 403 2,000 400 1,000 300 281 0 __________________________________ 200 1994 1995 1996 1997 1998 100 0 _________________________________ 1994 1995 1996 1997 1998 [Photos of Men] YNB SENIOR MANAGEMENT Clockwise from upper left: Jay G. Destribats, Chairman; Patrick M. Ryan, President and Chief Executive Officer; Timothy J. Losch, Executive Vice President and Chief Operating Officer and Stephen F. Carman, Executive Vice President and Chief Financial Officer. To Our Shareholders, Employees and Friends Building means many things to different people. To some, it means an edifice, constructed of bricks and mortar. Certainly, we have seen a lot of bricks and mortar (and steel, and bulldozers) this year as we have watched our new corporate headquarters near completion. But for us in YNB management, building is a concept - a key word for our future. We are building YNB into an entity for success far into the future - a supercommunity bank. A supercommunity bank, for us, is one that brings the best of all worlds together for the benefit of the customer. We can provide all the technological support that banking for the new millennium requires. A full line of state-of-the-art products and services, for both business and retail banking customers, is available. At the same time, we work hard to retain the dedication to our community, the attentive personal service, and the neighborhood feeling that is so much a part of YNB. Many institutions - large and small - call themselves community banks. At YNB, the term means that our involvement goes far beyond business. We live and work here. We are involved with activities from the scouts to the schools to the fire companies and local development agencies. Our commitment is to know our marketplace and to serve the businesses and individuals who form our community. That community is constantly expanding. For us, today, it is a "supercommunity," covering a much wider geographic area than ever before, on both sides of the Delaware River. In 1998, we opened a new branch in Pennington, and are following this expansion in 1999 with three new offices - a corporate headquarters branch in Hamilton to meet expanding market needs in our core market, our first banking office in Burlington County in Bordentown, and our first foray into Pennsylvania, in Newtown, Bucks County. As we continue our development into a supercommunity institution, we have taken the steps that will enable us to do so profitably, and with maximum benefit to our shareholders. Our plans to expand into Pennsylvania have already been realized with the opening of Newtown in March 1999. We are well on the way to reaching the $1 billion mark in assets, considered a significant milestone for a community bank. Our technology and infrastructure have been significantly upgraded, and we are able to compete with the largest regional banks for business. Enhancing Technology to Better Serve Customers We have worked hard to be sure that our technology is state-of-the-art, and capable of supporting all the sophisticated services today's banking customer desires. In the past year, we have continued to upgrade these systems, while we mounted a comprehensive program to be sure our bank will be prepared for the Year 2000. We have kept all our employees abreast of our Y2K progress, and have a comprehensive communications plan in place. Profitability. As we continue our development into a supercommunity institution, we have taken the steps that will enable us to do so profitably. 3 Diversifying our earnings stream. We have increased our non-lending services in 1998 to further diversify our earnings stream. We are also using our technology to assist in our sales efforts, as we are better able to recognize individual customer relationships and to identify the additional products and services that our existing customers may find useful. All of our branch representatives have undergone sales training in the past year, and we are making increased business a goal in each of our branch offices. YNB Initiatives Yield Tangible Results The culmination of all our building efforts can be seen in our strong financial performance. In 1998, YNB's net income rose to $5,582,000, or $1.10 per share on a diluted basis, compared to $5,006,000, or $0.98 per share on a diluted basis for 1997. Net income and earnings per share grew 11.5 percent and 12.2 percent, respectively, in 1998. Total assets at year end reached $757.7 million, an increase of 23.3 percent when compared with the $614.7 million in total assets at the end of 1997. Earnings Per Share Diluted $1.2 $1.10 1.0 $0.98 $0.82 $0.82 $0.80 0.8 0.6 0.4 0.2 0.0 ______________________________________ 1994 1995 1996 1997 1998 Commercial lending continues to be the most important factor in YNB's earnings growth, as businesses of all sizes choose YNB for its top quality service and products. We have established a niche for ourselves as the pre-eminent business lender in our marketplace, and as a result, our commercial loan portfolio is a primary component of our status as a supercommunity bank. YNB's total loan outstandings at December 31, 1998 increased to $491.6 million, up 27.5 percent over the total of $385.8 million recorded at the end of 1997. YNB's strong efforts to maintain and improve credit quality as the portfolio grows continued in 1998. Nonperforming assets increased minimally to $8,830,000 at December 31, 1998, from $8,486,000 at December 31, 1997, while the allowance for loan losses now totals $6,768,000 or 1.38 percent of total loans, covering 174.7 percent of total nonperforming loans. The deposit side of the ledger helps to support YNB's ongoing loan growth. Total deposits at year end rose to $519.6 million, a 22.9 percent increase over total deposits at December 31, 1997. Much of this growth comes both from new depositors, who are attracted from other banks by YNB's competitive rates, attentive customer service and convenient new product offerings, and from expanded relationships with satisfied current customers. In addition to deposit growth, we have also increased our non-lending services to both business and retail banking clients in 1998 to further diversify our earnings stream and increase non-interest income. For businesses, we added several new business products and services to an already extensive list of offerings. These now include lockbox and cash management, as well as business savings accounts. Consumer banking customers can now purchase alternative investments from a 4 representative at a YNB office, widening their investment opportunities and generating additional fee income for the bank. We also initiated Private Banking in 1998, and are looking at other opportunities to make YNB the kind of "one-stop," extended financial services institution that many customers seek with today's fast-paced lifestyle. Building Long-Term Shareholder Value Creating long-term, sustainable shareholder value remains a primary focus for YNB management. In 1998, cash dividends paid increased 20.8 percent over 1997, and in January 1999, the Board of Directors again increased the quarterly cash dividend to $0.08 per share, a 6.7 percent increase over the prior quarter. This, of course, followed the 2.5 percent stock dividend declared in March 1998. We will continue to make the types of business decisions that we have cited above to increase our profitability in the belief that, over both the intermediate and the long-term, the market will recognize the true value of our shares and reward our shareholders accordingly. Cash Dividend Per Share $0.4 0.3 $0.29 $0.24 $0.22 0.2 $0.19 $0.14 0.1 0.0 ______________________________________ 1994 1995 1996 1997 1998 To further support our growth, we worked diligently to ensure that YNB remained well-capitalized in 1998. At December 31, 1998, the capital ratios for YNB exceeded those required by regulatory authorities to consider an institution well capitalized, with Tier I leverage, Tier I risk-based, and Total risk-based capital ratios of 7.7, 9.9, and 11.2 percent, respectively. Looking Toward a Bright Future There has been much talk of the new millennium, and what it will bring for businesses and for our society. We are confident that the steps we have outlined in this letter and are continuing to put into place will serve YNB well as we build a strong and secure future as an independent, supercommunity bank. As an organization, we are grateful to our Board of Directors and to our Advisory Board members for their unselfish service to this institution as we have grown. We also appreciate the support of our shareholders and customers as we direct our best efforts toward that future. Building a secure future. We are confident the steps we have outlined will serve YNB well as we build a strong and secure future. Sincerely yours, /s/ Jay G. Destribats /s/ Patrick M. Ryan Jay G. Destribats Patrick M. Ryan Chairman of the Board President and Chief Executive Officer 5 YNB SERVES ALL SEGMENTS OF OUR COMMUNITY Whether providing commercial loans for area businesses to grow, or offering the special services both mature adults and young families need, YNB is there with the right financial products for every lifestyle and business situation. Building a Supercommunity Bank While the process of building a supercommunity bank is often thought of in physical terms, we are ever-mindful of the continuing importance of putting the customer first. In the locations we have selected, the technology we have acquired, the products we offer, and the training of our staff, satisfying the customer's needs is always considered the primary objective. YNB Builds a Sense of Community Convenient locations are an important factor in any bank's growth, and YNB has taken advantage of this fact as we have moved to expand our reach into new communities. Our move into Pennington this past year was warmly received, and that branch has already become an integral part of the community. In 1999, our growth will continue as we move into a new county, Burlington, with the opening of our Bordentown office, and a new state, Pennsylvania, as we open our Newtown office. When YNB enters a new area, we immediately bring our sense of community to bear. In Pennington, for example, we offered our "Neighbors First" package which allowed new customers to have YNB make a donation to fund area sports teams, computers for schools, or open space initiatives. YNB has also expanded our generous scholarship program to include all the high schools in our new neighborhoods. When we enter Newtown and Bordentown, we expect to demonstrate our commitment to those communities in a comparable way. The products we offer in all of our branch offices are those that consumers find most useful in their busy daily lives. Efficiency as well as service is an all-important issue, and YNB has worked hard to make our customers' lives easy. That's one of the reasons our Telephone Help Center has been such an overwhelming success. By just calling the Telephone Help Center at 1-8884-HELPLINE Monday through Friday from 8:30 AM to 7:00 PM, and on Saturdays from 9:00 AM to 12:00 PM, customers can gain information about current accounts, investment rates, available loan or mortgage programs, ATM locations - whatever they may need to make banking with YNB even more convenient. Convenience is also the reason that our Telebank Service has been a hit with our customers - old and new. YNB's Telebank allows current customers to check balances, transfer or verify funds, find out about Helping busy consumers. The products we offer in all of our branch offices are those that consumers find most useful in their busy daily lives. 7 Business banking. We have fostered a business banking environment that allows us to compete with other financial institutions of all sizes. recent transactions, order a mini-statement to be faxed, and complete other banking transactions from the comfort of their home or office - 24 hours a day, 7 days a week. New customers who want to move their accounts to YNB are served by Telebank, too, as they can check rates, inquire about products, and verify office hours and locations right on the telephone. New Technology and New Products YNB has also enhanced customer convenience with the addition of new technology. Of course, we have taken the necessary steps to make sure that our systems are Y2K compatible so the turn of the century should occur with no disruption to YNB customers. But more than that, we have taken this opportunity to upgrade our computer equipment, with a new mainframe computer and reader sorter to improve the information available to customers and the branch personnel who serve them. On the product side, we have offered special CD promotions throughout the year to bring our customers the best investment rates possible. These were quite successful, as YNB brought in $80 million in new deposits during 1998, from established and new customers alike. To stimulate consumer demand and remain competitive, we also lowered the rate on our popular Home Equity Line of Credit. An increasing proportion of our customers prefer to use their computers to perform their banking functions, and we have responded to their needs as well. The YNB website (http://www.yanb.com) provides extensive information on rates, products, office locations, and financial planning, and permits customers to e-mail YNB for additional information. This coming year, we will introduce "YNB OnLine" - PC Banking to serve all YNB customers quickly and conveniently. Commercial Banking Continues to Grow at YNB Retail and commercial banking must be linked for a solid supercommunity bank to thrive, and the growth of YNB's deposit base, as fostered by the activities noted above, provides a solid source to support our increased commercial lending activities. For the past five years, YNB has grown into a major business lender in Central New Jersey. By combining accessibility to senior management with responsive customer service, we have fostered a business banking environment that allows us to compete with other financial institutions of all sizes. And we've been doing so successfully, as we continue to gain business from our competition in all our market areas. YNB's growth in business banking has extended well beyond lending as we have sought to diversify our earnings stream with additional 8 business products and services. Our lockbox and cash management services have both grown in 1998 and offer our business customers all the advantages of a large commercial bank, accompanied by YNB's community bank focus on personal service. Technologically advanced services like Cash Command let business customers handle payroll deposits right from their offices, consolidate funds, make tax payments, transfer among accounts, and even make overnight investment sweeps. Our business customers also continue to enjoy the advantages of offering Service Direct to their employees, gaining additional banking benefits for them through Direct Deposit. Emphasizing Two-Way Communication As a bank grows into a supercommunity institution, a strong communications network is essential to preserve the customer focus that distinguishes community banks from those formed by mega-mergers. At YNB, we understand that it is important that we communicate clearly and often with our customers. But it is just as important that we listen when our customers give us feedback about what they want. We are proud to say that several of the product innovations and modifications we have made in the past year have been in direct response to expressed consumer wishes. Customers told us they felt the minimum balance for statement savings should be lowered. We did it. They wanted free checks as part of their Silver Checking Package. Done. Our popular Chairman's Choice product was only available with the bank safekeeping the checks, and our customers told us they wanted to be able to have the checks returned to them monthly. We arranged to do so. We have also conducted an extensive customer satisfaction survey, and were gratified to learn that our customers gave us high marks. More than 90% of the survey respondents told us that they were waited on promptly and courteously, and their transactions handled in a timely manner. Almost 80% rate our service overall as excellent or very good. Most rewarding for us was to find that over 93% of the survey respondents - all present customers - said they would recommend YNB to others. This type of individual personal endorsement is the best possible advertising we could employ. Training Our Bankers to be Effective Salespeople But word-of-mouth recommendations alone are not sufficient in the competitive world of community banking today. It is important for bankers to be salespeople, too. Our branch representatives have all undergone thorough training in the past year to enhance both their product knowledge and their selling skills. Because information is so important in financial decision-making, we feel the training our branch personnel have received will result in even better customer service and stronger, long-term relationships. Communication is key. At YNB, we understand that it is important that we communicate clearly and often with our customers. 9 Telemarketing is a growing sales technique, and we have an excellent opportunity to increase our business each time a customer calls the Telephone Help Center. By recommending products and services that may fit certain needs, we are assisting our customers as well as building the bank's business. Our Telephone Help Center representatives also take the initiative in communicating with prospects, and have begun a new program of calling our customers to inform them of special opportunities which may fit their financial needs, and also to call non-customers and share information about YNB with them. Finally, in a realignment of our branch management network, we have named several officers to the position of Regional Manager, responsible for the activities of several offices. This frees branch management up to conduct more comprehensive business development efforts. We also have appointed several full-time business development officers to help introduce YNB in new market areas such as Pennington and Newtown. Looking to the Future for YNB In examining our evolution into a supercommunity bank, we believe we have been successful because we have identified an important niche for YNB - to be an independent bank that is large enough to serve the needs of every customer, but small enough to give personal attention to each and every account holder. We possess the expertise and the technology to perform the most sophisticated banking functions, but we do so in a culture that values each individual customer, business, organization, and community as a unique entity whose business we must earn and work to retain every day. As we approach the new millennium, it is with the excitement that comes from setting a course and sticking by it - from knowing who we are and what we plan to be - and most of all, knowing how to get there. With the attention to individuals that has been a hallmark of banking at YNB since our formation almost 75 years ago, we have defined the new world of the supercommunity bank. Its name is YNB. Growing relationships. We have an excellent opportunity to increase our business each time a customer calls the Telephone Help Center. 10 Selected Historical Consolidated Financial Data - - -------------------------------------------------------------------------------- The following table sets forth certain historical financial data with respect to Yardville National Bancorp and subsidiaries on a consolidated basis. This table should be read in conjunction with Yardville National Bancorp's historical consolidated financial statements and related notes thereto. All share and per share data has been restated to reflect the 2.5% stock dividend declared in March 1998 and the two-for-one stock splits effected in the form of stock dividends declared in December 1997 and November 1994.
December 31, - - ------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - - ------------------------------------------------------------------------------------------------------------------ Statement of Income (in thousands) Interest income $ 50,923 $ 40,768 $ 34,251 $ 27,336 $ 18,004 Interest expense 28,392 21,100 17,041 12,841 6,360 - - ------------------------------------------------------------------------------------------------------------------ Net interest income 22,531 19,668 17,210 14,495 11,644 Provision for loan losses 1,975 1,125 1,640 865 305 Securities gains (losses), net 151 24 (136) (91) (124) Gains on sales of mortgages, net 62 30 21 19 92 Other non-interest income 2,789 2,490 2,228 1,927 1,586 Non-interest expense 15,337 13,341 11,479 10,260 9,285 - - ------------------------------------------------------------------------------------------------------------------ Income before income tax expense $ 8,221 7,746 6,204 5,225 3,608 Income tax expense 2,639 2,740 2,178 1,822 1,085 - - ------------------------------------------------------------------------------------------------------------------ Net income $ 5,582 $ 5,006 $ 4,026 $ 3,403 $ 2,523 - - ------------------------------------------------------------------------------------------------------------------ Balance Sheet (in thousands, except per share data) Assets $ 757,666 $ 614,686 $ 490,545 $ 403,115 $ 280,550 Loans, net of unearned income 491,649 385,751 331,237 245,054 196,910 Securities 221,688 186,636 124,967 133,853 63,235 Deposits 519,643 422,944 364,445 302,972 259,296 Borrowed funds 177,888 134,316 86,339 65,221 1,215 Stockholders' equity 40,756 39,745 35,230 31,717 18,451 Allowance for loan losses 6,768 5,570 4,957 3,677 2,912 Per Share Data Net income-- basic $ 1.11 $ 0.99 $ 0.82 $ 0.85 $ 0.85 Net income-- diluted 1.10 0.98 0.80 0.82 0.82 Cash dividends 0.29 0.24 0.22 0.19 0.14 Stockholders' equity (book value) 8.20 7.82 7.07 6.58 5.81 Other Data Average shares outstanding-- basic 5,017 5,052 4,938 4,026 2,974 Average shares outstanding-- diluted 5,059 5,117 5,040 4,151 3,093 ==================================================================================================================
11 Selected Historical Consolidated Financial Data (cont.) - - --------------------------------------------------------------------------------
December 31, - - ----------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - - ----------------------------------------------------------------------------------------------------------- Financial Ratios Return on average assets 0.82% 0.93% 0.90% 0.99% 1.04% Return on average stockholders' equity 13.96 13.32 12.25 13.84 15.89 Net interest margin (FTE) (1) 3.55 3.95 4.10 4.49 5.16 Efficiency ratio (2) 60.07 60.06 59.41 62.75 70.35 Average stockholders' equity to average assets 5.84 7.00 7.33 7.14 6.57 Dividend payout ratio 25.96 24.63 26.90 21.69 15.06 Tier 1 leverage ratio (3) 7.68 9.53 7.80 9.07 7.84 Tier 1 capital as a percent of risk-weighted assets 9.91 12.24 10.17 11.95 9.59 Total capital as a percent of risk-weighted assets 11.17 13.49 11.43 13.20 10.84 Allowance for loan losses to total loans (year end) 1.38 1.44 1.50 1.50 1.48 Net loan charge offs to average total loans 0.18 0.14 0.13 0.05 0.06 Nonperforming loans (5) to total loans 0.79 1.38 2.46 1.15 1.05 Nonperforming assets (4) to total loans and other real estate owned (year end) 1.78 2.18 2.57 1.40 1.21 Allowance for loan losses to nonperforming assets (4) (year end) 76.65 65.64 58.08 106.77 122.35 Allowance for loan losses to nonperforming loans (5) (year end) 174.75% 104.80% 60.90% 130.44% 140.95% ===========================================================================================================
(1) Tax equivalent based on a 34% Federal tax rate for all periods presented (FTE = Federal tax equivalent basis). (2) Efficiency ratio is equal to non-interest expense divided by the sum of the net interest income and non-interest income. (3) Tier 1 leverage ratio is Tier 1 capital to average assets. (4) Nonperforming assets include nonperforming loans and other real estate owned. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." (5) Nonperforming loans include nonaccrual loans, restructured loans, and loans 90 days past due or greater and still accruing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition." 12 Management's Discussion and Analysis - - -------------------------------------------------------------------------------- of Consolidated Financial Condition and Results of Operations This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. Throughout the following sections, the "Corporation" is defined as Yardville National Bancorp and its wholly owned subsidiaries Yardville National Bank (the "Bank") and Yardville Capital Trust, collectively referred to as "YNB". 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 operations of YNB. 1998 Overview In 1998 YNB was challenged by intense competition, changing customer demands and increased pricing pressures. Traditional loan and deposit activities face particularly challenging competitive pressures as both banks and non-banks compete for customers with access to a broad array of products. YNB's emphasis on relationship banking paid dividends again in 1998. YNB posted increases in net income, loans, and deposits. Technology upgrades have increased product diversity and enhanced customer service. Net income amounted to $5,582,000, an 11.5% increase, compared to the record results of $5,006,000 reported in 1997. Earnings were primarily enhanced by commercial loan growth and, to a lesser extent, securities growth experienced throughout the year. Earnings per share, on a diluted basis, adjusted for the 2.5% stock dividend declared March 25, 1998 increased from $0.98 in 1997 to $1.10 in 1998. Led by commercial loans, YNB's loan portfolio grew 27.5% in 1998 compared to 1997. At December 31, 1998 total loan outstandings reached $491,649,000 compared to $385,751,000 recorded at the end of 1997. The allowance for loan losses totaled $6,768,000 or 1.38% of total loans, covering 174.7% of total nonperforming loans. YNB's deposit base increased 22.9% to total $519,643,000 at December 31, 1998. CDs were competitively priced throughout the year to fund loan growth. YNB's emphasis Return on Average Assets 1.2% 1.04% 1.0 0.99% 0.93% 0.90% 0.82% 0.8 0.6 0.4 0.2 0.0 ______________________________________ 1994 1995 1996 1997 1998 Return on Average Stockholders' Equity 20% 15.89% 15 13.84% 13.32% 13.96% 12.25% 10 5 0 ______________________________________ 1994 1995 1996 1997 1998 on relationship banking is reflected in the 13.3% increase in demand deposits in 1998. Two industry measures of the performance by a bank are its return on average assets and return on average equity. Return on average assets decreased to 0.82% in 1998 from 0.93% in 1997 due primarily to the growth in average assets. Return on average equity is determined by dividing annual net income by average stockholders' equity and indicates how effectively a company can generate net income on the capital invested by its stockholders. For 1998 YNB's return on average equity was 13.96% compared to 13.32% in 1997. RESULTS OF OPERATIONS YNB earned $5,582,000 or $1.10 per share (diluted) for the year ended December 31, 1998 compared to $5,006,000 or $0.98 per share (diluted) for the year ended December 31, 1997. Net income and earnings per share grew 11.5% and 12.2%, respectively, in 1998. YNB posted net income of $4,026,000 or $0.80 per share (diluted) in 1996. The increase in earnings per share in 1998 is principally attributed to increased earnings. NET INTEREST INCOME Net interest income, YNB's largest and most significant component of operating income, is the difference between interest and fees earned on loans and other earning assets, and interest paid on deposits and borrowed funds. This component represented 88.2% of YNB's net revenues in 1998. Net interest income depends upon the relative amounts of interest earning assets, interest bearing liabilities, and the interest rate earned or paid on them. The following tables set forth YNB's consolidated average balances of assets, liabilities and stockholders' equity as well as the amount of interest income and expense on related items, and YNB's average yield or rate for the years ended December 31, 1998, 1997, 1996, 1995, and 1994. The yields and costs are derived by dividing income and expense by the average balance of assets or liabilities. 13 Financial Summary Average Balances, Rates Paid and Yields - - --------------------------------------------------------------------------------
December 31, 1998 December 31, 1997 - - ---------------------------------------------------------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (in thousands) Balance Interest Rate Balance Interest Rate - - ---------------------------------------------------------------------------------------------------------------------------------- Interest Earning Assets: Time deposits with other banks $ 3,365 $ 175 5.20% $ 2,533 $ 107 4.22% Federal funds sold 6,180 333 5.39 7,121 380 5.34 Securities 198,890 12,197 6.13 140,655 8,770 6.24 Loans, net of unearned income (1) 438,050 38,218 8.72 355,526 31,511 8.86 - - ---------------------------------------------------------------------------------------------------------------------------------- Total interest earning assets $ 646,485 $ 50,923 7.88% $ 505,835 $ 40,768 8.06% - - ---------------------------------------------------------------------------------------------------------------------------------- Non-Interest Earning Assets: Cash and due from banks $ 15,398 $ 15,425 Allowance for loan losses (6,102) (5,254) Premises and equipment, net 5,786 5,288 Other assets 22,599 15,337 - - ---------------------------------------------------------------------------------------------------------------------------------- Total non-interest earning assets 37,681 30,796 - - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 684,166 $ 536,631 - - ---------------------------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities: Deposits: Savings, money markets, and interest bearing demand $ 165,534 $ 5,034 3.04% $ 159,720 $ 5,083 3.18% Certificates of deposit of $100,000 or more 25,550 1,386 5.42 23,357 1,273 5.45 Other time deposits 211,790 12,152 5.74 168,962 9,759 5.78 - - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 402,874 18,572 4.61 352,039 16,115 4.58 Borrowed funds 158,106 8,756 5.54 84,492 4,761 5.63 Trust preferred securities 11,500 1,064 9.25 2,422 224 9.25 - - ---------------------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities 572,480 28,392 4.96 438,953 21,100 4.81 - - ---------------------------------------------------------------------------------------------------------------------------------- Non-Interest Bearing Liabilities: Demand deposits $ 66,857 $ 56,700 Other liabilities 4,857 3,404 Stockholders' equity 39,972 37,574 - - ---------------------------------------------------------------------------------------------------------------------------------- Total non-interest bearing liabilities and stockholders' equity $ 111,686 $ 97,678 - - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 684,166 $ 536,631 - - ---------------------------------------------------------------------------------------------------------------------------------- Interest rate spread (2) 2.92% 3.25% - - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income and margin (3) $ 22,531 3.49% $ 19,668 3.89% - - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income and margin (tax equivalent basis) (4) $ 22,950 3.55% $ 9,993 3.95% ==================================================================================================================================
(1) Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income. (2) The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities. (3) The net interest margin is equal to net interest income divided by average interest earning assets. (4) In order to make pre-tax income and resultant yields on tax exempt investments and loans comparable to those on taxable investments and loans, a tax equivalent adjustment is made equally to interest income and income tax expense with no effect on after tax income. The tax equivalent adjustment has been computed using a Federal income tax rate of 34% and has increased interest income by $419,000, $325,000, $222,000, $202,000, and $194,000 for the years ended December 31, 1998, 1997, 1996, 1995, and 1994, respectively. 14
December 31, 1996 December 31, 1995 December 31, 1994 - - -------------------------------------------------------------------------------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate - - -------------------------------------------------------------------------------------------------------- $ 1,992 $ 98 4.92% $ 685 $ 36 5.26% $643 23 3.58% 4,265 228 5.35 7,838 464 5.92 1,200 52 4.33 132,036 8,194 6.21 97,456 5,756 5.91 70,045 3,761 5.37 287,289 25,731 8.96 221,232 21,080 9.53 157,411 14,168 9.00 - - -------------------------------------------------------------------------------------------------------- $ 425,582 $ 34,251 8.05% $ 27,211 $ 27,336 8.35% $229,299 18,004 7.85% - - -------------------------------------------------------------------------------------------------------- $ 11,905 $ 8,778 $ 8,079 (4,190) (3,265) (2,736) 5,037 4,175 3,857 10,156 7,490 3,207 - - -------------------------------------------------------------------------------------------------------- 22,908 17,178 12,407 - - -------------------------------------------------------------------------------------------------------- $ 448,490 $344,389 $241,706 - - -------------------------------------------------------------------------------------------------------- $ 133,450 $ 4,014 3.01% $123,029 $ 4,107 3.34% $113,239 $ 3,156 2.79% 18,188 922 5.07 15,521 883 5.69 7,083 299 4.22 125,332 7,138 5.70 103,637 5,792 5.59 66,020 2,810 4.26 - - -------------------------------------------------------------------------------------------------------- 276,970 12,074 4.36 242,187 10,782 4.45 186,342 6,265 3.36 87,065 4,967 5.70 33,339 2,059 6.18 2,248 95 4.23 -- -- -- -- -- -- -- -- -- - - -------------------------------------------------------------------------------------------------------- 364,035 17,041 4.68 275,526 12,841 4.66 188,590 6,360 3.37 - - -------------------------------------------------------------------------------------------------------- $ 49,078 $ 42,321 $ 36,634 2,507 1,950 605 32,870 24,592 15,877 - - -------------------------------------------------------------------------------------------------------- $ 84,455 $ 68,863 $ 53,116 - - -------------------------------------------------------------------------------------------------------- $ 448,490 $344,389 $241,706 - - -------------------------------------------------------------------------------------------------------- 3.37% 3.69% 4.48% - - -------------------------------------------------------------------------------------------------------- $ 17,210 4.04% $ 14,495 4.43% $11,644 5.08% - - -------------------------------------------------------------------------------------------------------- $ 17,432 4.10% $ 14,697 4.49% $ 11,838 5.16% ========================================================================================================
15 Changes in net interest income and margin result from the interaction between the volume and composition of interest earning assets, interest bearing liabilities, related yields, and associated funding costs. The following table demonstrates the impact on net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in interest rates earned and paid.
- - -------------------------------------------------------------------------------------------------------------------------------- Yardville National Bancorp and Subsidiaries Rate/Volume Analysis 1998 vs. 1997 1997 vs. 1996 Increase (Decrease) Increase (Decrease) Due to changes in: Due to changes in: - - -------------------------------------------------------------------------------------------------------------------------------- (in thousands) Volume Rate Total Volume Rate Total - - -------------------------------------------------------------------------------------------------------------------------------- Interest Earning Assets: Time deposits with other banks $ 40 $ 28 $ 68 $ 24 $ (15) $ 9 Federal funds sold (51) 4 (47) 152 - 152 Securities 3,574 (147) 3,427 537 39 576 Loans, net of unearned income (1) 7,207 (500) 6,707 6,051 (271) 5,780 - - -------------------------------------------------------------------------------------------------------------------------------- Total interest income 10,770 (615) 10,155 6,764 (247) 6,517 - - -------------------------------------------------------------------------------------------------------------------------------- Interest Bearing Liabilities: Deposits: Savings, money markets, and interest bearing demand 181 (230) (49) 826 243 1,069 Certificates of deposit of $100,000 or more (6) 119 113 278 73 351 Other time deposits 2,458 (65) 2,393 2,519 102 2,621 - - -------------------------------------------------------------------------------------------------------------------------------- Total deposits 2,633 (176) 2,457 3,623 418 4,041 Borrowed funds 4,078 (83) 3,995 (61) (145) (206) Trust preferred securities 840 -- 840 224 -- 224 - - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense 7,551 (259) 7,292 3,786 273 4,059 - - -------------------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 3,219 $ (356) $ 2,863 $ 2,978 $ (520) $ 2,458 ================================================================================================================================
(1)Loan origination fees are considered adjustments to interest income. YNB's net interest income totaled $22,531,000 in 1998, an increase of 14.6% from the $19,668,000 reported in 1997. The prior year's increase was 14.3% from 1996's net interest income of $17,210,000. The principal factor contributing to the increase in net interest income in 1998 was an increase in interest income of $10,155,000 resulting from increased loan and security volumes. This was partially offset by decreases in loan and security yields and increased volumes of other time deposits, borrowed funds and trust preferred securities and the related interest expense. Average interest earning assets increased by $140,650,000 or 27.8% for 1998 with increases of $82,524,000 in loans and $58,235,000 in securities. Led by commercial loans, YNB's average loan portfolio grew by 23.2%, however, loan yields averaged 8.72% in 1998 or 14 basis points lower than 1997. Commercial loan yields moved lower as a result of prime rate reductions in the last quarter of 1998 as well as declining market interest rates. Approximately 48% of YNB's commercial, commercial mortgage, and real estate - construction loans have floating interest rates. YNB's average securities portfolio grew by 41.4%, however, the yield on that portfolio decreased 11 basis points when comparing 1998 to 1997, due to a flat treasury yield curve and increased prepayment speeds on mortgage-backed securities. Overall, the yield on earning assets decreased 18 basis points to 7.88% in 1998 from 8.06% in 1997. Interest expense was $28,392,000 for 1998, an increase of $7,292,000, or 34.6%, from $21,100,000 a year ago. The increase in interest expense for the comparable time period is attributable to higher levels of time deposits, borrowed funds, and the impact of trust preferred securities issued in October 1997. Time deposits were aggressively priced throughout 1998 to fund loan growth. The cost on these deposits, however, dropped 4 basis points in 1998 from 1997. Average interest bearing liabilities rose 30.4% in 1998 compared to 1997. The cost of total interest bearing liabilities rose 15 basis points to 4.96% in 1998 from 4.81% in 1997. Trust preferred securities accounted for approximately 40% of this increase. 16 Net interest income was $19,668,000 in 1997, an increase of 14.3% from $17,210,000 in 1996. The principal factor contributing to the improvement was an increase in interest income due to a substantial increase in commercial loan volume. This was partially offset by decreases in loan yields and increases in deposits and trust preferred securities and the related interest expense. The net interest margin (tax equivalent basis), which is net interest income divided by average interest earning assets, was 3.55% in 1998 versus 3.95% in 1997 and 4.10% in 1996. The decrease in the net interest margin resulted from the factors discussed previously. In addition, management has continued to use an investment leverage strategy (Investment Growth Strategy) which negatively impacts the margin. The Investment Growth Strategy is designed to increase net interest income by purchasing investments utilizing borrowed funds with a targeted spread of 75 basis points after tax. The primary goals of the strategy are to improve return on average equity and earnings per share. Incrementally, any increase to net interest income by this strategy will improve return on average equity and earnings per share. The targeted spread on this strategy, however, will result in a negative impact to the net interest margin and return on average assets. For the period ended December 31, 1998 the Investment Growth Strategy averaged approximately $132,900,000. The positive impact to return on average equity and earnings per share was approximately 2.00% and $0.17, respectively. The negative impact to the net interest margin and return on average assets was approximately .69% and .04%, respectively. This strategy is proactively managed, analyzing risk and reward relationships in different interest rate environments based on the composition of investments in the strategy and YNB's overall interest rate risk position. Nonaccrual loans totaled $2,046,000 in 1998, a decrease of $1,309,000 from the $3,355,000 reported in 1997. The decrease in nonaccrual loans was primarily the result of these loans being transferred into other real estate owned. Had such nonaccrual loans been paid in the manner and at the rate and time contracted at the time the loans were made, YNB would have recognized additional interest income of approximately $249,000 in 1998, $254,000 in 1997 and $351,000 in 1996. Average non-interest bearing demand deposits increased 17.9% to $66,857,000 in 1998 from $56,700,000 in 1997. Throughout the comparative periods, increases in average non-interest bearing deposits contributed to the increase in net interest income. NON-INTEREST INCOME Non-interest income amounted to $3,002,000 in 1998 compared to $2,544,000 the prior year, an increase of $458,000 or 18.0%. Non-interest income in 1997 increased by $431,000, or 20.4% from 1996's posted total of $2,113,000. Non-interest income represented 5.6% of total revenues in 1998. Part of YNB's strategic plan is to improve non-interest income growth. In 1998, YNB's Product Development and Management Committee re-introduced annuities and mutual funds to our marketplace. YNB has broadened its product lines and is in the process of analyzing several key strategic initiatives (e.g. insurance products), designed to provide additional sources of fee income that complement our established banking products and services. The major components of non-interest income are presented in the following table. Year Ended December 31, - - ------------------------------------------------------------- (in thousands) 1998 1997 1996 - - ------------------------------------------------------------- Service charges on deposit accounts $ 1,246 $ 1,174 $ 1,153 Other service fees 611 593 438 Gains on sales of mortgages, net 62 30 21 Securities gains (losses), net 151 24 (136) Earnings on bank owned life insurance 708 541 419 Other non-interest income 224 182 218 - - ------------------------------------------------------------- Total $ 3,002 $ 2,544 $ 2,113 ============================================================= Service charges on deposit accounts represent the largest single source of non-interest income. Service charge revenues in 1998 totaled $1,246,000, an increase of 6.1%, compared to $1,174,000 in 1997. Service charge income totaled $1,153,000 in 1996. This component of non-interest income represented 41.5%, 46.1% and 54.6% of the total non-interest income in 1998, 1997, and 1996, respectively. Service charge income increased in 1998 principally due to an increase in income from overdraft fees. Management has pursued a strategy of requiring compensating balances from its commercial customers. Those who meet balance requirements are not service charged. YNB also generates non-interest income from a variety of fee-based services. These include safe deposit rentals, lockbox services and Automated Teller Machine fees on non-customers. Deposit and fee services are repriced annually by the Product Development and Management Committee to reflect current costs and competitive factors. Gains on sales of mortgages, net, increased in 1998 to $62,000 from $30,000 in 1997. Gains on sales of mortgages, net, totaled $21,000 in 1996. While income realized from sales of mortgages increased for the comparable time periods, YNB has not been an active participant in the secondary mortgage market. YNB recorded net securities gains of $151,000 and $24,000 in 1998 and 1997, respectively. In 1996 YNB 17 realized $136,000 in net securities losses. The net gains in 1998 were the result of routine sales and repositioning transactions to take advantage of the volatility in the treasury yield curve. Income from Bank Owned Life Insurance (BOLI) totaled $708,000 in 1998, an increase of $167,000 or 30.9% compared to 1997. Income from BOLI totaled $419,000 in 1996. BOLI assets are utilized to offset the costs of executive compensation plans and a deferred compensation plan for directors. Other non-interest income is primarily composed of income derived from mortgage servicing. Other non-interest income totaled $224,000 in 1998, an increase of $42,000 or 23.1%, when compared to $182,000 in 1997. Other non-interest income totaled $218,000 in 1996. NON-INTEREST EXPENSE Non-interest expense totaled $15,337,000 in 1998, an increase of $1,996,000 or 15.0%, compared to $13,341,000 in 1997. Non-inter est expense in 1997 increased 16.2% from $11,479,000 in 1996. The largest increase in non-interest expense in 1998 compared to 1997 was in salaries and employee benefits. To a lesser extent, occupancy, equipment, and other non-interest expenses also increased for the comparable periods. Salaries and employee benefits, which represent the largest portion of non-interest expense, increased $669,000 in 1998 or 9.0% over 1997. These expenses in 1997 increased $817,000 or 12.3% over 1996. Contributing to this increase was the additional staffing required with the opening of YNB's tenth branch located in Pennington, as well as additional staffing due to YNB's growth. Normal annual salary compensation increases also account for part of the increase in this category. Employee benefits decreased 2.4% for the comparable periods due primarily to reductions in expenses for postretirement benefits. Full time equivalent employees increased to 187 at December 31, 1998 from 173 at December 31, 1997. 1997's increase over 1996 primarily was the result of additional staffing and related benefit expenses due to YNB's growth. In 1997 executive management was also strengthened and YNB opened its Telephone Help Center, which both contributed to the increase of salaries and employee benefits. Salaries and employee benefits as a percent of average assets was 1.2% in 1998, 1.4% in 1997 and 1.5% in 1996, respectively. During 1998 net occupancy expense increased $93,000 to $1,070,000 in 1998 from $977,000 reported in 1997. The increase in occupancy expenses in 1998 compared to 1997 was due primarily to new rental lease payments on YNB's Pennington branch, additional space for the East Windsor branch, as well as routine rent increases. In the last quarter of 1998 YNB began lease payments on its Newtown, Pennsylvania branch scheduled to open in the first quarter of 1999. In 1998, YNB also signed a lease for a 45,000 square foot corporate headquarters building. This new location will include a full service bank branch. Lease payments will not commence until the completion of the building, which is projected to be in the third quarter of 1999. The increase in occupancy expenses in 1997 compared to 1996 was attributable to increased maintenance costs, and to a lesser extent, rental and other expenses associated with the Telephone Help Center which opened in September 1997. This component of non-interest expense has remained constant as a percentage of average assets at 0.2% in 1998, 1997, and 1996, respectively. Equipment expenses increased $192,000, or 17.3%, to $1,299,000 in 1998 from $1,107,000 in 1997. Throughout 1998 YNB upgraded its technology capacity to increase productivity as well as resolve Year 2000 issues. More information on YNB's Year 2000 plan can be found later in management's discussion of financial condition. YNB's enhanced technology will allow management to further diversify business and consumer product lines. The technology upgrades undertaken in 1998 have already improved efficiency and enhanced quality customer service. The increase in equipment expenses in 1997 compared to 1996 was due to increased depreciation costs on YNB's in-house computer system as well as hardware and software upgrades designed to address Year 2000 issues. Other non-interest expenses were $4,853,000, $3,811,000, and $3,235,000 in 1998, 1997, and 1996, respectively. The accompanying table presents the major components of non-interest expense for the years indicated: Year Ended December 31, - - -------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - -------------------------------------------------------------------- Salaries and employee benefits $ 8,115 $ 7,446 $ 6,629 Occupancy expense, net 1,070 977 920 Equipment expense 1,299 1,107 695 Audit & examination fees 306 227 216 Attorneys' fees 379 373 153 O.R.E. expenses 573 378 163 Outside services and processing 328 332 325 Stationery and supplies 403 347 388 Communication and postage 434 373 354 FDIC insurance premium 53 47 1 Insurance (other) 101 127 102 Marketing 747 575 522 Amortization of trust preferred expenses 160 27 -- Other 1,369 1,005 1,011 - - -------------------------------------------------------------------- Total $15,337 $13,341 $11,479 ==================================================================== Other real estate (O.R.E.) expenses increased $195,000 to $573,000 in 1998 when compared to 1997. O.R.E. expenses increased 131.9% in 1997 to $378,000 from 18 $163,000 in 1996. Legal fees and real estate taxes associated with the two real estate-construction loans that were placed in nonaccrual in late 1996 account for the increased O.R.E. expenses in 1998 and 1997. Both of these construction projects are in the work-out process. Communications and postage expense increased $61,000, or 16.4%, to $434,000 in 1998. This increase was attributable to higher telecommunication costs, as a result of additional wiring and technology upgrades. Marketing expenses increased by $172,000, or 29.9% in 1998 to $747,000, compared to $575,000 in 1997. Marketing expenses totaled $522,000 in 1996. In 1998 the two primary focuses in the marketing division were: advertising to generate deposits to fund loan growth and YNB's continued emphasis on participation in community activities. Other expenses, which include various professional fees, loan-related expenses and other operating expenses, have increased primarily due to the increasing size of the organization. In 1998 other expenses were $1,369,000, an increase of $364,000 or 36.2% from $1,005,000 in 1997. Other expenses totaled $1,011,000 in 1996. The increase in 1998 other expenses compared to 1997 is primarily attributable to expenses related to loan growth, increased professional fees, and other operating expenses associated with a larger institution. YNB's ratio of non-interest expense to average assets decreased to 2.2% for 1998 compared to 2.5% for 1997 and 2.6% for 1996. An important industry productivity measure is the efficiency ratio. The efficiency ratio is calculated by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income while a decrease would indicate a more efficient allocation of resources. YNB's efficiency ratio increased slightly in 1998 to 60.07% compared to 60.06% in 1997, and 59.41% in 1996. INCOME TAXES The provision for income taxes, which is comprised of Federal and state income taxes, was $2,639,000 in 1998 compared to $2,740,000 in 1997 and $2,178,000 in 1996. The decrease was primarily due to a state tax savings strategy initiated in 1998. Those savings are anticipated to continue into 1999. Management has also increased the size of its tax-free securities portfolio to reduce Federal income tax expense. The provisions for income taxes for 1998, 1997, and 1996 represented effective tax rates of 32.1%, 35.4% and 35.1%, respectively. The decrease in the effective tax rate for 1998 was the result of the factors discussed above. 19 Financial Condition Years ended December 31, 1998 and 1997 - - -------------------------------------------------------------------------------- TOTAL ASSETS YNB's assets were $757,666,000 at year-end 1998 versus $614,686,000 the previous year, an increase of $142,980,000, or 23.3%. The growth in YNB's asset base throughout 1998 was due primarily to an increase in loans and securities available for sale. Average loans and securities grew 23.2% and 41.4% respectively, in 1998. YNB over the last several years has established its niche as one of the leading community banks in Mercer County specializing in commercial lending. The increase in loans, particularly commercial loans, was the product of YNB's relationship banking philosophy and the continued consolidation in the marketplace, which has solidified YNB's competitive position in the small and middle markets. Average interest earning assets in 1998 were $646,485,000, a 27.8% increase from $505,835,000 in 1997. YNB's ratio of average interest earning assets to average assets increased slightly to 94.5% at December 31, 1998 compared to 94.3% at December 31, 1997. SECURITIES YNB's securities portfolio represented $221,688,000, or 29.3% of assets at December 31, 1998 versus $186,636,000, or 30.4%, of assets at December 31, 1997. The $35,052,000 or 18.8% increase for the comparable period was primarily due to the increase in available for sale securities purchased as part of the Investment Growth Strategy. On an average basis the securities portfolio represented 30.8% of average interest earning assets for the year ended December 31, 1998 compared to 27.8% of average interest earning assets for the year ended December 31, 1997. Securities included in the Investment Growth Strategy totaled approximately $142,200,000 at December 31, 1998 compared to approximately $108,200,000 at December 31, 1997. The Investment Growth Strategy is diversified and consists of fixed and floating rate mortgage-backed securities as well as agency callable securities. Management utilizes asset and liability simulation models to analyze risk and reward relationships and the degree of interest rate exposure associated with this strategy. The purpose of this strategy is designed to improve return on average equity and earnings per share. The available for sale securities portfolio increased $25,853,000 to $185,577,000 at December 31, 1998 from $159,724,000 at December 31, 1997. The increase was primarily a result of securities purchased for the Investment Growth Strategy. The available for sale portfolio principally consists of U.S. Treasury, U.S. agency and agency mortgage-backed securities. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more attractive returns on these investments. As of December 31, 1998, available for sale securities represented 83.7% of the entire portfolio. These securities are reported at fair value, with unrealized gains and losses, net of tax, included as a separate component of stockholders' equity. In late 1998 YNB established a trading account policy. Trading securities are purchased specifically for short-term appreciation with the intent of selling in the near future. There were no trading securities outstanding at December 31, 1998. Investment securities classified as held to maturity totaled $36,111,000 at December 31, 1998 compared to $26,912,000 at December 31, 1997. This portfolio is principally comprised of mortgage-backed securities issued by Federal agencies and state and municipal securities. The municipal bond portfolio grew to $20,773,000 at December 31, 1998 from $8,819,000 at December 31, 1997. Municipal bonds were purchased to reduce YNB's effective tax rate. The following tables present the amortized cost and market values of YNB's securities portfolios as of December 31, 1998, 1997, and 1996.
- - ------------------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES December 31, - - ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - - ------------------------------------------------------------------------------------------------------------------------------- (in thousands) Amortized Cost Market Value Amortized Cost Market Value Amortized Cost Market Value - - ------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of other U.S. government agencies $ 55,051 $ 55,039 $ 62,465 $ 62,540 $ 31,951 $ 31,942 Mortgage-backed securities 120,410 119,986 91,193 91,316 59,441 59,182 Corporate obligations 2,867 2,867 3,297 3,306 -- -- Federal Reserve Bank Stock 812 812 587 587 572 572 Federal Home Loan Bank Stock 6,873 6,873 1,975 1,975 1,975 1,975 - - ------------------------------------------------------------------------------------------------------------------------------- Total $ 186,013 $ 185,577 $ 159,517 $ 159,724 $ 93,939 $ 93,671 ===============================================================================================================================
20
- - ------------------------------------------------------------------------------------------------------------------------------- INVESTMENT SECURITIES December 31, - - ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - - ------------------------------------------------------------------------------------------------------------------------------- (in thousands) Amortized Cos Market Value Amortized Cost Market Value Amortized Cost Market Value - - ------------------------------------------------------------------------------------------------------------------------------- Obligations of other U.S. government agencies $ 4,994 $ 4,935 $ -- $ -- $ -- $ -- Obligations of state and political subdivisions 20,773 20,982 8,819 8,957 9,070 9,108 Mortgage-backed securities 10,344 10,286 18,093 17,891 22,226 21,770 - - ------------------------------------------------------------------------------------------------------------------------------- Total $36,111 $36,203 $26,912 $26,848 $31,296 $30,878 ===============================================================================================================================
The expected maturities and average weighted yields for YNB's securities portfolio as of December 31, 1998 are shown below. Yields for tax-exempt securities are presented on a fully-taxable equivalent basis assuming a 34% tax rate.
- - --------------------------------------------------------------------------------------------------------------------------------- SECURITY MATURITIES AND AVERAGE WEIGHTED YIELDS AVAILABLE FOR SALE SECURITIES December 31, 1998 - - --------------------------------------------------------------------------------------------------------------------------------- After one After five Within but within but within After (in thousands) one year five years ten years ten years Total - - --------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of other U.S. government agencies $ 2,999 $ 8,953 $ 35,000 $ 8,099 $ 55,051 Mortgage-backed securities -- 2,778 3,349 114,283 120,410 Corporate obligations -- -- -- 2,867 2,867 Federal Reserve Bank Stock -- -- -- 812 812 Federal Home Loan Bank Stock -- -- -- 6,873 6,873 - - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 2,999 $ 11,731 $ 38,349 $132,934 $186,013 - - ---------------------------------------------------------------------------------------------------------------------------------- Weighted average yield, computed on a tax equivalent basis 6.26% 5.51% 6.58% 6.53% 6.47% ==================================================================================================================================
- - --------------------------------------------------------------------------------------------------------- Investment Securities December 31, 1998 - - --------------------------------------------------------------------------------------------------------- After one After five but within but within After (in thousands) five years ten years ten years Total - - --------------------------------------------------------------------------------------------------------- Obligations of other U.S. government agencies $ -- $ 1,998 $ 2,996 $ 4,994 Obligations of state and political subdivisions 3,812 2,678 14,283 20,773 Mortgage-backed securities 6,076 2,843 1,425 10,344 - - --------------------------------------------------------------------------------------------------------- Total $ 9,888 $ 7,519 $18,704 $36,111 - - --------------------------------------------------------------------------------------------------------- Weighted average yield, computed on a tax equivalent basis 6.19% 6.64% 6.95% 6.67% =========================================================================================================
Investments in mortgage-backed securities involve prepayment and interest rate risk. At December 31, 1998 and 1997, YNB had mortgage-backed securities totaling $130,754,000 and $109,286,000, respectively. At December 31, 1998 and 1997, there were $96,654,000 and $73,565,000 in fixed-rate mortgage-backed securities outstanding, respectively. The risk to fixed-rate mortgage-backed securities is similar to fixed-rate loans. In rising interest rate environments, the rate of prepayment on fixed-rate mortgage-backed securities tends to decrease because of lower prepayments on the underlying mortgages, and conversely, as interest rates fall, prepayments on such securities tend to rise. In 1998 YNB realized $46,041,000 in principal cash flows from mortgage- 21 backed securities, compared to $16,900,000 in 1997. The increased cash flows are the result of lower interest rates and a larger mortgage-backed security portfolio. YNB attempts to minimize these risks by diversifying the coupons of the mortgage-backed securities, buying seasoned securities with consistent and predictable prepayment histories and adhering to strict pricing policies when purchasing mortgage-backed securities. In 1998 management sold higher coupon fixed-rate mortgage-backed securities to mitigate the impact of prepayments. Securities with lower coupons were then purchased with the goal of more consistent cash flows. The yield on YNB's mortgage-backed security portfolio was impacted negatively in 1998 due to higher prepayment speeds. Collateralized mortgage obligations (CMOs) totaled approximately $9,836,000 at December 31, 1998. A CMO is a mortgage-backed security that is comprised of classes of bonds created by prioritizing the cash flows from the underlying mortgage pool in order to meet different objectives of investors. The CMOs in the investment portfolio are agency named and were generally originally purchased with average lives of two to four years. At December 31, 1998, YNB held no private labeled or corporate CMOs. Stress tests are performed at least semi-annually to assess prepayment speeds and their impact to the average lives and yields on those securities. All CMOs at December 31, 1998 were held in the available for sale category. LOAN PORTFOLIO The loan portfolio represents YNB's largest earning asset class and is a significant source of interest income. YNB's lending strategy stresses quality growth and portfolio diversification. During 1998, total loans increased $105,898,000, or 27.5% to $491,649,000 at December 31, 1998 from $385,751,000 at December 31, 1997. YNB's strength as a commercial business lender was reflected in the 1998 results. The principal areas of loan growth in 1998 were commercial and industrial loans and commercial real estate loans which grew 51.0% and 24.0%, respectively. YNB's loan portfolio represented 64.9% of assets at December 31, 1998 versus 62.8% at the prior year end. The following table sets forth the components of YNB's loan portfolio at the dates indicated.
- - --------------------------------------------------------------------------------------------------------------------------- Loan Portfolio Composition December 31, - - --------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Amount % Amount % Amount % Amount % Amount % - - --------------------------------------------------------------------------------------------------------------------------- Real estate -- mortgage: Commercial $166,725 33.9% $134,499 34.9% $112,914 34.1% $ 73,164 29.8% $ 49,186 25.0% Residential 93,540 19.0 85,754 22.2 83,183 25.1 73,076 29.8 60,156 30.5 Home equity 23,474 4.8 23,805 6.2 23,457 7.1 26,951 11.0 29,388 14.9 Commercial and industrial 133,263 27.1 88,228 22.9 63,426 19.2 33,218 13.6 26,626 13.5 Real estate-- construction 38,386 7.8 28,182 7.3 25,958 7.8 19,353 7.9 15,560 7.9 Consumer 24,531 5.0 18,519 4.8 15,034 4.5 12,386 5.1 10,934 5.6 Other loans 11,730 2.4 6,764 1.7 7,265 2.2 6,906 2.8 5,060 2.6 - - --------------------------------------------------------------------------------------------------------------------------- Total loans $491,649 100.0% $385,751 100.0% $331,237 100.0% $245,054 100.0% $196,910 100.0% ===========================================================================================================================
22 YNB's lending focus continues to be principally on commercial loans, owner-occupied commercial mortgage loans, and tenanted commercial real estate loans. In underwriting such loans, YNB first evaluates the cash flow capability of the borrower to repay the loan. In addition, a substantial majority of commercial loans are also secured by real estate, business assets, and guarantees. YNB makes commercial loans primarily to small- to medium-sized businesses and professionals. Real estate - commercial loans increased by $32,226,000, or 24.0% in 1998 to $166,725,000 from $134,499,000 at December 31, 1997. YNB's lending policies require an 80% or lower loan-to-value ratio for commercial real estate mortgages. Collateral values are established based upon independently prepared appraisals. Generally, these loans are secured by owner-occupied properties or are part of a broader commercial lending relationship. Real estate - residential loans are primarily comprised of residential mortgage loans, fixed-rate home equity loans, and business loans secured by residential real estate. This portion of the portfolio totaled $93,540,000 at December 31, 1998, up $7,786,000, or 9.1% from the prior year. Residential mortgage loans represented $53,360,000, or 57.0% of the total. YNB's residential mortgage loans are secured by first liens on the underlying real property. At December 31, 1998, approximately 48% of the residential mortgage loan portfolio had fixed interest rates and 52% had adjustable interest rates. The home equity credit line portfolio totaled $23,474,000 or 4.8% of YNB's loan portfolio at December 31, 1998. This compares to $23,805,000, or 6.2% of the total loan portfolio at December 31, 1997. Aggressive competition for home equity loans in YNB's markets continued in 1998. In an effort to solidify outstandings in this area, YNB lowered its rate on home equity credit lines in the first quarter of 1998 to make the product more competitive in the marketplace. The home equity credit line portfolio has provided consistent operating income to YNB with controllable delinquencies and minimal losses. The largest area of loan growth in 1998 was in commercial and industrial loans. Commercial and industrial loans increased $45,035,000, or 51.0% at December 31, 1998 to $133,263,000 from $88,228,000 at December 31, 1997. Commercial and industrial loans are made to small to middle market businesses for inventory, working capital, and equipment needs. These loans are generally secured by business assets of the borrower. YNB diversifies risk within this portfolio by monitoring industry concentration. Diversification is intended to limit the risk of loss from any single unexpected event or trend. The following table sets forth the components of commercial and industrial loans, by industry classification, at December 31, 1998. - - ------------------------------------------------------------------- YEAR-END COMMERCIAL and industrial LOANS (dollars in thousands) - - ------------------------------------------------------------------- Percent Number Industry Classification Balance of balance of loans - - ------------------------------------------------------------------- Services $ 32,587 24.5% 227 Real estate related 22,426 16.8 82 Retail trade 19,836 14.9 114 Manufacturing 17,754 13.3 61 Wholesale trade 10,121 7.6 44 Construction 9,929 7.5 60 Individuals 7,749 5.8 56 Transportation and public utilities 6,449 4.8 49 Trade contractors 4,001 3.0 27 Other 2,411 1.8 24 - - ------------------------------------------------------------------- Total $ 133,263 100.0% 744 =================================================================== Real estate - construction loans increased $10,204,000 to $38,386,000 at December 31, 1998 compared to $28,182,000 at December 31, 1997. These loans represented 7.8% of the total loan portfolio at December 31, 1998. Generally these loans are closely monitored with advances made only after work is completed and independently inspected and verified by qualified professionals. YNB makes automobile, motorcycle, personal and other loans to consumers. Consumer loans increased to $24,531,000 at December 31, 1998 compared to $18,519,000 at December 31, 1997. Other loans include loans to individuals and businesses for investment purposes, mortgage warehouse loans, and loans to non-profit organizations. These loans are generally secured. Other loans increased to $11,730,000 at December 31, 1998 compared to $6,764,000 at December 31, 1997. The majority of YNB's business is with customers located within Mercer County, New Jersey and contiguous counties. Accordingly, the ultimate collectibility of the loan portfolio and the recovery of the carrying amount of real estate are subject to changes in the region's economic environment and real estate market. Total Loan Portfolio (Dollars in millions) 500 492 400 386 331 300 245 200 197 100 0 ______________________________________ 1994 1995 1996 1997 1998 The following table provides information concerning the maturity and interest rate sensitivity of YNB's commercial and industrial and real estate--construction loan portfolios at December 31, 1998.
- - ------------------------------------------------------------------------------------------------------ After one After Within but within five (in thousands) one year five years years Total - - ------------------------------------------------------------------------------------------------------ Maturities: Commercial and industrial $ 58,062 $ 56,742 $ 18,459 $ 133,263 Real estate-- construction 16,405 8,310 13,671 38,386 - - ------------------------------------------------------------------------------------------------------ Total $ 74,467 $ 65,052 $ 32,130 $ 171,649 - - ------------------------------------------------------------------------------------------------------ Type: Floating Rate Loans $ 66,019 $ 35,462 $ 15,627 $ 117,108 Fixed Rate Loans 8,448 29,590 16,503 54,541 - - ------------------------------------------------------------------------------------------------------ Total $ 74,467 $ 65,052 $ 32,130 $ 171,649 ======================================================================================================
NONPERFORMING ASSETS Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are composed of (1) loans on a nonaccrual basis, (2) loans which are contractually past due 90 days or more as to interest and principal payments but have not been classified as nonaccrual and (3) loans whose terms have been restructured to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower. YNB's policy with regard to nonaccrual loans varies by the type of loan involved. Generally, commercial loans are placed on a nonaccrual status when they are 90 days past due unless these loans are well secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal and interest is in doubt. Consumer loans are generally charged off after they become 120 days past due. Mortgage loans are not generally placed on a nonaccrual status unless the value of the real estate has deteriorated to the point that a potential loss of principal or interest exists. Subsequent payments are credited to income only if collection of principal is not in doubt. Nonperforming loans totaled $3,873,000 at December 31, 1998, a decrease of $1,442,000 from the $5,315,000 reported at December 31, 1997. The decrease in nonperforming loans was primarily the result of nonaccrual loans being transferred into other real estate owned. The following table sets forth nonperforming assets and risk elements in YNB's loan portfolio by type for the years indicated.
- - -------------------------------------------------------------------------------------------------- NONPERFORMING ASSETS - - -------------------------------------------------------------------------------------------------- December 31, - - -------------------------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 1995 1994 - - -------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial and industrial $ 232 $ 515 $ 961 $ -- $ -- Real estate-- mortgage 570 384 1,451 1,395 1,203 Real estate-- construction 684 2,106 4,659 142 521 Consumer 31 38 12 30 -- Other 529 312 -- -- -- - - -------------------------------------------------------------------------------------------------- Total 2,046 3,355 7,083 1,567 1,724 - - -------------------------------------------------------------------------------------------------- Restructured loans 634 969 -- 612 -- - - -------------------------------------------------------------------------------------------------- Loans 90 days or more past due: Real estate-- mortgage 1,093 886 1,014 588 326 Consumer 100 105 43 52 16 - - -------------------------------------------------------------------------------------------------- Total 1,193 991 1,057 640 342 - - -------------------------------------------------------------------------------------------------- Total nonperforming loans 3,873 5,315 8,140 2,819 2,066 - - -------------------------------------------------------------------------------------------------- Other real estate 4,957 3,171 395 625 314 - - -------------------------------------------------------------------------------------------------- Total nonperforming assets $ 8,830 $ 8,486 $ 8,535 $ 3,444 $ 2,380 ==================================================================================================
24 Nonperforming assets increased $344,000, to $8,830,000 at December 31, 1998 compared to $8,486,000 at December 31, 1997. YNB continues to aggressively manage nonperforming assets with the goal of reducing these assets in relation to the entire portfolio. Nonperforming assets represented 1.17% of total assets at December 31, 1998 versus 1.38% at December 31, 1997. Nonperforming assets as a percentage of total loans and other real estate were 1.78% at December 31, 1998, compared to 2.18% at December 31, 1997. The improvement in these ratios is due to strong asset and loan growth rates, offset by a modest increase in nonperforming assets. Nonaccrual loans were $2,046,000, or 0.4% of total loans, at December 31, 1998, a decrease of $1,309,000 from December 31, 1997. Restructured loans totaled $634,000 at December 31, 1998 and $969,000 at December 31, 1997. These restructured loans are in compliance with restructured terms and conditions. No income is being accrued on these loans. At December 31, 1998, loans that were 90 days or more past due but still accruing interest income totaled $1,193,000, or 0.2% of total loans compared to $991,000, or 0.3% of total loans at December 31, 1997. Management's decision to accrue income on these loans was based on the level of collateral and the status of collection efforts. Other real estate (O.R.E.) totaled $4,957,000 at December 31, 1998 and $3,171,000 at December 31, 1997. O.R.E. represented 1.0% of total loans at December 31, 1998. Management uses an active strategy to liquidate these assets and re-deploy the proceeds in YNB's loan portfolio. At December 31, 1998, O.R.E. balances included two real estate construction loans originally placed into nonaccrual in late 1996. One of these loans totaling approximately $2,000,000 is under a contract of sale. Both properties are in the process of being resolved. Nonperforming Assets As a Percent of Total Assets 2.5% 2.0 1.74% 1.5 1.38% 1.17% 1.0 0.85% 0.85% 0.5 0.0 ______________________________________ 1994 1995 1996 1997 1998 ALLOWANCE FOR LOAN LOSSES Management utilizes a systematic and documented allowance adequacy methodology for loan losses that requires specific allowance assessment for all loans, including residential real estate mortgages and consumer loans. This methodology assigns reserves based upon credit risk ratings for specific loans and general reserves for all other loans. The general reserves are based on various factors, including historical performance and the current economic environment. On a quarterly basis, management reviews all criticized assets and closely monitors all delinquencies. Management continually reviews the process utilized to determine the adequacy of the allowance for loan losses. The following table presents, for the years indicated, an analysis of the allowance for loan losses and other related data.
- - -------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES Year Ended December 31, - - -------------------------------------------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 1995 1994 - - -------------------------------------------------------------------------------------------------------------------- Allowance balance, beginning of year $ 5,570 $ 4,957 $ 3,677 $ 2,912 $ 2,703 Charge offs: Commercial and industrial (547) (212) -- -- (47) Real estate-- mortgage -- (161) (72) (26) (51) Real estate-- construction -- -- (75) (30) (25) Consumer (296) (201) (252) (153) (83) - - -------------------------------------------------------------------------------------------------------------------- Total charge offs (843) (574) (399) (209) (206) - - -------------------------------------------------------------------------------------------------------------------- Recoveries: Commercial and industrial 6 7 -- -- 20 Real estate-- mortgage 4 -- -- 64 43 Consumer 56 55 39 45 47 - - -------------------------------------------------------------------------------------------------------------------- Total recoveries 66 62 39 109 110 - - -------------------------------------------------------------------------------------------------------------------- Net charge offs (777) (512) (360) (100) (96) Provision charged to operations 1,975 1,125 1,640 865 305 - - -------------------------------------------------------------------------------------------------------------------- Allowance balance, end of year $ 6,768 $ 5,570 $ 4,957 $ 3,677 $ 2,912 - - -------------------------------------------------------------------------------------------------------------------- Loans, end of year $ 491,649 $ 385,751 $ 331,237 $ 245,054 $ 196,910 Average loans outstanding $ 438,050 $ 355,526 $ 287,289 $ 221,232 $ 157,411 Allowance for loan losses to total loans, end of year 1.38% 1.44% 1.50% 1.50% 1.48% Net charge offs to average loans outstanding 0.18 0.14 0.13 0.05 0.06 Nonperforming loans to total loans 0.79 1.38 2.46 1.15 1.05 Nonperforming assets to total assets 1.17 1.38 1.74 0.85 0.85 Nonperforming assets to total loans and other real estate owned, end of year 1.78 2.18 2.57 1.40 1.21 Allowance for loan losses to nonperforming assets, end of year 76.65 65.64 58.08 106.77 122.35 Allowance for loan losses to nonperforming loans, end of year 174.75% 104.80% 60.90% 130.44% 140.95% ====================================================================================================================
26 YNB provides for possible loan losses by a charge to current operations to maintain the allowance for loan losses at an adequate level determined according to management's documented allowance adequacy methodology. The provision for loan losses for 1998 was $1,975,000, reflective of the continued substantial growth in the loan portfolio. This compares to a provision for loan losses of $1,125,000 in 1997 and $1,640,000 in 1996. It is management's assessment that the allowance for loan losses is adequate in relation to credit risk exposure levels. At December 31, 1998, the allowance for loan losses totaled $6,768,000, an increase of $1,198,000 or 21.5%, from $5,570,000 at December 31, 1997, which compares to $4,957,000 at December 31, 1996. The ratio of the allowance for loan losses to total loans was 1.38%, 1.44%, and 1.50% at December 31, 1998, 1997, and 1996, respectively. Another measure of the adequacy of the allowance for loan losses is the ratio of the allowance to total nonperforming loans. At December 31, 1998 this ratio was 174.7% versus 104.8% at December 31, 1997. YNB's gross charge offs in 1998 totaled $843,000, compared with $574,000 in 1997 and $399,000 in 1996. Losses on loans and loans which are determined to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to it. YNB's gross recoveries totaled $66,000 in 1998 compared to $62,000 in 1997 and $39,000 in 1996. The balance of the allowance for loan losses is determined by an overall analysis of the loan portfolio and reflects an amount, which in management's judgment is adequate to provide for potential loan losses. Management has taken the necessary steps to identify potential credit problems in its loan portfolio by strengthening lending policies and loan and credit administration. Management reviews all criticized loans on a quarterly basis. Allocations to the allowance for loan losses, both specific and general, are determined after this review. Loans are classified as "minimal, modest, better than average, average, acceptable, special mention, substandard, doubtful and loss." Loan classifications are based on internal reviews and evaluations performed by the lending staff. These evaluations are, in turn, examined by YNB's internal loan review officer. A formal loan review function, independent of loan origination, is used to identify and monitor risk classifications. Allocation of the allowance for loan losses The following tables describe the allocation for loan losses among various categories of loans and certain other information as of the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future loan losses may occur. The total allowance is available to absorb losses from any segment of loans.
December 31, - - ---------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------------------------------- Percent of Percent of Percent of Reserve Percent of Loans to Reserve Percent of Loans to Reserve Percent of Loans to (in thousands) Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans - - ---------------------------------------------------------------------------------------------------------------------------------- Commercial and industrial $1,741 25.7% 27.1% $1,627 29.2% 22.9% $1,704 34.4% 19.2% Real estate-- mortgage 2,993 44.2 57.7 1,740 31.2 63.3 2,064 41.7 66.3 Real estate-- construction 1,292 19.1 7.8 1,775 31.9 7.3 938 18.9 7.8 Consumer 358 5.3 5.0 283 5.1 4.8 175 3.5 4.5 Other loans 384 5.7 2.4 145 2.6 1.7 76 1.5 2.2 - - ---------------------------------------------------------------------------------------------------------------------------------- Total $6,768 100.0% 100.0% $5,570 100.0% 100.0% $4,957 100.0% 100.0% ==================================================================================================================================
December 31, - - ------------------------------------------------------------------------------------------------------------------ 1995 1994 - - ------------------------------------------------------------------------------------------------------------------ Percent of Percent of Reserve Percent of Loans to Reserve Percent of Loans to (in thousands) Amount Allowance Total Loans Amount Allowance Total Loans - - ------------------------------------------------------------------------------------------------------------------ Commercial and industrial $ 983 26.7% 13.6% $1,137 39.0% 13.5% Real estate-- mortgage 1,816 49.4 70.6 1,152 39.6 70.4 Real estate-- construction 664 18.1 7.9 398 13.7 7.9 Consumer 132 3.6 5.1 141 4.8 5.6 Other loans 82 2.2 2.8 84 2.9 2.6 - - ------------------------------------------------------------------------------------------------------------------ Total $3,677 100.0% 100.0% $2,912 100.0% 100.0% ==================================================================================================================
27 DEPOSITS The following table provides information concerning average rates and average balances of deposits for the years indicated:
- - --------------------------------------------------------------------------------------------------------------------------------- AVERAGE DEPOSIT BALANCES AND RATES - - --------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - - --------------------------------------------------------------------------------------------------------------------------------- % of % of % of (in thousands) Balance Rate Total Balance Rate Total Balance Rate Total - - --------------------------------------------------------------------------------------------------------------------------------- Non-interest bearing demand deposits $ 66,857 --% 14.2% $ 56,700 --% 13.9% $ 49,078 --% 15.1% Interest bearing demand deposits 47,709 3.41 10.2 44,024 3.46 10.8 23,554 2.50 7.2 Savings and money market deposits 117,825 2.89 25.1 115,696 3.08 28.3 109,896 3.12 33.7 Time deposits 237,340 5.70 50.5 192,319 5.74 47.0 143,520 5.62 44.0 - - --------------------------------------------------------------------------------------------------------------------------------- Total $469,731 3.95% 100.0% $408,739 3.94% 100.0% $326,048 3.70% 100.0% =================================================================================================================================
YNB's deposit base is the principal source of funds supporting interest earning assets. YNB offers a wide range of deposit products, including demand deposits, savings deposits, insured money market accounts and certificates of deposit. YNB's overall philosophy of building and maintaining long-term customer relationships is the key to further expanding the deposit base, which, in turn, presents opportunities for YNB to cross-sell its services. Total deposits amounted to $519,643,000 at year-end 1998 compared to $422,944,000 at the end of 1997, an increase of 22.9%. Average total deposits during 1998 totaled $469,731,000 compared to $408,739,000 during 1997, an increase of 14.9%. The growth in YNB's deposit base in 1998 was primarily the result of aggressive pricing of certificates of deposit (CDs) to fund loan growth. The continuing trend of increased balances in higher costing time deposits is indicative of the highly competitive Mercer County deposit marketplace. In March of 1998, YNB purchased a software program which allowed YNB to market its certificates of deposit nationwide. This program has become a part of management's strategy to fund loan growth as well as bolstering liquidity. At December 31, 1998, YNB had raised approximately $24,400,000 utilizing this software. The average balance of non-interest bearing demand deposits was $66,857,000 during 1998, an increase of $10,157,000, or 17.9% from $56,700,000 during 1997. Non-interest bearing demand deposits represent a stable, interest free source of funds. The increase in demand deposits is a contributing factor in the growth of net interest income. Average interest bearing demand, savings, and time deposits increased 8.4%, 1.8% and 23.4%, respectively, from 1997 to 1998. Total average time deposits, which consist of certificates of deposit and individual retirement accounts, increased $45,021,000 to $237,340,000 from $192,319,000 in 1997. Time deposits averaged over 50% of total average deposits as of December 31, 1998. Depositors in 1998 continued to place their funds in higher yielding CDs. In the second quarter of 1998, management initiated a program to reduce reserve levels required to be maintained with the Federal Reserve. The result of this program was a substantial reduction in required reserve levels. These funds were then deployed into earning assets. The average rate paid on YNB's deposit balances in 1998 was 3.95%, a 0.3% decrease from the 3.94% average rate for 1997. 28 The following table details amounts and maturities for certificates of deposit of $100,000 or more for the years indicated: December 31, - - -------------------------------------------------------- (in thousands) 1998 1997 - - -------------------------------------------------------- Maturity range: Within three months $ 6,702 $ 5,742 After three but within six months 9,112 5,232 After six but within twelve months 8,753 7,979 After twelve months 4,958 2,603 - - -------------------------------------------------------- Total $29,525 $ 21,556 ======================================================== Certificates of deposit of $100,000 or more totaled $29,525,000, or 5.7% of deposits, at December 31, 1998 compared to $21,556,000, or 5.1% of deposits, at December 31, 1997. Management anticipates that the branching projected for 1999 in the new markets of Burlington County and Bucks County, Pennsylvania will have positive results to YNB's deposit base. Management will also continue to explore other funding options, including brokered deposits. Total Deposits (Dollars in millions) 600 520 500 423 400 364 303 300 259 200 100 0 ______________________________________ 1994 1995 1996 1997 1998 BORROWED FUNDS Borrowed funds consist of securities sold under agreements to repurchase, Federal Home Loan Bank of New York (FHLB) advances, Federal funds purchased, treasury tax and loan deposits and other forms of short-term borrowings. Management utilizes, from time to time, unsecured Federal funds lines of credit with four of its correspondent banks for daily funding needs. Borrowed funds totaled $177,888,000 at December 31, 1998 compared to $134,316,000 at December 31, 1997. FHLB advances with a maturity greater than one year, with callable options, were utilized for funding growth strategy securities and loan growth in 1998. These advances lowered borrowing costs. Repurchase agreements totaling approximately $87,120,000 at year-end 1998 were used as part of the Investment Growth Strategy. Borrowed funds averaged $158,106,000 in 1998, an increase of $73,614,000 from the average reported in 1997 of $84,492,000. The average cost of borrowed funds declined 9 basis points during the year to 5.54% compared with 5.63% in 1997. At year-end 1998 there was $89,316,000 in outstanding borrowings with the FHLB and no outstanding borrowings with YNB's correspondents. Management will continue to strategically utilize borrowed funds to meet short-term liquidity needs and as an additional source of funding for the loan and investment portfolios. LIQUIDITY Liquidity measures the ability to satisfy current and future cash flow needs as they become due. YNB has an Asset/Liability Committee (ALCO) whose function is to monitor and coordinate all activities relating to maintaining adequate liquidity and protection of net interest income from fluctuations in market interest rates. Liquidity management refers to YNB's ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of customers. In addition to maintaining liquid assets, factors such as capital position, profitability, asset quality and availability of funding affect a bank's ability to meet its liquidity needs. On the asset side, liquid funds are maintained in the form of cash and cash equivalents, Federal funds sold, investment securities held to maturity maturing within one year, securities available for sale and loans held for sale. Additional asset-based liquidity is derived from scheduled loan repayments as well as investment repayments of principal and interest from mortgage-backed securities. On the liability side, the primary source of liquidity is the ability to generate core deposits, which generally excludes CDs $100,000 and over. Short-term borrowings are also used as supplemental funding sources when growth in the core deposit base does not keep pace with that of earning assets. At December 31, 1998, liquid assets (excluding securities purchased utilizing borrowed funds) amounted to $56,303,000, as compared to $74,322,000 at December 31, 1997. This represents 9.8% and 15.9% of earning assets, and 9.1% and 14.7% of total assets at December 31, 1998 and 1997, respectively. YNB has the availability to borrow up to $32,700,000 from the FHLB through its line of credit program, subject to collateral requirements. In addition, the bank is eligible to borrow up to 30% of assets under the FHLB advance program subject to FHLB stock level requirements, collateral requirements and individual advance proposals based on FHLB credit standards. YNB also has the ability to borrow at the Federal Reserve discount window along with agreements to borrow from four of its correspondent banks. 29 Strong earning asset growth in 1998 negatively impacted the liquidity profile of YNB. Management has outlined specific steps to address this issue in 1999. A plan is in place, designed to effectively manage liquidity due to changes in interest rates, credit markets, or other external risks. INTEREST RATE SENSITIVITY The objectives of interest rate risk management are to minimize and to the degree possible, control the effect of interest rate fluctuations on net interest income. Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. YNB's ALCO actively seeks to monitor and control the mix of interest rate-sensitive assets and interest rate-sensitive liabilities. One measure of interest rate risk is the gap ratio, which is defined as the difference between the dollar volume of interest earning assets and interest bearing liabilities maturing or repricing within a specified period of time as a percentage of total assets. A positive gap results when the volume of interest rate-sensitive assets exceeds that of interest rate-sensitive liabilities within comparable time periods. A negative gap results when the volume of interest rate-sensitive liabilities exceeds that of interest rate-sensitive assets within comparable time periods. As indicated in the accompanying table, YNB's one-year gap position at December 31, 1998 was a positive 1.7%. Generally, a financial institution with a positive gap position will most likely experience an increase in net interest income during periods of rising rates and decreases in net interest income during periods of lower interest rates. The positive gap was brought about in the last year primarily through increases in convertible advance borrowings in connection with the Investment Growth Strategy and as a replacement for short-term borrowings. These liabilities have an expected repricing date beyond the one-year gap interval. This effect was offset to some degree by increases in fixed rate investments associated with the strategy, although accelerated prepayments on mortgage-backed securities effectively shortened the overall investment duration. While gap analysis represents a useful asset/liability management tool, it does not necessarily indicate the effect of general interest rate movements on YNB's net interest income due to discretionary repricing of some assets and liabilities, balance sheet options, and other competitive pressures. YNB reports its callable agency securities ($47. 0 million at December 31, 1998) at their Option Adjusted Spread ("OAS") modified duration date, as opposed to the call or maturity date. In management's opinion, using modified duration dates on callable agency securities provided a better estimate of the option exercise date at December 31, 1998. The OAS methodology is an approach whereby the likelihood of option exercise takes into account the coupon on the security, the distance to the call date, the maturity date and the current interest rate volatility. In addition, prepayment assumptions derived from historical data have been applied to mortgage-related securities, which are included in investments. Similarly, convertible advance borrowings and repurchase agreements with options have expected repricing dates between the option date and the final maturity date, based on the debt instrument's interest rate and current market rate levels for the same type of debt. Included in the analysis of YNB's gap position are certain savings deposit and interest checking accounts, which are less sensitive to fluctuations in interest rates than other interest bearing sources of funds. In determining the sensitivity of such deposits, management reviews the movement of its deposit rates for the past five years relative to market rates. Using regression analysis, management's ALCO committee has estimated that these deposits are approximately 50-65% sensitive to interest rate changes (i.e., if short term rates were to increase 100 basis points, the interest rate on such deposits would increase 50-65 basis points). The table sets forth certain information at December 31, 1998 relating to YNB's assets and liabilities by scheduled repricing for adjustable assets and liabilities, or by contractual maturity for fixed-rate assets and liabilities. In addition to the utilization of gap for interest rate risk management, the ALCO utilizes simulation analysis whereby the model estimates the variance in net interest income with a change of interest rates of plus and minus 300 basis points over a 12 month period (base case sensitivity). Given recent simulations, YNB is presently positioned to benefit from a rising rate environment, with lower income levels calculated with declining rate environments of 300 basis points. However, YNB assigns a low probability to this rate scenario. Much of the risk to lower rates is due to core deposit funding whose rates can be moved only marginally lower relative to a rapidly declining interest rate market. The Bank is initiating strategies to address this minor imbalance in income (less than a 10% variance) in the early part of 1999. Management analyzes a number of different simulation scenarios to determine the impact to net interest income in various interest rate environments. Management assigns a higher probability of interest rates changing plus or minus 150 basis points over a 12 month period. Like the base case sensitivity, net interest income will be lower in a declining rate environment as discussed above. YNB would presently benefit in gradually increasing interest rates over a 12 month period. The impact, positive or negative, is within a 5% variance in this scenario. Lastly, YNB measures longer-term risks through the Economic Value of Portfolio Equity ("EVPE"). The present value of asset and liability cash flows are subjected to rate shocks of plus and minus 200 basis points. The variance in the residual, or economic value of equity is measured as a percentage of total assets. This variance is managed within a negative 3% boundary. 30
- - --------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS AND LIABILITIES December 31, 1998 - - --------------------------------------------------------------------------------------------------------------------------------- More than More than More than More than Under Six months one year two years five years ten years six through through through through and not (in thousands) months one year two years five years ten years repricing Total Assets Cash and due from banks $ -- $ -- $ -- $ -- $ -- $ 16,246 $ 16,246 Federal funds sold and interest bearing deposits 1,013 -- -- -- -- -- 1,013 Available for sale securities 30,850 17,845 32,471 60,350 18,816 25,245 185,577 Investment securities 1,645 1,376 5,225 10,172 6,626 11,067 36,111 Loans, net of unearned income 235,211 34,214 36,581 130,728 34,410 20,505 491,649 Other assets, net -- 13,787 -- -- -- 13,283 27,070 - - --------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 268,719 $ 67,222 $ 74,277 $ 201,250 $ 59,852 $ 86,346 $ 757,666 - - --------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Non-interest bearing demand $ -- -- $ -- $ -- $ -- $ 75,426 $ 75,426 Savings and interest bearing demand 71,957 -- 15,339 41,913 -- -- 129,209 Money markets 35,695 2,185 -- 6,781 -- -- 44,661 Certificates of deposit of $100,000 or more 15,814 8,753 3,785 1,173 -- -- 29,525 Other time deposits 98,220 67,472 51,917 23,213 -- -- 240,822 - - --------------------------------------------------------------------------------------------------------------------------------- Total deposits 221,686 78,410 71,041 73,080 -- 75,426 519,643 Borrowed funds 18,177 4,906 16,513 111,792 26,500 -- 177,888 Trust preferred securities -- -- -- -- -- 11,500 11,500 Other liabilities -- -- -- -- -- 7,879 7,879 Stockholders' equity -- -- -- -- -- 40,756 40,756 - - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 239,863 $ 83,316 $ 87,554 $ 184,872 $ 26,500 $ 135,561 $ 757,666 - - --------------------------------------------------------------------------------------------------------------------------------- Gap 28,856 (16,094) (13,277) 16,378 33,352 (49,215) Cumulative gap 28,856 12,762 (515) 15,863 49,215 -- Cumulative gap to total assets 3.8% 1.7% -0.1% 2.1% 6.5% -- =================================================================================================================================
31 MARKET RISK For YNB, market risk is defined as the potential loss in the value of financial instruments due to adverse changes in interest rates. This is different than accounting losses that may occur over the next one to two years due to maturity mismatches or spread changes between assets and liabilities, which are measured through simulation analysis. As a financial intermediary, YNB assumes market risk by holding both financial assets (primarily loans, securities, and Fed funds sold) and financial liabilities (deposits and borrowings) on the balance sheet. Rising rates have a negative impact on the value of fixed rate assets and a positive impact on the value of fixed rate and non-maturity deposits, as well as fixed rate borrowings. Deposits or borrowings acquired at today's market rate levels are more valuable to YNB as interest rates rise in the future, resulting in an economic gain. This occurs at the same time fixed rate asset values are declining. The table below shows the expected repricing of YNB's financial instruments subject to market risks, the weighted average interest rate, and fair value of the instruments as of December 31, 1998. The expected repricings take into account amortization and expected prepayments on mortgage-related securities and probable call dates on U.S. Agency notes and debentures represented by the option adjusted spread modified duration. The table does not include prepayments on loans, as they are less predictable than securities with homogenous coupons and maturity dates. Loan repricings are therefore likely to be shorter than what is indicated in this table, as some prepayments can be expected.
- - ----------------------------------------------------------------------------------------------------------------------------------- expected repricing of financial instruments - - ----------------------------------------------------------------------------------------------------------------------------------- Beyond Fair (in thousands) 1999 2000 2001 2002-2003 2004-2008 10 Years Totals Value - - ----------------------------------------------------------------------------------------------------------------------------------- Financial Assets Cash and due from banks $ -- $ -- $ -- $ -- $ -- $ 16,246 $ 16,246 $ 16,246 Average rate -- -- -- -- -- -- -- Federal funds sold and interest bearing deposits 1,013 -- -- -- -- -- 1,013 1,013 Average rate 4.75% -- -- -- -- -- 4.75% Available for sale securities 48,695 32,471 19,538 40,812 18,816 25,245 185,577 185,577 Average rate 6.09% 6.06% 6.57% 6.45% 6.51% 6.60% 6.33% Investment securities 3,021 5,225 3,281 6,891 6,626 11,067 36,111 36,203 Average rate 5.62% 5.29% 5.55% 5.49% 5.02% 4.85% 5.20% Loans, net of unearned income 269,425 36,581 54,955 75,773 34,410 20,505 491,649 492,712 Average rate 8.46% 8.57% 8.41% 8.26% 7.72% 6.61% 8.30% - - ----------------------------------------------------------------------------------------------------------------------------------- Financial Liabilities Non-interest demand deposits $ -- $ -- $ -- $ -- $ -- $ 75,426 $ 75,426 $ 75,426 Average rate -- -- -- -- -- -- -- Savings 51,974 -- 2,607 22,956 -- -- 77,537 77,537 Average rate 2.51% -- 3.00% 2.09% -- -- 2.40% Interest bearing demand 19,983 15,339 -- 16,350 -- -- 51,672 51,944 Average rate 2.25% 5.38% -- 2.25% -- -- 3.18% Money markets 37,880 -- 6,781 -- -- -- 44,661 44,661 Average rate 3.25% -- 2.58% -- -- -- 3.15% CDs of $100,000 or more 24,567 3,785 858 315 -- -- 29,525 29,693 Average rate 5.21% 5.55% 5.73% 5.59% -- -- 5.27% Other time deposits 165,692 51,917 9,079 14,134 -- -- 240,822 242,160 Average rate 5.46% 5.69% 5.71% 5.76% -- -- 5.54% Borrowed funds 23,083 16,513 41,760 70,032 26,500 -- 177,888 181,711 Average rate 5.58% 4.96% 5.20% 4.86% 5.77% -- 5.18% Trust preferred securities -- -- -- -- -- 11,500 11,500 12,219 Average rate -- -- -- -- -- 9.25% 9.25% ===================================================================================================================================
32 Deposits, other than time deposits and non-interest demand, are shown with a "rate sensitive" component due in 1999 and a "non-rate sensitive" component due in subsequent periods. Although these deposits are "payable on demand," YNB does not anticipate a situation where all of the deposits mature simultaneously. Therefore, rate sensitivity of non-contractual interest bearing deposits is measured through a historical regression analysis, which correlates the changes in the rates paid on these deposits to an external market rate (Fed funds). Since the regression is based on an historical relationship, it may not be indicative of how YNB will price these products in the future, but does provide some basis to determine the market risk of these liabilities. STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY The management of capital in a regulated bank environment requires a balance between maximizing leverage and return on average equity to stockholders while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. Stockholders' equity at December 31, 1998 totaled $40,756,000 compared to $39,745,000 at December 31, 1997. This represents an increase of $1,011,000 or 2.5%. This increase resulted from (i) earnings of $5,582,000 (less dividend payments of $1,449,000) and a negative equity adjustment of $408,000 for the unrealized loss on securities available for sale, (ii) proceeds of $294,000 from exercised options, and (iii) treasury stock purchased, at cost, of $3,008,000. In 1998, as part of YNB's Capital Management Plan, 170,300 shares were repurchased at a cost of $3,008,000. As of January 1, 1999, YNB adopted an Employee Stock Ownership Plan (ESOP) to permit eligible employees of YNB to share in the growth of YNB through stock ownership. On February 3, 1999, Yardville National Bancorp sold 155,340 shares to the ESOP for $2,000,000. The ESOP financed the stock purchase with a nonaffiliated financial institution. The financing is for a term of five years with an interest rate of 7.00%. The full balance of the loan will be repaid in equal installments over the term of the loan. The shares purchased by the ESOP were used as collateral for the loan. Yardville National Bancorp guarantees the repayment of the loan. The estimated minimum annual expenses associated with the ESOP are $540,000 per year for the next five years. YNB trades on the Nasdaq National Market System under the symbol "YANB." The listing on the Nasdaq National Market System has provided increased liquidity for YNB stockholders. During 1998, 3,139,000 shares were traded. There were 4,968,174 shares of common stock outstanding at December 31, 1998. All share and dividend information reflects the 2.5% common stock dividend paid April 21, 1998 to shareholders of record April 7, 1998. Dividends paid per share in 1998 totaled $0.29. As a result of YNB's performance during 1998, the common stock dividend was increased from $0.07 per share to $0.075 per share in the last two quarters of 1998. Dividends increased 20.8% in 1998 compared to 1997. Yardville National Bancorp and its banking subsidiary are subject to minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. The measurement of risk-based capital takes into account the credit risk of both balance sheet assets and off-balance sheet exposures. These guidelines require minimum risk-based capital ratios of 4% for Tier 1 capital and 8% for total capital (Tier I plus Tier II). In addition, the current minimum regulatory guideline for the Tier 1 leverage ratio is 4.0%. The Federal Deposit Insurance Corporation Improve-ment Act of 1991 (FDICIA) established five capital level designations ranging from "well capitalized" to "critically undercapitalized." A bank is considered "well capitalized" if it has minimum Tier 1 and total risk-based capital ratios of 6% and 10%, respectively, and a minimum Tier 1 leverage ratio of 5%. At December 31, 1998 the capital ratios for YNB exceeded the above ratios required to be well capitalized. The table below summarizes YNB's capital ratios for the years indicated: December 31, - - ------------------------------------------------------------------------------- 1998 1997 1996 - - ------------------------------------------------------------------------------- Tier 1 leverage ratio 7.7% 9.5% 7.8% Tier 1 risk-based 9.9% 12.2% 10.2% Total risk-based 11.2% 13.5% 11.4% =============================================================================== COMPANY - OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY (TRUST PREFERRED SECURITIES) On October 16, 1997, Yardville Capital Trust (the Trust), a statutory business trust, and a wholly owned subsidiary of Yardville National Bancorp issued $11,500,000 of 9.25% Trust Preferred Securities and $356,000 of 9.25% Common Securities to Yardville National Bancorp. Proceeds from the issuance of the Trust Preferred Securities were immediately used by the Trust to purchase $11,856,000 of 9.25% Subordinated Debentures maturing November 1, 2027 from Yardville National Bancorp. The Trust exists for the sole purpose of issuing Trust Preferred Securities and investing the proceeds into Subordinated Debentures of Yardville National Bancorp. These Subordinated Debentures constitute the sole assets of the Trust. These Subordinated Debentures are redeemable in whole or in part prior to maturity after November 1, 2002. The Trust is obligated to distribute all proceeds of a redemption, whether voluntary or upon maturity, to holders of the Trust Preferred Securities. Yardville National Bancorp's obligation with respect to the Trust Preferred Securities and the Subordinated Debentures, when taken together, provide a full and unconditional guarantee on a subordinated basis by Yardville National Bancorp of the Trust's obligations to pay amounts when due on the Trust Preferred Securities. 33 YEAR 2000 (Y2K) General Issues surrounding Y2K arise out of the fact that many existing computer programs use only two digits to identify a year in the date field. Additionally, Y2K is not just a computer issue, but involves communication, building and environmental systems as well as office equipment. Y2K readiness can be affected to the extent that other entities such as loan customers and key vendors are unsuccessful in addressing this issue. Y2K issues affect virtually all aspects of YNB's organization. YNB began taking a proactive approach to this issue in 1997. YNB's approach includes a written compliance plan. Management believes that the level of resources committed to the project is adequate and the oversight provided by senior management and the Board of Directors is appropriate. YNB is on schedule with its Y2K compliance plan. State of Readiness YNB has identified six distinct areas for its Y2K compliance efforts. The Technology committee, which consists of four directors and all of the executive management team, and the System and Operations committee are the primary groups coordinating YNB's Y2K efforts. The Board of Directors receives monthly reporting on the progress of YNB's Y2K compliance efforts. In addition, YNB receives guidance from the Federal Financial Institutions Examination Council, the formal interagency group responsible for uniform principles, standards, and procedures for the examination of financial institutions by the Federal regulatory agencies, and participates in scheduled Federal Year 2000 examinations. These examinations are being conducted to assess each financial institution's Year 2000 efforts. Core Computer Systems: YNB utilizes Information Technology System's (ITI) software for processing all deposits, commercial and consumer loans in addition to its general ledger activity. In June 1998, YNB completed preliminary testing of these loan and deposit functions at a remote disaster recovery site using Y2K testing software purchased from ITI. Results of the preliminary testing were satisfactory. Due to recent hardware upgrades, YNB plans to retest deposit and loan functions as well as complete testing on the general ledger in the first quarter of 1999. Management does not anticipate any major Y2K compliance problems with the ITI system. Significant Alliances: YNB depends on many outside vendors and suppliers to function efficiently. However, management has identified three systems that have significant Y2K compliance issues due to their reliance on computer hardware and software. These systems are the Federal Reserve Bank's Fed Line wire system, the MAC(R) network which supports YNB's automated teller machines (ATM), and Automated Clearing House (ACH) which YNB uses to process direct deposit activities including payrolls. The timing of Y2K testing on these outside alliances is dependent upon when such testing schedules become accessible to YNB. YNB is also dependent on these outside entities to make required Y2K changes. YNB requires vendors and suppliers to provide representations that their systems are Y2K compliant and has a system in place to track vendors' Y2K compliance efforts. Testing of the Fed Line wire system as well as outgoing ACH transactions was successfully completed during November of 1998. Testing of the MAC network and incoming ACH transactions will be incorporated into the system testing to be performed during the first quarter of 1999 to ensure the integrated components of the system will function properly together. YNB has also identified our provider of mortgage servicing, Wendover Financial Services Corporation, as a significant alliance. Wendover is a subsidiary of Electronic Data Systems, which is one of the largest service providers of data processing applications in the United States. Wendover utilizes software provided by ALLTEL Incorporated. YNB has been provided detailed plans and strategies from both companies regarding Year 2000 compliance. ALLTEL has advised YNB that their systems are Year 2000 compliant at December 31, 1998. ALLTEL is currently facilitating a client-managed task force that will conduct Year 2000 testing which will be completed by the end of the first quarter of 1999. Management does not anticipate any major Y2K compliance problems with either Wendover Financial Services or ALLTEL. End User Computing: YNB's plan to ensure compliance of desktop computers throughout the Corporation includes the replacement of non-compliant computers and related software. All mission critical personal computers are Y2K compliant. Technical Infrastructure: The most critical part of YNB's technical infrastructure is the communication network hardware and software that links all of YNB's departments and branches to the ITI system and allows them to process deposit, loan and general ledger activities. To ensure Y2K compliance the network components were tested from each location. To date, all but one location has been tested with favorable results. Management does not anticipate any significant Y2K compliance issues with its network. Testing of the final branch location will occur by the end of the first quarter of 1999. Any additional branches opened during 1999 will be tested before opening for customer business. Physical Property and Infrastructures: YNB's physical properties and infrastructures include energy and security systems as well as date sensitive equipment. Y2K upgrades to equipment such as ATMs were completed in October of 1998. Testing in this area is nearing completion and management does not anticipate any significant Y2K issues resulting from this area. Commercial Loan Relationships: YNB has identified its commercial loan customers as a potential area of YNB's Y2K exposure. To the extent that a borrower's financial position is weakened as a result of Y2K issues, credit quality could be adversely affected. Management has reviewed the commercial loan portfolio to identify loan types that have significant Y2K exposure. Loan calling officers are in the process of contacting loan customers and assessing their Y2K exposure and compliance efforts. All significant new commercial loan applications include an assessment of the Y2K exposure and compliance efforts of the customer. While YNB continues to closely monitor its commercial loan customers, management cannot predict whether its customers will be successful in becoming Y2K compliant. 34 Y2K Program Status at December 31, 1998 Core Computer Systems: Plan: 100% compliant by 3/31/99. Status: 90% completed. Significant Alliances: Plan: 100% ready* by 3/31/99. Status: 85% completed. End User Computing: Plan: 100% compliant by 12/31/98. Status: 95% completed; completion by end of first quarter of 1999. Technical Infrastructure: Plan: 100% compliant by 12/31/98. Status: 90% completed; completion by end of first quarter of 1999. Physical Properties and Infrastructure: Plan: 100% compliant by 3/31/99. Status: 95% completed. Commercial Loan Relationships: Plan: 100% ready* by 3/31/99. Status: 85% completed. *Ready means having a comprehensive Y2K program in place and a plan that will achieve compliance before January 1, 2000. Y2K Costs YNB's Y2K related costs for 1998 were approximately $810,000. This includes approximately $615,000 in equipment related purchases that will be depreciated over five years. The remaining expense includes additional compensation expense and costs related to the testing and upgrading of systems. Management anticipates 1999 expenditures to decline significantly as most of the significant hardware and software purchases have been completed. Total Y2K costs are projected to be between $50,000 and $100,000 in 1999. This level could rise in the event that ongoing testing uncovers unanticipated Y2K compliance issues. Y2K Contingency Plans YNB has established written Y2K contingency plans as part of its overall disaster recovery plan. These plans identify all mission critical systems and include strategies to overcome Y2K related problems. These plans continue to be reviewed and will be modified from time to time based on the results of the ongoing Y2K compliance efforts. Management believes that the contingency plans should allow YNB to continue to operate in the event of Y2K related problems with a minimum of disruption and moderate increased costs. Y2K Risks The most reasonable worst case scenario for YNB with respect to the Y2K problem is an adverse effect on the credit quality of its commercial loan portfolio. This could be caused by the inability of customers to service their bank debt due to their own Y2K problems or that of their key customers or suppliers. This could result in lower interest income and higher loan charge offs should the Y2K problem become very serious. Management cannot predict the number of customers that will experience Y2K related problems or the amount of revenue that could be lost due to them. In addition, without electrical power and telephone communications it would be very difficult for YNB to effectively operate. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities," established accounting reporting standards for derivative instruments, and for hedging activities. SFAS 133 supersedes the disclosure requirements in Statements No. 80, 105, and 119. This statement is effective for periods beginning after June 15, 1999. The adoption of SFAS 133 is not expected to have a material impact on the financial position or results of operations of the Corporation. Statement of Financial Accounting Standards No. 134 (SFAS No. 134), "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," amends FASB No. 65, "Accounting for Certain Mortgage Banking Activities," to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interest based on its ability and intent to sell or hold those investments. SFAS 134 is effective January 1, 1999. The adoption of this statement is not expected to have a material impact on the financial position of the Corporation. 35 FORWARD-LOOKING STATEMENTS This annual report contains express and implied statements relating to the future financial condition, results of operations, plans, objectives, performance and business of YNB, which are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements that relate to, among other things, profitability, liquidity, loan loss reserve adequacy, plans for growth, interest rate sensitivity, market risk and Year 2000 issues. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in economic conditions, interest rate fluctuations, continued levels of loan quality and origination volume, successful implementation of Year 2000 technology changes by YNB, its vendors and suppliers, competitive product and pricing pressures within YNB's markets, continued relationships with major customers including sources for loans and deposits, personal and corporate customers' bankruptcies, legal and regulatory barriers and structure, inflation, and technological changes, as well as other risks and uncertainties detailed from time to time in the filings of YNB with the Securities and Exchange Commission. 36 Yardville National Bancorp and Subsidiaries Consolidated Statements of Condition - - --------------------------------------------------------------------------------
December 31, - - -------------------------------------------------------------------------------------------------- (in thousands, except share data) 1998 1997 - - -------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 16, 246 $ 18,923 Federal funds sold 280 1,500 - - -------------------------------------------------------------------------------------------------- Cash and Cash Equivalents 16,526 20,423 - - -------------------------------------------------------------------------------------------------- Interest bearing deposits with banks 733 2,219 Securities available for sale 185,577 159,724 Investment securities (market value of $36,203 in 1998 and $26,848 in 1997) 36,111 26,912 Loans 491,649 385,751 Less: Allowance for loan losses (6,768) (5,570) - - -------------------------------------------------------------------------------------------------- Loans, net 484,881 380,181 Bank premises and equipment, net 6,251 5,192 Other real estate 4,957 3,171 Other assets 22,630 16,864 - - -------------------------------------------------------------------------------------------------- Total Assets $ 757,666 $ 614,686 - - -------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Deposits Non-interest bearing $ 75,426 $ 66,560 Interest bearing 444,217 356,384 - - -------------------------------------------------------------------------------------------------- Total Deposits 519,643 422,944 - - -------------------------------------------------------------------------------------------------- Borrowed funds Securities sold under agreements to repurchase 87,120 100,050 Federal Home Loan Bank advances 89,316 29,338 Other 1,452 4,928 - - -------------------------------------------------------------------------------------------------- Total Borrowed Funds 177,888 134,316 Company - obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust holding solely junior Subordinated Debentures of the Company 11,500 11,500 Other liabilities 7,879 6,181 - - -------------------------------------------------------------------------------------------------- Total Liabilities $ 716,910 $ 574,941 - - -------------------------------------------------------------------------------------------------- Commitments and Contingent Liabilities Stockholders' equity Preferred stock: no par value Authorized 1,000,000 shares, none issued Common stock: no par value Authorized 12,000,000 shares Issued 5,138,474 shares in 1998 and 5,082,050 shares in 1997 20,364 17,703 Surplus 2,205 2,205 Undivided profits 21,479 19,713 Treasury stock, at cost, 170,300 shares (3,008) -- Accumulated other comprehensive income (284) 124 - - -------------------------------------------------------------------------------------------------- Total Stockholders' Equity 40,756 39,745 - - -------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 757,666 $ 614,686 ==================================================================================================
See Accompanying Notes to Consolidated Financial Statements. 37 Yardville National Bancorp and Subsidiaries Consolidated Statements of Income - - --------------------------------------------------------------------------------
Year Ended December 31, - - ---------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------- Interest Income: Interest and fees on loans $ 38,218 $ 31,511 $ 25,731 Interest on deposits with banks 175 107 98 Interest on securities available for sale 10,788 7,093 6,262 Interest on investment securities: Taxable 783 1,277 1,536 Exempt from Federal income tax 626 400 396 Interest on Federal funds sold 333 380 228 - - ---------------------------------------------------------------------------------------------------------- Total Interest Income 50,923 40,768 34,251 - - ---------------------------------------------------------------------------------------------------------- Interest Expense: Interest on savings account deposits 5,034 5,083 4,014 Interest on certificates of deposit of $100,000 or more 1,386 1,273 922 Interest on other time deposits 12,152 9,759 7,138 Interest on borrowed funds 8,756 4,761 4,967 Interest on trust preferred securities 1,064 224 -- - - ---------------------------------------------------------------------------------------------------------- Total Interest Expense 28,392 21,100 17,041 - - ---------------------------------------------------------------------------------------------------------- Net Interest Income 22,531 19,668 17,210 Less provision for loan losses 1,975 1,125 1,640 - - ---------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 20,556 18,543 15,570 - - ---------------------------------------------------------------------------------------------------------- Non-Interest Income: Service charges on deposit accounts 1,246 1,174 1,153 Gains on sales of mortgages, net 62 30 21 Securities gains (losses), net 151 24 (136) Other non-interest income 1,543 1,316 1,075 - - ---------------------------------------------------------------------------------------------------------- Total Non-Interest Income 3,002 2,544 2,113 - - ---------------------------------------------------------------------------------------------------------- Non-Interest Expense: Salaries and employee benefits 8,115 7,446 6,629 Occupancy expense, net 1,070 977 920 Equipment expense 1,299 1,107 695 Other non-interest expense 4,853 3,811 3,235 - - ---------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 15,337 13,341 11,479 - - ---------------------------------------------------------------------------------------------------------- Income before income tax expense 8,221 7,746 6,204 Income tax expense 2,639 2,740 2,178 - - ---------------------------------------------------------------------------------------------------------- Net Income $ 5,582 $ 5,006 $ 4,026 - - ---------------------------------------------------------------------------------------------------------- Earnings Per Share: Basic $ 1.11 $ 0.99 $ 0.82 Diluted $ 1.10 $ 0.98 $ 0.80 ==========================================================================================================
See Accompanying Notes to Consolidated Financial Statements. 38 Yardville National Bancorp and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity - - --------------------------------------------------------------------------------
Year Ended December 31, 1998, 1997 and 1996 - - ---------------------------------------------------------------------------------------------------------------------------------- Accumulated other Common Common Undivided Treasury comprehensive (in thousands, except share amounts) shares stock Surplus profits stock income Total - - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1995 4,816,663 $ 16,409 $ 2,205 $ 12,997 $ 106 $ 31,717 Net income 4,026 4,026 Unrealized loss - securities available for sale, net of tax of $107,000 (267) (267) Total comprehensive income 3,759 Cash dividends (1,083) (1,083) Common stock issued: Exercise of stock options 130,958 562 562 Exercise of warrants 34,727 275 275 - - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1996 4,982,348 $ 17,246 $ 2,205 $ 15,940 $ (161) $ 35,230 Net income 5,006 5,006 Unrealized gain - securities available for sale, net of tax of $83,000 285 285 Total comprehensive income 5,291 Cash dividends (1,233) (1,233) Common stock issued: Exercise of stock options 99,702 457 457 - - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1997 5,082,050 $ 17,703 $ 2,205 $ 19,713 $ 124 $ 39,745 Net income 5,582 5,582 Unrealized loss - securities available for sale, net of tax of $152,000 (408) (408) Total comprehensive income 5,174 Cash dividends (1,449) (1,449) Common stock issued: Exercise of stock options 56,424 294 294 2.5% stock dividend 2,367 (2,367) Treasury shares acquired (170,300) (3,008) (3,008) - - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, December 31, 1998 4,968,174 $ 20,364 $ 2,205 $ 21,479 $ (3,008) $(284) $ 40,756 ==================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements. 39 Yardville National Bancorp and Subsidiaries Consolidated Statements of Cash Flows - - --------------------------------------------------------------------------------
Year Ended December 31, - - ----------------------------------------------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income $ 5,582 $ 5,006 $ 4,026 Adjustments: Provision for loan losses 1,975 1,125 1,640 Depreciation 942 832 666 Amortization and accretion 943 467 555 (Gain) loss on sales of securities available for sale (151) (24) 136 Writedown of other real estate 463 532 69 Loss on sale of other real estate 7 -- -- Increase in other assets (5,532) (2,076) (5,434) Increase in other liabilities 1,698 1,650 1,326 - - ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 5,927 7,512 2,984 - - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Net decrease (increase) in interest bearing deposits with banks 1,486 (862) (324) Purchase of securities available for sale (168,202) (123,534) (65,492) Maturities, calls and paydowns of securities available for sale 93,346 45,928 23,475 Proceeds from sales of securities available for sale 47,725 11,740 45,864 Proceeds from maturities and paydowns of investment securities 11,081 4,757 4,355 Purchase of investment securities (20,436) (528) (452) Net increase in loans (109,188) (57,984) (86,915) Expenditures for bank premises and equipment (2,001) (606) (2,058) Proceeds from sale of other real estate 257 -- 533 Capital improvements to other real estate -- (350) -- - - ----------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (145,932) (121,439) (81,014) - - ----------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net increase in non-interest bearing demand, money market, and savings deposits 23,232 36,188 15,704 Net increase in certificates of deposit 73,467 22,311 45,769 Net increase in borrowed funds 43,572 47,977 21,118 Proceeds from issuance of common stock 294 457 837 Treasury shares acquired (3,008) -- -- Proceeds from issuance of trust preferred securities -- 11,500 -- Dividends paid (1,449) (1,233) (1,083) - - ----------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 136,108 117,200 82,345 - - ----------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (3,897) 3,273 4,315 Cash and cash equivalents as of beginning of year 20,423 17,150 12,835 - - ----------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents as of End of Year $ 16,526 $ 20,423 $ 17,150 - - ----------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 25,714 $ 19,239 $ 16,338 Income taxes 3,140 3,642 2,324 =======================================================================================================================
Supplemental Schedule of Non-cash Investing and Financing Activities: The Corporation transferred from loans to other real estate, net of charge offs, $2,513, $2,958, and $372 in 1998, 1997, and 1996, respectively. See Accompanying Notes to Consolidated Financial Statements. 40 Notes to Consolidated Financial Statements Years ended December 31, 1998, 1997, and 1996 - - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies Business Yardville National Bancorp through its subsidiary Yardville National Bank (the Bank) provides a full range of services to individuals and corporate customers in Mercer County and contiguous counties. The Bank is subject to competition from other financial institutions. The Bank is also subject to the regulations of certain Federal agencies and undergoes periodic examinations by those regulatory authorities. Basis of Financial Statement Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. A. Consolidation. The consolidated financial statements include the accounts of Yardville National Bancorp and its subsidiaries, Yardville Capital Trust and the Bank and the Bank's wholly owned subsidiaries, the Yardville National Investment Corporation, Brendan, Nancy Beth, Jim Mary, Yardville Real Estate Corporation, and YNB Realty Inc. (collectively, the Corporation). All significant inter-company accounts and transactions have been eliminated. B. Cash and Cash Equivalents. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and Federal funds sold. Generally, Federal funds are purchased or sold for one day periods. C. Securities. The Corporation's securities portfolio is classified into three separate portfolios: held to maturity, available for sale and trading. Securities classified as available for sale may be used by the Corporation as funding and liquidity sources and can be used to manage the Corporation's interest rate sensitivity position. These securities are carried at their estimated market value with their unrealized gains and losses carried, net of income tax, as adjustments to stockholders' equity. Amortization of premium or accretion of discount are recognized as adjustments to interest income, on a level yield basis. Gains and losses on disposition are included in earnings using the specific identification method. Investment securities are composed of securities that the Corporation has the positive intent and ability to hold to maturity. These securities are stated at cost, adjusted for amortization of premium or accretion of discount. The premium or discount adjustments are recognized as adjustments to interest income, on a level yield basis. Unrealized losses due to fluctuations in market value are recognized as investment security losses when a decline in value is assessed as being other than temporary. Trading securities are purchased specifically for short-term appreciation with the intent of selling in the near future. Trading securities are carried at fair value with realized and unrealized gains and losses reported in non-interest income. D. Loans. Interest on loans is recognized based upon the principal amount outstanding. Loans are stated at face value, less unearned income and net deferred fees. Generally, commercial loans are placed on a nonaccrual status when they are 90 days past due unless they are well secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal and interest is in doubt. Consumer loans are generally charged off after they become 120 days past due. Mortgage loans are not generally placed on a nonaccrual status unless the value of the real estate has deteriorated to the point that a potential loss of principal or interest exists. Subsequent payments are credited to income only if collection of principal is not in doubt. Loan origination and commitment fees less certain costs are deferred and the net amount amortized as an adjustment to the related loan's yield. Loans held for sale are recorded at the lower of aggregate cost or market. E. Allowance for Loan Losses. The provision for loan losses charged to operating expense is determined by management and is based upon a periodic review of the loan portfolio, past experience, the economy, and other factors that may affect a borrower's ability to repay the loan. This provision is based on management's estimates, and actual losses may vary from these estimates. These estimates are reviewed and adjustments, as they become necessary, are reported in the periods in which they become known. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allow-ance may be necessary based on changes in economic conditions, particularly in New Jersey. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses and the valuation of other real estate. Such agencies may require the Corporation to recognize additions to the allowance or adjustments to the carrying value of other real estate based on their judgments about information available to them at the time of their examination. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or fair value of the collateral. Impairment losses are included in the allowance for loan losses through provisions charged to income. 41 F. Bank Premises and Equipment. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the assets (buildings 25 to 50 years, furniture and fixtures 7 to 10 years). Charges for maintenance and repairs are expensed as they are incurred. G. Other Real Estate (O.R.E.). O.R.E. comprises real properties acquired through foreclosure or deed in lieu of foreclosure in partial or total satisfaction of problem loans. The properties are recorded at the lower of cost or fair value less estimated disposal costs at the date acquired. When a property is acquired, the excess of the loan balance over the fair value is charged to the allowance for loan losses. Any subsequent writedowns that may be required to the carrying value of the property are included in other non-interest expense. Gains realized from the sales of other real estate are included in other non-interest income, while losses are included in non-interest expense. H. Federal Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period of the enactment date. I. Stock Based Compensation. The Corporation applies Accounting Principles Board (APB) Opinion 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Pro forma disclosures, as required by SFAS 123, "Accounting for Stock Based Compensation," have been included for awards granted after January 1, 1995 (see note 10). J. Earnings Per Share. On March 25, 1998, the Board of Directors of the Corporation approved a 2.5% stock dividend payable on April 21, 1998 to shareholders of record April 7, 1998. On December 23, 1997, the Board of Directors of the Corporation approved a two-for-one stock split effected in the form of a stock dividend payable on January 20, 1998 to shareholders of record January 5, 1998. All share data has been adjusted to reflect these two actions. Basic net income per common share is calculated by dividing net income, less the dividends on preferred stock, if any, by the weighted average common shares outstanding during the period. Diluted net income per common share is computed similar to that of basic net income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, principally stock options, were issued during the reporting period. Weighted average shares for the basic net income per share computation for the year ended December 31, 1998, 1997, and 1996 were 5,017,000, 5,052,000, and 4,938,000, respectively. For the diluted net income per share computation common stock equivalents of 42,000, 65,000, and 102,000 are included for the years ended December 31, 1998, 1997, and 1996, respectively. K. Comprehensive Income. On January 1, 1998, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholders' equity. SFAS No. 130 requires only additional disclosures in the consolidated financial statements; it does not affect the Corporation's financial postition or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The unrealized holding gains (losses) that arise during a year are equal to the net unrealized gains (losses) on securities available for sale included in total comprehensive income in the consolidated statements of changes in stockholders' equity plus a reclassification adjustment for gains (losses) realized in income. This reclassification adjustment is equal to the security gains (losses) included in the consolidated statements of income for all years presented. 2. Cash and Due From Banks The Corporation maintains various deposits with other banks. As of December 31, 1998 and 1997, the Corporation maintained sufficient cash on hand to satisfy Federal regulatory requirements. 42 3. Securities The amortized cost and estimated market value of securities available for sale are as follows:
December 31, - - --------------------------------------------------------------------------------------------------------------------------------- 1998 1997 - - --------------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value Cost Gains Losses Value - - --------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury securities and obligations of other U.S. government agencies $ 55,051 $ 149 $ (161) $ 55,039 $ 62,465 $117 $ (42) $ 62,540 Mortgage-backed securities 120,410 157 (581) 119,986 91,193 329 (206) 91,316 Corporate obligations 2,867 8 (8) 2,867 3,297 15 (6) 3,306 Federal Reserve Bank Stock 812 -- -- 812 587 -- -- 587 Federal Home Loan Bank Stock 6,873 -- -- 6,873 1,975 -- -- 1,975 - - --------------------------------------------------------------------------------------------------------------------------------- Total $ 186,013 $ 314 $ (750) $ 185,577 $ 159,517 $ 461 (254) $ 159,724 =================================================================================================================================
The amortized cost and estimated market value of investment securities are as follows:
December 31, - - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 - - -------------------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value Cost Gains Losses Value - - -------------------------------------------------------------------------------------------------------------------------------- Obligations of other U.S. government agencies $ 4,994 $ -- $ (59) $ 4,935 $ -- $ -- $ -- $ -- Obligations of state and political subdivisions 20,773 302 (93) 20,982 8,819 138 -- 8,957 Mortgage-backed securities 10,344 -- (58) 10,286 18,093 -- (202) 17,891 - - -------------------------------------------------------------------------------------------------------------------------------- Total $ 36,111 $ 302 $ (210) $ 36,203 $ 26,912 $ 138 (202) $ 26,848 ================================================================================================================================
The amortized cost and estimated market value of securities available for sale and investment securities as of December 31, 1998 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. - - -------------------------------------------------------------------------------- Securities available for sale Estimated Amortized Market (in thousands) Cost Value - - -------------------------------------------------------------------------------- Due in 1 year or less $ 2,999 $ 3,010 Due after 1 year through 5 years 8,953 8,995 Due after 5 years through 10 years 35,000 34,972 Due after 10 years 18,651 18,614 - - -------------------------------------------------------------------------------- Subtotal 65,603 65,591 Mortgage-backed securities 120,410 119,986 - - -------------------------------------------------------------------------------- Total $ 186,013 $185,577 ================================================================================ - - -------------------------------------------------------------------------------- Investment securities Estimated Amortized Market (in thousands) Cost Value - - -------------------------------------------------------------------------------- Due after 1 year through 5 years $ 3,812 $ 3,888 Due after 5 years through 10 years 4,676 4,761 Due after 10 years 17,279 17,268 - - -------------------------------------------------------------------------------- Subtotal 25,767 25,917 Mortgage-backed securities 10,344 10,286 - - -------------------------------------------------------------------------------- Total $ 36,111 $ 36,203 ================================================================================ Proceeds from sale of available for sale securities during 1998, 1997, and 1996 were $47,725,000, $11,740,000 and $45,864,000, respectively. Gross gains of $242,000, $24,000 and $43,000 were realized on those sales in 1998, 1997, and 1996, respectively. Gross losses of $91,000 and $179,000 were realized on those sales in 1998 and 1996, respectively. There were no losses in 1997. 43 Securities with a carrying value of approximately $164,358,000 as of December 31, 1998 were pledged to secure public deposits and for other purposes as required or permitted by law. As of December 31, 1998, Federal Home Loan Bank (FHLB) stock with a carrying value of $6,873,000 was held by the Corporation as required by the FHLB. 4. Loans and Allowance for Loan Losses The following table shows comparative year-end detail of the loan portfolio: December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 - - -------------------------------------------------------------------------------- Commercial and industrial loans $ 133,263 $ 88,228 Real estate loans-- mortgage 283,739 244,058 Real estate loans-- construction 38,386 28,182 Consumer loans 24,531 18,519 Other loans 11,730 6,764 - - -------------------------------------------------------------------------------- Total loans $ 491,649 $ 385,751 ================================================================================ Residential mortgage loans held for sale amounted to $3,084,000 and $2,773,000 as of December 31, 1998 and 1997, respectively. These loans are accounted for at the lower of aggregate cost or market value and are included in the table above. The Corporation originates and sells mortgage loans to Freddie Mac and FNMA. Generally, servicing on such loans is retained by the Corporation. As of December 31, 1998 and 1997, loans serviced for Freddie Mac were $33,476,000 and $39,025,000, respectively. Loans serviced for FNMA were $10,503,000 and $5,114,000, respectively, as of December 31, 1998 and 1997. The Corporation has extended credit in the ordinary course of business to directors, officers, and their associates on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other customers of the Corporation. The following table summarizes activity with respect to such loans: Year Ended December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 - - -------------------------------------------------------------------------------- Balance as of beginning of year $ 6,387 $ 3,330 Additions 3,347 5,399 Repayments and resignations 4,029 2,342 - - -------------------------------------------------------------------------------- Balance as of end of year $ 5,705 $ 6,387 ================================================================================ The majority of the Corporation's business is with customers located within Mercer County, New Jersey and contiguous counties. Accordingly, the ultimate collectibility of the loan portfolio and the recovery of the carrying amount of real estate are subject to changes in the region's economic environment and real estate market. A portion of the total portfolio is secured by real estate. The principal areas of exposure are construction and development loans, which are primarily commercial and residential projects, and commercial mortgage loans. Commercial mortgage loans are completed projects and are generally owner-occupied, creating cash flow.
Changes in the allowance for loan losses are as follows: Year Ended December 31, - - ---------------------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - ---------------------------------------------------------------------------------------------- Balance as of beginning of year $ 5,570 $ 4,957 $ 3,677 Loans charged off (843) (574) (399) Recoveries of loans charged off 66 62 39 - - ---------------------------------------------------------------------------------------------- Net charge offs (777) (512) (360) Provision charged to operations 1,975 1,125 1,640 - - ---------------------------------------------------------------------------------------------- Balance as of end of year $ 6,768 $ 5,570 $ 4,957 ==============================================================================================
The detail of loans charged off is as follows: Year Ended December 31, - - ---------------------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - ---------------------------------------------------------------------------------------------- Commercial and industrial $ 547 $ 212 $ -- Real estate loans -- mortgage -- 161 72 Real estate loans -- construction -- -- 75 Consumer loans 296 201 252 - - ---------------------------------------------------------------------------------------------- Total $ 843 $ 574 $ 399 ==============================================================================================
Nonperforming assets include nonperforming loans and other real estate. The nonperforming loan category includes loans on which accrual of interest has been discontinued with subsequent interest payments credited to income as received and loans 90 days past due or greater on which interest is still accruing. Nonperforming loans as a percentage of total loans were 0.79% as of December 31, 1998 and 1.38% as of December 31, 1997. 44 A summary of nonperforming assets follows: December 31, - - ---------------------------------------------------------- (in thousands) 1998 1997 - - ---------------------------------------------------------- Nonaccruing loans: Commercial and industrial loans $ 232 $ 515 Real estate loans -- mortgage 570 384 Real estate loans -- construction 684 2,106 Consumer loans 31 38 Other loans 529 312 - - ---------------------------------------------------------- Total nonaccruing loans $2,046 $3,355 - - ---------------------------------------------------------- Restructured loans $ 634 $ 969 - - ---------------------------------------------------------- Past due 90 days or more: Real estate loans -- mortgage $1,093 $ 886 Consumer loans 100 105 - - ---------------------------------------------------------- Total past due 90 days or more 1,193 991 - - ---------------------------------------------------------- Total nonperforming loans 3,873 5,315 Other real estate 4,957 3,171 - - ---------------------------------------------------------- Total nonperforming assets $8,830 $8,486 ========================================================== The Corporation has defined the population of impaired loans to be all nonaccrual commercial loans. Impaired loans are individually assessed to determine that the loan's carrying value is not in excess of the fair value of the collateral or the present value of the loan's expected cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment, including residential mortgage and consumer loans, are specifically excluded from the impaired loan portfolio. The recorded investment in loans receivable for which an impairment has been recognized as of December 31, 1998 and 1997 was $2,438,000 and $4,213,000, respectively. The related allowance for loan losses on these loans as of December 31, 1998 and 1997 was $519,000 and $716,000, respectively. The average recorded investment in impaired loans during 1998 and 1997 was $3,252,000 and $5,485,000, respectively. There was no interest income recognized on impaired loans in 1998 or 1997. Additional income before income taxes amounting to approximately $249,000 in 1998, $254,000 in 1997, and $351,000 in 1996 would have been recognized if interest on all loans had been recorded based upon original contract terms. There were two restructured loans to one borrower as of December 31, 1998 and 1997. 5. Bank Premises and Equipment The following table represents comparative information for premises and equipment: December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 - - -------------------------------------------------------------------------------- Land and improvements $ 773 $ 528 Buildings and improvements 4,413 4,308 Furniture and equipment 7,373 5,722 - - -------------------------------------------------------------------------------- Total 12,559 10,558 Less accumulated depreciation 6,308 5,366 - - -------------------------------------------------------------------------------- Bank premises and equipment, net $ 6,251 $ 5,192 ================================================================================ 6. Deposits Total deposits consist of the following: December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 - - -------------------------------------------------------------------------------- Non-interest bearing demand deposits $ 75,426 $ 66,560 Interest bearing demand deposits 51,672 44,520 Money market deposits 44,661 39,937 Savings deposits 77,537 75,047 Certificates of deposit of $100,000 and over 29,525 21,556 Other time deposits 240,822 175,324 - - -------------------------------------------------------------------------------- Total $ 519,643 $422,944 ================================================================================ A summary of certificates of deposit by maturity is as follows: December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 - - -------------------------------------------------------------------------------- Within one year $ 190,259 $ 141,183 One to two years 55,702 34,522 Two to three years 9,935 13,327 Three to four years 9,340 5,366 Four to five years 5,111 2,482 - - -------------------------------------------------------------------------------- Total $ 270,347 $ 196,880 ================================================================================ 7. BORROWED FUNDS Borrowed funds include securities sold under agreements to repurchase and Federal Home Loan Bank (FHLB) advances. Other borrowed funds consist of Federal funds purchased and Treasury tax and loan deposits. 45 The following table presents comparative data related to borrowed funds of the Corporation as of and for the years ended December 31, 1998, 1997, and 1996. December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - -------------------------------------------------------------------------------- Securities sold under agreements to repurchase $ 87,120 $100,050 $ 64,185 FHLB advances 89,316 29,338 20,813 Other 1,452 4,928 1,341 - - -------------------------------------------------------------------------------- Total $177,888 $134,316 $ 86,339 - - -------------------------------------------------------------------------------- Maximum amount outstanding at any month end $182,354 $134,316 $105,577 Average interest rate on year end balance 5.25% 5.94% 5.72% Average amount outstanding during the year $158,106 $ 84,492 $ 87,065 Average interest rate for the year 5.54% 5.63% 5.70% ================================================================================ The following is a summary of securities sold under agreements to repurchase and their expected maturities as of December 31, 1998: - - -------------------------------------------------------------------------------- (in thousands) - - -------------------------------------------------------------------------------- Up to 30 days $ 6,320 30 to 90 days 9,400 Over 90 days 71,400 - - -------------------------------------------------------------------------------- Total $ 87,120 ================================================================================ The outstanding amount includes $61,500,000 in callable repurchase agreements with maturities ranging from five to ten years and call dates of one to two years. Due to the call provisions, expected maturities could differ from contractual maturities. The FHLB advances as of December 31, 1998 mature as follows: - - -------------------------------------------------------------------------------- (in thousands) - - -------------------------------------------------------------------------------- Within one year $ 1,000 Over two to three years 784 Over three to four years 32 Over five years 87,500 - - -------------------------------------------------------------------------------- Total $ 89,316 ================================================================================ The outstanding amount includes $83,500,000 in callable advances with ten year maturities and call dates of one to five years. Due to the call provisions, expected maturities could differ from contractual maturities. Interest expense on borrowed funds is comprised of the following: Year Ended December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - -------------------------------------------------------------------------------- Securities sold under agreements to repurchase $5,851 $3,627 $3,792 FHLB advances 2,816 1,081 1,116 Other 89 53 59 - - -------------------------------------------------------------------------------- Total $8,756 $4,761 $4,967 ================================================================================ 8. company-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated debentures of the company (Trust Preferred Securities) On October 16, 1997, Yardville Capital Trust (the Trust), a statutory business trust, and a wholly owned subsidiary of Yardville National Bancorp, issued $11,500,000 of 9.25% Trust Preferred Securities and $356,000 of 9.25% Common Securities to Yardville National Bancorp. Proceeds from the issuance of the Trust Preferred Securities were immediately used by the Trust to purchase $11,856,000 of 9.25% Subordinated Debentures maturing November 1, 2027 from Yardville National Bancorp. The Trust exists for the sole purpose of issuing Trust Preferred Securities and investing the proceeds into Subordinated Debentures of Yardville National Bancorp. These Subordinated Debentures constitute the sole assets of the Trust. These Subordinated Debentures are redeemable in whole or part prior to maturity after November 1, 2002. The Trust is obligated to distribute all proceeds of a redemption, whether voluntary or upon maturity, to holders of the Trust Preferred Securities. Yardville National Bancorp's obligation with respect to the Trust Preferred Securities and the Subordinated Debentures, when taken together, provide a full and unconditional guarantee on a subordinated basis by Yardville National Bancorp of the Trust's obligations to pay amounts when due on the Trust Preferred Securities. 46 9. Income Taxes Income taxes reflected in the consolidated financial statements for 1998, 1997, and 1996 are as follows: Year Ended December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - -------------------------------------------------------------------------------- Statements of Income: Federal: Current $ 2,625 $ 2,440 $ 2,281 Deferred (358) (294) (521) State: Current 512 675 560 Deferred (140) (81) (142) - - -------------------------------------------------------------------------------- Total tax expense $ 2,639 $ 2,740 $ 2,178 - - -------------------------------------------------------------------------------- Statements of Condition: Deferred tax on securities available for sale $ (236) $ 190 $ (178) ================================================================================ Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws. Temporary differences which give rise to a significant portion of deferred tax assets and liabilities for 1998 and 1997 are as follows: December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 - - -------------------------------------------------------------------------------- Deferred tax assets: Deferred loan fees $ 58 $ 38 Allowance for loan losses 2,462 1,965 Writedown of basis of O.R.E. properties 118 22 Deferred income 16 2 Nonaccrual loans -- 40 Net state operating loss carryforwards 52 -- Unrealized loss on securities available for sale 152 -- Deferred compensation 474 458 - - -------------------------------------------------------------------------------- Total deferred tax assets $ 3,332 $ 2,525 - - -------------------------------------------------------------------------------- Valuation allowance (78) (78) Deferred tax liabilities: Unrealized gain on securities available for sale -- (83) Deferred income (168) -- Unamortized discount accretion (75) (71) Depreciation (166) (195) Other (13) -- - - -------------------------------------------------------------------------------- Net deferred tax assets $ 2,832 $ 2,098 ================================================================================ The Corporation has established the valuation allowance against certain temporary differences. The Corporation is not aware of any factors which would generate significant differences between taxable income and pre-tax accounting income in future years except for the effects of the reversal of current or future net deductible temporary differences. Management believes, based upon current information, that it is more likely than not that there will be sufficient taxable income through carryback to prior years to realize the net deferred tax asset. However, there can be no assurance regarding the level of earnings in the future. A reconciliation of the tax expense computed by multiplying pre-tax accounting income by the statutory Federal income tax rate of 34% is as follows: Year Ended December 31, - - -------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - -------------------------------------------------------------------------------- Income tax expense at statutory rate $ 2,795 $ 2,634 $ 2,105 State income taxes, net of Federal benefit 245 392 276 Changes in taxes resulting from: Tax exempt interest (239) (155) (122) Tax exempt income (227) (184) (142) Non-deductible expenses 65 53 61 - - -------------------------------------------------------------------------------- Total $ 2,639 $ 2,740 $ 2,178 ================================================================================ 10. BENEFIT PLANS Retirement Savings Plan. The Corporation has a 401(K) plan which covers substantially all employees with one or more years of service. The plan permits all eligible employees to make basic contributions to the plan up to 12% of base compensation. Under the plan, the Corporation provided a matching contribution of 50% in 1998, 1997, and 1996 up to 6% of base compensation. Employer contributions to the plan amounted to $107,000 in 1998, $93,000 in 1997, and $83,000 in 1996. Postretirement Benefits. In 1997, the Corporation modified its postretirement benefits plan. The Corporation provides additional postretirement benefits, namely life and health insurance, to retired employees over the age of 62 who have completed 15 years of service. The plan calls for retirees to contribute a portion of the cost of providing these benefits in relation to years of service. The cost of retiree health and life insurance benefits is recognized over the employees' period of service. There were no periodic postretirement benefit costs under SFAS 106 in 1998. Those costs were $64,000 and $205,000 in 1997 and 1996, respectively. The actuarial present value of benefit obligations was $604,000 in 1998, and $568,000 in 1997. 47 Stock Option Plans. The Corporation maintains stock option plans for both officers and directors. The purpose of these plans is to assist the Corporation in attracting and retaining highly qualified officers and directors and to provide such with incentive to contribute to the growth and development of the Corporation. These options are intended to be either incentive or non-qualified stock options. Options have been granted to purchase common stock at the fair value of the stock at the date of grant. A committee appointed by the Board of Directors sets the vesting schedule and terms of stock options. - - -------------------------------------------------------------------------------- Weighted average Shares exercise price - - -------------------------------------------------------------------------------- Balance, December 31, 1995 333,202 $ 4.26 - - -------------------------------------------------------------------------------- Shares: Granted 6,560 7.68 Exercised 130,958 4.30 Expired 7,403 5.00 - - -------------------------------------------------------------------------------- Balance, December 31, 1996 201,401 $ 4.32 - - -------------------------------------------------------------------------------- Shares: Granted 29,930 10.64 Exercised 99,702 4.64 Expired 1,322 4.95 - - -------------------------------------------------------------------------------- Balance, December 31, 1997 130,307 $ 5.52 - - -------------------------------------------------------------------------------- Shares: Granted 419,288 17.20 Exercised 57,575 5.03 Expired 1,529 8.43 - - -------------------------------------------------------------------------------- Balance, December 31, 1998 490,491 $ 15.55 - - -------------------------------------------------------------------------------- Shares exercisable as of December 31, 1998 64,862 $ 5.38 ================================================================================ The fair value of options granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997, and 1996, respectively: (1) an expected annual dividend rate of $0.32, $0.28, and $0.23. (2) risk free rate of 5.6%, 5.5%, and 5.2%. (3) expected life of approximately 5 years in 1998, and 1 year for 1997 and 1996. The Corporation applies APB Opinion No. 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for stock options in the consolidated financial statements. Had the Corporation determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Corporation's 1998, 1997, and 1996 net income would have been reduced to the pro forma amounts indicated below: - - ------------------------------------------------------------- (in thousands) 1998 1997 1996 - - ------------------------------------------------------------- Net income: As reported $ 5,582 $ 5,006 $ 4,026 Pro forma 3,567 4,976 4,021 - - ------------------------------------------------------------- Earnings per share: Basic: As reported $ 1.11 $ 0.99 $ 0.82 Pro forma 0.71 0.99 0.81 Diluted: As reported $ 1.10 $ 0.98 $ 0.80 Pro forma 0.71 0.97 0.80 ============================================================= Benefit Plans. The Corporation has a salary continuation plan for key executives and a director deferred compensation plan for its board members. The plans provide for yearly retirement benefits to be paid over a specified period. The present value of the benefits accrued under these plans as of December 31, 1998 and 1997 is approximately $493,000 and $342,000, respectively, and is included in other liabilities in the accompanying consolidated statements of condition. Compensation expense of approximately $138,000, $120,000, and $120,000 is included in the accompanying consolidated statements of income for the years ended December 31, 1998, 1997, and 1996, respectively. In connection with the benefit plans, the Corporation has purchased life insurance policies on the lives of the executives and directors. The Corporation is the owner and beneficiary of the policies. The cash surrender values of the policies are approximately $9,595,000 and $5,797,000 as of December 31, 1998 and 1997, respectively, and are included in other assets in the accompanying consolidated statements of condition. The Corporation implemented an officer group term replacement plan for divisional officers in 1996. This plan replaces group term life insurance for these officers. This plan is funded through life insurance policies purchased by the Corporation. This plan is a split dollar plan; therefore, the policy interests are divided between the bank and the employee. The death benefits over and above the cash surrender of the life insurance policy, if any, are endorsed to the beneficiary of the executive. The cash surrender value of the policies is approximately $4,192,000 and $3,441,000 as of December 31, 1998 and 1997, and is included in other assets in the accompanying consolidated statements of condition. 48 11. COMMON STOCK On October 28, 1997, the Corporation's Board of Directors authorized the repurchase of up to 172,000 shares in aggregate of the Corporation's common stock. There were no shares repurchased in 1997. At various times in 1998, the Corporation repurchased shares totaling 170,300 at an average price of $17.67. 12. OTHER NON-INTEREST EXPENSE Other non-interest expense included the following: Year Ended December 31, - - ---------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - ---------------------------------------------------------------------- Audit and examination fees $ 306 $ 227 $ 216 Attorneys' fees 379 373 153 O.R.E. expenses 573 378 163 Outside services and processing 328 332 325 Stationery and supplies 403 347 388 Communication and postage 434 373 354 FDIC insurance premium 53 47 1 Insurance (other) 101 127 102 Marketing 747 575 522 Amortization of trust preferred expenses 160 27 -- Other 1,369 1,005 1,011 - - ---------------------------------------------------------------------- Total $4,853 $3,811 $3,235 ====================================================================== 13. OTHER COMMITMENTS AND CONTINGENT LIABILITIES The Corporation enters into a variety of financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and letters of credit, both of which involve, to varying degrees, elements of risk in excess of the amount recognized in the consolidated financial statements. Credit risk, the risk that a counterparty of a particular financial instrument will fail to perform, is the contract amount of the commitments to extend credit and letters of credit. The credit risk associated with these financial instruments is essentially the same as that involved in extending loans to customers. Credit risk is managed by limiting the total amount of arrangements outstanding and by applying normal credit policies to all activities with credit risk. Collateral is obtained based on management's credit assessment of the customer. The contract amounts of off-balance sheet financial instruments as of December 31, 1998 and 1997 for commitments to extend credit were $114,077,000 and $77,943,000, respectively. For standby letters of credit, the contract amounts were $8,208,000 and $6,501,000, respectively. Many such commitments to extend credit may expire without being drawn upon, and therefore, the total commitment amounts do not necessarily represent future cash flow requirements. The Corporation maintains lines of credit with the FHLB and four of its correspondent banks. There were approximately $28,700,000 in lines of credit available as of December 31, 1998. The Corporation maintains repurchase agreement lines of credit with two brokerage firms. There were approximately $108,230,000 in lines available at December 31, 1998. The Corporation leases its banking offices in Ewing Township, East Windsor Township, Trenton, Hamilton Square, Pennington, and its Telephone Help Center. In 1998, the Corporation began paying rent on a future branch site in Newtown Township, Pennsylvania. In addition, the Corporation signed a lease for a new corporate headquarters building to be located in Hamilton Township. It is anticipated that rental payments will begin in the third quarter of 1999. Total lease rental expense was $298,234, $236,912 and $186,305 for the years ended December 31, 1998, 1997, and 1996, respectively. Minimum rentals under the terms of these leases are approximately $621,000 in 1999, $1,100,000 in 2000, and $1,200,000 for years 2001 through 2003. The Corporation and the Bank are party, in the ordinary course of business, to litigation involving collection matters, contract claims and other miscellaneous causes of action arising from their business. Management does not consider that any such proceedings depart from usual routine litigation, and in its judgment, the Corporation's consolidated financial position or results of operations will not be affected materially by the final outcome of any pending legal proceedings. 14. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. 49
The following table presents the Corporation's and Bank's actual capital amounts and ratios: - - -------------------------------------------------------------------------------------------------------------------------------- REGULATORY MATTERS Per Regulatory Guidelines - - -------------------------------------------------------------------------------------------------------------------------------- Actual Minimum "Well Capitalized" - - -------------------------------------------------------------------------------------------------------------------------------- (amounts in thousands) Amount Ratio Amount Ratio Amount Ratio - - -------------------------------------------------------------------------------------------------------------------------------- As of December 31, 1998: Corporation Total capital (to risk-weighted assets) $59,151 11.2% $42,394 8.0% $52,993 10.0% Tier I capital (to risk-weighted assets) 52,531 9.9 21,197 4.0 31,796 6.0 Tier I capital (to average assets) 52,531 7.7 27,367 4.0 34,208 5.0 Bank Total capital (to risk-weighted assets) $57,590 10.8% $42,500 8.0% $53,125 10.0% Tier I capital (to risk-weighted assets) 50,948 9.6 21,250 4.0 31,875 6.0 Tier I capital (to average assets) 50,948 8.5 27,251 4.0 34,064 5.0 As of December 31, 1997: Corporation Total capital (to risk-weighted assets) $56,341 13.5% $33,414 8.0% $41,767 10.0% Tier I capital (to risk-weighted assets) 51,116 12.2 16,707 4.0 25,060 6.0 Tier I capital (to average assets) 51,116 9.5 21,465 4.0 26,832 5.0 Bank Total capital (to risk-weighted assets) $51,675 12.5% $33,114 8.0% $41,393 10.0% Tier I capital (to risk-weighted assets) 46,496 11.2 16,557 4.0 24,836 6.0 Tier I capital (to average assets) 46,496 8.7 21,279 4.0 26,598 5.0 ================================================================================================================================
As of December 31, 1998, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. Permission from the Comptroller of the Currency is required if the total of dividends declared in a calendar year exceeds the total of the Bank's net profits, as defined by the Comptroller, for that year, combined with its retained net profits of the two preceding years. The retained net profits of the Bank available for dividends are approximately $7,952,000 as of December 31, 1998. On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Improve-ment Act") became law. While the FDIC Improvement Act primarily addresses additional sources of funding for the Bank Insurance Fund, which insures the deposits of commercial banks and saving banks, it also imposes a number of new mandatory supervisory measures on savings associations and banks. The FDIC Improvement Act requires financial institutions to take certain actions relating to their internal operations, including: providing annual reports on financial condition and management to the appropriate Federal banking regulators, having an annual independent audit of financial statements performed by an independent public accountant and establishing an independent audit committee composed solely of outside directors. The FDIC Improvement Act also imposes certain operational and managerial standards on financial institutions relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following fair value estimates, methods and assumptions were used to measure the fair value of each class of financial instruments for which it is practical to estimate that value: Cash and Cash Equivalents. For such short-term investments, the carrying amount was considered to be a reasonable estimate of fair value. Securities and Mortgage-backed Securities. The fair value of investments and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. 50 The fair value of performing loans, except residential mortgage loans, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities. The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, interest bearing demand deposits, money market, and savings deposits, is considered to be equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowed Funds. For securities sold under agreements to repurchase and FHLB advances, fair value was based on rates currently available to the Corporation for agreements with similar terms and remaining maturities. For other borrowed funds, the carrying amount was considered to be a reasonable estimate of fair values. The estimated fair values of the Corporation's financial instruments are as follows: December 31, 1998 - - ------------------------------------------------------------------------------- Carrying Fair (in thousands) Value Value - - ------------------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 16,526 $ 16,526 Interest bearing deposits with banks 733 733 Securities available for sale 185,577 185,577 Investment securities 36,311 36,203 Loans, net 484,881 485,944 Financial Liabilities: Deposits 519,643 521,421 Borrowed funds 177,888 181,711 Trust preferred securities 11,500 12,219 =============================================================================== December 31, 1997 - - ------------------------------------------------------------------------------- Carrying Fair (in thousands) Value Value - - ------------------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 20,423 $ 20,423 Interest bearing deposits with banks 2,219 2,219 Securities available for sale 159,724 159,724 Investment securities 26,912 26,848 Loans, net 380,181 383,200 Financial Liabilities: Deposits 422,944 423,082 Borrowed funds 134,316 134,248 Trust preferred securities 11,500 12,075 =============================================================================== The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, and as the fair value for these financial instruments was not material, these disclosures are not included above. Limitations. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include the deferred tax assets and bank premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. 51 16. PARENT CORPORATION INFORMATION The condensed financial statements of the parent company only are presented below: YARDVILLE NATIONAL BANCORP (Parent Corporation) Condensed Statements of Condition December 31, - - ------------------------------------------------------------------------------ (in thousands) 1998 1997 - - ------------------------------------------------------------------------------ Assets: Cash $ 200 $ 815 Securities available for sale 105 3,297 Investment in subsidiaries 51,020 46,971 Other assets 1,296 527 - - ------------------------------------------------------------------------------ Total Assets $52,621 $51,610 - - ------------------------------------------------------------------------------ Liabilities and Stockholders' Equity: Other liabilities $ 9 $ 9 Subordinated debentures 11,856 11,856 Stockholders' equity 40,756 39,745 - - ------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $52,621 $51,610 ============================================================================== Condensed Statements of Income Year Ended December 31, - - ------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - ------------------------------------------------------------------------------- Operating Income: Dividends from subsidiary $1,982 $1,765 $1,083 Interest income 42 -- -- Other income 63 -- -- - - ------------------------------------------------------------------------------- Total Operating Income 2,087 1,765 1,083 - - ------------------------------------------------------------------------------- Operating Expense: Interest expense 1,064 224 -- Other expense 340 144 114 - - ------------------------------------------------------------------------------- Total Operating Expense 1,404 368 114 - - ------------------------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiaries 683 1,397 969 Federal income tax benefit (441) (114) (40) - - ------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries 1,124 1,511 1,009 Equity in undistributed income of subsidiaries 4,458 3,495 3,017 - - ------------------------------------------------------------------------------- Net Income $5,582 $5,006 $4,026 =============================================================================== Condensed Statements of Cash Flows Year Ended December 31, - - ------------------------------------------------------------------------------- (in thousands) 1998 1997 1996 - - ------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income $ 5,582 $ 5,006 $ 4,026 Adjustments: Increase in other assets (769) (448) (40) Equity in undistributed income of subsidiaries (4,458) (3,495) (3,017) Increase in other liabilities -- 9 -- - - ------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 355 1,072 969 - - ------------------------------------------------------------------------------- Cash Flows from Investing Activities: Purchases of securities available for sale -- (3,297) -- Proceeds from sales of securities available for sale 3,192 -- -- Investing in subsidiaries 1 (8,356) (749) - - ------------------------------------------------------------------------------- Net Cash Provided (Used) by Investing Activities 3,193 (11,653) (749) - - ------------------------------------------------------------------------------- Cash Flows from Financing Activities: Proceeds from issuance of subordinated debentures -- 11,856 -- Proceeds from shares issued 294 457 837 Purchase of treasury shares (3,008) -- -- Dividends paid (1,449) (1,233) (1,083) - - ------------------------------------------------------------------------------- Net Cash (Used) Provided by Financing Activities (4,163) 11,080 (246) - - ------------------------------------------------------------------------------- Net (decrease) increase in cash (615) 499 (26) Cash as of beginning of year 815 316 342 - - ------------------------------------------------------------------------------- Cash as of end of year $ 200 $ 815 $ 316 =============================================================================== 52 Independent Auditors' Report The Board of Directors and Stockholders Yardville National Bancorp: We have audited the accompanying consolidated statements of condition of Yardville National Bancorp and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yardville National Bancorp and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Princeton, New Jersey January 22, 1999 53 OFFICERS YARDVILLE NATIONAL BANK Thomas A. McBain Assistant Cashiers Audit Sharon L. Bokma President/Chief Executive Officer Retail Administration Patrick M. Ryan Debra L. Mincarelli Retail Administration Barbara A. Brehaut Executive Vice Presidents Retail Administration Stephen F. Carman Tina H. Orben Cashier/Chief Financial Officer Private Banking Valerie Dromboski Residential Mortgage Timothy J. Losch Diane H. Polyak Chief Operating Officer Financial Services John T. Gaffney Alternative Investments First Senior Vice Presidents Leslie Rita James F. Doran Credit Administration Barbara A. Kaminsky Senior Lending Officer Operations Joseph H. Robotin Mary C. O'Donnell Residential Mortgage Kathleen M. Kirkham Chief Credit Officer Retail Administration Christine A. Secrist Senior Vice Presidents Retail Administration Gabriella Kovacs Frank Durand III Retail Administration Bank Administrator Joan M. Tarr Retail Administration Patricia D. Majeski Howard N. Hall Retail Administration Controller Jane M. Trout Marketing Jeffrey S. Millington Richard A. Kauffman Audit Chief Technology Officer Susan M. Valentino Retail Administration Barbara A. Morgan Nina D. Melker Commercial Lending Retail Administration Assistant Vice Presidents Scott W. Civil Michael J. Pelosci Thomas L. Nash Commercial Lending Alternative Investments Commercial Mortgage Nancy J. Collar Elizabeth A. Salvatore Sarah J. Strout Consumer Lending Consumer Lending Commercial Lending Barbara A. Cromwell Flora B. Shiarappa Vice Presidents Retail Administration Deposit Operations James T. Brotherton Lending Business Development Doreen A. Goch YARDVILLE NATIONAL BANCORP Commercial Mortgage Carol A. Budd President/Chief Executive Officer Commercial Lending Fay Horrocks Patrick M. Ryan Human Resources Shawn Chase-Merritt Secretary/Treasurer Retail Administration Peggy A. Iucolino Stephen F. Carman Purchasing Vincent P. Ditta Assistant Secretary and Treasurer Commercial Lending Linda A. Kelly Diane H. Polyak Data Services Kathleen A. Fone Human Resources Anne S. Marsilio Residential Mortgage Nancy C. German Deposit Operations William B. McDowell Small Business Lending Sandra A. Gray Commercial Mortgage Dawn L. Melker Retail Administration Dale K. Inman Consumer Lending William V. Radlinsky Loan Review
54 - - ------------------------------------------------------------------------------- BOARD OF DIRECTORS YARDVILLE NATIONAL BANK YARDVILLE NATIONAL BANCORP Jay G. Destribats, Jay G. Destribats, Chairman of the Board Chairman of the Board Weldon J. McDaniel, Jr., Weldon J. McDaniel, Jr., Vice Chairman Vice Chairman Patrick M. Ryan, Patrick M. Ryan, President and C.E.O. President and C.E.O. C. West Ayres C. West Ayres Elbert G. Basolis, Jr. Elbert G. Basolis, Jr. Lorraine Buklad Lorraine Buklad Anthony M. Giampetro, M.D., F.C.C.P. Anthony M. Giampetro, M.D., F.C.C.P. Sidney L. Hofing Sidney L. Hofing James J. Kelly James J. Kelly Gilbert W. Lugossy Gilbert W. Lugossy Louis R. Matlack, Ph.D. Louis R. Matlack, Ph.D. F. Kevin Tylus F. Kevin Tylus John C. Stewart, John C. Stewart, Director Emeritus Director Emeritus - - ------------------------------------------------------------------------------- ADVISORY BOARD David West Ayres George S. Martin James E. Bartolomei, CPA William J. Matisa, Jr. Vincent Civale, CPA Robert E. Mule Nancy S. Ellis Daniel J. O' Donnell, Esq. William G. Engel *Jeffrey F. Perlman, CPCU Gary Dean Gray Joyce H. Rainear Daniel J. Graziano, Esq. Marvin A. Rosen John J. Klein III Armand L. Ruderman, M.D., F.A.A.F.P. Richard J. Klockner Ronald K. Vernon Nancy J. Knight Robert L. Workman Eugene P. Marfuggi Harold N. Zeltt *as of February 24, 1999 55 - - ------------------------------------------------------------------------------ SHAREHOLDER INFORMATION Corporate Headquarters Registrar and Stock Yardville National Bancorp Transfer Agent 3111 Quakerbridge Road First City Transfer Company Mercerville, NJ 08619 P.O. Box 170 (609) 585-5100 Iselin, NJ 08830-0170 (732) 906-9227 Annual Meeting Shareholders are invited to Financial Information attend the Annual Meeting of Investors, security Shareholders at: La Villa analysts and others Ristorante 2275 Kuser Road desiring financial Hamilton, NJ 08690 Tuesday, information should April 27, 1999 Doors open 9:00 contact: a.m. Meeting begins at 10:00 a.m. Diane H. Polyak Assistant Secretary/ Common Stock Prices/ Assistant Treasurer Dividends Declared or The table below sets forth by Stephen F. Carman quarter the high and low bid Secretary/Treasurer price for YNB common stock and the cash dividends declared Form 10-K Availability per common share. Copies of Yardville National Bancorp's Form 10-K filed with Cash the Securities and Exchange Dividend Commission are available upon 1998 Quarter High Low Declared written request to the - - ----------------------------------------- Company. First $19.03 $17.08 $0.070 Second 19.75 16.38 0.070 Third 16.75 12.00 0.075 Fourth 14.25 12.00 0.075 ------ Total $0.290 ========================================= 1997 Quarter - - ----------------------------------------- First $11.22 $ 9.39 $0.060 Second 12.19 9.64 0.060 Third 13.84 11.95 0.060 Fourth 17.78 13.91 0.060 ------ Total $0.240 ========================================= Subsidiary Bank is a Member of the FDIC. 56 - - ------------------------------------------------------------------------------- OFFICES The Yardville National Bank Ewing Office P.O. Box 8487 1450 Parkside Avenue Trenton, New Jersey 08650 Ewing Township, New Jersey 08638 Yardville Office East Windsor Office 4556 South Broad Street 18 Princeton-Hightstown Road Yardville, New Jersey 08620 East Windsor, New Jersey 08520 Center City Office Trenton Office 1099 Whitehourse-Mercerville Road 410 Lalor Plaza Trenton, New Jersey 08610 Trenton, New Jersey 08611 Broad Street Park Office Nottingham Pointe Office 2025 South Broad Street 4631 Nottingham Way Trenton, New Jersey 08610 Hamilton Square, New Jersey 08690 Quakerbridge Office West Trenton Office 3111 Quakerbridge Road 40 Scotch Road Mercerville, New Jersey 08619 West Trenton, New Jersey 08628 Pennington Office Newtown Office The Pennington Shopping Center 295 North Sycamore Street Route 31 North Newtown, Pennsylvania 18940 Pennington, New Jersey 08534 YNB HELP CENTER: 1-8884-HELPLINE YNB ON THE WEB: http//www.yanb.com YNB LOGO Your Neighborhood Bank(R) ========================= YARDVILLE NATIONAL BANK EX-10.1 2 EMPLOYMENT CONTRACT 1 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this 31st day of January, 1999 by and between THE YARDVILLE NATIONAL BANCORP (the "Holding Company"), a corporation organized under the laws of the State of New Jersey, and Patrick M. Ryan (the "Executive"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Executive for the period provided in this Agreement; and WHEREAS, the Executive is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive shall serve as President and Chief Executive Officer of the Yardville National Bank (the "Bank") reporting to the Board of Directors of the Bank and as Chief Executive Officer of the Holding Company reporting to the Board of Directors of the Holding Company (collectively, the "Board"). During said period, Executive shall also serve as a director of the Bank and as a director of the Holding Company. Failure to re-elect Executive as President and Chief Executive Officer of the Bank or the Holding Company or failure to re-elect Executive as a member of the Board of Directors of the Bank or of the Holding Company shall constitute a Breach of this Agreement. 2. TERMS AND DUTIES (A) The period of the Executive's employment under this Agreement shall commence as of January 31, 1999 and shall continue for a period of twenty-four (24) full calendar months thereafter, unless terminated by the Bank on account of death, disability or cause (as herein defined). This Agreement is subject to approval, for continuation, by the Board of Directors of the Yardville National Bancorp, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of 2 compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. This Agreement shall be deemed to continue for an additional twelve (12) months from each succeeding anniversary date of the Agreement, it being the intention of the parties that, unless notice is given to the contrary by either party, the Agreement shall be extended for an additional one year period so that there be a full twelve month term remaining. (B) During the period of employment, the Executive shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the President and Chief Executive Officer of a commercial bank and from time to time may be perceived by the Board. 3. DEFINITIONS For purposes of the Agreement, (A) "Cause" means any of the following: (i) the willful commission of an act that causes or that probably will cause substantial economic damage to the bank Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Executive's duties; or (iii) a continuing willful failure to perform the duties of the Executive's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Executive's employment. (B) "Change in Control": means any of the following: (i) the acquisition by any person or group acting in concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or, (ii) the approval by the Board of the sale of all or substantially all of the assets of the Bank or Holding Company; or, 3 (iii) the approval by the Board of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (i) or (ii) above. (C) "Disability" means a mental or physical illness or condition rendering the Executive incapable of performing his normal duties for the Bank. (D) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (A) During the period of employment, the Bank shall pay to the Executive an annual salary of not less than $225,000.00 shall be paid in either bi-weekly or monthly installments as the Executive prefers. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. (B) The Executive shall be entitled to participate in or receive benefits under any retirement plan, salary continuation plan, pension plan, profit-sharing plan, stock plan, group term replacement plan, health-and-accident plan, medical coverage or any other employee benefit plan or prerequisite arrangement currently available or which may hereafter be adopted by the Bank for its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (C) The Executive shall be provided by the Bank with an automobile for his individual use. (D) In addition to the salary provided for under Section 4: (i) The Bank shall pay for all reasonable travel and other reasonable expenses incurred by the Executive in performing his obligations under this Agreement. 4 (ii) The Executive shall be eligible for an annual cash bonus, based upon the Bank's performance during the fiscal year. The cash bonus allowance will be set at 2% of profits, after taxes and prior to shareholder dividend payments, if earnings, in the fiscal year, exceed $5,000,000.00 All cash bonuses, for the Executive, are subject to the recommendation and approval of the Directors' Organization and Compensation Committee and all bonus provisions will be reviewed annually for appropriate revisions. 5. TERMINATION FOR CAUSE (A) The Executive shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. (B) Any unexercised stock option granted to the Executive shall become null and void effective upon the Executive's receipt of notice of termination for Cause and shall not be exercisable by the Executive at any time subsequent to such termination for Cause. (C) The Executive shall not be deemed to have been terminated for Cause unless and until there is delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the full Board at a meeting of such Board called and held for the purpose (after the Executive, together with counsel, has been given the opportunity to be heard before the Board), finding the Executive guilty of conduct set forth above in the definition of "Cause" in Subsection 3(A) and specifying the particulars thereof in detail. 6. CHANGE IN CONTROL (A) In the event that within three (3) years after a Change in Control (as herein defined), the Executive's employment is terminated by the Bank, other than for death, disability or Cause, the Executive shall be entitled to receive 5 three (3) years' salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. (B) The Executive will have the option within six (6) months after a Change in Control (as herein defined), to elect to resign his position. If the Executive's voluntary departure is for other than death, disability or cause the Executive shall be entitled to receive three (3) years' salary at an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (C) Under the provisions of Section 7 the Executive is entitled to receive a lump sum payment of three (3) years salary at the annual salary currently being paid at the time of the event. The Holding Company's independent accountants will determine if an excess payment (as defined in Section 4999 of the Internal Revenue Code of 1954, as amended (the "Code") exists after reductions permitted pursuant to Section 280G(b) (4) of the Code (such excess parachute payment after taking into account such reductions, if any, being hereafter referred to as the "Excess Parachute Payment"). As soon as practicable after the Excess Parachute Payment, if any, has been so determined, the Holding Company will pay to the Executive, subject to applicable withholding requirements under state or federal law (i) twenty (20%) percent of the Excess Parachute Payment, and (ii) such additional amount, if any (including Federal and State income and excise taxes applicable thereto) as may be necessary to compensate the Executive for the payment of state and federal income and excise taxes on the aforesaid payment, as outlined in Section C. 7. TERMINATION UPON DISABILITY (A) In the event that the Executive experiences a Disability during the period of his employment, his salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by any concurrent disability benefit payments provided under disability insurance maintained by the Holding Company. If such Disability continues for a period of six (6) consecutive months, the Holding Company 6 at its option may thereafter, upon written notice to the Executive or his personal representative, terminate the Executive's employment with no further notice. 8. OTHER TERMINATION BY THE HOLDING COMPANY (A) In the event the Executive's employment is terminated by the Holding Company, other than for disability, death or Cause, and in the absence of occurrence of a Change in Control, the Executive will be entitled to payment of the remaining term of this agreement, at the annual salary currently being paid with said payment to be a lump sum payment upon termination. (B) Vested stock options granted to the Executive shall be exercisable by the Executive at any time within three (3) months from the effective date of termination, but only to the extent exercisable by him on the date of such termination and in no event later than the expiration date of his option. 9. TERMINATION BY THE EXECUTIVE (A) In the event of the Executive's voluntary termination, the Executive shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. (B) Vested stock options granted to the Executive shall be exercisable by the Executive at any time within three (3) months from the effective date of termination by the Executive, but only to the extent exercisable by him on the date of such termination and in no event later than the expiration of his options. 10. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank, as the case may be. 11. MODIFICATION AND WAIVER This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 7 12. NOTICES Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence in the case of the Executive or to its principal place of business in the case of the Bank. 13. GOVERNING LAW This Agreement and the obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 14. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January, 1999. ATTEST: YARDVILLE NATIONAL BANCORP - - ------------------------------ ----------------------------- Jay G. Destribats Chairman of the Board - - ------------------------------ ----------------------------- F. Kevin Tylus, Chairman Directors' Organization & Compensation Committee WITNESS - - ------------------------------ ----------------------------- Patrick M. Ryan the Executive EX-10.2 3 EXHIBIT 10.2 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this 31st day of January, 1999 by and between THE YARDVILLE NATIONAL BANCORP (the "Holding Company"), a corporation organized under the laws of the State of New Jersey, and Jay G. Destribats (the "Executive"). RECITALS WHEREAS, the Holding Company desires to employ and retain the services of the Executive for the period provided in this Agreement; and WHEREAS, Jay G. Destribats is willing to serve as an Executive; in the employ of the Holding Company, devoting a substantial amount of time to such employment duties as are customarily and appropriately vested in the Chairman of the Board. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, Executive shall serve as Chairman of the Board of Directors of Yardville National Bank (the "Bank") reporting to the Board of Directors of the Bank and Yardville National Bancorp reporting to the Board of Directors of the Holding Company (collectively, the "Board"). During said period, it is anticipated the Executive will devote a substantial amount of time to such duties as are customarily and appropriately vested in the Chairman of the Board. Failure to re-elect Executive as a member of the Board of Directors of the Bank or of the Holding Company shall constitute a Breach of this Agreement. 2. TERMS AND DUTIES (a) The period of the Executive's employment under this Agreement shall commence as of January 31, 1999 and shall continue for a period of twenty-four (24) full calendar months thereafter, unless terminated by the Bank and/or Holding Company on account of death, disability or cause (as herein defined). This Agreement shall be deemed to continue for an additional twelve (12) months from each succeeding anniversary date of the Agreement, it being the intention of the parties that, unless notice is given to the contrary by either party, the Agreement shall be extended for an additional one year period so that there be a full twelve month term remaining. 2 (b) This agreement is subject to approval for continuation, by the Board of Directors of the Yardville National Bancorp, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (c) During the period of employment, the Executive shall devote substantial time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Chairman of the Board of Directors of the Holding Company and Bank and from time to time may be perceived by the Board. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause" means any of the following: (i) the willful commission of an act that causes or that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Executive's duties; or (iii) a continuing willful failure to perform the duties of the Executive's position with the Bank; or, (iv) the order of a bank regulatory agency or court requiring the termination of the Executive's employment. (b) "Change in Control: means any of the following: (i) the acquisition by any person or group acting in concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Holding Company, or, (ii) the approval by the Board of the sale of all or substantially all of the assets of the Bank or Holding Company; or, 3 (iii) the approval by the Board of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Executive incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment, the Bank, at the direction of the Holding Company, shall pay to the Executive an annual salary of not less than $180,000.00. Proceeds shall be paid in either bi-weekly or monthly installments as the Executive prefers. (b) The Executive shall be entitled to participate in or receive benefits under any retirement plan, pension plan, profit-sharing plan, stock plan, health-and-accident plan, medical coverage or any other employee benefit plan or prerequisite arrangement currently available or which may hereafter be adopted by the Holding Company for its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) The Executive shall be provided by the Holding Company with an automobile for his individual use. (d) In addition to the salary provided for under Section 4: (a) The Bank, at the direction of the Holding Company, shall pay for all reasonable travel and other reasonable expenses incurred by the Executive in performing his obligations under this Agreement. 6. TERMINATION FOR CAUSE (a) The Executive shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 4 (c) The Executive shall not be deemed to have been terminated for Cause unless and until there is delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the full Board at a meeting of such Board called and held for the purpose (after the Executive, together with counsel, has been given the opportunity to be heard before the Board), finding the Executive guilty of conduct set forth above in the definition of "Cause" in Subsection 3(a) and specifying the particulars thereof in detail. 7. CHANGE IN CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Executive's employment is terminated by the Holding Company, other than for death, disability or Cause, the Executive shall be entitled to receive three year's salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. (b) The Executive will have the option within six (6) months after a Change in Control (as herein defined), to elect to resign his position. If the Executive's voluntary departure is for other than death, disability or cause the Executive shall be entitled to receive three year's salary at an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. 8. TERMINATION UPON DISABILITY (a) In the event that the Executive experiences a Disability during the period of his employment, his salary shall continue at the same rate as was in effect on the date of the occurrence of such Disability, reduced by any concurrent disability benefit payments provided under disability insurance maintained by the Holding Company. If such Disability continues for a period of six (6) consecutive months, the Holding company at its option may thereafter, upon written notice to the Executive or his personal representative, terminate the Executive's employment with no further notice. 5 9. OTHER TERMINATION BY THE HOLDING COMPANY (a) In the event the Executive's employment is terminated by the Holding Company, other than for disability, death or Cause, and in the absence of occurrence of a Change in Control, the Executive will be entitled to payment of the remaining term of this agreement, at the annual salary currently being paid with said payment to be a lump sum payment upon termination. 10. TERMINATION BY THE EXECUTIVE (a) In the event of the Executive's voluntary termination, and in the absence of a change of a Change of Control, the Executive shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 11. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank, at the direction of the Holding Company, as the case may be. 12. MODIFICATION AND WAIVER This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 13. NOTICES Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence in the case of the Executive or to its principal place of business in the case of the Holding Company. 14. GOVERNING LAW This Agreement and the obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 6 15. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January, 1999. ATTEST: YARDVILLE NATIONAL BANCORP __________________________ __________________________ Patrick M. Ryan, President & CEO __________________________ __________________________ F. Kevin Tylus, Chairman Directors' Organization & Compensation Committee WITNESS: __________________________ __________________________ Jay G. Destribats, Chairman of the Board EX-10.3 4 EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1999 by and between THE YARDVILLE NATIONAL BANCORP (the "Holding Company"), a corporation organized under the laws of the State of New Jersey, and Stephen F. Carman (the "Officer"). RECITALS WHEREAS, the Holding Company desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, the Officer shall serve as Executive Vice President and Chief Financial Officer of The Yardville National Bank (the "Bank") reporting to the President & CEO of The Bank. 2. TERMS AND DUTIES (a) The period of the Officer's employment agreement shall commence as of January 31, 1999, and shall continue for a period of twenty-four (24) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as herein defined). This Agreement is subject to approval, for continuation, by the President/Chief Executive Officer and the Board of Directors of the Yardville National Bancorp, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Executive Vice President and Chief Financial Officer of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause" means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class equity security of the Bank or the Bank's Holding Company , or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $120,000.00, and an annual salary of not less than $125,000.00 in the second year of the contract period; which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary or said review shall be fixed by the Board from time to time. (b) The Executive shall be entitled to participate in or receive benefits under any retirement plan, pension plan, medical coverage or any other employee benefit plan or prerequisite arrangement currently available or which may hereafter be adopted by the Bank for its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the executive is entitled under this agreement. (c) The executive shall be provided by the Bank with an automobile for his individual use. (d) In addition to the salary provided for under Section 4: (a) the Bank shall pay for all reasonable travel and other reasonable expenses incurred by the Executive in performing his obligations under this Agreement. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that the Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extent that the Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive two year's salary at the annual salary currently being paid, which payment shall be made in lump sum promptly after the occurrence of such termination. (b) The Officer will have the option within six (6) months after a Change in Control (as herein defined), to elect to resign his position. If the Officer's voluntary departure is for other than death, disability or cause the Executive shall be entitled to receive two (2) years salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. 8. TERMINATION UPON DISABILITY (a) In the event that the Officer experiences a Disability during the period of his employment, his salary shall continue at the same rate as was in effect on the date of the occurrence of such Disability, reduced by any concurrent disability benefit payments provided under disability insurance maintained by the Bank. If such Disability continues for a period of six (6) consecutive months, the Bank at its option may thereafter, upon written notice to the Officer or his personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 10. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the _____31st___day of _____January___, 1999. ATTEST: Yardville National Bancorp - - ------------------- --------------------------- Patrick M. Ryan President/CEO WITNESS - - ------------------ --------------------------- Stephen F. Carman Executive Vice President & Chief Financial Officer EX-10.4 5 EXHIBIT 10.4 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1998 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and James F. Doran (the "Officer"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, the Officer shall serve as First Senior Vice President and Senior Lending Officer of The Yardville National Bank (the "Bank") reporting to the President of The Bank. 2. TERMS AND DUTIES (a) The period of the Officer's employment agreement shall commence as of January 31, 1998, and shall continue for a period of twenty-four (24) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as herein defined). This Agreement is subject to approval, for continuation, by the President/Chief Executive Officer and the Board of Directors of the Yardville National Bank, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the First Senior Vice President and Senior Lending Officer of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause" means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class equity security of the Bank or the Bank's Holding Company , or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $82,500.00, and an annual salary of not less than $85,000.00 in the second year of the contract period; which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary or said review shall be fixed by the Board from time to time. (b) The officer shall be provided by the Bank with an automobile for his individual use. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that the Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extent that the Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive eighteen (18) months salary at the annual salary currently being paid, which payment shall be made in lump sum promptly after the occurrence of such termination. 8. TERMINATION UPON DISABILITY (a) In the event that the Officer experiences a Disability during the period of his employment, his salary shall continue at the same rate as was in effect on the date of the occurrence of such Disability, reduced by any concurrent disability benefit payments provided under disability insurance maintained by the Bank. If such Disability continues for a period of six (6) consecutive months, the Bank at its option may thereafter, upon written notice to the Officer or his personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 10. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the _____31st___day of _____January___, 1998. ATTEST: Yardville National Bank - - ------------------- --------------------------- President/CEO WITNESS - - ------------------ --------------------------- James F. Doran First Senior Vice President EX-10.5 6 EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1999 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Richard A. Kauffman (the "Officer"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, the Officer shall serve as Senior Vice President & Chief Technology Officer of The Yardville National Bank (the "Bank") reporting to the Executive Vice President and Chief Financial Officer. 2. TERMS AND DUTIES. (a) The period of the Officer's employment agreement shall commence as of January 31, 1999 and shall continue for a period of twelve (12) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as Herein defined). This Agreement is subject to approval, for continuation, by the President/CEO, and the Board of Directors of Yardville National Bank, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Senior Vice President and Chief Technology Officer of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the Bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $81,159.00, which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extend that the Officer may be legally entitled to participate by virtue of COBRA or any other State of Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive eighteen (18) months salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. 8. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 9. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the ____31st_____day of ____January______,1999. ATTEST: Yardville National Bank - - ------------------------- ---------------------------------- President/CEO WITNESS - - -------------------------- ----------------------------------- Individually EX-10.6 7 EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1998 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Mary C. O'Donnell (the "Officer"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, the Officer shall serve as First Senior Vice President and Chief Credit Officer of The Yardville National Bank (the "Bank") reporting to the President of The Bank. 2. TERMS AND DUTIES (a) The period of the Officer's employment agreement shall commence as of January 31, 1998, and shall continue for a period of twenty-four (24) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as herein defined). This Agreement is subject to approval, for continuation, by the President/Chief Executive Officer and the Board of Directors of the Yardville National Bancorp, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the First Senior Vice President and Chief Credit Officer of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause" means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class equity security of the Bank or the Bank's Holding Company , or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $82,500.00, and an annual salary of not less than $85,000 in the second year of the contract period; which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary or said review shall be fixed by the Board from time to time. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that the Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extent that the Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive eighteen (18) months salary at the annual salary currently being paid, which payment shall be made in lump sum promptly after the occurrence of such termination. 8. TERMINATION UPON DISABILITY (a) In the event that the Officer experiences a Disability during the period of her employment, her salary shall continue at the same rate as was in effect on the date of the occurrence of such Disability, reduced by any concurrent disability benefit payments provided under disability insurance maintained by the Bank. If such Disability continues for a period of six (6) consecutive months, the Bank at its option may thereafter, upon written notice to the Officer or her personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 10. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the _____31st___day of _____January___, 1998. ATTEST: Yardville National Bank - - ------------------- --------------------------- President/CEO WITNESS - - ------------------ --------------------------- Mary C. O'Donnell First Senior Vice President EX-10.7 8 EXHIBIT 10.7 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1999 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Frank Durand, III (the "Officer"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, the Officer shall serve as Senior Vice President and Bank Administrator of The Yardville National Bank (the "Bank") reporting to the President/CEO. 2. TERMS AND DUTIES. (a) The period of the Officer's employment agreement shall commence as of January 31, 1999 and shall continue for a period of twelve (12) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as Herein defined). This Agreement is subject to approval, for continuation, by the President/CEO, and the Board of Directors of Yardville National Bank, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Senior Vice President and Bank Administrator of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the Bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $65,000.00, which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. (b) The Officer shall receive a monthly expense stipend of $250.00 for associated expenses incurred for extensive travel and vehicle maintenance for the performance of his duties as Bank Administrator. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extend that the Officer may be legally entitled to participate by virtue of COBRA or any other State of Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive eighteen (18) months salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. 8. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 9. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the ____31st_____day of ____January______,1999. ATTEST: Yardville National Bank _______________________ _______________________ President/CEO WITNESS _______________________ _______________________ Individually EX-10.11 9 EXHIBIT 10.11 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1999 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Thomas Nash (the "Officer"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, the Officer shall serve as Senior Vice President and Commercial Mortgage Division Manager of The Yardville National Bank (the "Bank") reporting to the First Senior Vice President & Senior Lending Officer. 2. TERMS AND DUTIES. (a) The period of the Officer's employment agreement shall commence as of January 31, 1999 and shall continue for a period of twelve (12) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as Herein defined). This Agreement is subject to approval, for continuation, by the President/CEO, and the Board of Directors of Yardville National Bank, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Senior Vice President and Commercial Mortgage Division Manager of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the Bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $73,785.00, which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. (b) The Officer shall receive a monthly expense stipend of $250.00 for associated expenses incurred for extensive travel and vehicle maintenance for the performance of his duties as Bank Administrator. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extend that the Officer may be legally entitled to participate by virtue of COBRA or any other State of Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive eighteen (18) months salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. 8. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 9. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the ____31st_____day of ____January______,1999. ATTEST: Yardville National Bank _______________________ _______________________ President/CEO WITNESS _______________________ _______________________ Individually EX-10.19 10 EXHIBIT 10.19 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1999 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Howard N. Hall (the "Officer"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, the Officer shall serve as Senior Vice President and Controller of The Yardville National Bank (the "Bank") reporting to the Executive Vice President and Chief Financial Officer. 2. TERMS AND DUTIES. (a) The period of the Officer's employment agreement shall commence as of January 31, 1999 and shall continue for a period of twelve (12) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as Herein defined). This Agreement is subject to approval, for continuation, by the President/CEO, and the Board of Directors of Yardville National Bank, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Senior Vice President and Controller of a commercial bank. -1- 3. DEFINITIONS For purposes of the Agreement, (a) "Cause means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the Bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. -2- 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $73,500.00, which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extend that the Officer may be legally entitled to participate by virtue of COBRA or any other State of Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive twelve (18) months salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. 8. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. -3- 9. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the ____31st_____day of ____January______,1999. ATTEST: Yardville National Bank - - ------------------------- ---------------------------------- President/CEO WITNESS - - -------------------------- ----------------------------------- Individually -4- EX-10.20 11 EXHIBIT 10.20 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1999 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Sarah J. Strout (the "Officer"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, the Officer shall serve as Senior Vice President and Commercial Lending Team Leader of The Yardville National Bank (the "Bank") reporting to the First Senior Vice President and Senior Lending Officer. 2. TERMS AND DUTIES. (a) The period of the Officer's employment agreement shall commence as of January 31, 1999 and shall continue for a period of twelve (12) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as Herein defined). This Agreement is subject to approval, for continuation, by the President/CEO, and the Board of Directors of Yardville National Bank, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Senior Vice President and Commercial Lending Team Leader of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the Bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $75,000.00, which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. (b) The Officer shall receive a monthly expense stipend of $250.00 for associated expenses incurred for extensive travel and vehicle maintenance for the performance of her duties as Commercial Lending Team Leader. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extend that the Officer may be legally entitled to participate by virtue of COBRA or any other State of Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive eighteen (18) months salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. 8. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 9. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the ____31st_____day of ____January______,1999. ATTEST: Yardville National Bank _______________________ _______________________ President/CEO WITNESS _______________________ _______________________ Individually EX-10.21 12 EMPLOYMENT CONTRACT EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 1999 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Nina D. Melker (the "Officer"). RECITALS WHEREAS, the Bank desires to employ and retain the services of the Officer for the period provided in this Agreement; and WHEREAS, Officer is willing to serve in the employ of the Bank on a full-time basis for said period; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, the Officer shall serve as Senior Vice President and Retail Administrator of The Yardville National Bank (the "Bank") reporting to the Executive Vice President & Chief Operating Officer. 2. TERMS AND DUTIES. (a) The period of the Officer's employment agreement shall commence as of January 31, 1999 and shall continue for a period of twelve (12) full calendar months thereafter unless terminated by the Bank on account of death, disability or cause (as Herein defined). This Agreement is subject to approval, for continuation, by the President/CEO, and the Board of Directors of Yardville National Bank, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Senior Vice President and Retail Administrator of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause means any of the following: (i) the willful commission of an act that causes that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control" means any of the following: (i) the acquisition by any person or group acting in the concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or (ii) the approval by the Board, and appropriate regulatory authorities of the sale of all or substantially all of the assets of the Bank or Holding Company, or (iii) the approval by the Board and appropriate regulatory authorities of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of an event described in clause (i) or (ii) above. (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment the Bank shall pay the Officer an annual salary of not less than $63,000.00, which salary shall be paid in bi-weekly installments. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. (b) The Officer shall receive a monthly expense stipend of $250.00 for associated expenses incurred for extensive travel and vehicle maintenance for the performance of her duties as Retail Administrator. 5. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 6. TERMINATION BY THE OFFICER (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extend that the Officer may be legally entitled to participate by virtue of COBRA or any other State of Federal Law concerning employee rights to benefits upon termination. 7. CHANGE OF CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or cause, the Officer shall be entitled to receive eighteen (18) months salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. 8. GOVERNING LAW This Agreement and other obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 9. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereto executed this Agreement on the ____31st_____day of ____January______,1999. ATTEST: Yardville National Bank - - ------------------------- ---------------------------------- President/CEO WITNESS - - -------------------------- ----------------------------------- Individually EX-10.22 13 EXHIBIT 10.22 1 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this 31ST day of January, 1999 by and between THE YARDVILLE NATIONAL BANCORP (the "Holding Company"), a corporation organized under the laws of the State of New Jersey, and Timothy J. Losch (the "Executive"). RECITALS WHEREAS, the Holding Company desires to employ and retain the services of the Officer; and WHEREAS, the Officer is willing to serve in the employ of the Bank; NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of his employment hereunder, the Officer shall serve as Executive Vice President and Chief Operations Officer of the Yardville National Bank (the "Bank") reporting to the President and Chief Executive Officer. 2. TERMS AND DUTIES (a) The period of the Officer's employment under this Agreement shall commence as of January 31, 1999 and shall continue for a period of twenty-four (24) full calendar months unless terminated by the Bank on account of death, disability or cause (as herein defined). This Agreement is subject to approval, for continuation, by the President/CEO, and the Board of Directors of the Yardville National Bancorp, at the conclusion of each contract period. Renewals shall be on the same terms and conditions as set forth herein, except for such modification of compensation and benefits as may hereafter be agreed upon between the parties hereto from time to time. 2 This Agreement shall be deemed to continue for an additional twelve months from each succeeding anniversary date of the Agreement, it being the intention of the parties that, unless notice is given to the contrary by either party, the Agreement shall be extended for an additional one year period so that there be a full twelve month term remaining. (b) During the period of employment, the Officer shall devote full time and attention to such employment and shall perform such duties as are customarily and appropriately vested in the Executive Vice President and Chief Operating Officer of a commercial bank. 3. DEFINITIONS For purposes of the Agreement, (a) "Cause" means any of the following: (i) the willful commission of an act that causes or that probably will cause substantial economic damage to the Bank or substantial injury to the Bank's business reputation; or, (ii) the commission of an act of fraud in the performance of the Officer's duties; or (iii) a continuing willful failure to perform the duties of the Officer's position with the Bank; or (iv) the order of a bank regulatory agency or court requiring the termination of the Officer's employment. (b) "Change in Control: means any of the following: (i) the acquisition by any person or group acting in concert of beneficial ownership of forty percent (40%) or more of any class of equity security of the Bank or the Bank's Holding Company, or, (ii) the approval by the Board of the sale of all or substantially all of the assets of the Bank or Holding Company; or, (iii) the approval by the Board of any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (i) or (ii) above. 3 (c) "Disability" means a mental or physical illness or condition rendering the Officer incapable of performing his normal duties for the Bank. (d) "Willfulness" means an act or failure to act done not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank. 4. COMPENSATION AND REIMBURSEMENT (a) During the period of employment, the Bank shall pay to the Officer an annual salary of not less than $120,000.00, in the first year of this agreement, and $125,000.00, in the second year (1998) of this agreement; proceeds shall be paid in bi-weekly installments. Such salary shall be reviewed by the Board or a duly appointed committee thereof at least annually and any adjustments in the amount of salary on said review shall be fixed by the Board from time to time. (b) The Officer shall be entitled to participate in or receive benefits under any retirement plan, salary continuation plan, pension plan, profit-sharing plan, stock plan, executive group term replacement plan, health-and-accident plan, medical coverage or any other employee benefit plan or prerequisite arrangement currently available or which may hereafter be adopted by the Bank for its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to the Officer under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Officer is entitled under this Agreement. (c) The Officer shall be provided by the Bank with an automobile for his individual use. (d) In addition to the salary provided for under Section 4: (a) The Bank shall pay for all reasonable travel and other reasonable expenses incurred by the Officer in performing his obligations under this Agreement. 4 5. STOCK OPTIONS (a) the Bank agrees to grant to the Officer the right, privilege, and option to purchase 5,000 shares of common stock of the Bank Holding Company at the fair market value of said stock as of the date of the Agreement, subject to the terms and conditions of the Holding Company's Stock Option Plan (the "Plan"). It is the intention of this Agreement that the Officer be granted options that will not be subject to state or federal income taxes when they are exercised, but rather only when the resultant stock is sold, assuming that such date of sale is at least two years after the date such options were granted one year after the date such stock was acquired by the Officer. It is understood that the Holding Company will receive no tax benefits or tax deduction in connection with these options. (b) the options as to the 5,000 shares may be exercised by the Officer at any time during a period commencing with the vesting date of such options and ending three (3) years after the option grant date, except to the extent that said time period may be decreased in accordance with the provisions contained in Subsections 5(c), 5(f) and 7(d). The options shall vest in accordance with the following schedule: Number of Options Vesting Date ----------------- ------------ 1750 June 2, 1998 1750 June 2, 1999 1500 June 2, 2000 The rights to exercise shall be cumulative, and any option not exercised in a prior year may be exercised in a subsequent year throughout the ten year option period. (c) In connection with any proposed sale or conveyance of all or substantially all of the assets of the Bank or Holding Company or recently accomplished Change in Control of the Holding Company, the vesting schedule of all options granted hereunder to the Executive shall accelerate and 100% of all options shall immediately vest to the Officer. (d) If and to the extent that the number of issued shares of common stock of the Holding Company shall increased by or reduced by any change in the par value, split- up, reclassification, distribution of a dividend payable in stock or the like, the number of shares proportionately adjusted. 5 If the Holding Company is reorganized, consolidated or merged with another corporation, the Executive shall be entitled to receive options covering shares of such reorganized, consolidated or merged corporation in the same proportion and at an equivalent price and subject to the same conditions. For the purposes of the preceding sentence, the excess of the aggregate fair market value of the shares subject to the option immediately after the reorganization, consolidation or merger over the aggregate option price of such shares shall not be more than the excess of the aggregate fair market value of all shares subject to the option immediately before such reorganization, consolidation or merger over the aggregate option price of such shares, and a new option or assumption of the old option shall not give the Officer additional benefits which he did not have under the old option. (e) The options granted hereunder are nontransferable by the Officer. (f) Any additional Incentive Stock Options granted, outside of this Agreement, will be periodically negotiated for the Officer under the terms and conditions of the shareholder approved Employee Stock Option Plan. 6. TERMINATION FOR CAUSE (a) The Officer shall not have the right to receive compensation or other benefits provided hereunder for any period after termination for Cause, except to the extent that Officer may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. (b) Any unexercised stock option granted to the Officer shall become null and void effective upon the Officer's receipt of notice of termination for Cause and shall not be exercisable by the Officer at any time subsequent to such termination for Cause. 7. CHANGE IN CONTROL (a) In the event that within three (3) years after a Change in Control (as herein defined), the Officer's employment is terminated by the Bank, other than for death, disability or Cause, the Officer shall be entitled to receive two (2) years' salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such termination. 6 (b) The Executive will have the option within six (6) months after a Change in Control (as herein defined), to elect to resign his position. If the Executive's voluntary departure is for other than death, disability or cause the Executive shall be entitled to receive two (2) years salary at the annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. 8. TERMINATION UPON DISABILITY (a) In the event that the Officer experiences a Disability during the period of his employment, his salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by any concurrent disability benefit payments provided under disability insurance maintained by the Bank. If such Disability continues for a period of six (6) consecutive months, the Bank at its option may thereafter, upon written notice to the Officer or his personal representative, terminate the Officer's employment with no further notice. 9. OTHER TERMINATION BY THE BANK (a) In the event the Officer's employment is terminated by the Bank, other than for disability, death or cause, and in the absence of occurrence of a Change in Control, the Officer will be entitled to payment of the remaining term of this agreement, at the annual salary currently being paid with said payment to be a lump sum payment upon termination. 10. TERMINATION BY THE EXECUTIVE (a) In the event of the Officer's voluntary termination, the Officer shall not have the right to receive compensation or benefits as provided hereunder after such date of termination, except to the extent that Executive may be legally entitled to participate by virtue of COBRA or any other State or Federal Law concerning employee rights to benefits upon termination. 11. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank, as the case may be. 7 12. MODIFICATION AND WAIVER This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. 13. NOTICES Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by registered mail to his residence in the case of the Officer or to its principal place of business in the case of the Bank. 14. GOVERNING LAW This Agreement and the obligations of the parties hereto shall be interpreted, construed and enforced in accordance with the laws of the State of New Jersey. 15. ENTIRE AGREEMENT This instrument contains the entire agreement of the parties. It may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. IN WITNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January, 1999. ATTEST: YARDVILLE NATIONAL BANCORP __________________________ __________________________ Patrick M. Ryan President/CEO WITNESS __________________________ __________________________ Timothy J. Losch Executive Vice President & Chief Operating Officer EX-10.30 14 LEASE AGREEMENT LEASE AGREEMENT THIS INDENTURE OF LEASE, made on this 30th day of October 1998, by Allan H. Smith, Real Estate Ltd. (hereinafter called "Agent"), Agent for SYCAMORE STREET ASSOCIATES, a Pennsylvania Partnership with Offices at 301 South State Street, Newtown, Pennsylvania (hereinafter called "Landlord") and YARDVILLE NATIONAL BANK or a subsidiary thereof (hereinafter called "Tenant"), WITNESSETH: LEASED PREMISES : Landlord hereby leases to Tenant and Tenant hereby rents from Landlord that portion of the building premises (hereinafter called the "premises", "leased premises" or "demised premises") more fully described as that building having the address of 295 North Sycamore Street, Newtown Township, Pennsylvania (which is a part of a larger commercial/residential complex containing approximately two acres) with the right to the non exclusive use, in common with others entitled to use same, of all such automobile parking areas, driveways, malls courts, corridors and footways, loading facilities and other facilities as may be designated by Landlord, subject however to the terms and conditions of this Indenture of Lease and the General Lease Provisions attached hereto and made a part hereof (hereinafter collectively referred to as "Lease"), and to reasonable rules and regulations for the use thereof prescribed from time to time by the Landlord. Premises are to be delivered to Tenant in the condition they were in when first inspected by Tenant with the exception that the southeast corner of the building where the previous tenant housed their "ATM" machine shall be restored so as to appear as if the "ATM" machine was ever located there. Landlord will have the exterior of the premises professionally cleaned and painted within sixty (60) days after this lease is executed however in the event Tenant elects to cancel this lease as set forth under the paragraph below headed, "Termination I Option," Tenant shall reimburse Landlord for the cost of said cleaning and painting within thirty days of said termination. LENGTH OF TERM : This lease shall commence on the date of possession and expire five ( 5) years from the Rental Commencement Date set forth below or, provided that the Rental Commencement Date falls on a day other than the first day of a month, five (5) years plus that period between the odd day on which the third year anniversary of the Rental Commencement Date falls and the first day of the following month. RENEWAL OPTION : Provided the tenant has complied with all the terms and conditions contained herein, this lease shall automatically renew for three (3) successive five (5) year periods unless Tenant provides Landlord written notice of its intention not to renew said lease at least six (6) months prior to the expiration date of the original term of this lease or six (6) months prior to the commencement date of any renewal option. POSSESSION : Tenant will take possession of the Premises on November 1, 1998 or the date Landlord provides Tenant unlimited access to the premises evidenced by Landlord's providing Tenant a key to the premises. RENTAL COMMENCEMENT DATE : Minimum Rent and the Tenant's Share of Taxes Insurance and Operating Costs, as set forth below, will become due and payable on November 1, 1998, said date being referred to herein as the "Rental Commencement Date". TERMINATION OPTION : From the period commencing November 1, 1998 and ending May 31, 1999 Tenant shall have the option of terminating this lease should the Pennsylvania Department of Banking and/or the Office of the Comptroller of Currency fail to grant to tenant the necessary approvals for Tenants' use of the Premises provided Tenant has made its best efforts to obtain said approvals. In the event Tenant exercises this option and terminates this lease during the aforementioned period, any rent that has been paid to Landlord regardless of whether the lease has commenced will be forfeited. In addition, at the Landlord's sole option Tenant will either restore the premises to the condition they were in at the commencement of this lease or, in the alternative, accept the premises with any improvements made by Tenant. In the event Tenant does not exercise this option during the aforementioned time II period, then in such case this lease agreement will continue as if this paragraph had never existed. MINIMUM RENT : The fixed minimum rent for each year of the term of this lease shall be FIFTY SIX THOUSAND AND FIFTY DOLLARS ($56,050.00) payable in twelve (12) equal monthly installments (the first of which is due at the time of the Tenant's execution of this lease) due on or before the first day of each month, in advance, at the office of the Landlord or at such other place as may be designated by Landlord from time to time, without any prior demand therefore and without any deduction or setoff whatsoever. In the event that the term of this lease shall commence on a day other than the first day of a month, Tenant shall pay fixed minimum rent in advance for the fractional month on a per diem basis calculated on the basis of a thirty (30) day month. INCREASES IN MINIMUM RENT : During each and every year of this lease and any renewal periods, the Tenant's minimum annual rent shall be increased on the anniversary date of the lease by two percent of the preceding years rent. In the event the Tenant elects to renew its lease as provided for in this lease, the rent for the first year of any renewal period shall be arrived at by multiplying the previous years Minimum Rent by any increase in the United States Urban Wage Earners Consumer Price Index ("CPI") for the preceding five years less ten percent(1) In the event the United States Urban Wage Earners Consumer Price Index is replaced by agencies of the United States Government with a new index, then the new index shall be used. In the event no such index is in use by the United States Government than annual increases in rent shall be determined by an index jointly agreed upon by Landlord and Tenant. - - ----------- (1) By way of example if in the first year of the lease the annual rent is $56,050.00 then in the second year the rent would be $57,171.00, for year three $58,314.42, for year four $59,480.71 and year five $60,670.32. Then if the lease was renewed and assuming the CPI had increased by a total of twenty percent over the preceding five years the rent for year six would be arrived at by adding to years five rent of $60,670.32 the twenty percent increase in CPI less the ten percent (two percent each year) the rent had already risen over the past five years. Hence years six rent would be $66,737.35 ($60,670.32 *1.10). For years seven through ten the rent would increase annually by two percent as before and then if the tenant elected to renew the lease again the same adjustment would be made reflecting the actual increase in CPI for that time period. III TENANT'S MINIMUM SHARE OF TAXES, INSURANCE AND OPERATING COSTS : During each year of this lease, or part thereof, Tenant shall pay to Landlord as a minimum, that amount of the Landlord's property taxes, insurance and operating costs as described in Section 4.02 of the attached General Lease Provisions. Tenant's share of said taxes, insurance and operating costs will be calculated by multiplying the total of said operating costs by the percentage arrived at by dividing the gross square footage of the leased premises by the total first floor square footage of the complex. During the first year of occupancy it is estimated that this calculation will result in an expense equal to EIGHTEEN THOUSAND TWO HUNDRED AND NINETY DOLLARS ($18,290.00) which shall be payable by Tenant in equal monthly installments together with Tenant's Minimum Rent. Tenant reserves the right to audit any expenses for taxes, insurance and operating costs and all said expenses should be reasonable and customary. INSPECTIONS: Tenant, at its sole expense may have the premises inspected to assure the structural, mechanical, plumbing, heating and electrical components of the premises are all in good working order and that there is no insect infestation nor any environmental hazards. In the event said inspection(s) produce written report(s) which reveal that repairs or maintenance are necessary, the Tenant shall have the option of canceling this lease unless the Landlord agrees to address all of the defects discovered by said inspections and for which action is requested by Tenant within sixty days of Tenant's written request to Landlord itemizing the said defects for which repair is sought. USE OF PREMISES : Tenant shall use the leased premises, subject to the provisions of the Lease Agreement attached hereto, solely as a financial services institution. Tenant will be responsible for obtaining all occupancy, use, and other like approvals necessitated by Tenant's use of the Premises. SOLE BANK USE: Landlord warrants that during the term of this lease it will not lease any other portion of the complex for a retail banking facility. LEASE DOCUMENTS : In addition to this Lease Agreement, this Lease shall for all purposes be deemed to include as though set out in full within this Lease Agreement the following attached document: General Lease Provisions consisting of thirty (30) pages. IV IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have hereunto set their hands and seals the day and year first above written. ALLAN H. SMITH REAL ESTATE LTD. By_______________________ TENANT YARDVILLE NATIONAL BANK WITNESS ____________________ By____________________________ WITNESS ____________________ Attest________________________ SYCAMORE STREET ASSOCIATES BY____________________________ Attest________________________ V INDEX TO GENERAL LEASE PROVISIONS ARTICLE I POSSESSION SECTION 1.01. Prior Access to Premises 1 SECTION 1.02. Failure of Tenant to Open and Remain Open 1 SECTION 1.03. Tenant's Work 1 SECTION 1.04. Violations 1 SECTION 1.05. Acceptance 2 ARTICLE II CONDUCT OF BUSINESS BY TENANT SECTION 2.01. Use of Premises 1 SECTION 2.02 Covenants regarding Environmental Compliance 2 SECTION 2.03. Injurious Acts 4 SECTION 2.04. Licenses, Permits, Etc. 4 ARTICLE III RENT SECTION 3.01. Minimum Rental; Late Charges 5 SECTION 3.02. Place of Payment 5 SECTION 3.03. No Accord and Satisfaction 5 ARTICLE IV COMMON USE AREAS, FACILITIES & SERVICES SECTION 4.01. Control of Common Use Areas and Services 5 SECTION 4.02. Tenant's Share of Costs of Common Facilities and Services 6 ARTICLE V UTILITY CHARGES SECTION 5.01. Utility Charges 6 ARTICLE VI REPAIRS AND ALTERATIONS SECTION 6.01. Responsibility for Repairs 7 SECTION 6.02. Tenant's Right to Make Alterations 7 SECTION 6.03. Contractors and Labor 8 ARTICLE VII MECHANICS LIENS SECTION 7.01. Tenant Shall Discharge All Liens 8 i ARTICLE VIII AFFIRMATIVE COVENANTS OF TENANTS SECTION 8.01. Compliance with Laws 8 SECTION 8.02. Notice of Accident, Etc. 8 SECTION 8.03. Loading and Unloading 8 SECTION 8.04. Refuse, Etc. 9 SECTION 8.05. Heat 9 SECTION 8.06. Parking 9 SECTION 8.07. Rules and Regulations 9 SECTION 8.08. Payment of Rent 9 SECTION 8.09. Surrender of Premises 9 ARTICLE IX NEGATIVE COVENANTS OF TENANT SECTION 9.01. Machinery, Loud Speakers, Etc. 9 SECTION 9.02. Acts Injurious to Insurance 10 SECTION 9.03. Awnings, Etc. 10 SECTION 9.04. Auctions, Etc. 10 ARTICLE X SIGNS SECTION 10.01. Landlord's Approval 10 SECTION 10.02. Permits 10 SECTION 10.03. Maintenance 10 ARTICLE XI INSPECTION OF PREMISES AND ACCESS THERETO SECTION 11.01. Inspection of Premises; Repairs 11 SECTION 11.02. Displaying "For Sale" or "For Rent" Signs 11 SECTION 11.03. Installation of Equipment, Etc. 11 SECTION 11.04. No Implied Eviction 11 ARTICLE XII INDEMNIFICATION SECTION 12.01. Indemnification 11 SECTION 12.02. Occupancy at Tenant's Risk 12 SECTION 12.03. Release of Liability 12 SECTION 12.04. Notice of Fire or Accident 12 ii SECTION 12.05. Litigation Involving Landlord 12 SECTION 12.06. Limit of Landlord's Liability - Non Recourse 12 ARTICLE XIII INSURANCE SECTION 13.01. Required Coverages 13 SECTION 13.02. Additional Coverages 13 SECTION 13.03. Designated Insureds; Endorsements; Evidence of Insurance 14 SECTION 13.04. No Injurious Acts 14 SECTION 13.05. Failure to Maintain Required Coverage 14 ARTICLE XIV TRADE FIXTURES SECTION 14 01. Title to Property and Removal 15 SECTION 14.02. Failure to Remove 15 ARTICLE XV ASSIGNING, MORTGAGING, SUBLETTING SECTION 15.01. Landlord's Consent 15 SECTION 15.02 Costs of Assignment or Subletting; Agency 15 ARTICLE XVI SUBORDINATION SECTION 16.01. Mortgages, Etc. 16 SECTION 16.02. Utility Easements, Etc. 16 SECTION 16.03. Execution of Documents 16 ARTICLE XVII TENANT'S DEFAULT SECTION 17.01. Insolvency, Etc. 17 SECTION 17.02. Failure to Pay Rent or Perform Other Obligation 17 SECTION 17.03. Scope 18 ARTICLE XVIII REMEDIES OF LANDLORD UPON TENANT'S DEFAULT SECTION 18.01. Right to Relet; Damages for Breach 18 SECTION 18.02. Right to Terminate 19 SECTION 18.03. Damages Upon Termination or Re-Entry 19 SECTION 18.04. Waiver of jury Trial 20 SECTION 18.05. Recovery of Legal Expenses 20 SECTION 18.06. Acceleration of Rent 20 SECTION 18.07. Default Prior to Possession 20 iii SECTION 18.08 All Remedies Cumulative; Injunctive Relief 21 SECTION 18.09 Joint and Several Liability 21 SECTION 18.10. No Designation of Credits 21 ARTICLE XIX WAIVERS AND MODIFICATIONS SECTION 19.01. Failure to Enforce No Waiver 21 SECTION 19.02. Executory Agreements to be in Writing 21 SECTION 19.03. Surrender to be in Writing 22 SECTION 19.04. Acceptance of Rents No Waiver of Breach 22 SECTION 19.05. Financing Requirements 22 ARTICLE XX FINANCING AGREEMENT SECTION 20.01. Execution Prohibited 22 ARTICLE XXI CUSTOM AND USAGE SECTION 21.01. Not Created by Failure to Enforce 22 ARTICLE XXII SURRENDER AND HOLDOVER SECTION 22.01. Damages Upon Failure to Surrender 23 SECTION 22.02. Consensual Holdover 23 SECTION 22.03. Tenant's Liability for Resulting Damages 23 ARTICLE XXIII ADDITONAL CONSTRUCTION SECTION 23.01. Rights Reserved to Landlord 23 ARTICLE XXIV DAMAGE OR DESTRUCT10N OF PREMISES SECTION 24.01. Total or Partial Destruction 24 SECTION 24.02. Partial Destruction of Complex 24 ARTICLE XXV EMINENT DOMAIN SECTION 25.01. Total Condemnation 24 SECTION 25.02 Total Parking Area 25 SECTION 25.03 Partial Condemnation 25 SECTION 25 04. Partial Condemnation of Parking Area 25 SECTION 25.05. Landlord's Damages 26 SECTION 25.06. Tenant's Damages 26 iv ARTICLE XXVI NO OFFER OR OPTION SECTION 26.01. No Offer or Option 26 SECTION 26.02. Execution and Delivery 26 ARTICLE XXVII AGENCY SECTION 27.01. No Liability of Agent 26 ARTICLE XXVIII SUCCESSORS AND ASSIGNS SECTION 28.01. Binding Effect 27 ARTICLE XXIX FORCE MAJEURE SECTION 29.01. Delay or Non-Performance Excused 27 ARTICLE XXX OFFSET STATEMENT SECTION 30.01. Duty of Tenant to Furnish 27 SECTION 30.02. Attornment 28 ARTICLE XXXI SECTION 31.01. Manner and Place of Service 28 ARTICLE XXXII INTERPRETATION SECTION 32.01. Entire Agreement 28 SECTION 32.02. Amendment 29 SECTION 32.03. Captions 29 SECTION 32.04. Controlling Law 29 SECTION 32.05. Venue 29 SECTION 32.06 Negation to Personal Liability 29 ARTICLE XXXIII BROKERAGE COMMISSIONS SECTION 33.01. Tenant's Warranty 29 v GENERAL LEASE PROVISIONS ARTICLE I POSSESSION SECTION 1.01. Prior Access to Premises. At any time prior to the delivery of possession of the demised premises as aforesaid, Tenant, its agents, servants and contractors shall have the right, after receiving approval from Landlord, to enter upon the demised premises for the purpose of taking measurements therein, and for making mechanical, structural, environmental and insect infestation inspections but for no other purpose. SECTION 1.02. Failure of Tenant to Open and Remain Open. Tenant agrees that upon receiving possession of the demised premises from Landlord it will with due diligence proceed to install such fixtures and equipment and to perform such other work as shall be necessary or appropriate in order to prepare the demised premises for the opening of business. In the event that Tenant does not open the demised premises for the conduct of its business fully fixtured, stocked and staffed within one hundred and eighty (180) days after receiving possession of the demised premises from Landlord, Landlord, in addition to all other remedies hereunder, shall have the option of terminating this Lease by giving Tenant written notice of such termination whereupon this Lease shall be terminated. Tenant further agrees that once the demised premises are open for business, Tenant agrees to continuously occupy and remain open for business during the entire term of this Lease. Should Tenant close its business at the leased premises for reasons other than those beyond the Tenant's control for more than forty five (45) consecutive days, Tenant shall be in default of this Lease. SECTION 1.03. Tenant's Work. Tenant has inspected the Premises and is accepting them in the condition they were in as of the date of this lease. At the expiration of this lease Landlord shall have the option of requiring Tenant to either return the Premises to the condition they were in on the date of the execution of this lease or accept the Premises with Landlords improvements. No other changes may be made by Tenant to the Premises without the advance written permission of Landlord. SECTION 1.04. Violations. Landlord agrees that upon the date of delivery of possession to the Tenant, the demised premises shall be reasonably free of all violations, orders, or notices of violations of all public authorities. SECTION 1.05. Acceptance. By occupying the leased premises as a Tenant, or by installing fixtures, facilities or equipment, or by performing finishing work, Tenant shall be deemed to have accepted the demised premises and to have acknowledged that the premises are in the condition required by this Lease. ARTICLE II CONDUCT OF BUSINESS BY TENANT SECTION 2.01. Use of Premises. Tenant shall use and occupy the demised premises solely for the conduct of the business herein elsewhere set forth. Tenant will not use or permit 1 or suffer the use of the leased premises for any other business or purpose. The authorization of the use of the premises for the business purpose set forth herein shall not constitute a representation by Landlord that such use of the premises is now or will continue to be permitted or lawful under applicable laws or regulations. SECTION 2.02 Covenants Regarding Environmental Compliance. 2.02(a) Tenant will not use, generate, manufacture, produce, store, release, discharge, or dispose of on, under or about the premises or the Complex any Hazardous Substance (as defined below) or allow any other person or entity to do so except in minor amounts under conditions permitted by applicable laws. 2.02(b) Tenant shall keep and maintain the premises in compliance with, and shall not cause or permit the premises to be in violation of any Environmental Law, as defined below. 2.02(c) Tenant shall give prompt written notice to Landlord of: (1) any proceeding or inquiry by any governmental authority with respect to the presence of any Hazardous Substance on the premises or the migration thereof from or to other property; (2) all claims made or threatened by any third party against Tenant or as the result of Tenant's activities, relating to any loss of injury resulting from any Hazardous Substance; and (3) Tenants discovery of any occurrence or condition on any real property adjoining or in the vicinity of the premises that could cause the premises or any part thereof to be subject to the restrictions on the ownership, occupancy, transferability or use of the premises under any Environmental Law. 2.02(d) Tenant shall protect, indemnify and hold harmless Landlord, its directors, officers, employees, agents, successors and assignees from and against any and all loss, damage, cost, expense or liability (including reasonable attorney fees and costs) directly or indirectly arising out of or attributable to the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal, or presence of a Hazardous Substances as the result of Tenant's occupancy of the premises on, under or about the premises, including without limitation (i) all foreseeable consequential damages and (ii) the costs of any required or necessary repair, cleanup or detoxification of the premises and the preparation and implementation of any closure, remedial or other required plans. The foregoing environmental indemnity shall survive the expiration or termination of this Lease and/or any transfer of all or any portion of the premises, or of any interest in this Lease, and shall be governed by the laws of the state in which the premises are located. 2.02(e) In the event that any investigation, site monitoring, containment, cleanup, removal, restoration or other remedial work of any kind or nature (the "Remedial Work") is reasonable, necessary or desirable as the result of Tenant's activities under any applicable local, state or federal law or regulation, any judicial order, or by any governmental or 2 non-governmental entity or person because of or in connection with, the current or future presence, suspected presence, release or suspected release of a Hazardous Substance in or into the air, soil, ground, water, surface water or soil vapor at, or about, under or within the premises or any portion thereof, as the result of Tenant's activities on the premises, Tenant shall within thirty (30) days after written demand for performance thereof by Landlord (or such shorter period of time as may be required under any applicable law, regulation, order or agreement), commence and thereafter diligently prosecute to completion, all such Remedial Work. All Remedial Work shall be performed by contractors approved in advance by Landlord, and under the supervision of a consulting engineer approved by Landlord. All costs and expenses of such Remedial Work shall be paid by Tenant including, without limitation, Landlord's reasonably attorney fees and costs incurred in connection with monitoring or review of such Remedial Work. In the event Tenant shall fail to timely commence, or cause to be commenced, or fail to diligently prosecute to completion, such Remedial Work, Landlord may, but shall not be required to, cause such Remedial Work to be performed and all costs and expenses thereof, or incurred in connection therewith, shall become immediately due and payable as additional rent to the Landlord from the Tenant. 2.02(f) Representations and Warranties relating to Environmental Matters (1) Tenant represents and warrants to Landlord that: (a) The Tenant is not in violation of or subject to any existing, pending or threatened investigation by any governmental authority under any Environmental Law. (b) Tenant has not and is not required by any Environmental Law to obtain any permits or license to construct or use any improvements, fixtures or equipment forming a part of the premises. (c) Tenant's intended use of the premises will not result in the disposal or release of any Hazardous Substance on or to the Property. (2) Landlord represents and warrants to Tenant that: (a) The Landlord is not in violation of or subject to any existing, pending or threatened investigation by any governmental authority under any Environmental Law. (b) That Landlord is not aware of the presence of any Hazardous Substance at the Complex. (c) That Landlord shall indemnify and hold harmless Tenant from and against any and all claims, losses, liabilities, damages, costs, and expense, including, without limitations, attorneys' fees and costs, arising out of or in any way connected with the use, manufacture, storage, or disposal of Hazardous Substances by any other of Landlord's tenant; the Landlord; and/or the predecessors in title to the premises and if there is found to be 3 Hazardous Substances or material on, under, or about the premises, including, without limitation, the cost of any required or necessary repair, clean-up, or detoxification, and the preparation of any closure or other required plans in connection therewith. The indemnity obligations of Landlord under this clause shall survive any termination of the Lease. Any expense incurred by Landlord attributable to the Hazardous Substances referred to in this subparagraph shall not be passed on to the Tenant as a part of Tenant's minimum rent and Tenant's share of costs of taxes, operating expenses, insurance, common facilities and services. 2.02(g) Definitions (1) "Environmental Law" means any federal, state or local law, statute, ordinance, or regulation pertaining to health, industrial hygiene, or the environmental conditions on, under or about the Complex, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") as amended, 42 U.S.C. Sections 9601 et seq., and the Resource Conservation and Recovery Act of 1976 ("RCRA")., 42 U.S.C. Sections 6901 et seq. (2) The Term "Hazardous Substance(s)" includes without limitation: (a) Those substances included within the definitions of "hazardous substances," or "solid waste" in CERCLA, RCRA, and the Hazardous Materials Transportation Act, 49 U.S.C. Sections 1801 et seq., and in the regulations promulgated pursuant to said laws; (b) those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) as hazardous substances (40 CFR Part 302 and amendments thereto); (c) such other substances, materials and wastes which are or become regulated under applicable local, state or federal law, or the United States government, or which are classified as hazardous or toxic under federal, state or local laws or regulations; and (d) any materials, waste or substance which is (i) asbestos, (ii) polycholorinated biphenyls, (iii) designated as a "hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. Sections 1251 et seq. (33 U.S.C. Section 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. Section 1317); (iv) explosives or (v) radioactive. SECTION 2.03. Injurious Acts. Tenant shall not perform any acts or carry on any practices which may injure the building or be a nuisance or menace to other tenants and business invitees of Tenant and the general public in the complex. SECTION 2.04. Licenses, Permits, Etc. Tenant shall be solely responsible for obtaining all licenses, permits, or certificates of occupancy which may be required by any governmental agency or authority, which Tenant shall obtain at its sole cost and expense. 4 ARTICLE III RENT SECTION 3.01. Minimum Rental; Late Charges. Tenant covenants and agrees to pay to Landlord the minimum annual rental hereinbefore reserved, payable in advance in equal monthly installments without deduction or set-off, on the first day of each calendar month during the term hereof, commencing upon the rental commencement date hereinbefore set forth. In addition to all other rights which Landlord may have pursuant to this Lease, Landlord shall have the right to demand and receive from Tenant in addition to the rent hereinbefore reserved, an additional sum of five percent (5%) of each monthly installment of rent not paid within ten (10) days after the due date thereof as and for a late charge. SECTION 3.02. Place of Payment. Tenant will promptly pay all rentals, additional rentals and other charges by cash or check made payable to: Sycamore Street Associates in care of Allan H. Smith, Real Estate, Ltd. and shall be made at its offices located at The Stocking Works, 301 South State Street, Newtown, PA 18940, or at such other place as Landlord shall designate in writing. SECTION 3.03. No Accord and Satisfaction. No acceptance by Landlord of a lesser sum that the Minimum Rent, Percentage Rent, additional rent or any other charge then due shall be deemed to be other than on account of the earliest installment of such rent or charge due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent or other charge be deemed an accord and satisfaction, and Landlord may accept such check or payment as rent without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy in this Lease provided. ARTICLE IV COMMON USE AREAS, FACILITIES AND SERVICES SECTION 4.01. Control of Common Use Areas and Services. All facilities and services furnished by Landlord in the Complex and designated for the general use, in common, of occupants of the Complex, including Tenant hereunder, their officers, agents, employees and customers, including, but not limited to, parking areas, streets, sidewalks, canopies, roadways, loading platforms, washrooms, shelters, ramps, landscaped areas and other similar facilities, shall at all times be subject to the exclusive control and management of Landlord and Landlord or its agent shall have the right from time to time to change the area, level, location and arrangement of such parking areas and other facilities above referred to; to restrict parking by tenants and their employees to employee parking areas; and to make all rules and regulations pertaining to and necessary for the proper operation and maintenance of the common facilities and services. None of the aforementioned actions however, shall reduce the amount of available parking presently serving the complex. Landlord shall also be responsible for maintaining adequate lighting in the parking area to allow for the safety of tenant's employees and customers. 5 SECTION 4.02. Tenant's Share of Cost of Taxes, Insurance, Common Facilities and Services. In each lease year Tenant will pay to Landlord as additional rent hereunder such proportion of Landlord's taxes, insurance, and operating cost of common facilities and services as the gross floor area of the demised premises bears to the gross rentable first floor area available to be leased of all the buildings of Landlord in the Complex, subject to the minimum sum payable in respect of such common facilities and services hereinbefore reserved. For the purpose of this paragraph the word "taxes" shall include all taxes attributable to improvements now or hereinafter made to the complex or any part thereof or attributable to the present or future installation in the complex or any part thereof, of fixtures, machinery or equipment, all real estate taxes, assessments, water and sewer fees, rents or charges, and other governmental impositions and charges of every kind and nature whatsoever, nonrecurring as well as recurring, special or extraordinary as well as ordinary, foreseen and unforeseen and each and every installment thereof, which shall or may during the term of this lease be levied, assessed or imposed, or become due and payable or become liens upon, or arise in connections with the use, occupancy or possession of, or any interest in, the Complex or any part thereof, or any land, buildings or other improvements therein. In addition, for the purpose of this paragraph, insurance, operating costs and expenses shall include those expenses or costs incurred by Landlord in operating, managing, equipping, lighting, repairing, and maintaining said facilities and services, including, without limitation, landscaping, water, sewer, electric, gas, sanitary control, cleaning, lighting, snow removal, resurfacing, painting, fire protection, public liability and property damage insurance, fire insurance, extended coverage, difference in conditions, boiler and machinery vandalism and malicious mischief insurance, rent insurance, repairs and policing, including the cost of personnel to implement such services and maintain such facilities, plus fifteen percent (15%) of all the foregoing costs to cover administrative and overhead costs. The annual charge shall be computed on the basis of twelve (12) consecutive calendar months as designated by Landlord, and shall be paid by Tenant in equal monthly or semi-annual installments at Landlord's option in advance upon demand by Landlord. Tenant shall be permitted to review the records of said operating costs at Landlord's offices during regular business hours. In the event, at the end of the aforementioned twelve (12) consecutive calendar month period, it is determined Tenant's payments to Landlord for said operating, costs were less than the Tenant's actual share of said operating costs thereby creating a shortfall, then, in such case, Tenant agrees to reimburse Landlord for said shortfall within thirty (30) days after Tenant's receives notice of such shortfall from the Landlord or Landlord's agent. In the event that the aforesaid sums payable as additional rent shall not be paid by Tenant within ten (10) days after demand therefore by Landlord, then Tenant shall pay, in addition to all such charges, an additional late charge of ten percent (10%) of the amount of additional rent due. ARTICLE V UTIOLITY CHARGES SECTION 5.01. Utility Charges. In addition to all rentals herein specified (including common area utility charges as described in Section 4.02), Tenant shall pay for all utilities used or consumed in or upon the demised premises which are separately metered, including all water and sewer charges, as and when the charges therefore shall become due and payable. 6 ARTICLE VI REPAIRS AND ALTERATIONS SECTION 6.01. Responsibility for Repairs. During the term of this lease Landlord will keep the roof, the exterior walls and the structural integrity of the premises, excepting any work done by Tenant and any glass or doors, in proper repair, provided that in each case Tenant shall have given Landlord prior written notice of the necessity of such repairs. After the first year's anniversary of this lease, Tenant will keep the interior of the demised premises, which includes but is not limited to, all electrical, plumbing, heating, air conditioning and other mechanical installations therein, all doors, and all plate glass and door and window glass, whether or not the same were initially furnished and installed by landlord, in good order, accomplishing any and all repairs, alterations, replacements and modifications at its own expense and using materials and labor of kind and quality equal to the original work, and will surrender the demised premises at the expiration or earlier termination of this lease in as good condition as when received, excepting only deterioration cause by ordinary wear and tear and damage by fire or other casualty of the kind insured against in standard policies of fire insurance with extended coverage. During the first year of this lease Landlord will be responsible for the aforementioned maintenance and repairs. Except as hereinabove provided, after the first year's anniversary of this lease, Landlord shall have no obligation to repair, maintain, alter, replace or modify the demised premises or any part thereof, or any plumbing, heating, electrical, air conditioning or other mechanical installation therein. Landlord reserves the right to have all mechanical equipment within the premises serving Tenant routinely maintained, such cost for said maintenance to be borne solely by the Tenant. Under no circumstances shall Landlord be obligated to repair, replace or maintain any plate glass or door or window glass. SECTION 6.02. Tenant's Right to Make Alterations. Tenant covenants and agrees it will not make any alterations, improvements or additions to the demised premises during the term of this lease or any extension thereof without first obtaining the written consent of Landlord. Tenant will not cut or drill into, or secure any fixture, apparatus or equipment of any kind to any part of the demised premises without first obtaining the written consent of Landlord. All alterations, improvements and additions made by Tenant as aforesaid shall remain upon the premises at the expiration or earlier termination of this lease and shall become the property of Landlord unless Landlord shall, prior to or after the termination of this lease, have given written notice to Tenant to remove same, in which event Tenant shall remove such alterations, improvements and additions and restore the premises to the same good order and condition in which it was at the commencement of this lease. Should Tenant fail so to do, Landlord may do so, collecting at Landlord's option the cost and expense thereof from Tenant as additional rent. All of such alterations, improvements or additions shall be made solely at the expense of the Tenant; and the Tenant agrees to protect, indemnify and save harmless the Landlord on account of any injury to third persons or property, by reason of any such changes, additions or alterations, and to protect, indemnify and save harmless Landlord from the payment of any claim of any kind or character on account of bills for labor or materials furnished or claimed to have been furnished in connection therewith. Tenant agrees to procure all necessary permits before undertaking such work and to do all such work in a good and 7 workmanlike manner employing materials of first quality and complying with all applicable governmental requirements. Notwithstanding the above, Landlord agrees that the Tenant may remove all ATM systems and drive-in systems that they installed upon the termination of this lease. SECTION 6.03. Contractors and Labor. To the end that there shall be no labor dispute which would interfere with the construction, completion or operation of the whole Complex or with any other work being carried on therein, in connection with any construction, alteration, fixturing or other work to be done upon the demised premises, Tenant shall engage the services of only such contractors and subcontractors as will work in harmony with each other, with those of landlord and with any others then working in the whole Complex and Tenant shall employ and shall require its contractors and subcontractors to employ only such laborers as will work in harmony with all other laborers then working in the Complex. ARTICLE VII MECHANICS LIENS SECTION 7.01. Tenant Shall Discharge All Liens. Tenant shall promptly pay all contractors and materialmen so as to minimize the possibility of a mechanic's or materialman's lien attaching to the leased premises. Should any such lien be made or filed, Tenant shall bond against or discharge the same within thirty (30) days after Tenant receives notice of entry of the lien, and in the event that Tenant shall fail to do so, Landlord may discharge the lien by payment of the amount secured thereby, and any amount so paid by Landlord, along with any attorney's fees or other costs relating to the discharge of such lien, shall be deemed additional rent and shall be immediately payable by Tenant to Landlord. ARTICLE VIII AFFIRMATIVE COVENANTS OF TENANTS SECTION 8.01. Compliance with Laws. Tenant agrees to comply with any and all requirements of any of the constituted public authorities, and with the terms of any State or Federal statute or local ordinance or regulation applicable to Tenant or its use of the demised premises, and save Landlord harmless from penalties, fines, costs, expenses or damages resulting from failure to do so. SECTION 8.02. Notice of Accident, Etc. Tenant agrees to give to Landlord prompt written notice of any accident, fire or damage occurring on or to the demised premises within twenty-four (24) hours of any such occurrence. SECTION 8.03. Loading and Unloading. Tenant agrees that all loading and unloading of goods shall be done only at such times in the areas and through such entrances as may be designated for such purposes by Landlord. Trailers or trucks shall not be permitted to remain parked overnight, in any area of Complex, whether loaded or unloaded. 8 SECTION 8.04. Refuse, Etc. Tenant agrees to keep all garbage and refuse in the kind of container specified by Landlord and to place the same outside of the premises prepared for collection in the manner and at the times and places specified by Landlord, and in accordance with municipal regulations; to keep the outside areas immediately adjoining the premises clean and free from ice and snow and not to burn, place or permit any rubbish, obstructions or merchandise in such areas; and to keep the demised premises clean, orderly, sanity and free from objectionable odors and from insects, vermin and other pests. SECTION 8.05. Heat. Tenant agrees to keep the demised premises sufficiently heated to prevent freezing of water in pipes and fixtures. SECTION 8.06. Parking. Tenant agrees for itself and its employees to park their cars only in those portions of the parking area as may be designated for that purpose by Landlord. SECTION 8.07. Rules and Regulations. Tenant agrees to comply with all reasonable rules and regulations of Landlord in effect at the time of the execution of this lease or at any time or times, and from time to time, promulgated by Landlord, which Landlord in its sole discretion shall deem necessary in connection with the demised premises, the building of which the demised premises are a part, or the Complex, including the installation of such fire extinguishers, smoke alarms and other safety equipment as Landlord may reasonably require. SECTION 8.08. Payment of Rent. Tenant agrees to pay all rent and all other charges payable as rent immediately when due, and to comply with all other terms and conditions of the within lease. SECTION 8.09. Surrender of Premises. At the expiration or sooner termination of the tenancy hereby created, Tenant shall surrender the leased premises in the same condition as the leased premises were in upon delivery of possession thereto under this lease, reasonable wear and tear excepted, and damage by unavoidable casualty excepted, and shall surrender all keys for the leased premises to Landlord or its Agent at the place then fixed for the payment of rent and shall inform Landlord or its Agent of all combinations on locks, safes and vaults, if any, in the leased premises. Tenant shall remove all its trade fixtures before surrendering the premises as aforesaid and shall repair any damage to the leased premises caused thereby. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this lease. ARTICLE IX NEGATIVE COVENANTS OF TENANT SECTION 9.01. Machinery, Loud Speakers, Etc. Tenant agrees that it will not, without the prior consent in writing of Landlord, use or operate any machinery which, in Landlord's opinion, is harmful to the building or disturbing to other tenants in the building of which the demised premises is a part; nor shall Tenant use any loud speakers, televisions, phonographs, radios or other devices in a manner so as to be heard or seen outside of the 9 demised premises, nor display merchandise on the exterior of the demised premises nor on the walkways or sidewalks appurtenant thereto either for sale or for promotion purposes. SECTION 9.02. Acts Injurious to Insurance. Tenant agrees that it will not do or suffer to be done, any act, matter or thing objectionable to the fire insurance companies whereby the fire insurance or any other insurance now in force or hereafter to be placed on the demised premises or any part thereof, or on the building of which the demised premises may be a part, shall become void or suspended, or whereby the same shall be rated as a more hazardous risk than at the date when Tenant receives possession hereunder. In case of a breach of this covenant, in addition to all other remedies of Landlord hereunder, Tenant agrees to pay to Landlord as additional rent any and all increase or increases of premiums on insurance carried by Landlord on the demised premises, or any part thereof, or on the building of which the demised premises may be a part, caused in any way by the occupancy of Tenant. SECTION 9.03. Awnings, Etc. Tenant agrees that it will not, without the prior consent in writing of Landlord not to be unreasonably withheld, attach any awning, canopy, antenna or other projection to the roof or the outside walls of the demised premises or the building of which the demised premises are a part. SECTION 9.04. Auctions, Etc. Tenant agrees that it will not, without the prior consent in writing of Landlord, conduct any auction, fire, bankruptcy, or selling-out sale on or about the demised premises. ARTICLE X SIGNS SECTION 10.01. Landlord's Approval. Tenant will not exhibit, inscribe, paint, or affix any sign, advertisement, notice or other lettering on any part of the outside of the demised premises or of the building the demised premises is a part, or inside the demised premises if visible from the outside, without first submitting to Landlord a plan or sketch of the proposed sign or signs and without first obtaining Landlord's written approval thereof said approval not to be unreasonably witheld. SECTION 10.02. Permits. Tenant shall obtain at its sole cost and expense, all permits required in connection with such signs, and shall comply with all laws, orders, rules and regulations of governmental authorities relative to the erection, maintenance and repair of such signs. Landlord shall, if requested, cooperate with tenant to the extent required under such laws, orders, rules and regulations, provided, however, that Tenant shall reimburse Landlord for any expense incurred by Landlord in connection therewith. SECTION 10.03. Maintenance. Tenant further agrees to maintain such sign, lettering, etc., as maybe approved in good condition and repair at all times. 10 ARTICLE XI INSPECTION OF PREMISES AND ACCESS THERETO SECTION 11.01. Inspection of Premises; Repairs. Landlord reserves the right at all reasonable times and with prior notice to the tenant (with the exception of emergencies), by itself or its duly authorized agents to go upon and inspect the demised premises and every part thereof, and at its option to make repairs, alterations and additions to the demised premises or the building of which the demised premises are a part, provided, however, that nothing herein contained shall be deemed or construed as an obligation of Landlord to undertake or effect any such repairs, alterations or additions other than as hereinelsewhere specifically set forth. SECTION 11.02. Displaying "For Rent" Signs. Landlord reserves the right, after notice from either party of intention to terminate this lease, or at any time within six (6) months prior to the expiration of this lease, to post a "For Rent" sign, and said sign shall be placed upon that part of the demised premises as Landlord or its Agent shall require, except on door or doors leading into the demised premises or in such places that would interfere with Tenant's business. Prospective tenants authorized by Landlord or its Agent may inspect the premises at reasonable hours at any time. SECTION 11.03. Installation of Equipment, Etc. Landlord with Tenant's approval not to be unreasonably withheld, reserves the right to install or place upon, or affix to, the roof and exterior walls of the demised premises equipment, signs, displays, antennae, and any other object or structure of any kind, provided the same shall not materially impair the structural integrity of the building or interfere with Tenant's occupancy of the demised premises. SECTION 11.04. No Implied Eviction. Notwithstanding any inference to the contrary herein contained, it is understood that the exercise by Landlord of any of its rights hereunder shall never be deemed an eviction (constructive or otherwise) of tenant, or a disturbance of its use of the demised premises, and shall in no event render Landlord liable to Tenant or any other person, so long as such exercise of rights is in accordance with the foregoing terms and conditions. ARTICLE XII INDEMNIFICATION SECTION 12.01. Indemnification. Tenant at all times, except for those occasions where the Landlord, its employees, agents or contractors has exercised negligence, shall indemnify Landlord and its agents, and save them harmless from suits, actions, damages, liability and expenses (including court costs and reasonable attorneys' fees) in connection with loss of life, bodily or personal injury or property damage arising from or out of any occurrence in, upon or at the demised premises or the occupancy or use by Tenant of said premises or any part thereof, or occasioned wholly or in part by any act or omission of Tenant, its agents, contractors, employees, servants, invitees, licensees or concessionaires, either within the demised premises or upon the sidewalks and common areas of the Complex. 11 SECTION 12.02. Occupancy at Tenant's Risk. Tenant shall store its property in, and shall occupy the demised premises and all other portions of the Complex at its own risk, and hereby releases Landlord and Landlord's agents from all claims of every kind resulting in loss of life, personal or bodily injury or property damage. Landlord and its agents shall not be responsible or liable at any time for any loss or damage to tenant's merchandise, equipment, fixtures or other personal property of Tenant or to Tenant's business. Landlord and its agents shall not be responsible or liable to Tenant or to those claiming by, through or under Tenant for any loss or damage to either the person or property of Tenant that may be occasioned by or through the acts or omissions of persons occupying adjacent, connecting or adjoining premises. Landlord and its agents shall not be responsible or liable for any defect, latent or otherwise, in the demised premises or in any other building in the Complex or any of the equipment, machinery, utilities, appliances or apparatus therein, except as herein before stated. SECTION 12.03. Release of Liability. Except for cases of the negligence of Landlord, its employees, agents or contractors, Landlord's agents,employees and contractors shall not be liable for, and Tenant waives all claims for, loss or damage to Tenant's business or damage to person or property sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in or upon the demised premises, the building or buildings of which it is a part, or any other part of the Complex, including, but not limited to, claims for damage resulting from: (i) any equipment or appurtenances becoming out of repair; (ii) any defect in or failure of plumbing, heating or air conditioning equipment, electric wiring or the install thereof, gas, water and steam pipes, stairs, porches, railings or walks; (iii) broken glass; (iv) the backing up of any sewer pipe or downspout; (v) the bursting, leaking or running of any tank, tub, washstand, water closet, waste pipe, drain or any other pipe or tank in, upon or about the demised premises, or any other building or buildings in the Complex; (vi) the escape of steam or hot water; (vii) water, snow, or ice being upon or coming through the roof, skylight, trap door, stairs, doorways, show windows, walks or any other place upon or near the demised premises, or any other building or buildings in the Complex, or otherwise; (viii) the falling of any fixture, plaster, tile or stucco; and (ix) any act, omission or negligence of other tenants, licensees or of any other persons or occupants of any building in the Complex or of adjoining or contiguous buildings, or of owners of adjacent or contiguous property. Notwithstanding the above, the language in Section 6.01 shall govern the first year if the Lease Agreement. SECTION 12.04. Notice of Fire or Accident. Tenant shall give notice to Landlord in case of fire or accident in the demised premises or in the building of which the demised premises are a part or of defects therein or in any fixtures or equipment, such notice to be given within twenty-four (24) hours after any such event or as soon thereafter as is reasonably practicable. SECTION 12.05. Litigation Involving Landlord. In the event that Landlord shall without fault on its part be made a party to any litigation commenced by or against Tenant, and based upon a claim which is not covered by Landlord's insurance, then, and to such extent Tenant shall protect and hold Landlord and Agent harmless from and against any liability arising therefrom, and shall pay all costs, expenses and reasonable attorneys' fees. SECTION 12.06. Limit of Landlord's Liability - Non Recourse. Notwithstanding anything contained herein to the contrary, Tenant agrees that Landlord and its partners shall 12 have no personal liability with respect to any of the provisions of this lease and Tenant shall look solely to the estate and property of Landlord in the land and buildings comprising the property of which the leased premises forms a part for the satisfaction of Tenant's remedies, including without limitation, the collection of any judgement or the enforcement of any judicial process requiring the payment or expenditure of money by Landlord or its partners in the event of any default or breach by Landlord with respect to any of the terms and provisions of this Lease to be observed and/or performed by Landlord, subject, however, to the prior rights of any holder of any mortgage covering all or part of the property and no other assets of Landlord or any principal or partner of Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenant's claim and in the event Tenant obtains a judgement against Landlord, and/or its partners, the judgement docket shall be so noted. This section shall inure to the benefit of Landlord's successors and assigns and their respective partners and/or principals. ARTICLE XIII INSURANCE SECTION 13.01. Required Coverages. Tenant, at its own cost and expense shall obtain and maintain in full force and effect during the original term of this lease, and any renewals or extensions thereof, policies of insurance covering the following risks: (i) Fire and extended coverage, vandalism and malicious mischief insurance covering all of Tenant's stock in trade, fixtures, furniture, furnishings, removable floor coverings, trade equipment, signs, and all other decorations placed by Tenant in or upon the demised premises, to the extent of 100% of their full insurable value and replacement cost without deduction for depreciation, but in any event in an amount sufficient to prevent Tenant from becoming a coinsurer under the provisions of applicable policies; (ii) Comprehensive General Public Liability Insurance on an occurrence basis with minimum limits of liability in an amount of not less than $1,000,000.00 for bodily, personal injury or death to any one person and to the limit of not less than $2,000,000.00 for bodily, personal injury or death to more than one person and in an amount of not less than $250,000.00 with respect to damage to property including water damage and sprinkler leakage legal liability. (iii) Rent insurance payable in case of loss caused by a peril against which insurance is required to be maintained under (i) above, in an amount not less than the minimum rent becoming due under this lease, together with all other charges payable as rent hereunder, and the taxes levied, imposed or assessed with respect to, the twelve-month period following any such loss, damage or destruction. (iv) Business interruption insurance in amounts sufficient to prevent Tenant from becoming a co-insurer thereof, and to assure the continuance of the operating income and profit of Tenant's business during any period in which Tenant is unable to conduct such business in the demised premises, or any part thereof, by reason of loss or damage due to fire or other casualty, the elements, civil commotion or riot, or any other cause, whether insured or uninsured. SECTION 13.02. Additional Coverages. Whenever in Landlord's reasonable judgment, good business practice and changing conditions indicate a need for additional or different types 13 of insurance coverage, Tenant shall, upon request from Landlord, obtain such coverage, provided such coverages are reasonable, at Tenant's sole expense. SECTION 13.03. Designated Insureds; Endorsements; Evidence of Insurance. All policies of insurance to be obtained and furnished by Tenant hereunder shall be issued and carried in the name of Landlord and Tenant, as their respective interests may appear, together with such other party or parties as may be designated by Landlord as their interests may appear. All such policies of insurance shall be issued by a financially responsible company or companies, authorized to issue such policy or policies, and licensed to do business in Pennsylvania, and shall contain endorsements providing as follows: (a) that any such insurance shall not be subject to cancellation, termination or change except after ten (10) days' prior written notice by registered or certified mail to Landlord by the insurance company; and (b) that Landlord shall not be liable for any damage by fire or other casualty covered by such insurance, no matter how caused, it being understood that Tenant shall look solely to its insurer or insurers for reimbursement. Landlord and Tenant waive their right to recover damages against each other for any reason whatsoever to the extent the damaged party recovers indemnity from its insurance carrier. Any insurance policy procured by Tenant which does not name the Landlord as an additional insured shall contain an express waiver of any ri& of subrogation by the insurance company against Landlord. All public liability and property damage policies shall contain an endorsement that Landlord, although named as an insured, shall nevertheless be entitled to recover under said policies for any loss or damage occasioned to it, its servants, agents and employees by reason of the negligence of Tenant. All policies of fire and/or extended coverage or other insurance covering the demised premises or its contents shall contain a clause or endorsement providing in substance that the insurance shall not be prejudiced if the assureds have waived right of recovery from any person or persons prior to the date and time of loss or damage, if any. The original policy or policies, or duly executed certificates, for the same, together with satisfactory evidence or payment of the premium thereof shall be delivered to Landlord on or before the commencement of any Tenant work under this lease, and upon renewals of such policies, not less than fifteen (15) days prior to the expiration of the term of any such coverage. SECTION 13.04. No Injurious Acts. Tenant shall not do, suffer to be done, or keep, or suffer to be kept anything in, upon or about the demised premises which will contravene Landlord's policies insuring against loss or damage by fire or other hazards, including, but not limited to, public liability or which will prevent Landlord from procuring such policies in companies acceptable to Landlord. If anything be done, omitted to be done or suffered to be done by Tenant or kept or suffered by tenant to be kept in, upon or about the premises that shall cause the rate of fire or other insurance on the premises or other property of Landlord in companies acceptable to Landlord to be increased beyond the minimum rate from time to time applicable to the demised premises for use for the purpose permitted under this lease, or such other property for the use or uses made thereof, Tenant will pay the amount of such increase promptly upon Landlord's demand as additional rent. SECTION 13.05. Failure to Maintain Required Coverage. In the event that the Tenant at any time or times shall fail to obtain or maintain in full force and effect any or all of the insurance policies and coverages required of it hereunder, the Landlord, at its election after 14 ten (10) days' written notice to the Tenant, and as agent for the Tenant, may obtain such insurance or coverage, or additional insurance or coverage as the case may be, pay the premiums thereon, or take such other steps as may be necessary to meet the requirements of this Article and upon demand, obtain reimbursement of the costs so expended (including service charges in the amount of 1 1/2% per month upon all such costs paid by Landlord) from the Tenant as additional rent, or Landlord may, at its sole option, terminate this lease upon thirty (30) days' written notice. ARTICLE XIV TRADE FIXTURES SECTION 14.01. Title to Property and Removal. All trade fixtures and lighting fixtures installed by tenant in the leased premises shall remain the property of Tenant and shall be removable at the expiration or earlier termination of this lease or any renewal or extension thereof, provided Tenant shall not at such time be in default under any covenant or agreement contained in this lease; and provided further, that in the event of such removal, having repaired the damage caused by such removal, Tenant shall promptly restore the premises to its original order and condition including reinstalling the original light fixtures which Teriant must store at a place of its choosing at Tenant's expense. Any such trade fixture not removed at or prior to such termination shall be and become the property of Landlord. Air conditioning equipment, whether or not installed by Tenant, shall not be removable at the expiration or earlier termination of this lease or at the expiration or any renewal or extension thereof, and shall become the property of Landlord. SECTION 14.02. Failure to Remove. Should, at the expiration or earlier termination of this lease or any renewal or extension thereof, Tenant fail to remove any trade fixtures installed by Tenant, then Landlord may remove such fixtures and recover all costs incidental to such removal from the Tenant as additional rent, and Landlord may dispose of such fixtures in any manner he deems fit without the necessity of accounting to Tenant for the proceeds of same. ARTICLE XV ASSIGNING, MORTGAGING, SUBLETTING SECTION 15.01. Landlord's Consent. Tenant agrees not to assign, mortgage, pledge or encumber this lease, in whole or in part, or sublet the whole or any part of the demised premises to any licensee or concessionaire, without first obtaining the written consent of Landlord said consent not to be unreasonably withheld. Tenant agrees that, in the event of any such assignment, subletting, licensing or granting of a concession, made with the written consent of the Landlord as aforesaid, it will nevertheless, remain liable for the performance of all the terms, conditions and covenants of this lease, and in no event shall Tenant be entitled to receive any excess rents over the sums payable by Tenant to Landlord hereunder. The sale of the stock of the tenant shall not be considered an assignment for the purposes of this paragraph and Tenant shall not be obligated to obtain the consent of the Landlord for said sale. SECTION 15.02. Costs of Assignment or Subletting; Agency. In addition to all other obligations imposed upon Tenant hereunder, Tenant shall reimburse Landlord, upon 15 demand, for all costs incurred by Landlord in connection with any assignment or subletting of the demised premises, including without limitation the cost of making inquiries and investigations as to the acceptability of the proposed assignee or subtenant and the legal costs incurred, if any, in connection therewith. ARTICLE XVI SUBORDINATION SECTION 16.01. Mortgages, Etc. At the option of Landlord or Landlord's permanent lender, or both of them, this lease and the Tenant's interest hereunder shall be subject and subordinate at all times to any mortgage or mortgages, deed or deeds of trust, or such other security instrument or instruments, including all renewals, extensions, consolidations, assignments and refinances of the same, as well as all advances made upon the security thereof, which now or hereafter become liens upon the Landlord's fee and/or leasehold interest in the demised premises, and/or any and all of the buildings now or hereafter erected or to be erected at the Complex, and/or any and all of the land comprising the Complex; provided, however, that in each such case, the holder of such other security or the trustee of such deed of trust or holder of such other security instrument shall agree that this lease shall not be divested or in any way affected by foreclosure or other default proceedings under said mortgage, deed of trust, or other instrument or other obligations secured thereby, so long as the Tenant shall not be in default under the terms of this lease; and Tenant agrees that this lease shall remain in full force and effect notwithstanding any such default proceedings. SECTION 16.02. Utility Easements, Etc. At the option of Landlord and/or Landlord's permanent lender, this lease and the Tenant's interest hereunder shall be subject and subordinate to any and all utility easements or grants, mutual parking easement agreements or Development and Operating agreements which may now or hereafter affect the Complex or any portion or portions thereof. SECTION 16.03. Execution of Documents. The Tenant agrees to execute such other document or documents as may be required by any mortgagee, trustee under any deed of trust, or holder of a similar security interest, or any party to the types of documents enumerated herein for the purpose of subordinating this lease in accordance with the foregoing. To effectuate the intention of the parties with respect to this section it is agreed and understood that should Tenant fail or otherwise refuse to execute such other document or documents as Landlord may request, and such failure or refusal shall continue for a period of ten (10) days after a formal written request shall have been forwarded to Tenant by Landlord, then and upon such event, Tenant shall be deemed to have appointed Landlord and Landlord shall thereupon be regarded as the irrevocable attorney-in-fact of the Tenant, duly authorized to execute and deliver the required document or documents for and on behalf of Tenant. 16 ARTICLE XVII TENANT'S DEFAULT SECTION 17.01. Insolvency, Etc. This lease and the term and estate hereby granted are subject, inter alia, to the limitation that whenever Tenant or any guarantor of Tenant under this lease shall make an assignment for the benefit of creditors; or shall file a voluntary petition under any bankruptcy or insolvency law; or an involuntary petition alleging an act of bankruptcy or insolvency is filed against Tenant; or whenever a petition shall be filed by or against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or any future state or federal bankruptcy act or any other present or future applicable federal, state or other statute or law; or whenever Tenant shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of Tenant or of all or any substantial part of its properties; or whenever a permanent or temporary receiver of Tenant or of or for the property of Tenant shall be appointed; or whenever Tenant shall plead bankruptcy or insolvency as a defense in any action or proceeding; or an order, judgment or decree shall be entered by any court of competent jurisdiction on the application of a creditor adjudicating the Tenant a bankrupt or insolvent, or approving a petition seeking reorganization of the Tenant, or its guarantor; or appointment of a receiver, trustee or liquidator of the Tenant or its guarantor, or of all or substantially all of either of their respective assets; or any department of the state or the federal government, or any officer thereof, duly authorized, shall take possession of the business or property of the Tenant by reason of insolvency or alleged insolvency of the Tenant; or whenever the Tenant shall permit or otherwise suffer this lease to be taken under any writ of execution; or if this lease shall pass to or devolve upon, by law or otherwise, to one other than Tenant, then and in any one or more of such events, the Landlord (a) at any time after receipt of notice of the occurrence of any such event, or (b) if such event occurs without the acquiescence of Tenant, at any time after the event continues for sixty (60) days, may give Tenant a notice of intention to end the term of this lease at the expiration of five (5) days from the service of such notice of intention, and upon the expiration of said five (5) day period this lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as hereinelsewhere provided. SECTION 17.02. Failure to Pay Rent or Perform Other Obligation. This lease and the term and estate hereby granted are subject to the further limitation that: (i) Whenever Tenant shall default in the payment of any installment of minimum rent, on any day upon which the same shall be due and payable, or (ii) Whenever Tenant shall default in the payment of any installment of percentage rent, real estate taxes, Tenant's proportionate share of common area and other charges, Tenants' Association dues and assessments, promotion and advertising expenses, or any other charge or payment due or payable by Tenant under this lease for any reason whatsoever, on any day upon which the same shall be due and payable, or (iii) Whenever Tenant shall default in the performance of any other obligation, covenant or agreement by it to be performed or observed under this lease, and such default shall continue and shall not be remedied by Tenant within five (5) days after Landlord shall have given to Tenant a notice specifying the same, or, in the case of a happening or default which 17 cannot with due diligence be cured within a period of five (5) days and the continuance of which for the period required for cure will not subject Landlord to the risk of criminal liability or termination of any superior lease or foreclosure of any superior mortgage, if Tenant shall not duly institute within such five (5) day period and promptly and diligently prosecute to completion all steps necessary to remedy the same, or (iv) If Tenant shall fail for any reason to assume occupancy of the demised premises pursuant to the provisions of this lease (provided that all of the conditions therein set forth shall have occurred), or (v) Whenever Tenant shall abandon the demised premises, or a substantial portion of the demised premises shall remain vacant for a period of thirty (30) consecutive days, unless such vacancy arises as a result of a casualty including, but not limited to, fire explosion or similar events. Then at any time after the occurrence of any one or more of such events and should Tenant fail to cure such event within ten days after receiving written notice from Landlord of said event, Landlord may give to Tenant a notice of intention to end the term of this lease at the expiration of five (5) days from the date of the service of such notice of intention, and upon the expiration of said five (5) days this lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as hereinelsewhere provided. SECTION 17.03. Scope. This Article XVII shall apply to all extensions, expansions, or renewals of the term of this Lease, and in the event that prior to the date fixed for the commencement of any extension or renewal term the Tenant shall be in default of any of the obligations to be observed and performed by it hereunder, the Landlord shall have the right, exercisable upon two (2) days' written notice to Tenant to cancel said extension or renewal term. ARTICLE XVIII REMEDIES OF LANDLORD UPON TENANT'S DEFAULT SECTION 18.01. Right to Relet; Damages for Breach. Should Landlord elect to re-enter the demised premises as provided in this lease, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this lease or it may from time to time without terminating this lease make such alterations and repairs as may be necessary in order to relet the premises and relet said premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this lease) and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable; upon each such reletting all rentals received by the Landlord from such reletting shall be applied, first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees payable by Landlord to its agent under both the existing letting hereunder and the reletting and attorneys' fees and of costs of such alterations and repairs; third, to the payment of rent due and unpaid hereunder and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any 18 month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this lease for such previous breach. SECTION 18.02. Right to Terminate. Tenant further agrees and it is hereby made a condition of this lease, or any extension thereof, that if Tenant shall commit any of the breaches enumerated in Article XVII hereof then Landlord, in the event of any such breach or breaches, will have the option of giving Tenant a notice of intention to end the term of this lease at the expiration of ten (10) days from the service of such notice of intention, and provided said breech or breeches are not cured within ten (10) days from the date of service of said notice this lease and the term and estate hereby granted (whether or not the term shall theretofore have commenced) as well as all of the right, title and interest of the Tenant hereunder, shall wholly cease and expire and become void in the same manner and with the same force and effect (except as to Tenant's liability) as if the date fixed in such notice were the date herein originally specified for the expiration of the term herein demised; and tenant shall then immediately quit and surrender to Landlord the demised premises, including any and all buildings and improvements thereon, and Landlord may enter into and repossess the demised premises by summary proceedings, detainer, ejectment or otherwise and remove all occupants thereof and, at Landlord's option, any property thereon without being liable to indictment, prosecution or damage therefor. SECTION 18.03. Damages Upon Termination or Re-Entry. Should Landlord at any time terminate this lease for any breach hereof or exercise its right of re-entry hereunder, then, in addition to any other remedies it may have, Landlord may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the leased premises, reasonable attorneys' fees and the amount of rent and charges equivalent to rent reserved in this lease for the remainder of the stated term, all of which amounts shall be immediately due and payable from Tenant to Landlord, and Landlord shall thereafter pay to Tenant, at such time or times as Landlord shall be in receipt of the same, the rent for the leased premises for the remainder of the stated term collected from tenants thereafter using the premises, up to the amount of the rent reserved which has theretofore been collected from Tenant, less costs of reletting, including brokerage commissions, attorneys' fees, costs incurred in making repairs, replacements or decorations in the demised premises, advertising expenses and all other costs and expenses incidental or consequent to such reletting. In determining the rent payable by Tenant hereunder subsequent to default, the annual rent for each year of the unexpired term shall be equal to the aggregate of the fixed minimum rent reserved for the balance of the term remaining after default, plus the number of years remaining in the balance of the term multiplied by the annual average of the percentage rent, if any, and all other additional rent theretofore paid or payable by the Tenant for the three (3) lease years last preceding such default or, if three (3) lease years have not elapsed, the annual average of the percentage rent, if any, and all other additional rent theretofore paid or payable by Tenant. It is hereby further understood that any such reletting may be for a period shorter or longer than the remaining term of this 19 lease, but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, nor shall Tenant be entitled to credit in respect of any net rents from such a reletting (except to the extent that such net rents are actually received by Landlord). Landlord shall in no event be responsible or liable for any failure to relet the demised premises or any part thereof, nor for failure to collect the rental therefor under such reletting. SECTION 18.04. Waiver of Jury Trial. The Tenant does waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Landlord and Tenant, Tenant's use and occupancy of the leased premised and/or any claim of injury or damage. SECTION 18.05. Recovery of Legal Expenses. If either party brings a legal action against the other as a result of an infraction of the terms of this lease, the party that is found not to be in violation of the terms of this lease shall be entitled to recover its reasonable legal fees from the violating party. SECTION 18.06. Acceleration of Rent. In the event of any default hereunder, Tenant agrees that thereupon and in such event the whole rent reserved for the balance of the term and all other sums payable hereunder as rent for the balance of the term or any part thereof shall immediately become due and payable as if by the terms of this lease it were payable in advance, and Landlord may immediately proceed to distrain, collect, confess judgment or bring action for the said whole rent or such part thereof as aforesaid, as rent being in arrears, or may enter judgment therefor in an amicable action as hereinelsewhere provided for in case of rent in arrears, or may file a proof of claim in any bankruptcy or insolvency proceedings for such rent, or Landlord may institute any other proceedings, whether similar to the foregoing or not, to enforce payment thereof. For the purposes of this lease, the rent reserved for the balance of the term as used herein shall be deemed to be aggregate of the fixed minimum rent reserved for the balance of the term remaining after such default or breach by the Tenant, plus the number of years remaining in the balance of the term multiplied by the annual average of the percentage rent, if any, and all other additional rent theretofore paid or payable by the Tenant for the three (3) years last preceding such breach or default or, if three (3) lease years have not then elapsed, the annual average of the percentage rent, if any, and all other additional rent theretofore paid or payable by the Tenant. SECTION 18.07. Default Prior to Possession. In the event Tenant breaches or threatens to breach this lease prior to possession, in addition to any other rights accruing to Landlord by operation of law or equity, by or under any legal proceedings or by the provisions of this lease, Landlord may cancel this lease by giving Tenant five (5) days written notice of its intent to do so whereupon all security deposits will be retained by Landlord as liquidated damages and Landlord, at its option, may proceed to relet the demised premises with no liability or obligation to Tenant whatsoever. This section shall be self-operative and no further instrument of cancellation shall be required of Tenant and Landlord. 20 SECTION 18.08. All Remedies Cumulative; Injunctive Relief. It is further agreed that in the event of a breach or threatened breach by Tenant of any of the agreements, conditions, covenants or terms hereof, Landlord shall have the right to injunctive relief to restrain the Tenant and the right to invoke any remedy allowed by law or in equity whether or not other remedies, indemnity or reimbursements are, herein provided. It is further agreed that each and every right and remedy of Landlord provided for in this lease shall be cumulative and shall be in addition to every other right or remedy provided for in this lease or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this lease or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this lease or now or hereafter existing at law or in equity or by statute or otherwise. SECTION 18.09. Joint and Several Liability. If two or more individuals, corporations, partnerships, unincorporated associates or other entities (or any combination of two or more thereof) shall execute this lease as Tenant, the liability of each such individual, corporation, partnership, unincorporated association or other entity to pay rent and perform all other obligations hereunder shall be deemed to be joint and several. In like manner, if the Tenant named herein shall be a partnership or other business association the members of which are, by virtue of statute or common law, subject to personal liability, then the liability of each such member shall be joint and several. SECTION 18.10. No Designation of Credits. In the event that Tenant is in arrears in payment of minimum rent, percentage rent and/or additional rent, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items it sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited. ARTICLE XIX WAIVERS AND MODIFICATIONS SECTION 19.01. Failure to Enforce No Waiver. The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the agreements, terms, covenants, conditions or obligations of this lease, or to exercise any right, remedy or election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this lease or of the right to exercise such right, remedy or election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omissions. The manner of enforcement or the failure of Landlord to enforce any of the Rules and Regulations set forth herein, or hereafter adopted, against the Tenant and/or any other tenant in the Complex shall not be deemed a waiver of any such Rules and Regulations. SECTION 19.02. Executory Agreements to be in Writing. No executory agreement hereafter made between Landlord and Tenant shall be effective to change, modify, waive, 21 release, discharge, terminate or effect an abandonment of this lease, in whole or in part, unless such executory agreement is in writing, refers expressly to this lease and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge or termination or effectuation of the abandonment is sought SECTION 19.03. Surrender to be in Writing. No agreement to accept a surrender of all or any part of the demised premises shall be valid unless in writing and signed by Landlord. The delivery of keys to an employee of Landlord shall not operate as a termination of this lease or an acceptance of a surrender of the demised premises. If Tenant shall at any time request Landlord to sublet the demised premises for Tenant's account, Landlord or its agent is authorized to receive said keys for such purposes without releasing Tenant from any of its obligations under this lease, and Tenant hereby releases Landlord from any liability for loss or damage to any of Tenant's property in connection with such subletting. SECTION 19.04. Acceptance of Rents No Waiver of Breach. The receipt or acceptance by Landlord of rents with knowledge of breach by Tenant of any term, agreement, covenant, condition or obligation of this lease shall not be deemed a waiver of such breach. SECTION 19.05. Financing Requirements. If, in connection with obtaining, continuing or renewing financing for which the Complex or any portion or portions thereof, or the fee or the leasehold or any interest therein represents collateral in whole or in part, a banking, insurance or other lender shall request reasonable modifications of this lease as a condition of such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or adversely affect to a material degree the Tenant's leasehold interest hereby created. ARTICLE XX FINANCING AGREEMENT SECTION 20.01. Execution Prohibited. Tenant agrees not to enter into, execute or deliver any financing agreement that can be considered as a priority to any mortgage, deed of trust or security interest in the tenant's chattels located in and/or pertaining to the demised premises and, in the event Tenant does so execute or deliver such financing agreement, such action on the part of Tenant shall be considered a breach of the terms and conditions of this lease entitling Landlord to such remedies as are provided for herein, including, but not limited to, termination of this lease. ARTICLE CUSTOM AND USAGE SECTION 21.01. Not Created by Failure to Enforce. It is hereby covenanted and agreed, any law, usage or custom to the contrary notwithstanding, that Landlord shall have the right at all times to enforce the covenants and conditions of this lease in strict accordance with the terms hereof, notwithstanding any conduct or custom on the part of the Landlord in refraining from so doing at any time or times; and further, that the failure of Landlord at any 22 time or times to enforce its right under said covenants and provisions strictly in accordance with the same shall not be construed as having created a custom in any way or manner contrary to the specific terms, provisions and covenants of this lease or as having in any way or manner modified or waived the same. ARTICLE XXII SURRENDER AND HOLDOVER SECTION 22.01. Damages Upon Failure to Surrender. Tenant, upon expiration or earlier termination of this lease, or any renewal or extension hereof, either by lapse of time or otherwise, agrees peaceably to surrender to Landlord the premises in broom-clean condition and in good repair as required by Articles VII and IX hereof. In the event that Tenant shall fail to surrender the premises Landlord, in addition to all other remedies available to it hereunder, shall have the right to receive, as liquidated damages for all the time Tenant shall so retain possession of the premises or any part thereof, an amount equal to one and one half the minimum rent, if applicable, specified in Articles III and IV of this Lease, as applied to such period. Provided, however, that nothing contained in this section shall be deemed or construed as conferring upon Tenant a right to remain in possession of the demised premises beyodd the expiration or termination of this lease or any extension or renewal hereof. SECTION 22.02. Consensual Holdover. In the event Tenant shall remain in possession of the demised premises with Landlord's consent but without having executed a new lease or an extension or renewal of the within lease, then Tenant shall be deemed to be in occupancy and possession of the demised premises as a Tenant from month to month, subject to all the other terms, conditions, provisions and obligations of this lease insofar as the same are applicable to a month to month tenancy. In the event that there occurs such consensual holdover as aforesaid, and if either party thereafter desires to terminate said occupancy at the end of any one month period following the expiration date of the term of this lease, the parties so desiring to terminate the same shall give the other party at least thirty (30) days' written notice to that effect. SECTION 22.03. Tenant's Liability for Resulting Damages. If the said Tenant fails to surrender the demised premises upon the termination of this lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall indemnify and hold Landlord harmless from loss or liability resulting from such failure including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded on such failure. ARTICLE XXIII ADDITIONAL CONSTRUCTION SECTION 23.0 1. Rights Reserved to Landlord. Landlord hereby reserves the right at any time and from time to time to make alterations or additions to, and to build additional stories on, the building in which the premises are contained, and to build adjoining the same provided such changes do not intefere with tenant's business. Landlord also reserves the right to construct other or add to other buildings or improvements in the Complex, and to permit others to do so, from time to time. 23 ARTICLE XXIV DAMAGE OR DESTRUCTION OF PREMISES SECTION 24.01. Total or Partial Destruction. If the leased premises shall be damaged by fire or other casualty covered by policies of fire and broad form extended coverage insurance but are not thereby rendered untenantable in whole or in part, Landlord shall at its own expense cause such damage to be repaired, and the rent shall not be abated. If by reason of such occurrence, the premises shall be rendered untenantable in whole or in part and provided the necessary repairs to make the space tenantable can be performed within ninety days of the occurrence of said casulaty, Landlord shall at its own expense cause the damage to be repaired and the fixed minimum rent meanwhile shall be abated proportionately until Landlord has restored the premises as to the portion of the premises rendered untenantable. If the leased premises shall be damaged or destroyed by a fire or casualty not covered by Landlord's policies of fire and broad form extended coverage insurance and the Landlord decides not to repair and restore the premises, Landlord shall have the right, to be exercised by notice in writing delivered to Tenant within ninety (90) days from and after the occurrence of such damage or destruction, to elect to cancel and terminate this lease. Either party shall have the right, to be exercised by notice in writing, delivered to the other within sixty (60) days from and after any occurrence which renders the premises wholly untenantable to cancel this lease, said cancellation to take effect sixty (60) days from and after the receipt of such notice by the other party, and in such event this lease and the tenancy hereby created shall cease as of the aforesaid cancellation date, the rent to be adjusted as of such date; provided. In no event shall Landlord be obligated to expend for any repairs or reconstruction pursuant to this section an amount in excess of the insurance proceeds recovered by it and allocable to the damage to the leased premises after deduction therefrom of any amounts required to be paid to Landlord's mortgagee. (Landlord shall not be liable for delays occasioned by adjustment of losses with insurance carriers or by any other cause so long as Landlord shall proceed in good faith.) SECTION 24.02. Partial Destruction of Complex. In the event that fifty percent (50%) or more of the gross leasable area of the Complex shall be damaged or destroyed by fire or other cause notwithstanding that the leased premises may be unaffected by such fire or other cause, Landlord shall have the right, to be exercised by notice in writing delivered to the Tenant within sixty (60) days from and after said occurrence, to cancel and terminate this lease. Upon the giving of such notice, the term of this lease shall expire by lapse of time upon the ninetieth (90th) day after such notice is given and Tenant shall vacate the leased premises and surrender the same to Landlord. ARTICLE XXV EMINENT DOMAIN SECTION 25.01. Total Condemnation. If the whole of the leased premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then the term of this lease shall cease and terminate as of the date on which possession of the demised premises is required to be surrendered to the condemning authority, and all rentals 24 shall be paid up to that date and Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired term of this lease. SECTION 25.02. Total Parking Area. If the whole of the common parking areas in the Complex shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then the term of this lease shall cease and terminate as of the date on which possession of the parking area is required to be surrendered to the condemning authority, unless Landlord shall prior to such date notify Tenant of its intention to provide other parking facilities of similar size and location to the original parking which shall not violate the requirements of the applicable zoning or similar law (or any permitted variance thereof or exception thereto) regulating the size, layout and location of parking facilities at the Complex, and shall thereafter provide such facilities within six (6) months after such date. In the event that Landlord shall provide such other parking facilities, then this lease shall continue in full force and effect without any reduction or abatement of rent. In any event, Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired term of this lease. SECTION 25.03. Partial Condemnation. If any part of the leased premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, and in the event that such partial taking or condemnation shall render the leased premises unsuitable for the business of the Tenant, then the term of this lease shall cease and terminate as of the date on which possession of the demised premises is required to be surrendered to the condemning authority and Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired term of this lease. In the event of a partial taking or condemnation which is not extensive enough to render the premises unsuitable for the business of Tenant, then Landlord shall promptly restore the leased premises to the extent of condemnation proceeds available for such purpose to a condition comparable to their condition at the time of such condemnation less the portion lost in the taking, and this lease shall continue in full force and effect. In such event, the fixed minimum rent shall abate proportionately, but the percentage rent, if any, shall not abate; however, the "volume allowance" shall abate proportionately to the minimum rent. For purposes of determining the amount of funds available for restoration of the leased premises from the condemnation award said amount will be deemed to be that part of the award which remains after payment of Landlord's reasonable expenses, including Agents commissions, incurred in recovering same and any amounts due to any mortgagee of Landlord, and which represents a portion of the total sum so available (excluding any award or other compensation for land) which is equitably allocable to the leased premises. SECTION 25.04. Partial Condemnation of Parking Area. If any part of the parking area in the Complex shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose and if, as the result of such partial taking, the size, layout or location of the remaining parking facilities will violate the requirements of the applicable zoning or similar law (or any permitted variance thereof or exception thereto) regulating same, then the Landlord shall have the right and power to declare the term of this lease at an end as of the date on which possession of the condemned property is required to be surrendered to the condemning authority, unless the Landlord shall take immediate steps toward eliminating such violation, in 25 which event this lease shall be unaffected and remain in full force and effect as between the parties. In any event, Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired term of this lease. SECTION 25.05. Landlord's Damages. In the event of any condemnation or taking as hereinbefore provided, whether whole or partial, the Tenant shall not be entitled to any part of the award, as damages or otherwise, for such condemnation and the Landlord and any mortgagee of Landlord are to receive the full amount of such award as their respective interests may appear, the Tenant hereby expressly waiving any right or claim to any part thereof and assigning to Landlord any such right or claim to which it might become entitled. SECTION 25.06. Tenant's Damages. Although all damages in the event of any condemnation are to belong to the Landlord and any mortgagee of Landlord as aforesaid, unless such damages are awarded as full compensation for diminution in value of the leasehold or to the fee of the leased premises, Tenant shall have the right to the extent that same shall not diminish the Landlords or such mortgagee's award to claim and recover from the condemning authority, but not from Landlord or such mortgagee, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right for or on account of, and limited solely to, any cost to which Tenant might be put in removing Tenant's merchandise, furniture, fixtures, leasehold improvements and equipment. ARTICLE XXVI NO OFFER OR OPTION SECTION 26.01. No Offer or Option. The submission of this lease for examination by Tenant does not constitute an offer or an option to leased the demised premises, nor is it intended as a reservation of the demised premises for the benefit of Tenant. SECTION 26.02. Execution and Delivery. It is expressly understood and agreed that this "formal written lease agreement" shall not be effective or binding upon the parties until it is fully and properly executed by Tenant and Landlord. ARTICLE XXVII AGENCY SECTION 27.01. No Liability of Agent. It is expressly understood and agreed between the parties hereto that Allan H. Smith, Real Estate Ltd. its salesmen and employees, are acting in the representative capacity of agent only and will in no case whatsoever be held liable in any manner to either party for the performance of any term or covenant of this agreement or for damages for the non-performance thereof 26 ARTICLE XXVIII SUCCESSORS AND ASSIGNS SECTION 28.01. Binding Effect. All rights, obligations and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the several and respective heirs, executors, administrators, successors, sublessees and assigns of said parties, subject to the provisions of Article XVI hereof, and if there shall be more than one Tenant, they shall all be bound jointly and severally by the terms, covenants, and agreements herein and the word "Tenant" shall be deemed and taken to mean each and every person or party mentioned as a Tenant herein, be the same one or more; and if there shall be more than one Tenant, any notice required or permitted by the terms of this lease may be given by or to anyone thereof. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord in writing as aforesaid. ARTICLE XXEX FORCE MAJEURE SECTION 29.01. Delay or Non-Performance Excused. In the event that Landlord shall be delayed, or hindered, or prevented from the performance of any act required hereunder, by reason of governmental restrictions, scarcity of labor or materials, or for other reasons beyond its control, the performance of such act shall be excused for the period of delay, and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay. ARTICLE XXX OFFSET STATEMENT SECTION 30.01. Duty of Tenant to Furnish. Within ten (10) days after request therefor by Landlord, or in the event that upon any sale, assignment or hypothecation of the leased premises and/or the land thereunder and/or any interest therein of Landlord or any person or entity through which Landlord's interest is derived, a statement shall be required from Tenant, Tenant agrees to execute and deliver to any proposed mortgagee or purchaser or Landlord, (provided mortgagee, purchaser or Landlord provides Tenant a non disturbance agreement for the balance of tenant's lease) a certificate in recordable form satisfactory to the requesting party, signed by a duty authorized officer of Tenant, certifying (if such be the case) that this lease is in full force and effect and that there are no defenses or offsets thereto or modifications thereof, or stating those claimed by Tenant, and providing also such additional information concerning the status or conditions of this lease and the rental payments hereunder and agreements regarding notification of lease cancellation or other matters as may reasonably be requested by Landlord or such mortgagee or purchaser. Any failure of Tenant to comply within such ten (10) day period shall be deemed a material breach of this lease, and it is intended that any statement delivered hereunder may be relied upon by any prospective purchaser of the leased premises or interest therein, or any holder or prospective holder of a mortgage of the fee title of the premises or premises of which they are a part or interest therein, or any assignee of any such mortgage or any landlord in any sale-leaseback of the Complex or part thereof or interest therein. 27 SECTION 30.02. Attornment. Tenant shall, if requested at any time, by a first mortgagee of the premises, or by Landlord's landlord or other party through whom Landlord's rights in the premises are derived in the event of the termination of Landlord's estate in the premises, or in the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage made by the Landlord covering the leased premises, attorn to the purchaser upon any such foreclosure or sale or to such other party and recognize such purchase or other party as the Landlord under this lease. ARTICLE XXXI NOTICES SECTION 31.01. Manner and Place of Service. Wherever in this lease it shall be required or permitted that notice or demand be given or served by either party to this lease to or on the other, such notice or demand shall not be deemed to have been duly given or served unless in writing and either personally delivered or forwarded by registered or certified mail, postage prepaid, addressed to: the Landlord, Sycamore Street Associates, c/o Allan H. Smith, Real Estate Ltd. P.O. Box 529 301 South State Street Newtown, Pa. 18940 with a copy to Craig A. Smith, Esq. P.O. Box 39 Newtown, Pennsylvania 18940 and addressed to the Tenant at said Tenant's address set forth on the first page of this lease with a copy to: Daniel J. O'Donnell, Esq., Destribats, Campbell, DeSantis, Magee & O'Donnell 247 White Horse Avenue Trenton, New Jersey 08610 ARTICLE XXXII INTERPRETATION SECTION 32.01. Entire Agreement. This lease, and the exhibits, riders, schedules or addenda, if any, attached hereto, constitute the entire agreement between the parties, and any prior conversations or writings are deemed merged herein and thereby extinguished and of no further force and effect, and there are no covenants, promises, agreements, conditions or understandings either oral or written, between the parties to this lease other than those herein set forth. 28 SECTION 32.02. Amendment. Except as herein may be otherwise provided, no subsequent alteration, amendment, change or addition to this lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by them. SECTION 32.03. Captions. The captions, headings, article and section numbers, and index appearing in this lease have been inserted only for convenience of reference and are not intended in any way to define, limit, construe, or circumscribe the scope or intent of the sections or articles designated thereby nor in any way to affect this lease. SECTION 32.04. Controlling Law. This lease, and the exhibits, riders, schedules or addenda, if any, attached hereto, are to be interpreted and construed according to the laws and statutes of the Commonwealth of Pennsylvania. SECTION 32.05 Venue. The parties agree that for any cause of action brought by virtue of or arising under the terms of this lease, either equitable or at law, venue shall be only in the Court of Common Pleas of Bucks County, Pennsylvania. SECTION 32.06. Negation to Personal Liability. Notwithstanding anything contained herein to the contrary, Tenant agrees that Landlord and its partners shall have no personal liability with respect to any of the provisions of this lease and Tenant shall look solely to the estate and property of Landlord in the land and buildings comprising the Complex of which the demised premises forms a part for the satisfaction of Tenant's remedies, including without limitation, the collection of any judgment or the enforcement of any other judicial process requiring the payment or expenditure of money by Landlord or its partners in the event of any default or breach by Landlord with respect to any of the terms and provisions of this lease to be observed and/or performed by Landlord, subject, however, to the prior rights of any holder of any Mortgage covering all or part of the Complex, and no other assets of Landlord or any principal or partner of Landlord shall be subject to levy, execution or other judicial process for the satisfaction of Tenant's claim and in the event Tenant obtains a judgment against Landlord, and/or its partners the judgment docket shall be so noted. This Section shall inure to the benefit of Landlord's successors and assigns and their respective partners and/or principals. ARTICLE XXXIII BROKERAGE COMMISSIONS SECTION 33.01. Tenant's Warranty. Tenant warrants and represents to Landlord that Tenant has dealt with no brokers in connection with this lease and that the premises being leased hereunder was not called to Tenant's attention by any broker, other than Allan H. Smith Real Estate Ltd.,whose commission will be paid by Landlord. Tenant agrees to be responsible for and to indemnify and save Landlord harmless from and against any claim for a commission or other compensation by any broker claiming to have negotiated with tenant with respect to the premises leased hereunder or to have called the said premises to Tenants attention. IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have hereunto set their hands and seals the day and year first above written. 29 (TENANT) YARDVILLE NATIONAL BANK By:_____________________________ Patrick M. Ryan, Pre/CEO Attest: (CORPORATE SEAL (if applicable)] SYCAMORE STREET ASSOCIATES: By:_____________________________ 30 EX-21 15 EXHIBIT 21 Yardville National Bancorp Subsidiaries Exhibit 21 - - -------------------------------------------------------------------------------- 1 Yardville National Bank - - -------------------------------------------------------------------------------- 2 Yardville Capital Trust - - -------------------------------------------------------------------------------- 3 Yardville National Investment Corporation (wholly-owned subsidiary of Bank) - - -------------------------------------------------------------------------------- 4 YNB Real Estate Holding Company (wholly-owned subsidiary of Bank) - - -------------------------------------------------------------------------------- 5 Brendan, Inc. (wholly-owned subsidiary of Bank) - - -------------------------------------------------------------------------------- 6 YNB Financial, Inc. (wholly-owned subsidiary of Bank) - - -------------------------------------------------------------------------------- 7 Nancy-Beth, Inc. (wholly-owned subsidiary of Bank) - - -------------------------------------------------------------------------------- 8 YNB Realty, Inc. (wholly-owned subsidiary of Bank) - - -------------------------------------------------------------------------------- 9 Jim Mary, Inc. (wholly-owned subsidiary of Bank) - - -------------------------------------------------------------------------------- EX-23.1 16 EXHIBIT 23.1 Independent Auditors' Consent The Board of Directors Yardville National Bancorp: We consent to incorporation by reference in the registration statements (No. 33-98076, No. 333-28193 and No. 333-71741) on Form S-8 of Yardville National Bankcorp of our report dated January 22, 1999, relating to the consolidated statements of condition of Yardville National Bancorp and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report is incorporated by reference in the December 31, 1998 annual report on Form 10-K of Yardville National Bancorp. KPMG LLP Princeton, New Jersey March 29, 1999 EX-27.1 17 FINANCIAL DATA SCHEDULE
9 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 16,426 733 280 0 185,577 36,111 36,203 491,649 6,768 757,666 519,643 177,888 7,879 11,500 0 0 20,364 20,392 40,756 38,218 12,207 498 50,923 18,572 28,392 22,531 1,975 151 15,337 8,221 8,221 0 0 5,582 1.11 1.10 7.88 2,406 1,193 634 0 5,570 843 66 6,768 6,768 0 0
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