-----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, RQbtFotGgruXA7bn2xyIv5g0fsdq9OoZENX1HgQmUZDR/n4uf858qtzFOC7u4VFb uOpSJS0dV5EB5JSN8mbLlA== 0000950116-03-002158.txt : 20030331 0000950116-03-002158.hdr.sgml : 20030331 20030331114123 ACCESSION NUMBER: 0000950116-03-002158 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 25 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YARDVILLE NATIONAL BANCORP CENTRAL INDEX KEY: 0000787849 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222670267 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26086 FILM NUMBER: 03628052 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 tenk.txt TENK-TXT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002. OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________. Commission File No.: 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 Identification No.) Incorporation or organization) 2465 Kuser Road, Hamilton, New Jersey 08690 - ------------------------------------------------------------ --------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (609) 585-5100 ------------------ 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 - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The aggregate market value of voting Common Stock held by non-affiliates (computed by using the closing sales price on the last business day of the registrant's most recently completed second fiscal quarter (June 28, 2002)) was $102,354,911. An aggregate of 10,398,705 shares of Common Shares were outstanding as of March 28, 2003. Documents Incorporated By Reference Portions of the definitive proxy statement for the Annual Meeting of Stockholders of Yardville National Bancorp to be held June 5, 2003 are incorporated by reference into Part III of this Form 10-K. ii FORM 10-K INDEX
EDGAR PAGE PART I Item 1. Business............................................................................................6 Item 2. Properties.........................................................................................17 Item 3 Legal Proceedings..................................................................................17 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............................................................................19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................................49 Item 8. Financial Statements and Supplementary Data........................................................49 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............49 PART III Item 10. Directors and Executive Officers of the Registrant.................................................50 Item 11. Executive Compensation.............................................................................50 Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................50 Item 13. Certain Relationships and Related Transactions.....................................................50 Item 14. Controls and Procedures............................................................................50 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................50 Signatures.........................................................................................51 Certifications.....................................................................................52 Index to Financial Statements.....................................................................F-1 Index to Exhibits.................................................................................E-1
iii Statements contained in this Annual Report on Form 10-K regarding future events or performance are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could be quite different from those expressed or implied by the forward-looking statements. Factors that could affect our results are discussed more fully under the Section entitled, "Risk Factors," in Item 1 and elsewhere in this Annual Report. Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. PART I Item 1. Business General Yardville National Bancorp, referred to as "we" or the "Company," is a registered financial holding company headquartered in Mercer County, New Jersey with total assets of $2.2 billion, total deposits of $1.3 billion and total stockholders' equity of $145.9 million at December 31, 2002. We conduct a general commercial and retail banking business through our principal operating subsidiary, The Yardville National Bank, referred to as the "Bank," which commenced operations as a commercial bank in 1925. We provide a broad range of lending, deposit and other financial products and services with an emphasis on commercial real estate and commercial and industrial lending to small to mid-sized businesses and individuals. Our existing and target markets are located in the corridor between New York City and Philadelphia. We currently operate 19 full-service branches, including 13 branches in our primary market of Mercer County. As part of our expansion strategy, in the past three years, we have opened three branches in Hunterdon County, New Jersey, one branch in Burlington County, New Jersey and one branch in Middlesex County, New Jersey. In addition, we have received regulatory approval to open our first branch in Somerset County, New Jersey. Due to consolidation among financial institutions, we continue to see opportunities to grow our asset base both in our existing markets and by expanding into contiguous markets in New Jersey and Pennsylvania. We believe these regions have customers with banking needs that can no longer be adequately served by smaller local institutions but who still desire the personalized service that larger institutions typically do not offer. We believe that the key differentiating factors between us and our larger competitors are our philosophy of relationship banking and our in-market expertise, while our ability to enter into larger loan relationships enables us to effectively compete against smaller institutions. Our principal and executive offices are located at 2465 Kuser Road, Hamilton, New Jersey 08690. Our telephone number is (609) 585-5100. Retail Strategy Our goals are to further develop the earnings power and increase the value of our franchise. In order to achieve these goals, we plan to reduce our cost of funds and increase our non-interest income by attracting lower cost transaction and other core deposit accounts. Specifically, we continue to implement our retail strategy by expanding our branch network, enhancing our brand image and upgrading our technology infrastructure. However, we can make no assurances that we will achieve these goals. Subsidiaries The Company directly owns the Bank and four additional subsidiaries, Yardville Capital Trust, Yardville Capital Trust II, Yardville Capital Trust III and Yardville Capital Trust IV. The Company is also the indirect owner, through the Bank, of eight subsidiaries. The assets, liabilities and results of operations of the subsidiaries of the Company and the Bank are consolidated with the Company for financial reporting purposes. Competition The Bank's primary market area in Central New Jersey is highly competitive for financial services and the Bank faces significant competition both in making loans and in attracting deposits. The Bank is subject to 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 which have substantially greater resources, higher lending limits, larger branch systems and which provide a broader array of banking services. Liberalized branching and acquisition laws have lowered barriers to entry into the banking business, increased competition and increased 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 competition from consumer finance companies and mortgage companies, which are subject to fewer regulatory restrictions than 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, insurance companies and investment companies who offer the opportunity to invest in such instruments as short-term money market funds, corporate and government securities funds, mutual funds and annuities. Supervision and Regulation General Bank holding companies and banks are subject to extensive supervision and regulation under both Federal and state laws. The regulation and supervision of the Company and the Bank are designed primarily for the protection of consumers, depositors and the FDIC, and not the Company or its stockholders. Enforcement actions for failure to comply with applicable requirements may include the imposition of a conservator or receiver, cease-and-desist orders, written agreements, the termination of insurance on deposits, the imposition of civil money penalties and removal and prohibition orders. In addition, private parties may assert claims against the Company or the Bank. If any enforcement action is taken by a banking regulator or if the Company or the Bank is subject to private litigation, the value of an equity investment in the Company could be substantially reduced or eliminated. Bank Holding Company Act The Company is registered as a bank holding company and is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956, as amended. 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 or bank holding company, or merges or consolidates with another bank holding company. In addition, bank holding companies are restricted in the types of activities in which they may engage, directly or indirectly through subsidiaries, and prior approval of the FRB may be required before engaging in certain activities. The Company has elected to be a "financial holding company" under the Bank Holding Company Act, and as such may engage generally in activities determined by the FRB to be "financial in nature," including insurance and securities activities. In order to maintain its status as a financial holding company, the Company and the Bank must be well capitalized and well managed, as determined by the FRB and the Office of the Comptroller of the Currency, referred to as the "OCC." In addition, as a condition to engaging in a new financial activity, the Bank must have a satisfactory rating under the Community Reinvestment Act ("CRA"). For bank holding companies that are not financial holding companies, the permissible activities are limited to those previously determined by the FRB to be so "closely related to banking" as to be a "proper incident thereto." The Company is not currently engaged in any activity that would not be permissible if it ceased to be a financial holding company. 2 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. 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 Federal Deposit Insurance Corporation, referred to as 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. In addition to specific regulatory restrictions and requirements imposed by Federal and state banking laws and regulations, the OCC possesses broad power to prohibit institutions regulated by it (such as the Bank) from engaging in any activity that it determines would be an unsafe and unsound banking practice. 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. 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. 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, referred to as "tier 1 capital". The remainder may consist of subordinated debt, nonqualifying preferred stock and a limited amount of the loan loss allowance, referred to as "tier 2 capital." At December 31, 2002, the Company's tier 1 capital and total capital ratios were 11.8 percent and 13.0 percent, respectively. 3 In addition, the Federal Reserve Board has established minimum leverage ratio requirements for bank holding companies. Pursuant to these requirements, bank holding companies that meet certain specified criteria, including having the highest regulatory rating, must maintain a minimum leverage ratio of tier 1 capital to adjusted average assets, referred to as the "leverage ratio," equal to three percent. Other bank holding companies that fail to meet such criteria will generally be required to maintain a leverage ratio of four to five percent. The Company's leverage ratio at December 31, 2002, was 8.2 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 tangible 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." 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, 2002:
Adequately Well Bank ratios at Capitalized Capitalized December 31, 2002 ----------- ----------- ----------------- Total Risk-Based Capital Ratio........ 8.00% 10.00% 12.6% Tier 1 Risk-Based Capital Ratio....... 4.00% 6.00% 11.4% Leverage Ratio........................ 4.00% 5.00% 7.9%
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. 4 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 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. The FDIC sets deposit insurance assessment rates on a semiannual basis, and is required to set assessments to the extent necessary to maintain the ratio of reserves to insured deposits at 1.25%. Factors such as significant bank failures and increases in insured deposits could result in the reserve ratio falling below 1.25% and resultant increases in the assessments set by the FDIC. 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. Limitations on Payment of Dividends Under applicable New Jersey law, the Company is not permitted to pay dividends on its capital stock if, following the payment of the dividend, (1) it would be unable to pay its debts as they become due in the usual course of business or (2) its total assets would be less than its total liabilities. Further, it is the policy of the FRB that bank holding companies should pay dividends only out of current earnings. 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, the 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 for the bank's allowance for loan and lease losses. Furthermore, the Bank, as an FDIC-insured institution, may not pay dividends or make capital distributions that would cause the institution to fail to meet minimum capital requirements. These restrictions would not prevent the Bank from paying dividends from current earnings to the Company at this time. 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. Federal regulators also have authority to prohibit banks and bank holding companies from paying a dividend if they deem such payment to be an unsafe or unsound practice. Recent Banking Legislation In the wake of the tragic events, of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism ("USA PATRIOT") Act of 2001. The USA PATRIOT Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions. Among its provisions, the USA PATRIOT Act requires each financial institution to (1) establish an anti-money laundering program, (2) establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private bank accounts and correspondent accounts maintained for non-United States persons or their representatives, and (3) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA PATRIOT Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to request for information from federal banking agencies within 120 hours. 5 The USA PATRIOT Act also amended the Bank Holding Company Act and the Bank Merger Act to require Federal banking regulators to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing an application under those Acts. 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 potential liabilities under state and Federal environmental laws. Legislation and Regulatory Changes Legislation and regulations may be enacted which increase the cost of doing business, limit or expand permissible activities, or affect 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. Employees At December 31, 2002, the Company employed 316 full-time employees and 28 part-time employees. Statistical Disclosure The Company's statistical disclosure information, required of bank holding companies, is contained in "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," which is set forth in Item 7 of this report. 6 Availability of SEC Reports The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed by the Company with the SEC are available, without charge, via a link to "Investor News" from the Company's Internet web site, "http://www.ynbonline.com" as soon as reasonably practicable after such materials are filed with the SEC. The Company's Internet web site and the information contained in or connected with that web site are not intended to be incorporated by reference into this report. Risk Factors The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contain statements that are forward-looking. These may include statements that relate to, among other things, profitability, liquidity, loan loss reserve adequacy, plans for growth, interest rate sensitivity, market risk, regulatory compliance, and financial and other goals. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. As forward-looking statements, these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements made by, or on behalf of, the Company. Factors that could cause actual results to differ materially from management's current expectations include, among other things: - the results of our efforts to implement our retail strategy; - adverse changes in our loan portfolio and the resulting credit risk-related losses and expenses; - interest rate fluctuations and other economic conditions; - continued levels of our loan quality and origination volume; - our ability to attract core deposits; - continued relationships with major customers; - competition in product offerings and product pricing; - adverse changes in the economy that could increase credit-related losses and expenses; - adverse changes in the market price of our common stock; - compliance with laws, regulatory requirements and Nasdaq standards; - other factors, including those matters discussed in additional detail below; and - other risks and uncertainties detailed from time to time in our filings with the SEC. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. The following is a discussion of certain significant risk factors that could potentially negatively impact our financial condition and results of operations. We may not be able to continue to grow our business, which may adversely impact our results of operations. During the last five years, our total assets have grown substantially from $757.7 million at December 31, 1998 to $2.2 billion at December 31, 2002. Our business strategy calls for continued expansion, but we do not anticipate growth to continue at this rate. Our ability to continue to grow depends, in part, upon our ability to open new branch locations, successfully attract deposits to existing and new branches and identify favorable loan and investment opportunities. In the event that we do not continue to grow, our results of operations could be adversely impacted. 7 We may not be able to manage our growth, which may adversely impact our financial results. As part of our expansion strategy, we plan to open new branches in our existing and target markets. However, we may be unable to identify attractive locations on terms favorable to us or to hire qualified management to operate the new branches, and the organizational and overhead costs may be greater than we anticipated. In addition, we may not be able to obtain the regulatory approvals necessary to open new branches. The new branches may take longer than expected to reach profitability, and we cannot assure you they will become profitable. The additional costs of starting new branches may adversely impact our financial results. Our ability to manage growth successfully will depend on whether we can continue to fund this growth while maintaining cost controls and asset quality, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends. If we are not able to control costs and maintain asset quality, such growth could adversely impact our earnings and financial condition. We may not be able to successfully integrate future acquisitions, which may adversely affect our business. We intend to consider future strategic acquisitions, some of which could be material to us and which may include companies that are substantially equivalent or larger in size compared to us. We continually explore and conduct discussions with third parties regarding possible acquisitions. As of the date of this report, we have not entered into any definitive agreement and we do not have any definitive plans relating to any specific acquisitions. We will have to integrate any acquisitions into our business. The difficulties of combining the operations, technologies and personnel of companies we acquire include coordinating and integrating geographically separated organizations and integrating personnel with diverse business backgrounds. We may not be able to effectively manage or integrate the acquired companies. Further, we may not be successful in implementing appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. Our efforts to integrate these businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions and increased competition. In addition, the process of integrating these businesses could cause an interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers. The diversion of management's attention and any delays or difficulties encountered in connection with the transition and integration of these businesses could negatively impact our business and results of operations if any of the above adverse effects were to occur. Further, the benefits that we anticipate from these acquisitions may not be obtained. Loss of our key personnel or an inability to hire and retain qualified personnel could adversely affect our business. Our future operating results are substantially dependent on the continued service of Patrick M. Ryan, our President and Chief Executive Officer, Jay G. Destribats, our Chairman of the Board, and other key personnel. The loss of the services of Mr. Ryan would have a negative impact on our business because of his lending expertise and years of industry experience. In addition, the loss of the services of Mr. Ryan or Mr. Destribats could have a negative impact on our business because of their business development skills and community involvement. Our success also depends on the experience of our branch managers and our lending officers and on their relationships with the communities they serve. The loss of these or other key persons could negatively impact our banking operations. Although we have employment agreements with Mr. Ryan, Mr. Destribats and our other key personnel, our employees may voluntarily terminate their employment at any time. We cannot assure you that we will be able to retain our key personnel or attract the qualified personnel necessary for the management of our business. 8 Our exposure to credit risk, because we focus on commercial lending, could adversely affect our earnings and financial condition. There are certain risks inherent in making loans. These risks include interest rate changes over the time period in which loans may be repaid, risks resulting from changes in the economy, risks inherent in dealing with borrowers and, in the case of a loan backed by collateral, risks resulting from uncertainties about the future value of the collateral. Commercial loans are generally viewed as having a higher credit risk than residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Commercial and industrial loans and commercial real estate loans, which comprise our commercial loan portfolio, were 79.1% of our total loan portfolio at December 31, 2002. Construction loans, which are included as part of our commercial real estate loans, were 10.1% of our total loan portfolio at December 31, 2002. Construction financing typically involves a higher degree of credit risk than commercial mortgage lending. Risk of loss on a construction loan depends largely on the accuracy of the initial estimate of the property's value at completion of construction compared to the estimated cost (including interest) of construction. If the estimated property value proves to be inaccurate, the loan may be undersecured. Because our loan portfolio contains a significant number of commercial real estate loans and commercial and industrial loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could cause an increase in the provision for loan losses and an increase in loan charge offs, which could adversely impact our results of operations and financial condition. The allowance for loan losses at December 31, 2002, totaled $16.8 million, or 1.41% of total loans, covering 268.1% of total non performing loans. This compares to the allowance for loan losses at December 31, 2001, of $13.5 million, or 1.34% of total loans, covering 264.2% of total non performing loans. The increase in the allowance for loan losses to total loans in 2002 is primarily attributable to growth in the loan portfolio. As our loan portfolio increases, and in particular our commercial real estate loan and commercial and industrial loan portfolios continue to grow, we would expect further increases in our provision for loan losses and corresponding increases in our allowance for loan losses. If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings would decrease. In an attempt to mitigate any loan losses which we may incur, we maintain an allowance for loan losses based on, among other things, national and regional economic conditions and historical loss experience and delinquency trends among loan types. However, we cannot predict loan losses with certainty and we cannot assure you that charge offs in future periods will not exceed the allowance for loan losses. In addition, regulatory agencies, as an integral part of their examination process, review our allowance for loan losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination. Factors that require an increase in our allowance for loan losses could reduce our earnings. Changes in interest rates may adversely affect our earnings and financial condition. Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience "gaps" in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. 9 We use an Investment Growth Strategy to increase net interest income by purchasing securities with borrowed funds. Although this Investment Growth Strategy has minimal credit risk, it does increase our overall interest rate risk. We attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance. Adverse economic and business conditions in our market area may have an adverse effect on our earnings. Substantially all of our business is with customers located within Mercer County and contiguous counties. Generally, we make loans to small to mid-sized businesses most of whose success depends on the regional economy. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. Adverse economic and business conditions in our market area could reduce our growth rate, affect our borrowers ability to repay their loans and, consequently, adversely affect our financial condition and performance. Further, we place substantial reliance on real estate as collateral for our loan portfolio. A sharp downturn in real estate values in our market area could leave many of our loans undersecured. If we are required to liquidate the collateral to satisfy the debt securing a loan during a period of reduced real estate values, our earnings could be adversely affected. Competition from other financial institutions in originating loans and attracting deposits may adversely affect our profitability. We face substantial competition in originating loans. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans. In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns and better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations which would increase our cost of funds. We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition. 10 We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements, which could reduce our ability to effectively compete. The financial services industry is undergoing rapid technological changes with frequent introduction of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot assure you that we will be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete. Our hardware and software systems are vulnerable to damage that could harm our business. We rely upon our existing information systems for operating and monitoring all major aspects of our business, including deposit and loan information, as well as various internal management functions. These systems and our operations are vulnerable to damage or interruption from natural disasters, power loss, network failure, improper operation by our employees, security breaches, computer viruses or intentional attacks by third parties. Any disruption in the operation of our information systems could adversely impact our operations, which may affect our results of operations and financial condition. Government regulation significantly affects our business. The banking industry is extensively regulated. Banking regulations are intended primarily to protect depositors, consumers and the Federal deposit insurance funds, not stockholders. We are subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The Yardville National Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and growth. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. We are subject to various regulatory capital requirements, which involve both quantitative measures of our assets and liabilities and qualitative judgments by regulators regarding risks and other factors. Failure to meet minimum capital requirements or comply with other regulations could result in actions by regulators that could adversely affect our ability to pay dividends or otherwise adversely impact operations. In addition, changes in laws, regulations and regulatory practices affecting the banking industry may limit the manner in which we may conduct our business. Such changes may adversely affect us, including our ability to offer new products and services, obtain financing, attract deposits, make loans and achieve satisfactory spreads and impose additional costs on us. As a public company, we are also subject to the corporate governance standards set forth in the recently enacted Sarbanes-Oxley Act of 2002, as well as any rules or regulations promulgated by the SEC or The Nasdaq Stock Market, Inc. In addition to laws and regulations affecting our banking business, compliance with other laws, regulatory requirements and Nasdaq standards imposes administrative costs and burdens on us. We have not been in full compliance with certain of these laws, regulatory requirements and Nasdaq standards in the past. Upon learning of our non-compliance, we promptly commenced steps to address these issues and expect to complete these steps in the near future. These issues involved SEC registration and information distribution requirements for our employees' savings plan and shareholder dividend reinvestment and stock purchase plan and Nasdaq shareholder approval requirements for certain non-employee director stock options. We believe the stock option issue will not have an impact on the listing of our common stock on Nasdaq. While it is possible that we may have liability based on these legal, regulatory and Nasdaq requirements, we do not believe that any such liabilities or claims, if asserted, would have a material adverse effect on our financial condition or results of operations. If the market price of our common stock declines significantly before we can complete certain of the steps necessary to address these issues, we may have liabilities or claims, if asserted, that could have a material adverse effect on our financial condition and results of operations. 11 Item 2. Properties As of March 31, 2003 the Company and the Bank were conducting their business through 19 banking branches and an operations center. The Bank has received permission from the OCC to open a branch in Somerset County, New Jersey. This branch is expected to open in the second quarter of 2003. The executive offices for the Company and the Bank are located at 2465 Kuser Road, Hamilton, New Jersey (also the location of one of our bank branches). The Bank leases the offices at this location pursuant to a lease that commenced in October 1999, has an initial term of 14 years ending in 2013, and is renewable for two additional five-year periods thereafter. The monthly rental payments under the lease are $54,750 during the first five years of the lease. Thereafter, the monthly rental will be adjusted every five years in accordance with a formula based on the Consumer Price Index, provided that the monthly rental payment for any lease period may not vary by more than 3% from the monthly rental payment in the immediately preceding lease period. The Bank has the option to purchase the property at any time after the fifth year of the lease at a purchase price equal to the fair market value of the property at the time the option is exercised. Of the 19 banking branches, five of the buildings and the land on which they are located are owned and 14 buildings and the land on which they are located are leased. The operations center and the land on which it is located is leased. The branch expected to be opened in the second quarter of 2003 in Somerset County is expected to be a leased facility. Item 3. Legal Proceedings The Company 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 Company's consolidated financial position or results of operations will not be affected materially by the final outcome of any pending legal proceedings. 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, 2002. PART II Item 5. Market For Common Equity and Related Stockholder Matters Market Information The common stock is traded in The Nasdaq Stock Market, Inc.'s National Market under the symbol YANB. The following table shows the high and low closing sales prices of the common stock in the The Nasdaq Stock Market, Inc.'s National Market during 2001 and 2002. Year Ended December 31, 2001: High Low - ----------------------------- ---- --- First Quarter......................... $14.25 $12.06 Second Quarter........................ 14.45 13.56 Third Quarter......................... 14.10 11.00 Fourth Quarter........................ 12.80 10.96 Year Ended December 31, 2002: - ----------------------------- First Quarter......................... $13.45 $12.25 Second Quarter........................ 19.94 12.89 Third Quarter......................... 21.20 16.05 Fourth Quarter........................ 19.05 16.35 12 Holders As of December 31, 2002, the Company had approximately 677 holders of record of the common stock. Dividends In 2001, the Company paid four quarterly cash dividends on the common stock in the aggregate amount of $3.3 million. In 2002, the Company paid four quarterly cash dividends on the common stock in the aggregate amount of $3.5 million. Dividends paid per share in 2002 totaled $0.44. Cash dividends are generally paid quarterly or four times a year. In the first quarter of 2003, the Company paid a cash dividend in the amount of $.115 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, 2002, the net profits of the Bank available for distribution to the Company as dividends without regulatory approval were approximately $14.3 million. The Company expects to pay quarterly cash dividends for the remaining three quarters in 2003 to holders of common stock, subject to the conditions described above. Item 6. Selected 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 the consolidated financial statements and related notes thereto included in this Annual Report. All share and per share data have been restated to reflect the 2.5% stock dividend declared in March 1998.
At or for the year ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF INCOME (in thousands) Interest income $ 120,145 $ 118,948 $ 100,389 $ 69,719 $ 50,923 Interest expense 73,662 82,813 62,654 39,645 28,392 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 46,483 36,135 37,735 30,074 22,531 Provision for loan losses 4,375 3,925 3,700 3,175 1,975 Securities gains (losses), net 3,084 3,182 46 (301) 151 Other non-interest income 5,220 4,855 3,380 3,066 2,851 Non-interest expense 31,044 29,052 22,861 18,457 15,337 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income tax expense $ 19,368 $ 11,195 $ 14,600 $ 11,207 $ 8,221 Income tax expense 5,364 2,642 4,259 3,187 2,639 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 14,004 $ 8,553 $ 10,341 $ 8,020 $ 5,582 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET (in thousands, except per share data) Assets $2,231,458 $1,943,389 $1,619,312 $1,123,598 $ 757,666 Loans 1,195,143 1,007,973 818,289 646,737 491,649 Securities 875,355 812,236 675,638 417,465 221,688 Deposits 1,272,286 1,092,690 950,318 743,807 519,643 Borrowed funds 757,711 707,113 545,223 298,689 177,888 Stockholders' equity 145,939 93,245 78,237 58,825 40,756 Allowance for loan losses 16,821 13,542 10,934 8,965 6,768 - ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE DATA Net income - basic $ 1.72 $ 1.13 $ 1.47 $ 1.33 $ 1.11 Net income - diluted 1.68 1.11 1.47 1.33 1.10 Cash dividends 0.44 0.44 0.40 0.34 0.29 Stockholders' equity (book value) 14.08 11.68 10.64 8.88 8.20 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER DATA Average shares outstanding - basic 8,124 7,601 7,022 6,015 5,017 Average shares outstanding - diluted 8,319 7,678 7,039 6,041 5,059 ====================================================================================================================================
At or for the year ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS Return on average assets 0.67% 0.48% 0.79% 0.83% 0.82% Return on average stockholders' equity 13.45 9.86 15.64 15.34 13.96 Net interest margin (tax equivalent basis) 2.36 2.17 3.07 3.33 3.55 Efficiency ratio 56.66 65.77 55.54 56.20 60.07 Total loans to total assets 53.56 51.87 50.53 57.56 64.89 - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL RATIOS Average stockholders' equity to average assets 4.97% 4.85% 5.05% 5.39% 5.84% Dividend payout ratio 25.32 39.06 27.46 25.40 25.96 Tier I leverage ratio 8.16 6.92 8.13 7.90 7.68 Tier I capital as a percent of risk-weighted assets 11.84 10.03 10.56 10.26 9.91 Total capital as a percent of risk-weighted assets 13.00 11.25 11.65 11.46 11.17 - ------------------------------------------------------------------------------------------------------------------------------------ ASSET QUALITY RATIOS Allowance for loan losses to total loans 1.41% 1.34% 1.34% 1.39% 1.38% Net loan charge offs to average total loans 0.10 0.15 0.24 0.17 0.18 Nonperforming loans to total loans 0.52 0.51 0.86 0.48 0.79 Nonperforming assets to total loans and other real estate owned 0.61 0.74 1.11 0.87 1.78 Nonperforming assets to total assets 0.33 0.38 0.56 0.50 1.17 Allowance for loan losses to nonperforming assets 229.73 181.67 120.50 158.31 76.65 Allowance for loan losses to nonperforming loans 268.11 264.23 155.47 291.26 174.75 ====================================================================================================================================
FORWARD-LOOKING STATEMENTS This Annual Report contains express and implied statements relating to our future financial condition, results of operations, plans, objectives, performance, and business, which are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements that relate to, among other things, profitability, liquidity, loan loss reserve adequacy, plans for growth, interest rate sensitivity, market risk, regulatory compliance, and financial and other goals. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Actual results may differ materially from those expected or implied as a result of certain risks and uncertainties, including, but not limited to, the results of our efforts to implement our retail strategy, adverse changes in our loan portfolio and the resulting credit risk-related losses and expenses, interest rate fluctuations and other economic conditions, continued levels of our loan quality and origination volume, our ability to attract core deposits, continued relationships with major customers, competition in product offerings and product pricing, adverse changes in the economy that could increase credit-related losses and expenses, adverse changes in the market price of our common stock, compliance with laws, regulatory requirements and Nasdaq standards, and other risks and uncertainties detailed from time to time in our filings with the SEC. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation This discussion should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report. Throughout this report the terms "YNB," "company," "we," "us," "our," and "corporation" refer to Yardville National Bancorp, our wholly owned banking subsidiary The Yardville National Bank (the "Bank") and other wholly owned subsidiaries as a consolidated entity. The purpose of this discussion and analysis is to assist in the understanding and the evaluation of the financial condition, changes in financial condition and results of our operations. 2002 OVERVIEW The rebound of our profitability in 2002 was primarily due to the significant increase in our net interest income. The reduction in our cost of liabilities, and continued strong loan and deposit growth in 2002 resulted in a 63.7% increase in net income. Loans and deposits grew 18.6% and 16.4%, respectively, this past year. Our strong philosophy of relationship banking has contributed to the growth in YNB's asset base, which totaled $2.2 billion at December 31, 2002. Our goals are to further develop the earnings power of YNB's branches and increase the value of our franchise. In 2002, we continued our retail expansion, opening three new branches in the demographically strong markets of Hunterdon and Middlesex Counties in New Jersey. We also expect to open our first branch in attractive Somerset County, New Jersey in 2003. To support the strong growth experienced and continued growth plans, we raised additional equity capital in the last quarter of 2002. A common stock offering, completed in December, raised net new capital of $34.3 million and will support our ongoing expansion. SUMMARY OF FINANCIAL RESULTS YNB earned net income of $14.0 million or $1.68 per diluted share for the year ended December 31, 2002, compared to $8.6 million or $1.11 for the year ended December 31, 2001. This represents an increase of 63.7% and 51.4%, respectively, in 2002. We posted net income of $10.3 million or $1.47 per diluted share in 2000. The improvement in net income of $5.4 million in 2002 was driven by an increase of $10.3 million in net interest income. The improvement in net interest income was primarily the result of the reduction in our cost of funds and continued strong commercial loan growth. YNB's cost of liabilities declined $9.1 million in 2002 from 2001. Certificates of deposit (CDs), which represented 54.2% of our total deposit base at December 31, 2001, repriced 224 basis points lower during 2002 reducing the cost of those funds from 5.95% in 2001 to 3.71% in 2002. Total loans outstanding increased 18.6% reaching a record level of $1.2 billion at December 31, 2002. Interest and fees on loans increased $5.0 million from $70.4 million in 2001 to $75.4 million in 2002. Overall loan quality remained strong as nonperforming assets to total assets decreased to 0.33% in 2002. Earnings per share, on a diluted basis, increased for the same reasons previously discussed. Due principally to the higher average shares outstanding related to the full impact of the private equity placement completed in August 2001 the percentage increase in diluted earnings per share in 2002 was less than net income. The key profitability ratios of Return on Average Assets (ROA) and Return on Average Stockholders' Equity (ROE) rebounded in 2002 as well. Our ROA increased to 0.67% from 0.48% in 2001 while ROE increased to 13.45% in 2002 from 9.86% in 2001. We expect that the implementation of our retail strategy, described in this Annual Report, which is designed to further lower our cost of funds and build non-interest income, should begin to move our ROA higher in the future. Conversely, the issuance of 2.3 million common shares from our public common stock offering in late 2002 will have a negative impact on our ROE and earnings per share measurements in 2003. As the new capital is put to work over time, we expect ROE to return to levels experienced previously. Our higher level of net interest income also had a positive impact on YNB's efficiency ratio, which declined to 56.66% in 2002 from 65.77% in 2001. NET INTEREST INCOME Net interest income is the largest and most significant component of our operating income. Net interest income is the difference between income on interest earning assets and expense on interest bearing liabilities. This component represented 93.5% of YNB's revenues in 2002. Net interest income depends upon the relative amount and mix of interest earning assets and interest bearing liabilities, and the interest rate earned or paid on them. Net interest income is also impacted by changes in interest rates and the shape of market yield curves. Our goal is to optimize net interest income performance in varying interest rate environments. The following tables set forth our consolidated average balances of assets and liabilities and the related yields and costs for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. Average yields for each year are derived by dividing income by the average balance of the related assets and average costs are derived by dividing expense by the average balance of the related liabilities. The yields and costs include fees, costs, premiums and discounts, which are considered adjustments to interest rates. AVERAGE BALANCES, YIELDS AND COSTS
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Yield/ Average Yield/ (in thousands) Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EARNING ASSETS: Deposits with other banks $ 2,887 $ 60 2.08% $ 3,816 $ 171 4.48% Federal funds sold 71,415 1,157 1.62 74,624 2,765 3.71 Securities 865,070 43,533 5.03 747,172 45,604 6.10 Loans (1) 1,085,306 75,395 6.95 891,957 70,408 7.89 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest earning assets $2,024,678 $ 120,145 5.93% $1,717,569 $ 118,948 6.93% - ------------------------------------------------------------------------------------------------------------------------------------ NON-INTEREST EARNING ASSETS: Cash and due from banks $ 22,965 $ 21,026 Allowance for loan losses (14,771) (11,583) Premises and equipment, net 11,363 10,081 Other assets 51,198 52,288 - ------------------------------------------------------------------------------------------------------------------------------------ Total non-interest earning assets 70,755 71,812 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $2,095,433 $1,789,381 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST BEARING LIABILITIES: Deposits: Savings, money markets, and interest bearing demand $ 469,985 $ 11,228 2.39% $ 318,595 $ 9,931 3.12% Certificates of deposit of $100,000 or more 148,119 5,184 3.50 129,340 7,581 5.86 Other time deposits 469,858 17,747 3.78 453,747 27,085 5.97 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing deposits 1,087,962 34,159 3.14 901,682 44,597 4.95 Borrowed funds 735,201 36,403 4.95 644,690 35,264 5.47 Trust preferred securities 32,500 3,100 9.54 31,048 2,952 9.51 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing liabilities $1,855,663 $ 73,662 3.97% $1,577,420 $ 82,813 5.25% - ------------------------------------------------------------------------------------------------------------------------------------ NON-INTEREST BEARING LIABILITIES: Demand deposits $ 118,154 $ 104,577 Other liabilities 17,493 20,617 Stockholders' equity 104,123 86,767 - ------------------------------------------------------------------------------------------------------------------------------------ Total non-interest bearing liabilities and stockholders' equity $ 239,770 $ 211,961 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $2,095,433 $1,789,381 - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate spread (2) 1.96% 1.68% - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income and margin (3) $ 46,483 2.30% $ 36,135 2.10% - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income and margin (tax equivalent basis) (4) $ 47,728 2.36% $ 37,197 2.17% ====================================================================================================================================
(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 present pre-tax income and resultant yields on tax exempt investments and loans on a basis comparable to those on taxable investments and loans, a tax equivalent adjustment is made to interest income. The tax equivalent adjustment has been computed using a Federal income tax rate of 34% and has the effect of increasing interest income by $1,245,000, $1,062,000, $921,000, $712,000, and $419,000 for the years ended December 31, 2002, 2001, 2000, 1999, and 1998, respectively. AVERAGE BALANCES, YIELDS AND COSTS (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2000 December 31, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,322 $ 82 6.20% $ 734 $ 45 6.13% $ 3,365 $ 175 5.20% 37,961 2,454 6.46 17,932 904 5.04 6,180 333 5.39 494,439 33,435 6.76 341,135 21,216 6.22 198,890 12,197 6.13 723,570 64,418 8.90 564,552 47,554 8.42 438,050 38,218 8.72 - ------------------------------------------------------------------------------------------------------------------------------------ $1,257,292 $ 100,389 7.98% $ 924,353 $ 69,719 7.54% $ 646,485 $ 50,923 7.88% - ------------------------------------------------------------------------------------------------------------------------------------ $ 18,307 $ 16,208 $ 15,398 (9,798) (7,638) (6,102) 9,303 7,493 5,786 32,944 29,109 22,599 - ------------------------------------------------------------------------------------------------------------------------------------ 50,756 45,172 37,681 - ------------------------------------------------------------------------------------------------------------------------------------ $1,308,048 $ 969,525 $ 684,166 - ------------------------------------------------------------------------------------------------------------------------------------ $ 233,012 $ 7,937 3.41% $ 185,504 $ 4,887 2.63% $ 165,534 $ 5,034 3.04% 106,851 6,918 6.47 51,290 2,643 5.15 25,550 1,386 5.42 408,414 24,772 6.07 320,809 17,528 5.46 211,790 12,152 5.74 - ------------------------------------------------------------------------------------------------------------------------------------ 748,277 39,627 5.30 557,603 25,058 4.49 402,874 18,572 4.61 367,021 21,219 5.78 256,957 13,523 5.26 158,106 8,756 5.54 19,333 1,808 9.35 11,500 1,064 9.25 11,500 1,064 9.25 - ------------------------------------------------------------------------------------------------------------------------------------ $1,134,631 $ 62,654 5.52% $ 826,060 $ 39,645 4.80% $ 572,480 $ 28,392 4.96% - ------------------------------------------------------------------------------------------------------------------------------------ $ 96,024 $ 81,843 $ 66,857 11,284 9,351 4,857 66,109 52,271 39,972 - ------------------------------------------------------------------------------------------------------------------------------------ $ 173,417 $ 143,465 $ 111,686 - ------------------------------------------------------------------------------------------------------------------------------------ $1,308,048 $ 969,525 $ 684,166 - ------------------------------------------------------------------------------------------------------------------------------------ 2.46% 2.74% 2.92% - ------------------------------------------------------------------------------------------------------------------------------------ $ 37,735 3.00% $ 30,074 3.25% $ 22,531 3.49% - ------------------------------------------------------------------------------------------------------------------------------------ $ 38,656 3.07% $ 30,786 3.33% $ 22,950 3.55% ====================================================================================================================================
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.
- ------------------------------------------------------------------------------------------------------------------------------------ RATE/VOLUME ANALYSIS 2002 vs. 2001 2001 vs. 2000 Increase (Decrease) Increase (Decrease) Due to changes in: Due to changes in: - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EARNING ASSETS: Deposits with other banks $ (35) $ (76) $ (111) $ 117 $ (28) $ 89 Federal funds sold (114) (1,494) (1,608) 1,665 (1,354) 311 Securities 6,591 (8,662) (2,071) 15,600 (3,431) 12,169 Loans (1) 14,040 (9,053) 4,987 13,852 (7,862) 5,990 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 20,482 (19,285) 1,197 31,234 (12,675) 18,559 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST BEARING LIABILITIES: Deposits: Savings, money markets, and interest bearing demand 3,986 (2,689) 1,297 2,738 (744) 1,994 Certificates of deposit of $100,000 or more 982 (3,379) (2,397) 1,358 (695) 663 Other time deposits 930 (10,268) (9,338) 2,725 (412) 2,313 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 5,898 (16,336) (10,438) 6,821 (1,851) 4,970 Borrowed funds 4,677 (3,538) 1,139 15,240 (1,195) 14,045 Trust preferred securities 139 9 148 1,113 31 1,144 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 10,714 (19,865) (9,151) 23,174 (3,015) 20,159 - ------------------------------------------------------------------------------------------------------------------------------------ Change in net interest income $ 9,768 $ 580 $ 10,348 $ 8,060 $ (9,660) $ (1,600) ====================================================================================================================================
(1) Loan origination fees are considered adjustments to interest income. Net interest income totaled $46.5 million in 2002, an increase of $10.4 million or 28.6% from net interest income of $36.1 million in 2001. The prior year's decrease was 4.2% from 2000's net interest income of $37.7 million. The principal factor contributing to the increase in net interest income in 2002 was a decrease in interest expense of $9.1 million resulting from a lower cost of 128 basis points on interest bearing liabilities, and to a lesser extent, the change in composition of our deposit base and the increased volumes of loans and securities. In 2002, the interest rate spread increased 28 basis points and the net interest margin on a tax equivalent basis increased 19 basis points to 2.36%. In 2001, the net interest spread declined 78 basis points and the net interest margin declined 90 basis points to 2.17% from 3.07% in 2000. Interest income for the year ended December 31, 2002 increased to $120.1 million, compared to $118.9 million for the year ended December 31, 2001 and $100.4 million for the year ended December 31, 2000. Average interest earning assets increased by $307.1 million or 17.9% to $2.0 billion for 2002 compared to average interest earning assets of $1.7 billion and $1.3 billion in 2001 and 2000, respectively. Due to the aggressive lowering of short-term interest rates in 2001 (Prime rate declined 475 basis points) by the Federal Reserve and the low interest rate environment that continued through 2002, the yield on interest earning assets declined 100 basis points to 5.93% by year-end as compared to 2001. Led by commercial loans, our average loan portfolio grew by 21.7% to $1.1 billion, with loan yields averaging 6.95% in 2002 or 94 basis points lower than 2001. YNB's floating rate commercial loans tied to the prime rate totaled approximately 46% of the entire commercial portfolio at December 31, 2002. The average prime rate decreased from 6.91% in 2001 to 4.68% in 2002 contributing to the decline in our loan portfolio yield. Interest income on loans increased 7.1% due to the growth shown above. Although our average securities portfolio increased $117.9 million in 2002, the decline in yield of 107 basis points caused interest income on securities to decrease $2.1 million. During 2002, we implemented a strategy to reduce the investment portfolio duration to better position our balance sheet for rising interest rates. This action, while improving our longer-term interest rate risk position (for further information see "Market Risk"), negatively impacted net interest income and our net interest margin in 2002. Interest expense was $73.7 million for 2002, a decrease of $9.1 million, or 11.1% from $82.8 million a year ago. Interest expense totaled $62.7 million in 2000. The decrease in interest expense in 2002 resulted primarily from lower rates on all interest bearing deposits, and to a lesser extent, on borrowed funds. Lower interest expense was partially offset by higher average balances on all interest bearing liabilities. In December 2001, we retired $50.0 million in Federal Home Loan Bank (FHLB) advances early. This transaction was designed to reduce longer-term interest rate risk by repositioning a portion of our borrowed funds portfolio, and also resulted in positive improvement to net interest income and the net interest margin in 2002. Interest expense on these funds declined approximately $1.2 million in 2002. Average interest bearing liabilities rose $278.2 million or 17.6% to $1.9 billion for 2002 compared to average interest bearing liabilities of $1.6 billion and $1.1 billion in 2001 and 2000, respectively. The average cost of total interest bearing liabilities decreased 128 basis points to 3.97% in 2002 from 5.25% in 2001 and 5.52% in 2000. Net interest income was $36.1 million in 2001, a decrease of 4.2% from the $37.7 million reported in 2000. The principal factor contributing to the decrease in net interest income in 2001 was an increase in interest expense of $20.2 million resulting from increased borrowed funds and time deposit volumes. In addition, the average rate paid on interest bearing liabilities did not decline in proportion to yields on interest earning assets in the lower interest rate environment of 2001 compared to 2000. This was partially offset by increased volumes of loans and securities and the related interest income. Other factors, such as the Investment Growth Strategy, the level of nonaccrual loans, and the balance of non-interest bearing demand deposits have impacted our net interest income and net interest margin. We manage a portion of our investment portfolio with the primary objective of enhancing return on average stockholders' equity and earnings per share. We refer to this as our Investment Growth Strategy. The income from this strategy has helped to offset the costs from the growth of our infrastructure and enhanced total net interest income. In connection with this strategy, we utilize asset liability simulation models to analyze risk and reward relationships in different interest rate environments, based on the composition of investments in the portfolio and our overall interest rate risk position. While this strategy has minimal credit risk, it does increase our overall interest rate risk. The amount of securities managed in the Investment Growth Strategy totaled $230.1 million at December 31, 2002, or 10.3% of our assets, and we have currently capped the strategy at $380.0 million. The net interest margin was negatively impacted by the Investment Growth Strategy by approximately 30 basis points in 2002, 35 basis points in 2001, and 52 basis points in 2000. Effective credit management has resulted in relatively low levels of nonaccrual loans. Nonaccrual loans totaled $5.1 million in 2002, an increase of $1.5 million from the $3.6 million reported in 2001. Had such nonaccrual loans been paid based upon original contract terms, we would have recognized additional interest income of approximately $240,000 in 2002, $163,000 in 2001, and $640,000 in 2000. Moreover, YNB's net interest margin would have been 0.01% higher in 2002 and 2001, and 0.06% higher in 2000. The targeting of small- to mid-size businesses and individuals who value long-term relationships and personal service has led to success in acquiring core business and personal checking accounts. Average non-interest bearing demand deposits increased 13.0% to $118.2 million in 2002 from $104.6 million in 2001. Throughout the comparative periods, increases in average non-interest bearing demand deposits have made a positive contribution to net interest income and the net interest margin. We are continuing our efforts to improve our net interest margin in 2003. The low interest rate environment and higher than anticipated prepayment speeds on mortgage-backed securities in the last quarter of 2002 negatively impacted the investment portfolio yield by 50 basis points, which accounted for the slight margin compression in the fourth quarter compared to the prior quarters in 2002. We have implemented several strategies during 2002 and into 2003 designed to increase net interest income and our net interest margin. Interest rate floors were instituted on approximately 77% of our floating rate commercial loans in 2002, which should protect net interest income should rates continue to fall. The investment portfolio has been repositioned to generate higher levels of net interest income in what, we believe, will be a gradually increasing interest rate environment in the second half of 2003. The greatest opportunity, however, to enhance net interest income will be the successful implementation of our retail strategy. The expansion of our branch network in new and existing markets, the enhancement of our brand image and marketing of our products and services is expected to reduce YNB's cost of funds and raise our net interest margin over time. NON-INTEREST INCOME In 2002, non-interest income primarily consisted of service charges on deposit accounts, net securities gains, earnings on Bank Owned Life Insurance (BOLI) and other service fees. Non-interest income totaled $8.3 million in 2002 compared to $8.0 million the prior year, an increase of $267,000 or 3.3%. The primary reason for the improvement was service charges on deposit accounts, which increased $346,000. Non-interest income in 2001 increased by $4.6 million, or 134.6% from 2000's total of $3.4 million. The increase for that period was due to higher securities gains and an increase in earnings on BOLI. The major components of non-interest income are presented in the following table. Year Ended December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------- Service charges on deposit accounts $ 2,203 $ 1,857 $ 1,551 Securities gains, net 3,084 3,182 46 Earnings on Bank Owned Life Insurance 1,678 1,784 822 Other service fees 1,145 990 822 Investment and insurance fees 35 29 -- Gains on sales of mortgages, net 8 14 10 Other non-interest income 151 181 175 - ---------------------------------------------------------------------- Total $ 8,304 $ 8,037 $ 3,426 ====================================================================== Service charges on deposit accounts represent the largest single source of core non-interest income. Service charges on deposit accounts increased to $2.2 million in 2002 compared to $1.9 million in 2001 and $1.6 million in 2000. The increases were due principally to increased income from overdraft fees and to additional branch locations generating a larger base of transaction accounts and the related fee income. We have continued targeted marketing campaigns on lower cost or interest free demand deposit accounts designed to lower our cost of funds and generate additional service charge or fee income. Net gains on the sale of securities totaled $3.1 million in 2002 compared to net securities gains of $3.2 million and $46,000, respectively, in 2001 and 2000. In 2002, net gains resulted primarily from the sale of fixed rate 30-year mortgage-backed securities, 30-year fixed rate trust preferred securities and other securities with longer duration or extension risk. This strategy restricted the improvement in our net interest margin during 2002 to achieve the asset and liability objective of reducing longer-term interest rate risk in a rising interest rate environment. Earnings on BOLI totaled $1.7 million in 2002, a decrease of $105,000 or 5.9% compared to $1.8 million in 2001. The modest decline in income was primarily due to lower yields on the floating rate portion of BOLI assets we own. Income from BOLI totaled $822,000 in 2000. In December 2002, we purchased an additional $7.5 million of BOLI assets, bringing our total investment in BOLI assets to approximately $40.8 million. The purchase of BOLI assets in 2002 had little impact on our liquidity position. As was the case with all of our BOLI asset purchases, after the initial purchase there are no additional premiums paid on these policies. BOLI assets offset the cost of deferred compensation plans and reduce our overall effective tax rate. We also generate non-interest income from a variety of fee-based services. These include Second Check(R) fees, Automated Teller Machine (ATM) fees on non-customers, cash management and other customer related service fees. Fee schedules are reviewed annually to reflect our current costs and competitive factors. Other service fees increased 15.7% to $1.1 million in 2002 from $990,000 in 2001. Other service fees totaled $822,000 in 2000. Other non-interest income is primarily composed of income derived from mortgage servicing and safe deposit box rentals. Other non-interest income totaled $151,000 in 2002, a decrease of $30,000 or 16.6% when compared to $181,000 in 2001. Other non-interest income totaled $175,000 in 2000. Non-interest income represented only 6.5% of our total revenues in 2002. As part of our longer-term strategic objective of increasing non-interest income, we have introduced several initiatives over the last few years and will continue to do so. Started in 2001, YNB Financial Services, Inc. generated $35,000 in investment and insurance fees in 2002 by offering a comprehensive array of financial planning, investment, and insurance products to individual and business customers through third party providers. In 2002, we introduced enhanced Internet banking services, that include electronic bill payment. Looking forward in 2003, we will be offering enhanced cash management services. We anticipate these services, requested by our customers, will provide additional non-interest income or increased non-interest bearing balances, which would be expected to generate additional net interest income. NON-INTEREST EXPENSE Non-interest expense consists of salaries and employee benefits, occupancy, equipment and all other operating expenses we incur. Non-interest expense totaled $31.0 million in 2002, an increase of $2.0 million or 6.9%, compared to $29.0 million in 2001. Non-interest expense in 2001 increased 27.1% from $22.9 million in 2000. The largest increases in non-interest expense in 2002 compared to 2001 were primarily in salaries and employee benefits and occupancy expense. In 2002, we early adopted Statement of Financial Accounting Standards Board (FASB) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminated the treatment of the early retirement of debt expense as an extraordinary item. Consequently, the early retirement of debt expense of $2.2 million has been reclassified as a non-interest expense for 2001. The increase in non-interest expense was partially offset by the absence of early retirement of debt expense in 2002. The following table presents the major components of non-interest expense for the years indicated. Year ended December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------- Salaries and employee benefits $ 17,890 $ 14,923 $ 11,632 Occupancy expense, net 3,507 2,817 2,404 Equipment expense 2,423 2,021 1,892 Marketing 1,104 957 1,144 Stationery and supplies 823 633 628 Communication and postage 809 694 601 Outside services and processing 595 400 269 Audit and examination fees 570 501 396 Other real estate expenses 418 831 893 Attorneys' fees 258 238 257 Insurance (other) 205 152 156 FDIC insurance premium 200 180 161 Amortization of trust preferred expenses 190 210 176 Early retirement of debt expense -- 2,217 -- Other 2,052 2,278 2,252 - ---------------------------------------------------------------------- Total $ 31,044 $ 29,052 $ 22,861 ====================================================================== Salaries and employee benefits, which represent the largest portion of non-interest expense, increased $3.0 million or 19.9% to $17.9 million for the year ended December 31, 2002 compared to $14.9 million for the same period in 2001. These expenses increased $3.3 million or 28.3% over 2000. The opening of two branches and our northern regional headquarters office during 2002 contributed to the increase in salaries and employee benefits. Also, executive management was strengthened, and experienced retail, lending and administrative personnel were hired as part of our strategic plan. Full time equivalent employees increased to 330 at December 31, 2002 from 293 at December 31, 2001. From these staffing increases and in addition to annual merit increases, salaries rose approximately $2.2 million or 19.8%. Employee benefit expense totaled $4.3 million, an increase of $726,000, or 20.3% from 2001. Increases in benefits costs are primarily related to higher health benefit costs on a broader employee base, various payroll taxes, and our Employee Stock Ownership Plan (ESOP). Salaries and employee benefits were $14.9 million in 2001, an increase of 28.3% from $11.6 million in 2000. The increase was primarily due to the addition of new branch staffing, administrative staff and lending professionals. Rising health benefit expenses, payroll taxes, and costs associated with executive deferred compensation plans also contributed to the increase for the comparable periods. Salaries and employee benefits, as a percent of average assets, were 0.9% in 2002, 0.8% in 2001, and 0.9% in 2000, respectively. Net occupancy expense increased $690,000 or 24.5% to $3.5 million in 2002 from $2.8 million in 2001. Total rent expense on leased properties increased $546,000 and was the primary reason for the increase in occupancy expense in 2002. The increase in rent expense and other facility related expenses was due to several factors. Occupancy expense in 2002 reflected a full year's rent expense for our operations center relocated in the last quarter of 2001 and our Bordentown branch opened in 2001. In addition, we opened two new branches in Hunterdon County, including one in our regional headquarters, and our first branch in Middlesex County in 2002. The increase in occupancy expense in 2001 compared to 2000 was due primarily to higher rent expense from new branches in Flemington, Lawrence and Bordentown and normal rent increases on other leased branch properties, as well as the relocation of our operations center into a new leased facility. Occupancy expense as a percentage of average assets remained constant at 0.2% in 2002, 2001, and 2000. Equipment expense increased $402,000 or 19.9% to $2.4 million in 2002 from $2.0 million in 2001. The increase in equipment expense was primarily due to higher depreciation expense, costs related to equipment maintenance, and the upgrade of technology to increase processing capacity, efficiency and service levels. Expenses associated with our ATM machines also increased 21.7% in 2002. The increase in equipment expenses in 2001 compared to 2000 was due to the same factors. Investment in technology and equipment has allowed us to improve service response time at our branches and further develop business and consumer products and services. Our expense base is reflective of a growing institution. Expenses such as communication and postage, stationery and supplies have grown as the number of facilities, phone lines and new accounts have increased. In 2003, we are projecting additional expenses associated with the continuing implementation of our retail strategy. Marketing expenses increased by $147,000 or 15.4% in 2002 to $1.1 million, compared to $957,000 in 2001. Marketing expenses were $1.1 million in 2000. We continue focused marketing campaigns with the goal of attracting lower cost deposits. We also continued our support of community activities in 2002. Projected marketing expenses for 2003 are expected to increase as we further develop our brand image and market our products and services in both new and existing markets. Other real estate (ORE) expenses decreased $413,000 to $418,000 in 2002 when compared to 2001. More efficient management and the lower level of ORE properties held in 2002 resulted in less expenses. ORE expenses for 2001 decreased $62,000 to $831,000 from $893,000 in 2000. Other expenses include various professional fees, loan-related expenses and other operating expenses. Other expenses totaled $2.1 million in 2002 compared to $2.3 million in 2001 and 2000. The decrease in other expenses was primarily due to cost containment programs initiated during the year. Our ratio of non-interest expense to average assets decreased to 1.5% for 2002 compared to 1.6% in 2001 and 1.7% for 2000. We continuously assess the efficiency of our operations, seeking ways to best serve our customers while reducing operating costs. 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 can indicate that more resources are being utilized to generate the same volume of income while a decrease would indicate a more efficient use of resources. YNB's efficiency ratio decreased in 2002 to 56.66% compared to 65.77% in 2001, and 55.54% in 2000. The efficiency ratio improved in 2002 as our net interest income increased. Excluding net securities gains and the early retirement of debt expense, our efficiency ratio was 60.04%, 65.47% and 55.60% for 2002, 2001, and 2000, respectively. Further improvements to the efficiency ratio depend on increases in net interest income, the level of non-interest income and growth in non-interest expenses. INCOME TAXES The provision for income taxes, which is comprised of Federal and state income taxes, was $5.4 million in 2002 compared to $2.6 million in 2001 and $4.3 million in 2000. For 2001, the income tax expense and effective tax rate reflect the reclassification of early retirement of debt expense. The increase in tax expense in 2002 resulted from higher taxable income and increased New Jersey state taxes, partially offset by higher levels of tax-exempt income. In July 2002, the New Jersey Business Tax Reform Act was passed. This Act created an alternative minimum assessment for companies that operate in New Jersey. The tax was retroactive to January 1, 2002. The alternative minimum tax may be used to offset future tax liabilities, and as such, a deferred tax asset of approximately $400,000 was established for the excess of this tax over the regular New Jersey corporate business tax. The provisions for income taxes for 2002, 2001, and 2000 were at effective tax rates of 27.7%, 23.6%, and 29.2%, respectively. FINANCIAL CONDITION YEARS ENDED DECEMBER 31, 2002 AND 2001 TOTAL ASSETS YNB's assets were $2.2 billion at year-end 2002 versus $1.9 billion the previous year, an increase of $288.1 million, or 14.8%. The growth in our asset base throughout 2002 was primarily due to an increase in loans and securities. Average loans and securities grew 21.7% and 15.8%, respectively, in 2002. YNB's strength as a business-focused, relationship-oriented independent community bank was reflected in our financial results in 2002. Headquartered in Mercer County for 78 years and having established commercial loans as the foundation for our growth, we are now focusing our efforts in expanding our retail network in the demographically attractive markets of Hunterdon, Somerset and Middlesex Counties in New Jersey. We believe that the strength of our markets, relationship banking philosophy and experienced management team, combined with industry consolidation, provide us with continued opportunities to expand market share and attain the goal of enhancing our franchise value. Average interest earning assets in 2002 were $2.0 billion, a 17.9% increase from $1.7 billion in 2001. The growth in average interest earning assets was principally funded by the increase in average interest bearing deposits, and, to a lesser extent, borrowed funds. Further supporting average interest earning asset growth was a 20.0% increase in average stockholders' equity. YNB's ratio of average interest earning assets to average assets increased slightly to 96.6% in 2002, compared to 96.0% in 2001. SECURITIES YNB's securities portfolio totaled $875.4 million or 39.2% of assets at December 31, 2002 versus $812.2 million, or 41.8% of assets at December 31, 2001. This represents a $63.2 million or 7.8% increase from 2001. In addition to providing a reliable income stream, effective investment portfolio management has provided a stable secondary liquidity source, a tool for managing interest rate risk and a method of reducing our overall effective tax rate. We also manage a portion of our investment portfolio, in our Investment Growth Strategy, with the primary goals of enhancing return on average stockholders' equity and earnings per share. On an average basis, the securities portfolio represented 42.7% of average interest earning assets for the year ended December 31, 2002, compared to 43.5% of average interest earning assets for the year ended December 31, 2001. Securities included in the Investment Growth Strategy totaled approximately $230.1 million at December 31, 2002, compared to approximately $372.8 million at December 31, 2001. This represents a decrease of 38.3% in 2002. This strategy is comprised primarily of fixed rate agency mortgage-backed securities. We determined in mid-2002, based on the limited market opportunities in a lower interest rate environment, not to replace cash flows from our Investment Growth Strategy. We believe the Investment Growth Strategy, as a percentage of our total assets, will continue to decline over time as our asset base continues to grow. The available for sale (AFS) securities portfolio increased $74.2 million to $820.7 million at December 31, 2002 from $746.5 million at December 31, 2001. The available for sale portfolio principally consists of U.S. agency mortgage-backed securities and government agency bonds, both callable and non-callable. A continuing lower interest rate environment, in addition to strategies implemented to reduce longer-term interest rate risk exposure in a rising rate environment, resulted in a change in the composition of the AFS portfolio in 2002. During 2002, we sold 30-year fixed rate mortgage-backed and trust preferred securities, and other securities with longer duration or extension risk to reduce the average duration of the securities portfolio and more effectively manage longer-term interest rate risk in a rising rate environment. Shorter-duration securities and floating rate trust preferred securities were purchased with the sale proceeds. The repositioning of the AFS portfolio is expected to provide more consistent cash flows to invest in securities in what we project to be a higher interest rate environment over the next eighteen months. Fixed rate U.S. agency securities and fixed rate U.S. agency Collateralized Mortgage Obligations (CMOs) increased $133.2 million and $88.3 million, respectively in 2002, accounting primarily for the net increase in the AFS portfolio. Shorter duration U.S. agency CMOs and short-term agency callable bonds were purchased to meet the asset and liability objectives of managing longer-term interest rate risk and enhancing liquidity. These securities were also purchased to reduce higher Federal funds sold balances as the average yield for all of 2002 was only 1.62%. Conversely, fixed rate U.S. agency mortgage-backed securities decreased $150.1 million in 2002, indicative of sales activity and higher than projected prepayment speeds. The yield on the available for sale portfolio decreased 118 basis points to 4.50% in 2002. In the fourth quarter alone, our investment portfolio, which is made up of AFS securities representing 94% of the total, dropped in yield by approximately 50 basis points, principally due to higher prepayment speeds which negatively impacted the yield on mortgage-backed securities. We also continue to invest in two money market funds. The average investment in money market funds during 2002 was $36.5 million. The yields on these funds exceeded the yield on Federal funds sold by approximately 10 to 15 basis points in 2002. Activity in the AFS portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more attractive returns. AFS securities are reported at fair value, with unrealized gains and losses, net of tax, included as a separate component of stockholders' equity. Volatility in the bond market continued throughout 2002 with the yield curve fluctuating often. Indicative of this volatility was the change in the market value of the AFS portfolio. To achieve previously stated asset and liability objectives, we took advantage of the volatile yield curve to reposition securities throughout 2002, which resulted in net securities gains of $3.1 million. At December 31, 2002, securities available for sale had net unrealized gains of $11.1 million compared to net unrealized gains of $555,000 at December 31, 2001. The net unrealized gain, net of tax effect, was $7.4 million at December 31, 2002 compared to a net unrealized gain of $361,000 at December 31, 2001, and is reported in "Accumulated other comprehensive income" in stockholders' equity. Trading securities are purchased specifically for short-term appreciation with the intent of selling in the near future. Minimal net gains of $24,000 were realized on trading securities for 2002. There were no trading securities outstanding at December 31, 2002. Investment securities classified as held to maturity totaled $54.7 million at December 31, 2002 compared to $65.8 million at December 31, 2001. Securities in this category, for which there is the intent and the ability to hold to maturity, are carried at amortized historical cost. This portfolio is comprised of state and municipal and agency mortgage-backed securities. The decline in the held to maturity portfolio was due to the call of $13.0 million in callable agency securities. Partially offsetting this decline was net growth of $1.6 million in the municipal bond portfolio. The municipal bond portfolio grew to $50.3 million at December 31, 2002 from $48.7 million at December 31, 2001. Municipal bonds were purchased to reduce our effective tax rate and enhance the tax equivalent yield of the portfolio. Based on our anticipated levels of taxable income, we expect in 2003 to increase the size of our municipal bond portfolio. At December 31, 2002, investment securities had unrealized gains of $2.0 million compared to net unrealized losses of $867,000 at December 31, 2001. The yield on this portfolio increased 6 basis points to 7.01% in 2002 as compared to 6.95% in 2001. The following tables present the amortized cost and market values of YNB's securities portfolios as of December 31, 2002, 2001, and 2000.
- ------------------------------------------------------------------------------------------------------------------------------------ SECURITIES AVAILABLE FOR SALE December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Amortized Market Amortized Market Amortized Market (in thousands) Cost Value Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of other U.S. government agencies $ 245,973 $ 248,901 $ 113,862 $ 113,861 $ 173,608 $ 172,374 Mortgage-backed securities 468,745 478,357 521,988 523,179 338,377 336,798 Corporate obligations 55,087 53,696 72,946 72,311 26,713 27,091 Federal Reserve Bank Stock 2,411 2,411 2,381 2,381 2,036 2,036 Federal Home Loan Bank Stock 37,300 37,300 34,751 34,751 26,639 26,639 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 809,516 $ 820,665 $ 745,928 $ 746,483 $ 567,373 $ 564,938 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT SECURITIES December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Amortized Market Amortized Market Amortized Market (in thousands) Cost Value Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------------------------ Obligations of other U.S. government agencies $ -- $ -- $ 13,000 $ 13,066 $ 68,185 $ 66,439 Obligations of state and political subdivisions 50,308 52,212 48,694 47,729 38,660 38,336 Mortgage-backed securities 4,382 4,498 4,059 4,092 3,855 3,785 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 54,690 $ 56,710 $ 65,753 $ 64,887 $ 110,700 $ 108,560 ====================================================================================================================================
The expected maturities and average weighted yields for YNB's securities portfolios as of December 31, 2002 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 SECURITIES AVAILABLE FOR SALE December 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------------ 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 $ 24,348 $ 193,184 $ 31,369 $ -- $ 248,901 Mortgage-backed securities -- -- 49,573 428,784 478,357 Corporate obligations 1,287 4,861 1,000 46,548 53,696 Federal Reserve Bank Stock -- -- -- 2,411 2,411 Federal Home Loan Bank Stock -- -- -- 37,300 37,300 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 25,635 $ 198,045 $ 81,942 $ 515,043 $ 820,665 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average yield, computed on a tax equivalent basis 3.28% 3.77% 4.82% 4.79% 4.50% ==================================================================================================================================== INVESTMENT SECURITIES December 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------------ After one After five Within but within but within After (in thousands) one year five years ten years ten years Total - ------------------------------------------------------------------------------------------------------------------------------------ Obligations of state and political subdivisions $ 750 $ 3,588 $ 7,366 $ 38,604 $ 50,308 Mortgage-backed securities -- -- 1,174 3,208 4,382 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 750 $ 3,588 $ 8,540 $ 41,812 $ 54,690 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average yield, computed on a tax equivalent basis 6.99% 7.46% 6.77% 7.03% 7.01% ====================================================================================================================================
Expected maturities will differ from stated maturities because issuers may have the right to call their obligations with or without call or prepayment penalties. Mortgage-backed securities experience principal cash flows based on the activity on the underlying mortgages. Investments in mortgage-backed securities involve prepayment and interest rate risk. We attempt to minimize these risks by diversifying the coupons and final maturity dates of the mortgage-backed securities, buying seasoned securities with consistent and predictable prepayment histories, average lives and yields. At December 31, 2002, YNB had mortgage-backed securities totaling $482.7 million, of which $454.3 million were fixed rate. At December 31, 2001, YNB had mortgage-backed securities totaling $527.2 million, of which $507.6 million were fixed rate. Certain of these securities can be purchased at premiums or discounts. The risk of 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. The yield and average lives of these securities will change based on prepayment speeds and how the premium or discount must be amortized or accreted. Significantly lower interest rates and higher than projected prepayment speeds led to lower than projected yields and $264.1 million in principal cash flows from mortgage-backed securities in 2002, compared to $188.3 million in 2001. Included in mortgage-backed securities are U.S. agency CMOs, which totaled approximately $219.5 million at December 31, 2002, compared to $126.2 million at December 31, 2001. A CMO is a mortgage-backed security created by prioritizing the cash flows from the underlying mortgage pool in order to meet different objectives. All CMOs at December 31, 2002 were held in the available for sale portfolio. LOANS We continue to emphasize commercial real estate and commercial and industrial lending to small to mid-sized businesses and individuals. From December 31, 1998 to December 31, 2002, we increased our total loans from $491.6 million to $1.2 billion for a 24.9% compound annual growth rate during that period. We have achieved these results by stressing quality growth, product and industry diversification, while maintaining strong underwriting standards in a competitive environment. Loans historically have been the primary component of our earning assets. By expanding geographically into new markets, we have continued to experience robust credit demand. Our larger capital base has resulted in a higher legal lending limit and attracted larger loan relationships and increased business from existing customers. During 2002, total loans increased $187.2 million or 18.6%, reaching $1.2 billion at December 31, 2002 from $1.0 billion at December 31, 2001. The following table sets forth YNB's loan portfolio composition at the dates indicated.
- ------------------------------------------------------------------------------------------------------------------------------------ LOAN PORTFOLIO COMPOSITION December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Amount % Amount % Amount % Amount % Amount % - ------------------------------------------------------------------------------------------------------------------------------------ Commercial real estate Owner occupied $ 164,450 13.8% $ 143,767 14.3% $ 135,234 16.5% $ 118,068 18.3% $ 85,856 17.5% Investor occupied 321,583 26.9 255,471 25.3 198,184 24.2 173,645 26.8 109,316 22.2 Construction and development 121,295 10.1 99,978 9.9 93,432 11.4 48,535 7.5 36,150 7.4 Residential 1-4 family 116,829 9.8 107,840 10.7 92,876 11.4 74,639 11.5 63,632 12.9 Multi-family 34,012 2.8 33,970 3.4 27,800 3.4 18,678 2.9 14,858 3.0 Commercial and industrial Term 129,513 10.8 117,005 11.6 116,995 14.3 63,066 9.7 49,714 10.1 Lines of Credit 207,562 17.4 164,075 16.3 72,217 8.8 77,152 11.9 62,156 12.6 Demand 972 0.1 1,055 0.1 1,389 0.2 959 0.2 741 0.2 Consumer Home Equity 70,579 5.9 58,084 5.8 50,809 6.2 45,469 7.0 45,396 9.2 Installment 19,078 1.6 19,266 1.9 22,428 2.7 20,375 3.2 18,093 3.7 Other 9,270 0.8 7,462 0.7 6,925 0.9 6,151 1.0 5,737 1.2 - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,195,143 100.0% $1,007,973 100.0% $ 818,289 100.0% $ 646,737 100.0% $ 491,649 100.0% ====================================================================================================================================
Investor occupied and commercial and industrial lines of credit were the two loan types with the highest loan growth, increasing $66.1 million and $43.5 million, respectively. YNB's loan portfolio represented 53.6% of total assets at December 31, 2002 versus 51.9% at year-end 2001. At December 31, 2002, commercial real estate and commercial and industrial loans represented 79.1% of our total loans. In underwriting these loans, we first evaluate the cash flow capability of the borrower to repay the loan as well as the borrower's business experience. In addition, a majority of commercial loans are also secured by real estate and business assets, and supported by the personal guarantees of the principals. We also diligently monitor the composition and quality of the overall commercial loan portfolio including significant credit concentrations by borrower or industry. Commercial real estate loans increased by $108.1 million, or 21.7% in 2002 to $607.3 million from $499.2 million at December 31, 2001. Commercial real estate loans consist of owner occupied, investor occupied, and construction and development loans. Commercial real estate loans generally have a final maturity of five to fifteen years. Construction and development loans include residential and commercial projects. Loans are typically made to experienced residential or commercial construction developers. Residential construction loans include single family, multi-family, and condominium projects. Commercial construction loans include office and professional development, retail development and other commercial related projects. Generally, construction loan terms run between one and two years and are interest only, adjustable rate loans indexed to the prime rate. Our lending policies generally require an 80% or lower loan-to-value ratio for commercial real estate mortgages. Collateral values are established based upon independently prepared appraisals. Growth in commercial real estate loans accounted for 57.8% of the total loan growth in 2002 compared to 38.2% in 2001. Residential loans are comprised of 1-4 family and multi-family loans. This segment of the portfolio totaled $150.8 million at December 31, 2002, up $9.0 million, or 6.4% from the prior year total of $141.8 million. The low interest rate environment stimulated ongoing refinancing activity and growth in this portfolio during 2002. Residential 1-4 family loans represented $116.8 million, or 77.5% of the total. Our residential mortgage loans are secured by first liens on the underlying real property. We are a participating seller/servicer with the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) and we generally underwrite our single-family residential mortgage loans to conform with standards required by these agencies. Multi-family loans, which represented $34.0 million of the total, primarily consist of loans secured by apartment complexes. Commercial and industrial loans include term loans, lines of credit, and demand loans. Commercial and industrial loans increased $55.9 million, or 19.8%, at December 31, 2002 to $338.0 million from $282.1 million at December 31, 2001. Higher balances on business lines of credit from both new and existing relationships primarily accounted for the increase in commercial and industrial loans. These loans accounted for 29.9% of the total loan growth in 2002. Commercial and industrial loans are typically loans made to small- to middle-market businesses and consist of working capital loans, which are used to finance inventory, receivables, and other working capital needs of commercial borrowers. In addition, term loans are provided for equipment needs. As shown in the table below, we have maintained diversification of risk within industry classification concentrations with the goal of limiting the risk of loss from any single unexpected event or trend. COMMERCIAL AND INDUSTRIAL LOANS (dollars in thousands) December 31, 2002 - ------------------------------------------------------------------- Percent Number Industry Classification Balance of balance of loans - ------------------------------------------------------------------- Services $ 88,449 26.2% 259 Retail trade 30,859 9.1 100 Real estate-related 52,250 15.5 176 Manufacturing 18,325 5.4 74 Construction 73,373 21.7 99 Wholesale trade 13,204 3.9 52 Individuals 33,946 10.0 109 Transportation and public utilities 5,801 1.7 33 Other 21,840 6.5 57 - ------------------------------------------------------------------- Total $338,047 100.0% 959 =================================================================== Consumer loans increased 16.6% to $98.9 million at December 31, 2002 compared to $84.8 million at December 31, 2001. Consumer loans include fixed rate home equity loans, floating rate home equity lines, indirect auto loans and other types of installment loans. Home equity loans and lines represented 71.3% of total consumer loans. In 2002, we believe that comparatively lower interest rates and increased marketing accounted for the increased activity in the home equity portfolio. The expansion of our retail network is expected to generate additional opportunities to increase the size of our consumer loan portfolio. Substantially all of our business is with customers located within Mercer County and contiguous counties. Changes in the region's economic environment and real estate market conditions could affect our borrowers' ability to repay their loans, which could result in an adverse impact to our financial condition, performance and loan growth. Competition and future consolidation in our markets could also impact future loan growth. TOTAL LOAN PORTFOLIO - -------------------- (In millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- $492 $647 $818 $1,008 $1,195 We enter 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 reflected in the consolidated financial statements. Credit risk for letters of credit 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, 2002 and 2001 for commitments to extend credit were $243.1 million and $191.8 million, respectively, and for letters of credit were $17.8 million and $13.4 million, respectively. Commitments to extend credit and letters of credit may expire without being drawn upon, and therefore, the total commitment amounts do not necessarily represent future cash flow requirements. The following table provides information concerning the maturity and interest rate sensitivity of YNB's commercial and industrial and commercial real estate - -- construction and development loan portfolios at December 31, 2002.
- ---------------------------------------------------------------------------------------------------- After one After Within but within five (in thousands) one year five years years Total - ---------------------------------------------------------------------------------------------------- Maturities: Commercial and industrial $ 174,932 $ 140,752 $ 22,363 $ 338,047 Commercial real estate - construction and development 75,985 45,093 217 121,295 - ---------------------------------------------------------------------------------------------------- Total $ 250,917 $ 185,845 $ 22,580 $ 459,342 - ---------------------------------------------------------------------------------------------------- Type: Floating rate loans $ 232,744 $ 104,293 $ 9,156 $ 346,193 Fixed rate loans 18,173 81,552 13,424 113,149 - ---------------------------------------------------------------------------------------------------- Total $ 250,917 $ 185,845 $ 22,580 $ 459,342 ====================================================================================================
ASSET QUALITY We have successfully grown our loan portfolio while at the same time maintaining high asset quality standards. Our significant lending experience, collateral based approach to lending, and the effective development and management of our commercial lending relationships have resulted in low levels of nonperforming assets and net charge offs. Nonperforming assets decreased $132,000 to $7.3 million at December 31, 2002 compared to $7.4 million at December 31, 2001. For the five-years ended December 31, 2002, YNB's nonperforming assets have averaged less than $8 million. Credit quality has remained strong during periods of robust loan growth. Nonperforming assets represented 0.33% of total assets at December 31, 2002 and 0.38% at December 31, 2001. The improvement in this ratio was due to both the growth in YNB's asset base and the reduction in nonperforming assets. Nonperforming assets as a percentage of total loans and other real estate were 0.61% at December 31, 2002, compared to 0.74% at December 31, 2001. Indicative of our collateral-based approach to lending, the ratio of net loan charge offs as a percent of average total loans was 0.10% for the year ended December 31, 2002 and, based on year-end ratios, has averaged 0.17% for the five year period ended December 31, 2002. Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are composed of loans on a nonaccrual basis, loans which are contractually past due 90 days or more as to interest or principal payments but have not been classified as nonaccrual and loans whose terms have been restructured to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower. Our policy regarding nonaccrual loans varies by loan type. Generally, commercial loans are placed on nonaccrual when they are 90 days past due, unless these loans are well secured and in the process of collection or, regardless of the past due status of the loan, when management determines that the complete recovery of principal or interest is in doubt. Consumer loans are generally charged off after they become 120 days past due. Residential mortgage loans are not generally placed on nonaccrual 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. If principal and interest payments are brought contractually current, and future collectibility is reasonably assured, loans are returned to accrual status. Restructured loans remain on nonaccrual until collectibility improves and a satisfactory payment history is established, generally six consecutive monthly payments. 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) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial real estate $ 2,395 $ 888 $ 2,075 $ 733 $ 1,035 Residential 1,526 1,133 2,423 740 175 Commercial and industrial 1,143 1,494 851 441 594 Consumer 55 98 453 275 242 - ------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 5,119 3,613 5,802 2,189 2,046 - ------------------------------------------------------------------------------------------------------------------- Restructured loans 711 770 532 540 634 - ------------------------------------------------------------------------------------------------------------------- Loans 90 days or more past due: Residential 323 514 526 206 771 Commercial and industrial -- -- -- 47 -- Consumer 121 228 173 96 422 - ------------------------------------------------------------------------------------------------------------------- Total loans 90 days or more past due 444 742 699 349 1,193 - ------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 6,274 5,125 7,033 3,078 3,873 Other real estate 1,048 2,329 2,041 2,585 4,957 - ------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 7,322 $ 7,454 $ 9,074 $ 5,663 $ 8,830 ===================================================================================================================
Nonperforming loans totaled $6.27 million at December 31, 2002, an increase of $1.14 million from the $5.13 million amount reported at December 31, 2001. The increase in nonperforming loans resulted from an increase in nonaccrual loans. Nonaccrual loans were $5.1 million, or 0.43% of total loans, at December 31, 2002 an increase of $1.5 million from the December 31, 2001 total of $3.6 million. Commercial real estate loans accounted principally for the increase in nonaccrual loans. Commercial loans represent approximately 70% of total nonaccrual loans. There was one restructured commercial loan totaling $711,000 at December 31, 2002 compared to $770,000 at December 31, 2001. Based upon the recent payment history, this loan returned to accruing status in January 2003. At December 31, 2002, loans that were 90 days or more past due but still accruing interest represented $444,000, or 0.04% of total loans, compared to $742,000, or 0.07% of total loans at December 31, 2001. Six residential mortgage loans accounted for 73% of total loans 90 days or more past due. Management's decision to accrue interest on these loans is based on the level of collateral and the status of collection efforts. Other real estate (ORE) totaled $1.0 million at December 31, 2002, down from $2.3 million at December 31, 2001. The decrease in ORE for 2002 was principally due to the sale of one property. ORE is reported at the lower of cost or fair value at the time of acquisition and at the lower of fair value, less estimated costs to sell, or cost thereafter. We believe that our historical low level of nonperforming assets in relation to an increasing loan portfolio is reflective of our credit culture, which includes strict underwriting standards, active loan review, and strong credit policies. Our objective is to maintain a high credit quality loan portfolio regardless of the economic climate. The continuing weakness of the economy, however, could cause nonperforming asset levels to increase from their current or historical levels, which would have a negative impact on our earnings. NONPERFORMING ASSETS AS A PERCENTAGE OF TOTAL ASSETS - ---------------------------------------------------- 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- 1.17% 0.50% 0.56% 0.38% 0.33% ALLOWANCE FOR LOAN LOSSES We have identified the allowance for loan losses to be a critical accounting policy. We utilize a system to rate substantially all of our loans based on their respective risk. Our emphasis on commercial real estate and commercial and industrial loans has provided higher earnings. These loans, however, entail greater risk than residential mortgage and consumer loans. The primary emphasis in our risk rating system is on commercial real estate and commercial and industrial loans. Risk is measured by use of a matrix, which is customized to measure the risk of each loan type. Risk ratings of 1 to 5 are considered to be acceptable risk and consist of loans rated as either "minimal, modest, better than average, average and acceptable." Loans with acceptable risk were reserved at a range of 0.35% to 1.50% at December 31, 2002. Risk ratings of between 6 and 8 are considered higher than acceptable risk and consist of loans rated as "special mention, substandard and doubtful." Due to the higher level of risk, these loans were reserved at a range of 3.75% to 50% at December 31, 2002. Loans with a risk rating of 9 were considered to be a loss and reserved at 100% at December 31, 2002. Residential mortgage and consumer loans are assigned individual reserve percentages of between 0.25% for the lowest risk to 0.75% for higher risk loans. In setting the reserve percentage for each risk rating, we utilize a computer software program to perform migration analysis to determine historical loan loss experience. In addition, we use our judgment concerning the anticipated impact on credit risk of economic conditions, real estate values, interest rates and level of business activity. Allocations to the allowance for loan losses, both specific and general, are determined after this review. We provide for possible loan losses by a charge to current operations to maintain the allowance for loan losses at an adequate level according to our documented allowance adequacy methodology. The provision for loan losses for 2002 was $4.4 million, compared to $3.9 million and $3.7 million for 2001 and 2000, respectively. The increase in the provision for loan losses in 2002 was principally due to three factors. First, we continued to experience strong loan growth, principally commercial, in 2002. Second was the modest increase of $1.1 million in nonperforming loans. A third factor was the weakening of credit quality of certain borrowers as reflected by risk rating downgrades in 2002. We believe that most of these downgrades reflected the impact of a slowing economy on the level of business activity. If these trends continue in 2003, there may be an increase in nonperforming loans. Our gross charge offs in 2002 totaled $1.2 million, compared with $1.7 million in 2001 and $1.9 million in 2000. 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. Our gross recoveries totaled $92,000 in 2002, compared to $382,000 in 2001 and $136,000 in 2000.
- ------------------------------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES At or for the year ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance balance, beginning of year $ 13,542 $ 10,934 $ 8,965 $ 6,768 $ 5,570 Charge offs: Commercial real estate (78) (696) (356) (233) (453) Residential (168) -- (288) -- -- Commercial and industrial (719) (591) (896) (278) (94) Consumer (223) (412) (327) (574) (296) - ------------------------------------------------------------------------------------------------------------------------------------ Total charge offs (1,188) (1,699) (1,867) (1,085) (843) - ------------------------------------------------------------------------------------------------------------------------------------ Recoveries: Commercial real estate 1 -- -- 20 4 Commercial and industrial 11 31 -- -- 3 Consumer 80 351 136 87 59 - ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries 92 382 136 107 66 - ------------------------------------------------------------------------------------------------------------------------------------ Net charge offs (1,096) (1,317) (1,731) (978) (777) Provision charged to operations 4,375 3,925 3,700 3,175 1,975 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance balance, end of year $ 16,821 $ 13,542 $ 10,934 $ 8,965 $ 6,768 - ------------------------------------------------------------------------------------------------------------------------------------ Loans, end of year $1,195,143 $1,007,973 $ 818,289 $ 646,737 $ 491,649 Average loans outstanding $1,085,306 $ 891,957 $ 723,570 $ 564,552 $ 438,050 Allowance for loan losses to total loans 1.41% 1.34% 1.34% 1.39% 1.38% Net charge offs to average loans outstanding 0.10 0.15 0.24 0.17 0.18 Nonperforming loans to total loans 0.52 0.51 0.86 0.48 0.79 Nonperforming assets to total assets 0.33 0.38 0.56 0.50 1.17 Nonperforming assets to total loans and other real estate owned 0.61 0.74 1.11 0.87 1.78 Allowance for loan losses to nonperforming assets 229.73 181.67 120.50 158.31 76.65 Allowance for loan losses to nonperforming loans 268.11% 264.23% 155.47% 291.26% 174.75% ====================================================================================================================================
At December 31, 2002, the allowance for loan losses totaled $16.8 million, an increase of $3.3 million or 24.2% from $13.5 million at December 31, 2001, which compares to $10.9 million at December 31, 2000. The increase of the allowance reflected the extensive analysis previously discussed. It is our assessment, based on our judgment and analysis, that the allowance is appropriate in relation to the credit risk at December 31, 2002. The ratio of the allowance for loan losses to total loans was 1.41%, 1.34%, and 1.34%, at December 31, 2002, 2001, and 2000, 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, 2002 this ratio was 268.11% versus 264.23% at December 31, 2001. Extending credit to businesses and consumers exposes us to credit risk. We manage credit risk in the loan portfolio through adherence to strict underwriting standards, guidelines and limitations. Various approval levels, based on the amount of the loan and other credit considerations, have also been established. We recognize that despite our best efforts to minimize risk, losses will occur. In times of economic slowdown, either within our markets or nationally, the risk inherent in YNB's loan portfolio will increase. The timing and amount of loan losses that may occur is dependent upon several factors, most notably current and expected general, regional and local economic conditions and the specific financial condition of our borrowers. Although we use the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term changes. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The following table describes the allocation for loan losses among various categories of loans and certain other information as of the dates indicated. An unallocated allowance is distributed proportionately among each loan category. This unallocated portion of the loan loss allowance is important to maintain the overall allowance at a level that is adequate to absorb potential credit losses inherent in the total loan portfolio. The allocation is made for analytical purposes only 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, - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ 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 real estate $ 8,189 48.7% 50.8% $ 6,843 50.5% 49.5% $ 6,303 57.6% 52.1% Residential 1,063 6.3 12.6 1,106 8.2 14.1 1,118 10.2 14.8 Commercial and industrial 6,886 40.9 28.3 4,974 36.7 28.0 2,739 25.1 23.3 Consumer 683 4.1 8.3 619 4.6 8.4 774 7.1 9.8 - ------------------------------------------------------------------------------------------------------------------------------------ Total $16,821 100.0% 100.0% $13,542 100.0% 100.0% $10,934 100.0% 100.0% ==================================================================================================================================== December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ 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 real estate $ 5,229 58.3% 52.6% $ 3,594 53.1% 47.1% Residential 840 9.4 14.4 598 8.8 15.9 Commercial and industrial 2,303 25.7 21.8 1,994 29.5 22.9 Consumer 593 6.6 11.2 582 8.6 14.1 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 8,965 100.0% 100.0% $ 6,768 100.0% 100.0% ====================================================================================================================================
DEPOSITS Deposits represent our primary funding source supporting earning asset growth. YNB's deposit base consists of non-interest and interest bearing demand deposits, savings and money market accounts, and time deposits. In 2002, we continued to implement our retail strategy. Our goal is to further develop the earnings power and increase the value of our retail franchise. To achieve these goals, we plan to further reduce our cost of funds and increase our non-interest income by attracting lower cost transaction and other core deposit accounts. In 2002, we continued our geographic expansion into the demographically attractive markets of Hunterdon and Middlesex Counties with a planned entry into Somerset County by mid-2003. Through marketing of our expanded deposit product offerings, we expect to attract core deposits in our primary Mercer County market in addition to targeted markets such as Hunterdon, Somerset and Middlesex Counties. Total deposits grew to $1.3 billion at December 31, 2002 compared to $1.1 billion at year-end 2001, an increase of 16.4%. The successful opening of branches in new markets and increased marketing resulted in growth across all deposit types. The growth in our deposit base in 2002 was primarily in money market deposits, and, to a lesser extent, other time deposits. Average total deposits for 2002 totaled $1.2 billion compared to $1.0 billion for 2001, an increase of 19.9%. The average rate paid on YNB's deposits during 2002 was 2.83%, a 160 basis point decrease from the 4.43% average rate for 2001. As anticipated, our cost of funds dropped dramatically as higher costing time deposits repriced lower in 2002. Due to the lower interest rate environment in 2002 and a strong liquidity position supported by cash flows from the investment portfolio we have aggressively lowered rates on time deposits. Our depositors' preference in 2002 was our competitively priced Premier Money Market account. The result has been a lower cost of funds and change of composition in our deposit base. Time deposits were almost 60% of total deposits at the end of 2000 and have declined to 49.3% of our deposit base at December 31, 2002. Growth in money markets accounted for almost 62% of the total increase in deposits in 2002. Deposit growth experienced in 2001 was also led primarily by money markets. The following table provides information concerning average balances and rates of deposits for the years indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE DEPOSIT BALANCES AND RATES - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ % of % of % of (in thousands) Balance Rate Total Balance Rate Total Balance Rate Total - ------------------------------------------------------------------------------------------------------------------------------------ Non-interest bearing demand deposits $ 118,154 --% 9.8% $ 104,577 --% 10.4% $ 96,024 --% 11.4% Interest bearing demand deposits 113,261 2.38 9.4 88,765 2.70 8.8 67,443 2.60 8.0 Money market deposits 276,506 2.75 22.9 154,901 4.02 15.4 89,232 4.85 10.6 Savings deposits 80,218 1.16 6.7 74,929 1.75 7.4 76,337 2.43 9.0 Certificates of deposit of $100,000 or more 148,119 3.50 12.3 129,340 5.86 12.9 106,581 6.47 12.7 Other time deposits 469,858 3.78 38.9 453,747 5.97 45.1 408,414 6.07 48.3 - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,206,116 2.83% 100.0% $1,006,259 4.43% 100.0% $844,301 4.69% 100.0% ====================================================================================================================================
In addition to marketing CDs through our branch network, we also market them through a computer-based service, which allows us to place our CDs nationally. During 2002, we continued our strategy of reducing these generally higher costing CDs generated through this service. These CDs, which totaled $107.0 million at December 31, 2001, declined to $96.8 million at year-end 2002. The average maturity of these CDs is approximately eleven months. This funding source has represented a dependable source of secondary liquidity during times of increased loan demand. We will continue our efforts to reduce our reliance on this generally higher cost of funds through the successful implementation of our retail strategy. The average balance of non-interest bearing demand deposits was $118.2 million during 2002, an increase of $13.6 million, or 13.0% from $104.6 million during 2001. Non-interest bearing demand deposits represent a stable, interest-free source of funds. The increase in demand deposits is primarily from the growth in new and existing business relationships. The increase in business and personal checking accounts has contributed positively to net interest income. Average interest bearing demand, money market and savings deposits increased 27.6%, 78.5%, and 7.1%, respectively, from 2001 to 2002. Our primary deposit gathering strategy emphasizes growth in non-interest bearing demand deposits and other low cost core deposits, such as interest bearing demand and money market accounts. In 2002, we marketed our core deposit accounts to both business and personal depositors. Money market deposits experienced the highest average growth, increasing by $121.6 million. The average cost of these deposits decreased from 4.02% in 2001 to 2.75% in 2002 due to the lower interest rate environment. Total average time deposits, which consist of certificates of deposit of $100,000 or more and other time deposits, which include individual retirement accounts, increased 6.0% or $34.9 million to $618.0 million from $583.1 million in 2001. The average months to maturity on the entire CD portfolio at December 31, 2002 was approximately twelve months. As we expected, the cost of average time deposits decreased modestly in 2001, due to the repricing characteristics of these deposits. As these time deposits matured in 2002, the cost of these deposits significantly decreased due to the lower interest rate environment and the aggressive lowering of CD or time deposit rates. The average cost of time deposits declined 224 basis points in 2002 to 3.71% from 5.95% in 2001. As we move into 2003, time deposit costs should continue to drop. The following table details amounts and maturities for certificates of deposit of $100,000 or more for the years indicated: December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 - ---------------------------------------------------------------------- Maturity range: Within three months $ 46,683 $ 60,878 After three months but within six months 22,015 28,096 After six months but within twelve months 36,466 44,017 After twelve months 40,027 4,693 - ---------------------------------------------------------------------- Total $ 145,191 $ 137,684 ====================================================================== TOTAL DEPOSITS AT YEAR END - -------------------------- (In millions) 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- $520 $744 $950 $1,093 $1,272 Certificates of deposit of $100,000 or more totaled $145.2 million, or 11.4% of deposits, at December 31, 2002 compared to $137.7 million, or 12.6% of deposits at December 31, 2001. We believe the successful implementation of our retail strategy, which includes the expansion of our branch network, enhancing our brand image, and upgrading our technology infrastructure, will be the critical factors in attracting lower cost deposits and reducing our overall cost of funds. By creating and expanding relationships in our established and new markets, we believe we can expand our net interest margin. Competition in our markets, our ability to fund our loan growth with lower costing core deposits, and the depositors' desire to achieve the highest return possible on their money when interest rates eventually move higher, could affect net interest income levels and our net interest margin. BORROWED FUNDS We utilize borrowed funds for our earning asset growth not supported by deposit generation and for asset and liability, and liquidity management purposes. Borrowed funds consist primarily of FHLB advances and, to a much lesser extent, securities sold under agreements to repurchase. Borrowed funds totaled $757.7 million at December 31, 2002, an increase of $50.6 million or 7.2% when compared to $707.1 million at December 31, 2001. The increase in borrowed funds was due to the addition of FHLB advances. At December 31, 2002, borrowed funds represented 34.0% of our assets compared to 36.4% at year-end 2001. FHLB advances totaled $746.0 million at December 31, 2002 compared to $695.0 million at December 31, 2001. The $51.0 million increase in advances in 2002 was attributable to the purchase of callable advances with extended lockout periods to reduce interest rate risk exposure in a rising rate environment. Our FHLB advance portfolio includes callable advances that have terms of two to ten years and are callable after periods ranging from three months to five years. Callable borrowings totaled $629.0 million at December 31, 2002, of which $487.0 million have call dates in 2003. Generally, when rates rise, some or all of these advances could be called and would then be replaced with higher costing borrowings. Conversely, when interest rates fall, advances will not be called and the duration would extend. Based on an analysis at year-end 2002, an increase of 400 basis points in interest rates in 2003 would not trigger significant calls. Since 1994, we have been a member of the FHLB of New York and have utilized advances for funding earning asset growth, enhancing liquidity, managing interest rate risk and, to a lesser extent, funding for the Investment Growth Strategy. FHLB advances require no deposit insurance premiums and operational overhead costs are considerably less than those associated with deposits. In December 2001, $50.0 million in FHLB advances were retired early, which resulted in a pre-tax loss of $2.2 million. The purpose of this transaction was to strategically reposition a portion of our borrowed funds portfolio to meet asset and liquidity objectives designed to reduce longer-term interest rate risk. Interest expense reduction on these liabilities totaled $1.2 million in 2002. In April 2001, management curtailed the use of 10-year callable advances for purposes of the Investment Growth Strategy. Much of the longer-term interest rate risk in our balance sheet is embedded in the FHLB callable advances. With the decreasing level of the Investment Growth Strategy, FHLB advances are not expected to be used for that purpose in 2003. Borrowed funds also include $400,000 related to our Employee Stock Ownership Plan (ESOP). Initiated in 1999, the ESOP purchased 155,340 shares of YNB's common stock with a loan from a nonaffiliated financial institution. Borrowed funds averaged $735.2 million in 2002, an increase of $90.5 million from the $644.7 million average reported in 2001. The average cost of borrowed funds decreased 52 basis points during the year to 4.95% compared with 5.47% in 2001. The retirement of callable FHLB advances in late 2001 and repositioning into floating rate LIBOR based advances primarily accounted for the decrease in the cost of borrowed funds in 2002. It is our goal in 2003 to reduce our level of FHLB borrowings. There are $56.0 million in advances maturing in 2003. Based on our current liquidity projections our intent is to pay off these advances as they become due. Within approved policy guidelines, we will, however, continue to use borrowed funds as an alternative funding source or to meet desired business, asset and liability, and liquidity objectives. ASSET AND LIABILITY MANAGEMENT The objective of asset and liability management is the prudent control of liquidity risk, market risk and the appropriate use of capital, while maximizing profitability. Our asset/liability and investment committees provide oversight to the interest rate risk management process and recommend policy guidelines regarding exposure to interest rates for approval by the Board of Directors. Adherence to these policies is monitored on an ongoing basis and decisions related to the management of interest rate exposure due to changes in balance sheet composition and/or market interest rates are made when appropriate and agreed to by these committees and approved by the Board of Directors. LIQUIDITY Liquidity represents the ability to maintain adequate cash flows to satisfy all of our present and anticipated financial obligations and commitments. Liquidity management refers to YNB's ability to support asset growth while satisfying the borrowing needs and deposit withdrawal requirements of our customers. In addition to maintaining liquid assets, factors such as our capital position, profitability, asset quality and availability of funding affect our ability to meet liquidity needs. Traditional sources of liquidity include deposit growth, asset maturities and asset prepayments. Our focus on increasing core deposits to strengthen liquidity is ongoing. In addition, we may use borrowed funds to further support and enhance liquidity. Liquidity can also be generated by the acquisition of funds through liability management. As previously discussed, we strategically utilize a nationwide computer-based service to generate CDs to bolster liquidity and fund loan growth as well. Asset prepayments include proceeds from principal on loans and mortgage-backed securities (MBS). While maturities and scheduled amortization of loans and MBS are generally a predictable source of funds, deposit flows and investment prepayments are greatly influenced by interest rates and competition. Brokered CD facilities are also available as another source of liquidity. As part of liquidity management, we also have a contingency funding plan in place. Our contingency funding plan is structured to manage potential liquidity concerns due to changes in interest rates, credit markets or other external risks. Liquidity was again actively managed in 2002, as strong earning asset growth continued. We maintain a portion of our assets in a diversified portfolio of marketable securities, including U.S. Government agency and mortgage-backed instruments, from which funds could be promptly generated. Total unpledged securities were approximately $310.0 million at December 31, 2002 and $246.8 million at December 31, 2001. We have built the unpledged security position by purchasing short-term high quality securities with comparatively modest market value risk. A higher level of Federal funds sold may be experienced from time to time instead of building the unpledged security position. This may be due to projected loan growth or investment opportunities in the marketplace. Liquidity can be further analyzed by utilizing our Consolidated Statements of Cash Flows. During 2002, net cash provided by financing activities was $261.8 million. This was primarily due to net increases in non-interest bearing demand, money market, and savings deposits of $144.7 million and borrowed funds of $50.6 million. Net cash used by investing activities was $250.4 million, consisting primarily of $679.3 million in purchases of securities available for sale and a $188.3 million net increase in loans, partially offset by maturities, calls, paydowns, and proceeds from sales of securities available for sale of $617.0 million. Net cash provided by operating activities was $23.0 million. Overall, cash and cash equivalents increased $34.4 million at year-end 2002 compared to year-end 2001. We are eligible to borrow additional funds from the FHLB subject to its stock level and collateral requirements, and individual advance proposals based on FHLB credit standards. FHLB advances are collateralized by securities as well as residential and commercial mortgage loans. We also have the ability to borrow at the Federal Reserve discount window. We also maintain unsecured Federal funds lines totaling $25 million with four correspondent banks for daily funding needs. Active liquidity management remains a strategic focus, due to the strong asset growth we have experienced over the last several years. We continue to develop additional funding sources to ensure our ability to continue to grow while maintaining sufficient liquidity. Our entry into new markets and branch expansion in our primary market, Mercer County, should help to build our deposit base and further enhance our liquidity profile. MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. Market risk arises principally from interest rate risk inherent in lending, investment, deposit and borrowing activities. We seek to manage our asset and liability portfolios to help reduce any adverse impact on net interest income caused by fluctuating interest rates. Interest rate risk due to a sudden and significant change in interest rates may adversely impact our earnings to the extent that the interest rates of assets and liabilities do not change at the same speed, to the same extent or on the same basis. Accordingly, we actively analyze and manage our interest rate exposures. The primary goal of our interest rate risk management is to control exposure to interest rate risk inherent in the balance sheet, determine the level of risk appropriate given our strategic objectives and manage the risk consistent with the Board of Directors' approved limits and guidelines. These limits and guidelines reflect our tolerance for interest rate risk over both short- and long-term time horizons. Our asset and liability and investment committees meet monthly to discuss pertinent asset and liability issues. On a quarterly basis, management provides a detailed review of our interest rate risk position to the Board of Directors. Our interest rate risk, and the related risk to net interest income, is derived from the difference in the maturity and repricing characteristics between assets and liabilities. In 2002, time deposits, which represented over 50% of YNB's deposit base at December 31, 2001, repriced significantly lower throughout the year based on the aggressive lowering of short-term rates by the Federal Reserve in 2001 and the maturity characteristics of time deposits. The liability sensitive position of the balance sheet in the first half of 2002 resulted in increased net interest income levels. We control interest rate risk by identifying and quantifying interest rate risk exposures using simulation and economic value risk models, as well as a simpler gap analysis described below. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments, but may do so in the future to mitigate interest rate risk. 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. The following table sets forth certain information at December 31, 2002 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.
- ------------------------------------------------------------------------------------------------------------------------------------ RATE SENSITIVE ASSETS AND LIABILITIES December 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------------ Six More than More than More than More than Under 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 $ -- $ -- $ -- $ -- $ -- $ 28,608 $ 28,608 Federal funds sold and interest bearing deposits 74,986 -- -- -- -- -- 74,986 Available for sale securities 254,357 140,575 183,891 131,987 33,409 76,446 820,665 Investment securities 971 997 1,682 4,341 7,361 39,338 54,690 Loans 306,140 124,550 157,339 380,615 161,247 65,252 1,195,143 Other assets, net -- 15,911 -- -- -- 41,455 57,366 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $ 636,454 $ 282,033 $ 342,912 $ 516,943 $ 202,017 $ 251,099 $2,231,458 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest bearing demand $ -- $ -- $ -- $ -- $ -- $ 126,183 $ 126,183 Savings and interest bearing demand 37,001 -- 15,600 152,215 -- -- 204,816 Money markets 190,804 -- -- 123,725 -- -- 314,529 Certificates of deposit of $100,000 or more 68,698 36,466 23,169 16,858 -- -- 145,191 Other time deposits 158,518 104,203 141,478 77,368 -- -- 481,567 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits $ 455,021 $ 140,669 $ 180,247 $ 370,166 $ -- $ 126,183 $1,272,286 Borrowed funds 144,311 -- 400 22,500 590,500 -- 757,711 Trust preferred securities 11,500 -- -- -- -- 21,000 32,500 Other liabilities -- -- -- -- -- 23,022 23,022 Stockholders' equity -- -- -- -- -- 145,939 145,939 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $ 610,832 $ 140,669 $ 180,647 $ 392,666 $ 590,500 $ 316,144 $2,231,458 - ------------------------------------------------------------------------------------------------------------------------------------ Gap 25,622 141,364 162,265 124,277 (388,483) (65,045) Cumulative gap 25,622 166,986 329,251 453,528 65,045 -- Cumulative gap to total assets 1.1% 7.5% 14.8% 20.3% 2.9% -- ====================================================================================================================================
As indicated in the table on the preceding page, our one-year gap position at December 31, 2002 was a positive 7.5%. 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 falling interest rates. Included in the analysis of our gap position are certain savings deposits, money markets 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, we review the recent movement (last 12 months) of deposit rates relative to market rates. Historically, we have used regression analysis to determine deposit sensitivity, but due to the sudden and significant drop in the last two years, recent patterns are considered a more accurate tool. The negative gap in the one-year timeframe turned positive in the third quarter of 2002. The change in our gap position resulted from a combination of a longer liability structure and at the same time a shorter asset structure. Liability durations were primarily driven longer by two-year term CDs resulting from deposit promotions in new markets and the purchase of FHLB advances with five-year lockout periods. On the asset side, the acceleration in actual and expected prepayment speeds in addition to securities sales shortened asset durations. The one-year cumulative gap position policy guideline is measured as a percentage of assets within a +10/-25% range. At December 31, 2002, the gap position was within the policy guideline. While gap analysis represents a useful asset/liability management tool, it may not necessarily indicate the effect of interest rate movements on our net interest income due to discretionary repricing of some assets and liabilities, balance sheet options, and other competitive pressures. Simulation analysis involves dynamically modeling our interest income and expenses over specified time periods under various interest rate scenarios and balance sheet structures. We use simulation analysis primarily to measure the sensitivity of net interest income over 12- and 24-month time horizons, based on assumptions approved by the asset and liability committee and ratified by the Board of Directors. In YNB's base case sensitivity scenario using a static balance sheet, the model measures the variance from a flat or unchanging rate environment in net interest income with a change in interest rates of plus and minus 200 basis points over a 12-month period and a continuation of rates at that level for the second year. We utilized a minus 100 basis point scenario due to the low interest rate environment that existed at year-end. The plus and minus base case scenario is measured within a policy guideline of -7% change in net interest income in year one and -14% change in year two. To measure the change in interest rates, the following table reflects the estimated exposure of YNB's net interest income in the base case scenario measured for a two-year period beginning January 1, 2003, based on the December 31, 2002 balance sheet: Percentage Change in Net Interest Income ------------------- Change in Market Interest Rates 2003 2004 - ----------------------------------------------------------------------------- +200 basis points 5.6 3.4 Flat -- -- - -100 basis points (2.7) (2.3) ============================================================================= The actions we have taken during 2002 have resulted in a more balanced interest rate risk position over the next 12 and 24-month period. From an asset perspective, we have taken actions to protect net interest income in the policy simulation or base case scenario. Interest rate floors have been instituted on the majority of our floating rate commercial loan assets. Should interest rates move lower, income from these earning assets will not decline below the floor. The repositioning of our investment portfolio, previously discussed, will provide additional income in a rising interest rate environment. YNB's net interest income will benefit most from a gradually higher interest rate environment in 2003. Our simulation results indicate that, if interest rates increase 2%, net interest income will improve by approximately 5.6% in 2003. If interest rates decrease 1%, net interest income decreases by approximately 2.7% in 2003. We also measure, through simulation analysis, the impact to net interest income based on projected balance sheet growth scenarios in addition to rate ramps greater than 2% over 12 and 24-month periods. There are several factors that management evaluates when constructing short-term and longer-term interest rate risk models. There is uncertainty regarding the maturity, repricing and runoff characteristics of some of our assets and liabilities. Money market deposits, for example, have no contractual maturity, meaning customers have the ability to add or withdraw funds from these deposit accounts freely. These deposits may fluctuate unexpectedly due to changes in market rates or even competitive factors. Accordingly, rates on money market deposits may have to be increased more or reduced less than expected. Given the uncertainties of deposit composition or repricing characteristics, the interest rate sensitivity of bank deposits cannot be calculated precisely. This uncertainty also reflects options embedded in financial instruments, which include mortgage-backed securities, callable bonds and FHLB advances. To deal with the many uncertainties when constructing either short or longer-term interest rate risk measurements, management has developed a number of assumptions. Depending on the product or behavior in question, each assumption will reflect some combination of market data, research analysis and business judgment. Assumptions are reviewed periodically with changes made when appropriate. We also measure longer-term interest rate risk through the Economic Value of Equity ("EVE") model. This model involves projecting future cash flows from YNB's current assets and liabilities over a longer time horizon, discounting those cash flows at appropriate interest rates, and then aggregating the discounted cash flows. Our EVE is the estimated net present value of these discounted cash flows. The variance in the economic value of equity is measured as a percentage of the present value of equity. The sensitivity of EVE to changes in the level of interest rates is a measure of the sensitivity of long-term earnings to changes in interest rates. We use the sensitivity of EVE principally to measure the exposure of equity to changes in interest rates over a relatively long time horizon. The following table lists YNB's percentage change in EVE in a plus or minus 200 basis point rate shock at December 31, 2002 and 2001. Due to the low interest rate environment in 2002 and 2001, not all interest rates could be shocked 200 basis points. Based on the underlying assumptions used: Percentage Change in EVE Change in Market Interest Rates ----------------- (Rate Shock) 2002 2001 - ------------------------------------------------------------------------- +200 basis points -11 -45 - -100 basis points -18 -1 ========================================================================= Our longer-term interest rate risk profile has improved in 2002 and now reflects a more balanced position in the event of an immediate increase or decrease in interest rates. The addition of new capital in late 2002 had a positive impact to the measurements. Certain shortcomings are inherent in the methodology used in the previously discussed interest rate risk measurements. Modeling changes in the simulation and EVE analysis require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although these models provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of change in market interest rates on YNB's net interest income and will differ from actual results. We believe that more likely scenarios include gradual changes in interest rate levels. We continue to monitor our gap and rate shock analyses to detect changes to our exposure to fluctuating interest rates. We have the ability to shorten or lengthen maturities on assets, sell securities, enter into derivative financial instruments, or seek funding sources with different repricing characteristics in order to change our asset and liability structure for the purpose of mitigating the effect of interest rate risk. STOCKHOLDERS' EQUITY AND CAPITAL RESOURCES The management of capital in a regulated environment requires a balance between earning the highest return for stockholders while maintaining sufficient capital levels for proper risk management, satisfying regulatory requirements, and for future expansion. Our proactive capital management is designed to assure that we are always well capitalized as defined by regulatory authorities and have the necessary capital for our expansion plans. On December 13, 2002, we completed the sale of 2.3 million shares of our common stock in an underwritten common stock offering. The common stock was sold at a price of $16.25 per share and generated gross proceeds of $37.4 million. Net proceeds after underwriting and other offering expenses were $34.3 million, of which $33.0 million was contributed to the Bank to support asset growth. Stockholders' equity at December 31, 2002 totaled $145.9 million compared to $93.2 million at December 31, 2001. This represents an increase of $52.7 million or 56.5%. This increase resulted from earnings of $14.0 million, net proceeds of $34.3 million from the public common stock offering, proceeds of $602,000 from exercised stock options, a positive adjustment to equity of $7.0 million related to the improvement in market value of securities available for sale, proceeds of $400,000 from allocated ESOP shares, and an increase of $110,000 associated with the fair market value adjustment related to the allocation of shares from the ESOP, offset by cash dividend payments of $3.5 million and treasury shares acquired at an aggregate price of $124,000. On August 22, 2001, we completed the private placement of 596,654 shares of common stock. The shares were sold to a limited number of accredited investors at an aggregate purchase price of approximately $7.8 million and net proceeds of $7.4 million. We have an Employee Stock Ownership Plan (ESOP) that permits eligible employees to share in the growth of YNB through stock ownership. Initiated in 1999, we initially sold 155,340 shares to the ESOP for $2 million. 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% with a maturity date of December 31, 2003. 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. The balance of unallocated ESOP shares at December 31, 2002 was $400,000. The annual expenses associated with the ESOP were $483,000 in 2002, $439,000 in 2001 and $376,000 in 2000. These expenses include compensation expense, debt service on the loan and any adjustment required due to changes in the fair value of the shares at time of allocation. The reason for the increase in cost was primarily the result of adjustments related to the change in the fair value of our common stock. We have not complied with certain regulatory requirements and Nasdaq standards. These issues involved Securities and Exchange Commission registration and information distribution requirements for our employees' savings plan and shareholder dividend reinvestment and stock purchase plan and Nasdaq shareholder approval requirements for certain non-employee director stock options. Upon learning of our non-compliance, we promptly commenced steps to address these issues and expect to complete these steps in the near future. For a discussion of these matters, see "Notes to Consolidated Financial Statements - Notes 10 and 11." Dividends declared on common stock totaled $0.44 per share for 2002 and for 2001. The dividend payout ratio was 25.3% for 2002, compared to 39.1% at year-end 2001. The decrease in the dividend payout ratio is a reflection of our net income growth in 2002. YNB's common stock trades on the Nasdaq National Market under the symbol YANB. The quarterly market price ranges and dividends declared per common share for the last two years are shown below. Cash Dividend 2002 Quarter High Low Declared - ------------------------------------------------------- First $ 13.45 $ 12.25 $ 0.11 Second 19.94 12.89 0.11 Third 21.20 16.05 0.11 Fourth 19.05 16.35 0.11 - ------------------------------------------------------- Total $ 0.44 ======================================================= 2001 Quarter - ------------------------------------------------------- First $ 14.25 $ 12.06 $ 0.11 Second 14.45 13.56 0.11 Third 14.10 11.00 0.11 Fourth 12.80 10.96 0.11 - ------------------------------------------------------- Total $ 0.44 ======================================================= We are subject to minimum risk-based and leverage capital guidelines under Federal banking regulations. These banking regulations relate a company's regulatory capital to the risk profile of its total assets and off-balance sheet items, and provide the basis for evaluating capital adequacy. Regulatory capital adequacy is measured using three ratios: Tier I leverage, Tier I risk-based, and total risk-based capital. These guidelines require minimum risk-based capital ratios of 4% and 8% of risk-weighted assets for Tier I and total risk-based capital measurements. Total regulatory capital is comprised of all of the components of Tier I capital plus qualifying subordinated debt instruments and the reserve for loan losses, subject to certain limits. In addition, the current minimum regulatory guideline for the Tier I leverage ratio is 4%. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital level designations ranging from "well capitalized" to "critically undercapitalized." A bank is considered "well capitalized" if it has minimum Tier I and total risk-based capital ratios of 6% and 10%, respectively, and a minimum Tier I leverage ratio of 5%. At December 31, 2002, our capital ratios exceeded the above ratios required by regulatory definition to be considered well capitalized. The table below summarizes YNB's capital ratios for the years indicated: December 31, - ----------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------- Tier I leverage 8.2% 6.9% 8.1% Tier I risk-based 11.8% 10.0% 10.6% Total risk-based 13.0% 11.3% 11.6% ======================================================================= On March 28, 2001, Yardville Capital Trust III ("Trust III"), a statutory business trust and a wholly owned subsidiary of Yardville National Bancorp, issued $6.0 million of 10.18% Trust Preferred Securities in a private placement and $190,000 of 10.18% Common Securities to Yardville National Bancorp. Proceeds from the issuance of the Trust Preferred Securities were immediately used by Trust III to purchase $6.2 million of 10.18% Subordinated Debentures maturing June 8, 2031 from Yardville National Bancorp. Trust III exists for the sole purpose of issuing Trust Preferred Securities and investing the proceeds in Subordinated Debentures of Yardville National Bancorp. These Subordinated Debentures constitute the sole assets of Trust III. These Subordinated Debentures are redeemable in whole or part prior to maturity after June 8, 2011. Trust III 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 obligations of Trust III to pay amounts when due on the Trust Preferred Securities. Of the total proceeds raised by the private trust preferred securities and equity offerings in 2001, approximately $11.5 million was contributed to the Bank to support future asset growth. In 1997, Yardville Capital Trust (the Trust) issued $11.5 million of 9.25% Trust Preferred Securities and $356,000 of 9.25% Common Securities to Yardville National Bancorp. Proceeds were used by the Trust to purchase $11.9 million of 9.25% Subordinated Debentures maturing November 1, 2027. Those debentures became redeemable in whole or in part prior to maturity after November 1, 2002. We intend to redeem these securities on March 31, 2003 with a portion of the proceeds of a new trust preferred offering. (See "Notes to Consolidated Financial Statements - Footnote 8) On February 19, 2003, Yardville Capital Trust IV (Trust IV), a statutory business trust, and a wholly owned subsidiary of Yardville National Bancorp, issued $15.0 million of floating rate Trust Preferred Securities in a private placement transaction and $464,000 of floating rate Common Securities to Yardville National Bancorp. The floating rate is based on three month LIBOR plus 340 basis points. Proceeds from the issuance of the Trust Preferred Securities were immediately used by Trust IV to purchase $15.0 million of floating rate Subordinated Debentures maturing March 1, 2033 from Yardville National Bancorp. Trust IV exists for the sole purpose of issuing Trust Preferred Securities and investing the proceeds in Subordinated Debentures of Yardville National Bancorp. These Subordinated Debentures constitute the sole assets of Trust IV. These Subordinated Debentures are redeemable in whole or part prior to maturity after March 1, 2008. Trust IV 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, provides a full and unconditional guarantee on a subordinated basis by Yardville National Bancorp of the obligations of Trust IV to pay amounts when due on the Trust Preferred Securities. RECENT ACCOUNTING PRONOUNCEMENTS In December, 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The additional disclosure requirements of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The Company has adopted the expanded disclosure provisions of this statement effective December 31, 2002. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN. 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others." The Interpretation requires that the Bank recognize the fair value of guarantee and indemnification arrangements issued or modified by the Bank after December 31, 2002, if these arrangements are within the scope of that Interpretation. In addition, under previously existing generally accepted accounting principles, the Bank continues to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable. Management does not anticipate that the initial adoption of FIN 45 will have a significant impact on the Bank's financial statements. CRITICAL ACCOUNTING POLICIES The disclosures included in this Annual Report are based on our audited consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate the estimates used, including the adequacy of allowances for loan losses. We believe our policies with respect to the determination of the allowance for loan losses involve a high degree of complexity and require us to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Estimates are based upon historical experience, current economic conditions and other factors that we consider reasonable under the circumstances. These estimates result in judgments regarding the carrying values of assets and liabilities where these values are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in the "Notes to Consolidated Financial Statements" under "Summary of Significant Accounting Policies." Unaudited quarterly results are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (UNAUDITED) Three Months Ended - ------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) December 31 September 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------------------- 2002 Interest income $30,520 $30,835 $29,898 $28,892 Interest expense 18,389 18,719 18,310 18,244 - ------------------------------------------------------------------------------------------------------------------- Net interest income 12,131 12,116 11,588 10,648 Provision for loan losses 1,450 1,300 1,075 550 Non-interest income 1,872 2,212 2,318 1,902 Non-interest expense 8,058 7,861 7,926 7,199 - ------------------------------------------------------------------------------------------------------------------- Income before income tax expense 4,495 5,167 4,905 4,801 Income tax expense 1,212 1,473 1,373 1,306 - ------------------------------------------------------------------------------------------------------------------- Net income $ 3,283 $ 3,694 $ 3,532 $ 3,495 =================================================================================================================== Earnings per share - basic $ 0.39 $ 0.46 $ 0.44 $ 0.44 Earnings per share - diluted 0.38 0.44 0.43 0.43 =================================================================================================================== 2001 Interest income $29,295 $30,295 $29,494 $29,864 Interest expense 20,052 21,388 20,991 20,382 - ------------------------------------------------------------------------------------------------------------------- Net interest income 9,243 8,907 8,503 9,482 Provision for loan losses 1,525 825 650 925 Non-interest income 2,294 2,263 1,914 1,566 Non-interest expense 9,082 7,023 6,543 6,404 - ------------------------------------------------------------------------------------------------------------------- Income before income tax expense 930 3,322 3,224 3,719 Income tax (benefit) expense (4) 831 823 992 - ------------------------------------------------------------------------------------------------------------------- Net income $ 934 $ 2,491 $ 2,401 $ 2,727 =================================================================================================================== Earnings per share - basic $ 0.12 $ 0.33 $ 0.33 $ 0.37 Earnings per share - diluted 0.12 0.32 0.32 0.37 ===================================================================================================================
Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information with respect to this Item is contained in "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," which is set forth in Item 7 of this report. Item 8. Financial Statements and Supplementary Data The information with respect to this Item is contained in our financial statements included in Item 15 of this report and the quarterly financial data included in Item 7 of this report. Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure None. 13 PART III Item 10. Directors and Executive Officers of the Company Incorporated herein by reference to 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 June 5, 2003. Item 11. Executive Compensation Incorporated herein by reference to 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 June 5, 2003. The information contained in the Company's definitive proxy statement under the captions "Organization and Compensation Committee Report," "Performance Graph" and "Audit Committee Report" shall not be deemed to be incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management Incorporated herein by reference to 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 June 5, 2003. Item 13. Certain Relationships and Related Transactions Incorporated herein by reference to 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 June 5, 2003. Item 14. Controls and Procedures The Company's management, including the Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures within 90 days of the filing of this quarterly report, and based, on their evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports On Form 8-K Exhibits and Financial Statement Schedules Financial Statements For a list of the Financial statements filed herewith, see the Index to Financial Statements on page F-1. No schedules are included with the financial statements because the required information is inapplicable or is presented in the financial statements or notes thereto. 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. Reports on Form 8-K Current Report on Form 8-K for the announcement of earnings for the third quarter ended September 30, 2002 filed on October 21, 2002, as amended by Form 8-K/A filed with the SEC on February 13, 2003. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 26, 2003. YARDVILLE NATIONAL BANCORP By: /s/ Patrick M. Ryan -------------------------------------- Patrick M. Ryan, President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Jay G. Destribats Chairman of the Board March 26, 2003 - ------------------------------ and Director Jay G. Destribats /s/ Patrick M. Ryan Director, President March 26, 2003 - ------------------------------ and Chief Executive Officer Patrick M. Ryan /s/ Stephen F. Carman Vice President, Treasurer, March 26, 2003 - ------------------------------ Principal Financial Officer and Stephen F. Carman Principal Accounting Officer /s/ Elbert G. Basolis, Jr. Director March 26, 2003 - ------------------------------ Elbert G. Basolis, Jr. /s/ Lorraine Buklad Director March 26, 2003 - ------------------------------ Lorraine Buklad /s/ Anthony M. Giampetro Director March 26, 2003 - ------------------------------ Anthony M. Giampetro /s/ Sidney L. Hofing Director March 26, 2003 - ------------------------------ Sidney L. Hofing /s/ Gilbert W. Lugossy Director March 26, 2003 - ------------------------------ Gilbert W. Lugossy /s/ Louis R. Matlack Director March 26, 2003 - ------------------------------ Louis R. Matlack /s/ Martin Tuchman Director March 26, 2003 - ------------------------------ Martin Tuchman /s/ F. Kevin Tylus Director March 26, 2003 - ------------------------------ F. Kevin Tylus /s/ Christopher S. Vernon Director March 26, 2003 - ------------------------------ Christopher S. Vernon
15 CERTIFICATION I, Patrick M. Ryan, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Yardville National Bancorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 By: /s/ Patrick M. Ryan --------------- ---------------------------------------- Name: Patrick M. Ryan Title: President and Chief Executive Officer 16 CERTIFICATION I, Stephen F. Carman, Vice President and Treasurer, certify that: 1. I have reviewed this annual report on Form 10-K of Yardville National Bancorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 By: /s/ Stephen F. Carman --------------- ------------------------------------ Name: Stephen F. Carman Title: Vice President and Treasurer 17 INDEX TO FINANCIAL STATEMENTS Description Page - ----------- ---- Consolidated Statements of Condition at December 31, 2002 and 2001 F-2 Consolidated Statements of Income for each of the years ended December 31, 2002, 2001 and 2000 F-3 Consolidated Statements of Changes in Stockholders' Equity for each of the years ended December 2002, 2001 and 2000 F-4 Consolidated Statements of Cash Flows for each of the years ended December 31, 2002, 2001 and 2000 F-5 Notes to Consolidated Financial Statements F-6 Independent Auditors' Report F-27 F-1 YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED Statements of Condition
December 31, - ----------------------------------------------------------------------------------------------------- (in thousands, except share data) 2002 2001 - ----------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 28,608 $ 27,771 Federal funds sold 72,485 38,960 - ----------------------------------------------------------------------------------------------------- Cash and Cash Equivalents 101,093 66,731 - ----------------------------------------------------------------------------------------------------- Interest bearing deposits with banks 2,501 2,320 Securities available for sale 820,665 746,483 Investment securities (market value of $56,710 in 2002 and $64,887 in 2001) 54,690 65,753 Loans 1,195,143 1,007,973 Less: Allowance for loan losses (16,821) (13,542) - ----------------------------------------------------------------------------------------------------- Loans, net 1,178,322 994,431 Bank premises and equipment, net 12,208 10,910 Other real estate 1,048 2,329 Bank Owned Life Insurance 40,850 31,764 Other assets 20,081 22,668 - ----------------------------------------------------------------------------------------------------- Total Assets $2,231,458 $1,943,389 - ----------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits Non-interest bearing $ 126,183 $ 114,405 Interest bearing 1,146,103 978,285 - ----------------------------------------------------------------------------------------------------- Total Deposits 1,272,286 1,092,690 - ----------------------------------------------------------------------------------------------------- Borrowed funds Securities sold under agreements to repurchase 10,000 10,000 Federal Home Loan Bank advances 746,000 695,008 Obligation for Employee Stock Ownership Plan (ESOP) 400 800 Other 1,311 1,305 - ----------------------------------------------------------------------------------------------------- Total Borrowed Funds 757,711 707,113 - ----------------------------------------------------------------------------------------------------- Company - obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust holding solely junior Subordinated Debentures of the Company 32,500 32,500 Other liabilities 23,022 17,841 - ----------------------------------------------------------------------------------------------------- Total Liabilities $2,085,519 $1,850,144 - ----------------------------------------------------------------------------------------------------- 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 10,576,157 shares in 2002 and 8,214,568 shares in 2001 89,297 54,334 Surplus 2,205 2,205 Undivided profits 50,633 40,175 Treasury stock, at cost: 180,248 shares in 2002 and 172,000 shares in 2001 (3,154) (3,030) Unallocated ESOP shares (400) (800) Accumulated other comprehensive income 7,358 361 - ----------------------------------------------------------------------------------------------------- Total Stockholders' Equity 145,939 93,245 - ----------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $2,231,458 $1,943,389 =====================================================================================================
See Accompanying Notes to Consolidated Financial Statements. F-2 YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED Statements of Income
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Interest Income: Interest and fees on loans $ 75,395 $ 70,408 $ 64,418 Interest on deposits with banks 60 171 82 Interest on securities available for sale 40,498 39,866 27,146 Interest on investment securities: Taxable 690 3,722 4,647 Exempt from Federal income tax 2,345 2,016 1,642 Interest on Federal funds sold 1,157 2,765 2,454 - ------------------------------------------------------------------------------------------------------------------- Total Interest Income 120,145 118,948 100,389 - ------------------------------------------------------------------------------------------------------------------- Interest Expense: Interest on savings account deposits 11,228 9,931 7,937 Interest on certificates of deposit of $100,000 or more 5,184 7,581 6,918 Interest on other time deposits 17,747 27,085 24,772 Interest on borrowed funds 36,403 35,264 21,219 Interest on trust preferred securities 3,100 2,952 1,808 - ------------------------------------------------------------------------------------------------------------------- Total Interest Expense 73,662 82,813 62,654 - ------------------------------------------------------------------------------------------------------------------- Net Interest Income 46,483 36,135 37,735 Less provision for loan losses 4,375 3,925 3,700 - ------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision For Loan Losses 42,108 32,210 34,035 - ------------------------------------------------------------------------------------------------------------------- Non-Interest Income: Service charges on deposit accounts 2,203 1,857 1,551 Securities gains, net 3,084 3,182 46 Income on Bank Owned Life Insurance 1,678 1,784 822 Other non-interest income 1,339 1,214 1,007 - ------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 8,304 8,037 3,426 - ------------------------------------------------------------------------------------------------------------------- Non-Interest Expense: Salaries and employee benefits 17,890 14,923 11,632 Occupancy expense, net 3,507 2,817 2,404 Equipment expense 2,423 2,021 1,892 Early retirement of debt expense -- 2,217 -- Other non-interest expense 7,224 7,074 6,933 - ------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 31,044 29,052 22,861 - ------------------------------------------------------------------------------------------------------------------- Income before income tax expense 19,368 11,195 14,600 Income tax expense 5,364 2,642 4,259 - ------------------------------------------------------------------------------------------------------------------- Net Income $ 14,004 $ 8,553 $ 10,341 - ------------------------------------------------------------------------------------------------------------------- Earnings Per Share: Basic $ 1.72 $ 1.13 $ 1.47 Diluted $ 1.68 $ 1.11 $ 1.47 ===================================================================================================================
See Accompanying Notes to Consolidated Financial Statements. F-3 YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED Statements of Changes in Stockholders' Equity
Year Ended December 31, 2002, 2001 and 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Unallocated other Common Common Undivided Treasury ESOP comprehensive (in thousands, except share amounts) shares stock Surplus profits stock shares (loss) income Total - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 1999 6,745,794 $ 40,052 $ 2,205 $ 27,462 $ (3,030) $ (1,600) $(6,264)$ 58,825 Net income 10,341 10,341 Unrealized gain - securities available for sale, net of tax of $2,536 4,712 4,712 Less reclassification of realized net gain on sale of securities available for sale, net of tax of $16 (30) (30) -------- Total comprehensive income 15,023 -------- Cash dividends (2,840) (2,840) ESOP fair value adjustment (75) (75) Common stock issued: Exercise of stock options 14,420 69 69 Common shares issued 685,000 6,835 6,835 ESOP shares allocated 400 400 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 2000 7,445,214 $ 46,881 $ 2,205 $ 34,963 $ (3,030) $ (1,200) $(1,582)$ 78,237 Net income 8,553 8,553 Unrealized gain - securities available for sale, net of tax of $2,129 4,043 4,043 Less reclassification of realized net gain on sale of securities available for sale, net of tax of $1,082 (2,100) (2,100) -------- Total comprehensive income 10,496 -------- Cash dividends (3,341) (3,341) ESOP fair value adjustment 8 8 Common stock issued: Exercise of stock options 700 6 6 Common shares issued 596,654 7,439 7,439 ESOP shares allocated 400 400 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 2001 8,042,568 $ 54,334 $ 2,205 $ 40,175 $ (3,030) $ (800) $ 361 $ 93,245 Net income 14,004 14,004 Unrealized gain - securities available for sale, net of tax of $4,646 9,032 9,032 Less reclassification of realized net gain on sale of securities available for sale, net of tax of $1,049 (2,035) (2,035) -------- Total comprehensive income 21,001 -------- Cash dividends (3,546) (3,546) ESOP fair value adjustment 110 110 Common stock issued: Exercise of stock options 61,589 602 602 Common shares issued 2,300,000 34,251 34,251 ESOP shares allocated 400 400 Treasury shares acquired (8,248) (124) (124) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, December 31, 2002 10,395,909 $ 89,297 $ 2,205 $ 50,633 $ (3,154) $ (400) $ 7,358 $145,939 ====================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements. F-4 YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES CONSOLIDATED Statements of Cash Flows
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 14,004 $ 8,553 $ 10,341 Adjustments: Provision for loan losses 4,375 3,925 3,700 Depreciation 1,894 1,608 1,521 ESOP fair value adjustment 110 8 (75) Amortization and accretion 2,909 1,040 146 Gain on sales of securities available for sale (3,084) (3,182) (46) Writedown of other real estate 232 569 599 Loss on sale of other real estate -- 38 25 Increase in other assets (2,598) (4,344) (8,862) Increase (decrease) in other liabilities 5,181 (1,993) 8,257 - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 23,023 6,222 15,606 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in interest bearing deposits with banks (181) (1,729) 364 Purchase of securities available for sale (679,333) (864,841) (363,424) Maturities, calls and paydowns of securities available for sale 379,487 360,152 65,692 Proceeds from sales of securities available for sale 237,492 328,301 49,240 Proceeds from maturities and paydowns of investment securities 15,755 63,352 5,263 Purchase of investment securities (5,751) (18,429) (7,841) Purchase of Bank Owned Life Insurance (7,500) -- (15,000) Net increase in loans (188,282) (192,469) (173,989) Expenditures for bank premises and equipment (3,190) (3,090) (1,549) Proceeds from sale of other real estate 1,065 572 626 - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Used by Investing Activities (250,438) (328,181) (440,618) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in non-interest bearing demand, money market, and savings deposits 144,721 118,904 92,760 Net increase in certificates of deposit 34,875 23,478 113,751 Net increase in borrowed funds 50,598 162,690 246,534 Proceeds from issuance of trust preferred securities -- 6,000 15,000 Proceeds from issuance of common stock 34,853 7,445 6,904 Decrease in unallocated ESOP shares 400 400 400 Treasury shares acquired (124) -- -- Dividends paid (3,546) (3,341) (2,840) - ------------------------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Financing Activities 261,777 315,576 472,509 - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 34,362 (6,383) 47,497 Cash and cash equivalents as of beginning of year 66,731 73,114 25,617 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents as of End of Year $ 101,093 $ 66,731 $ 73,114 - ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 75,204 $ 85,140 $ 56,700 Income taxes 1,097 3,745 6,922 - ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Transfer from loans to other real estate, net of charge offs $ 16 $ 1,466 $ 706 ====================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements. F-5 YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 NOTES TO CONSOLIDATED Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Yardville National Bancorp is a registered financial holding company which conducts a general commercial and retail banking business through its principal operating subsidiary, The Yardville National Bank (the Bank). The Bank provides a broad range of lending, deposit and other financial products and services with an emphasis on commercial real estate and commercial and industrial lending to small- to mid-sized businesses and individuals. Our existing and target markets are located in the corridor between New York City and Philadelphia. We operate 19 full-service branches, including 13 branches in our primary market of Mercer County, New Jersey. We have expanded our franchise into demographically attractive markets. In the past three years, we have opened three branches in Hunterdon County, New Jersey, one branch in Burlington County, New Jersey, and one branch in Middlesex County, New Jersey. The Bank is subject to competition from other financial institutions and non-bank providers of financial services. 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 accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities 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, Yardville Capital Trust II, Yardville Capital Trust III, and the Bank and the Bank's wholly owned subsidiaries (collectively, the Corporation). All significant inter-company balances and transactions have been eliminated in consolidation. 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: available for sale, held to maturity 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. If the market value loss is determined to be other than temporary, the security is written down to its market value with the loss recognized in the Income Statement. All securities are evaluated quarterly to determine whether any unrealized losses are other than temporary. 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. A loan is considered past due when a payment has not been received in accordance with the contractual terms. 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. Commercial loans are generally charged off after an analysis is completed which indicates that collection of the full principal balance 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. If principal and interest payments are brought contractually current and future collectibility is reasonably assured, loans are returned to accrual status. F-6 Mortgage loans are generally charged off when the value of the underlying collateral does not cover the outstanding principal balance. 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 allowance may be necessary based on changes in economic conditions, particularly in New Jersey. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses and the valuation of other real estate. Such agencies may require the Corporation to recognize additions to the allowance or adjustments to the carrying value of other real estate based on their judgments about information available to them at the time of their examination. Management utilizes a system to rate substantially all of its loans based on their respective risk. Consumer and residential mortgage loans are evaluated as a group with only those loans that are delinquent evaluated separately. The primary emphasis of the risk rating system is on commercial and industrial loans and commercial real estate loans. Risk is measured by use of a matrix, which is customized to measure the risk of each loan type. Risk ratings of 1 to 5 are considered to be acceptable risk and are reserved at a range of 0.35% to 1.50%. Risk ratings of between 6 and 8 are considered higher than acceptable risk and are reserved at a range of 3.75% to 50% depending on the rating. Loans with a risk rating of 9 are considered losses and reserved at 100%. In setting the reserve percentage for each risk rating, management uses a computer software program to perform migration analysis to determine historic loan loss experience. In addition, management relies on its judgment concerning the anticipated impact on credit risk of economic conditions, real estate values, interest rates and level of business activity. 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. Losses on impaired loans are included in the allowance for loan losses through provisions charged to income. F. Bank Premises and Equipment. Bank premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation. Depreciation is computed on straight-line and accelerated methods over the estimated useful lives of the assets ranging from three years to forty years depending on the asset or lease. Charges for maintenance and repairs are expensed as they are incurred. G. Other Real Estate (ORE) - ORE 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 sale of other real estate are included in other non-interest income, while losses are included in non-interest expense. H. 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. F-7 I. Stock Based Compensation. 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. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation. - -------------------------------------------------------------------------------- (in thousands) 2002 2001 2000 - -------------------------------------------------------------------------------- Net income as reported: As reported $ 14,004 $ 8,553 $ 10,341 Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effects 331 158 1,859 - -------------------------------------------------------------------------------- Pro forma net income $ 13,673 $ 8,395 $ 8,482 - -------------------------------------------------------------------------------- Earnings per share: Basic: As reported $ 1.72 $ 1.13 $ 1.47 Pro forma 1.68 1.10 1.21 Diluted: As reported $ 1.68 $ 1.11 $ 1.47 Pro forma 1.64 1.09 1.21 ================================================================================ 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 2002, 2001, and 2000, respectively: (1) an expected annual dividend rate of $0.46, $0.44, and $0.44 (2) risk free rate of 2.7%, 4.3%, and 5.0% (3) expected life of approximately five years in 2002, 2001, and 2000 (4) expected volatility of 36% in 2002, 38% in 2001 and 40% in 2000. F-8 J. Earnings Per Share. 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 similarly to basic net income per common share except the denominator is increased to include the 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 years ended December 31, 2002, 2001, and 2000 were 8,124,000, 7,601,000, and 7,022,000, respectively. For the diluted net income per share computation, common stock equivalents of 195,000, 77,000, and 17,000 are included for the years ended December 31, 2002, 2001, and 2000, respectively. Common stock equivalents that were antidilutive were 410,000, 654,000, and 1,019,522 in 2002, 2001, and 2000, respectively. K. Comprehensive Income. Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes items recorded directly to equity, such as unrealized gains and losses on securities available for sale, net of tax. Comprehensive income is presented in the Consolidated Statements of Changes in Stockholders' Equity. L. Reclassification. Certain reclassifications have been made in the consolidated financial statements for 2001 and 2000 to conform to the classification presented in 2002. 2. CASH AND DUE FROM BANKS The Corporation maintains various deposits with other banks. As of December 31, 2002 and 2001, the Corporation maintained sufficient cash on hand to satisfy Federal regulatory requirements. 3. SECURITIES The amortized cost and estimated market value of securities available for sale are as follows:
December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ 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 $ 245,973 $ 2,928 $ -- $ 248,901 $ 113,862 $ 914 $ (915) $ 113,861 Mortgage-backed securities 468,745 10,157 (545) 478,357 521,988 3,204 (2,013) 523,179 Corporate obligations 55,087 417 (1,808) 53,696 72,946 779 (1,414) 72,311 Federal Reserve Bank Stock 2,411 -- -- 2,411 2,381 -- -- 2,381 Federal Home Loan Bank Stock 37,300 -- -- 37,300 34,751 -- -- 34,751 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 809,516 $ 13,502 $ (2,353) $ 820,665 $ 745,928 $ 4,897 (4,342) $ 746,483 ==================================================================================================================================== The amortized cost and estimated market value of investment securities are as follows: December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ 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 $ -- $ -- $ -- $ -- $ 13,000 $ 67 $ (1) $ 13,066 Obligations of state and political subdivisions 50,308 1,938 (34) 52,212 48,694 367 (1,332) 47,729 Mortgage-backed securities 4,382 121 (5) 4,498 4,059 48 (15) 4,092 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 54,690 $ 2,059 $ (39) $ 56,710 $ 65,753 $ 482 (1,348) $ 64,887 ====================================================================================================================================
F-9 The amortized cost and estimated market value of securities available for sale and investment securities as of December 31, 2002 by contractual maturity are shown below. The contractual maturity of Federal Reserve Bank and Federal Home Loan Bank stock is shown as due after 10 years. Expected maturities will differ from contractual maturities because issuers may have the right to call their 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 $ 25,294 $ 25,635 Due after 1 year through 5 years 195,789 198,045 Due after 5 years through 10 years 31,997 32,369 Due after 10 years 87,691 86,259 - ---------------------------------------------------------------------- Subtotal 340,771 342,308 Mortgage-backed securities 468,745 478,357 - ---------------------------------------------------------------------- Total $809,516 $820,665 ====================================================================== INVESTMENT SECURITIES Estimated Amortized Market (in thousands) Cost Value - ---------------------------------------------------------------------- Due in 1 year or less $ 750 $ 753 Due after 1 year through 5 years 3,588 3,823 Due after 5 years through 10 years 7,366 7,775 Due after 10 years 38,604 39,861 - ---------------------------------------------------------------------- Subtotal 50,308 52,212 Mortgage-backed securities 4,382 4,498 - ---------------------------------------------------------------------- Total $ 54,690 $ 56,710 ====================================================================== Proceeds from sale of securities available for sale during 2002, 2001, and 2000 were $237.5 million, $328.3 million, and $49.2 million, respectively. Gross gains of $3,383,000, $3,575,000, and $162,000 were realized on those sales in 2002, 2001, and 2000, respectively. Gross losses of $299,000, $393,000, and $116,000 were realized on those sales in 2002, 2001 and 2000, respectively. Securities with a carrying value of approximately $566.7 million as of December 31, 2002 were pledged to secure borrowed funds, public deposits and for other purposes as required or permitted by law. As of December 31, 2002, Federal Home Loan Bank (FHLB) stock with a carrying value of $37.3 million 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 and includes unamortized deferred fees of $834,000 and $464,000 at December 31, 2002 and 2001, respectively: December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 - ---------------------------------------------------------------------- Commercial real estate $ 607,328 $ 499,216 Residential 150,841 141,810 Commercial and industrial 338,047 282,135 Consumer 98,927 84,812 - ---------------------------------------------------------------------- Total loans $1,195,143 $1,007,973 ====================================================================== Residential mortgage loans held for sale amounted to $1.0 million and $1.4 million as of December 31, 2002 and 2001, 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 FHLMC and FNMA. Generally, servicing on such loans is retained by the Corporation. As of December 31, 2002 and 2001, loans serviced for FNMA and FHLMC were $20.4 million and $29.4 million, respectively. 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. F-10 The following table summarizes activity with respect to such loans: Year Ended December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 - ---------------------------------------------------------------------- Balance as of beginning of year $ 37,409 $ 14,671 Additions 29,724 29,255 Reductions 24,137 6,517 - ---------------------------------------------------------------------- Balance as of end of year $ 42,996 $ 37,409 ====================================================================== None of these loans were past due or on nonaccrual status as of December 31, 2002 and 2001. 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 or tenanted investment projects, creating cash flow. F-11 Changes in the allowance for loan losses are as follows: Year Ended December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------- Balance as of beginning of year $13,542 $10,934 $ 8,965 Loans charged off (1,188) (1,699) (1,867) Recoveries of loans charged off 92 382 136 - ---------------------------------------------------------------------- Net charge offs (1,096) (1,317) (1,731) Provision charged to operations 4,375 3,925 3,700 - ---------------------------------------------------------------------- Balance as of end of year $16,821 $13,542 $10,934 ====================================================================== The detail of loans charged off is as follows: Year Ended December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------- Commercial real estate $ (78) $ (696) $ (356) Residential (168) -- (288) Commercial and industrial (719) (591) (896) Consumer (223) (412) (327) - ---------------------------------------------------------------------- Total $(1,188) $(1,699) $(1,867) ====================================================================== Nonperforming assets include nonperforming loans and other real estate. The nonperforming loan category includes loans on which accrual of interest has been discontinued (nonaccrual); loans 90 days past due or more on which interest is still accruing; and restructured loans. Nonperforming loans as a percentage of total loans were 0.52% as of December 31, 2002 and 0.51% as of December 31, 2001. A summary of nonperforming assets follows: December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 - ---------------------------------------------------------------------- Nonaccrual loans: Commercial real estate $2,395 $ 888 Residential 1,526 1,133 Commercial and industrial 1,143 1,494 Consumer 55 98 - ---------------------------------------------------------------------- Total nonaccrual loans $5,119 $3,613 - ---------------------------------------------------------------------- Restructured loans $ 711 $ 770 - ---------------------------------------------------------------------- Loans past due 90 days or more: Residential $ 323 $ 514 Consumer 121 228 - ---------------------------------------------------------------------- Total loans past due 90 days or more 444 742 - ---------------------------------------------------------------------- Total nonperforming loans 6,274 5,125 Other real estate 1,048 2,329 - ---------------------------------------------------------------------- Total nonperforming assets $7,322 $7,454 ====================================================================== The Corporation has defined the population of impaired loans to be all nonaccrual commercial loans. Impaired loans are individually assessed to determine whether the loan's carrying value is 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, 2002 and 2001 was $4.2 million and $3.2 million, respectively. The related allowance for loan losses on these loans as of December 31, 2002 and 2001 was $1.0 million and $848,000, respectively. The average recorded investment in impaired loans during 2002 and 2001 was $3.8 million and $3.2 million, respectively. There was no interest income recognized on impaired loans in 2002, 2001 and 2000. There are no commitments to lend additional funds to debtors whose loans are nonperforming. Additional income before income taxes amounting to approximately $240,000 in 2002, $163,000 in 2001 and $640,000 in 2000 would have been recognized if interest on all loans had been recorded based upon original contract terms. F-12 5. BANK PREMISES AND EQUIPMENT, NET The following table represents comparative information for premises and equipment: December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 - ---------------------------------------------------------------------- Land and improvements $ 510 $ 854 Buildings and improvements 7,910 7,507 Furniture and equipment 15,035 11,586 Construction in process 1,364 1,680 - ---------------------------------------------------------------------- Total 24,819 21,627 Less accumulated depreciation 12,611 10,717 - ---------------------------------------------------------------------- Bank premises and equipment, net $12,208 $10,910 ====================================================================== 6. DEPOSITS Total deposits consist of the following: December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 - ---------------------------------------------------------------------- Non-interest bearing demand deposits $ 126,183 $ 114,405 Interest bearing demand deposits 122,015 105,354 Money market deposits 314,529 203,872 Savings deposits 82,801 77,168 Certificates of deposit of $100,000 and over 145,191 137,684 Other time deposits 481,567 454,207 - ---------------------------------------------------------------------- Total $1,272,286 $1,092,690 ====================================================================== F-13 A summary of certificates of deposit by maturity is as follows: December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 - ---------------------------------------------------------------------- Within one year $367,885 $542,966 One to two years 164,647 34,545 Two to three years 36,547 6,551 Three to four years 9,496 4,605 Four to five years 48,183 3,224 - ---------------------------------------------------------------------- Total $626,758 $591,891 - ---------------------------------------------------------------------- 7. BORROWED FUNDS Borrowed funds include securities sold under agreements to repurchase, FHLB advances, and obligation for ESOP. Other borrowed funds consist of Federal funds purchased and Treasury tax and loan deposits. The following table presents comparative data related to borrowed funds of the Corporation as of and for the years ended December 31, 2002, 2001, and 2000. December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------- Securities sold under agreements to repurchase $ 10,000 $ 10,000 $ 10,000 FHLB advances 746,000 695,008 532,768 Obligation for ESOP 400 800 1,200 Other 1,311 1,305 1,255 - ---------------------------------------------------------------------- Total $757,711 $707,113 $545,223 - ---------------------------------------------------------------------- Maximum amount outstanding at any month end $757,711 $707,113 $545,223 Average interest rate on year-end balance 4.85% 4.97% 5.79% Average amount outstanding during the year $735,201 $644,690 $367,021 Average interest rate for the year 4.95% 5.47% 5.78% ====================================================================== There are $10.0 million in securities sold under agreements to repurchase with an expected maturity over 90 days as of December 31, 2002. The outstanding amount is a callable repurchase agreement with a maturity of ten years and a call date of one year. Due to the call provision, the expected maturity could differ from the contractual maturity. The FHLB advances as of December 31, 2002, mature as follows: - ---------------------------------------------------------------------- (in thousands) 2002 - ---------------------------------------------------------------------- Within one year $ 56,000 Over one to two years 87,000 Over four to five years 10,000 Over five years 593,000 - ---------------------------------------------------------------------- Total $746,000 ====================================================================== The outstanding amount includes $629.0 million in callable advances with two to ten year maturities and call dates of three months to five years. Due to the call provisions, expected maturities could differ from contractual maturities. In December 2001, the Corporation retired $50.0 million in convertible FHLB advances early. The $50.0 million consisted of ten year original maturity borrowings with lockout dates ranging from three months to two years. The borrowings had an average rate of 4.38% and an average maturity of 8.8 years. As a result of the transaction, the Corporation recognized a loss on the early retirement of the debt of $2.2 million ($1.5 million net of tax benefit of $753,000). The retirement was funded through short term floating rate FHLB advances. The transaction was undertaken to improve the interest rate risk profile of the Corporation. In 2002, the Corporation adopted Financial Accounting Standards Board (FASB) No. 145 "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." This statement eliminated the extraordinary item treatment of the early retirement of debt on the transaction conducted in December of 2001. As a result, the Consolidated Statement of Income for 2001 has been reclassified to reflect the loss on this transaction as early retirement of debt expense in non-interest expense. F-14 Interest expense on borrowed funds is comprised of the following: Year Ended December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------- Securities sold under agreements to repurchase $ 624 $ 624 $ 1,281 FHLB advances 35,722 34,535 19,785 Obligation for ESOP 44 72 100 Other 13 33 53 - ---------------------------------------------------------------------- Total $36,403 $35,264 $21,219 ====================================================================== 8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY (TRUST PREFERRED SECURITIES) On March 28, 2001, Yardville Capital Trust III (Trust III), a statutory business trust, and a wholly owned subsidiary of Yardville National Bancorp, issued $6.0 million of 10.18% Trust Preferred Securities in a private placement transaction and $190,000 of 10.18% Common Securities to Yardville National Bancorp. Proceeds from the issuance of the Trust Preferred Securities were immediately used by Trust III to purchase $6.2 million of 10.18% Subordinated Debentures maturing June 8, 2031 from Yardville National Bancorp. Trust III 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 Trust III. These Subordinated Debentures are redeemable in whole or part prior to maturity after June 8, 2011. Trust III is obligated to distribute all proceeds of a redemption, whether voluntary or upon maturity, to holders of the Trust F-15 Preferred Securities. Yardville National Bancorp's obligation with respect to the Trust Preferred Securities and the Subordinated Debentures, when taken together, provides a full and unconditional guarantee on a subordinated basis by Yardville National Bancorp of the obligations of Trust III to pay amounts when due on the Trust Preferred Securities. On June 23, 2000, Yardville Capital Trust II (Trust II), a statutory business trust and a wholly owned subsidiary of Yardville National Bancorp, issued $15.0 million of 9.50% Trust Preferred Securities in a private placement transaction and $464,000 of 9.50% Common Securities to Yardville National Bancorp. Proceeds from the issuance of the Trust Preferred Securities were immediately used by Trust II to purchase $15.5 million of 9.50% Subordinated Debentures maturing June 22, 2030 from Yardville National Bancorp. Trust II 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 Trust II. These Subordinated Debentures are redeemable in whole or part prior to maturity after June 23, 2010. Trust II 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, provides a full and unconditional guarantee on a subordinated basis by Yardville National Bancorp of the obligations of Trust II to pay amounts when due on the Trust Preferred Securities. In 1997, Yardville Capital Trust (the Trust) issued $11.5 million of 9.25% Trust Preferred Securities and $356,000 of 9.25% Common Securities to Yardville National Bancorp. Proceeds were used by the Trust to purchase $11.9 million of 9.25% Subordinated Debentures maturing November 1, 2027. Those debentures are redeemable in whole or in part prior to maturity after November 1, 2002. On February 19, 2003, Yardville Capital Trust IV (Trust IV), a statutory business trust and a wholly owned subsidiary of Yardville National Bancorp, issued $15.0 million of floating rate Trust Preferred Securities in a private placement transaction and $464,000 of floating rate Common Securities to Yardville National Bancorp. The floating rate is based on three month LIBOR plus 340 basis points. Proceeds from the issuance of the Trust Preferred Securities were immediately used by Trust IV to purchase $15.0 million of floating rate Subordinated Debentures maturing March 1, 2033 from Yardville National Bancorp. Trust IV 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 Trust IV. These Subordinated Debentures are redeemable in whole or part prior to maturity after March 1, 2008. Trust IV 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, provides a full and unconditional guarantee on a subordinated basis by Yardville National Bancorp of the obligations of Trust IV to pay amounts when due on the Trust Preferred Securities. On February 20, 2003, the Corporation announced the redemption of the $11.5 million of 9.25% Subordinated Debentures due November 1, 2027 and the 9.25% Common Securities. The redemption date is March 31, 2003 at the price of 100% of principal amount plus accrued and unpaid distributions. 9. INCOME TAXES Income taxes reflected in the consolidated financial statements for 2002, 2001, and 2000 are as follows: Year Ended December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------- Federal: Current $6,357 $3,587 $5,330 Deferred (1,120) (1,025) (1,179) State: Current 669 80 108 Deferred (542) -- -- - ---------------------------------------------------------------------- Total tax expense $5,364 $2,642 $4,259 ====================================================================== F-16 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 2002 and 2001 are as follows: December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 - ---------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 6,718 $ 5,409 Writedown of basis of ORE properties 61 149 Deferred income 11 14 Nonaccrual loans 3 -- Net state operating loss carryforwards 397 46 Depreciation 91 -- Deferred compensation 1,403 1,022 - ---------------------------------------------------------------------- Total deferred tax assets $ 8,684 $ 6,640 - ---------------------------------------------------------------------- Valuation allowance (78) (78) - ---------------------------------------------------------------------- Deferred tax liabilities: Accumulated other comprehensive income (3,791) (194) Deferred income (1,414) (1,065) Unamortized discount accretion (97) (77) Depreciation -- 40 Other -- (27) - ---------------------------------------------------------------------- Total deferred tax liabilities $(5,302) $(1,323) - ---------------------------------------------------------------------- Net deferred tax assets $ 3,304 $ 5,239 ====================================================================== F-17 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) 2002 2001 2000 - ---------------------------------------------------------------------- Income tax expense at statutory rate $6,585 $3,806 $4,964 State income taxes, net of Federal benefit 84 53 71 Changes in taxes resulting from: Tax exempt interest (822) (701) (591) Tax exempt income (571) (606) (279) Non-deductible expenses 88 90 94 - ---------------------------------------------------------------------- Total $5,364 $2,642 $4,259 ====================================================================== 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 2002, 2001 and 2000 up to 6% of base compensation. Employer contributions to the plan amounted to $209,000 in 2002, $178,000 in 2001, and $151,000 in 2000. Postretirement Benefits. The Corporation provides additional postretirement benefits, namely life and health insurance, to retired employees over the age of 62 who have completed 15 years of service. The plan calls for retirees to contribute a portion of the cost of providing these benefits in relation to years of service. The cost of retiree health and life insurance benefits is recognized over the employees' period of service. There were $128,000 in periodic postretirement benefit costs under FASB Statement No. 106 in 2002, $84,000 in 2001 and none for 2000. The actuarial present value of benefit obligations was $967,000 in 2002 and $839,000 in 2001. Stock Option Plans. The Corporation maintains stock option plans for both officers and directors. In March 1988, the stockholders approved the 1988 plan for key employees (Employee Plan). The Employee Plan allowed for the granting of up to 328,000 shares of the Corporation's common stock at an option price no less than the market value of the stock on the date such options are granted. As of February 28, 1998, no incentive stock options may be granted under the Employee Plan. In April 1997, the stockholders approved the 1997 stock option plan for key employees (The 1997 Plan). The 1997 Plan allows for the granting of 1,070,000 shares of the Corporation's common stock at an option price to be no less than the market value of the stock on the date such options are granted. Options typically have a ten-year term and vest ratably over a five-year period. At December 31, 2002, there were 208,688 shares available for grant under The 1997 Plan. In April 1994, the Board of Directors approved a non-qualified stock option plan for non-employee directors (Director Plan). The Director Plan allowed for the granting of 228,820 shares of the Corporation's common stock at an option price to be no less than the market value of the stock on the date such options are granted. As of November 1, 2002, options to purchase an aggregate of 125,980 shares of our common stock were outstanding under the plan (at exercise prices ranging from $10.94 to $17.20 per share, with vesting over a period of four years and terms of ten years). In addition, an aggregate of 8,248 shares had been acquired upon exercise of vested options by two directors. On three occasions (once in 1998, once in 2000 and once in 2002), the number of shares available for the grant of options under this plan was increased by the Board of Directors. Each of these increases was inadvertently implemented without obtaining shareholder approval required under applicable rules of the Nasdaq Stock Market. Upon being advised of this shareholder approval requirement, the Corporation cancelled the increases in the number of shares available under the plan, and the non-employee directors holding options granted without shareholder approval have rescinded and terminated such options. These terminations were completed in November 2002. In addition, the Corporation and the two directors that had exercised vested options agreed to rescind the exercise by taking back shares that had been acquired upon exercise of such options in exchange for a return of the exercise price (aggregating approximately $124,000) to the applicable holder. These terminations were completed in November 2002. These transactions did not have a material adverse effect on the Corporation's financial condition or results of operations. At December 31, 2002, there were no shares available for grant under the Director Plan. F-18 The table below lists information on stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------------------------ Weighted Average Weighted Number of Weighted Range of Number Remaining Average Shares Average Exercise Of Shares Contractual Exercise Exercisable Exercise Prices Outstanding Life in Years Price at Period End Price - ------------------------------------------------------------------------------------------------------------------------------------ $ 3.90 - $ 5.85 6,490 0.42 $ 3.90 6,490 $ 3.90 9.875 - 14.81 469,876 7.93 11.19 169,764 11.16 16.00 - 20.12 390,888 5.70 17.29 273,185 17.20 - ------------------------------------------------------------------------------------------------------------------------------------ $ 3.90 - $20.12 867,254 7.56 $13.88 449,439 $14.73 ====================================================================================================================================
The tables below list the activity in our stock option plans for each of the years in the three-year period ended December 31, 2002.
Weighted Average Weighted Average Director Plan Shares Exercise Price 1988 and 1997 Plans Shares Exercise Price - ------------------------------------------------------------ ---------------------------------------------------------------- Balance, Balance, December 31, 1999 73,800 $16.37 December 31, 1999 420,719 $15.64 - ------------------------------------------------------------ ---------------------------------------------------------------- Shares: Shares: Granted 82,500 10.95 Granted 429,560 10.95 Exercised 2,680 8.77 Exercised 11,740 3.90 Expired 3,280 10.27 Expired 2,192 13.68 - ------------------------------------------------------------ ---------------------------------------------------------------- Balance, Balance, December 31, 2000 150,340 $13.66 December 31, 2000 836,347 $13.39 - ------------------------------------------------------------ ---------------------------------------------------------------- Shares: Shares: Exercised 600 10.49 Granted 39,200 12.74 Expired 1,640 10.06 Exercised 100 3.90 - ------------------------------------------------------------ Expired 6,100 16.44 Balance, ---------------------------------------------------------------- December 31, 2001 148,100 $13.67 Balance, - ------------------------------------------------------------ December 31, 2001 869,347 $13.34 Shares: ---------------------------------------------------------------- Granted 7,500 12.52 Shares: Exercised 8,248 14.92 Granted 56,000 17.45 Expired 28,684 12.94 Exercised 53,341 8.97 Terminated 118,668 13.74 Expired 4,752 12.32 - ------------------------------------------------------------ ---------------------------------------------------------------- Balance, Balance, December 31, 2002 -- $ 0.00 December 31, 2002 867,254 $13.88 - ------------------------------------------------------------ ---------------------------------------------------------------- Shares exercisable as of Shares exercisable as of December 31, 2002 -- $ 0.00 December 31, 2002 449,439 $14.73 ============================================================ ================================================================
F-19 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. In addition, there is an officer group term life insurance plan for divisional officers. The present value of the benefits accrued under these plans as of December 31, 2002 and 2001 is approximately $2.4 million and $1.7 million, respectively, and is included in other liabilities in the accompanying consolidated statements of condition. Compensation expense of approximately $744,000, $780,000, and $140,000 is included in the accompanying consolidated statements of income for the years ended December 31, 2002, 2001, and 2000, respectively. In connection with the benefit plans, the Corporation has purchased life insurance policies on the lives of the executives, directors, and divisional officers. The Corporation is the owner and beneficiary of the policies. The cash surrender values of the policies are approximately $40.9 million and $31.8 million as of December 31, 2002 and 2001, respectively. 11. COMMON STOCK On November 14, 2002, the Corporation repurchased 8,248 shares of the Corporation's common stock for approximately $124,000 from two directors relating to the termination of the 1994 stock option plan. See Note 10 - Benefit Plans. In 1999, the Bank established an Employee Stock Ownership Plan and related trust (ESOP) for eligible employees. The ESOP is a tax-qualified plan subject to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Employees with twelve months of employment with the Bank and who have worked at least 1,000 hours are eligible to participate. The ESOP borrowed $2 million from an unaffiliated financial institution and purchased 155,340 shares of common shares, no par value, of the Corporation. Shares purchased by the ESOP are held in a suspense account pending allocation among participants as the loan is repaid. Compensation expense is recognized based on the fair value of the stock when it is committed to be released. Compensation expense amounted to $445,000, $367,000 and $275,000 for the years ended December 31, 2002, 2001, and 2000, respectively. The fair value of unearned shares at December 31, 2002 is $536,000. The number of shares allocated as of December 31, 2002 was 124,272. Unallocated shares are deducted from common shares outstanding for earnings per share purposes with shares which are committed to be released during the year added back into weighted average shares outstanding. On June 23, 2000, the Corporation completed the private placement of 68,500 units, each unit consisting of 10 shares of common stock and 1 common stock purchase warrant. The warrants have an expiration date of June 23, 2010 and a purchase price of $12.00 per share. The units were sold to a limited number of accredited investors and generated gross proceeds of $6.9 million. Net proceeds after offering costs were $6.8 million. Nearly all the net proceeds were contributed to the Bank to support future asset growth. On August 22, 2001, the Corporation completed the private placement of 596,654 shares of common stock for an aggregate purchase price of $7.8 million. Net proceeds after offering costs were $7.4 million. Of the net proceeds, $6.0 million was contributed to the Bank to support future asset growth. On December 18, 2002, the Corporation completed the sale of 2,300,000 shares of its common stock in an underwritten public offering. The common stock was offered at a price of $16.25 per share and generated gross proceeds of $37.4 million. Net proceeds after the underwriting discount and other offering costs were $34.3 million. Of the net proceeds, $33.0 million was contributed to the Bank to support future asset growth. The Bank's 401(k) savings plan has, since August 1998, included an option for the bank employees to invest a portion of their plan accounts in a fund (YNB Stock Fund) that has acquired shares of the Corporation's common stock in the open market. In connection with the addition to the plan of the YNB Stock Fund, the Corporation inadvertently did not register with the Securities and Exchange Commission the 401(k) savings plan interests or the shares of common stock acquired by the YNB Stock Fund and may not have distributed certain information to plan participants on a timely basis as required by securities laws. After being advised of those requirements, the Corporation promptly completed the registration and distributed the required information to plan participants. The Board of Directors has approved the discontinuance of the YNB Stock Fund, which will involve the sale of the shares of the Corporation's common stock owned by the YNB Stock Fund and application of the proceeds of such sale to other investment choices within the 401(k) savings plan at the direction of the participants. It is anticipated that such sale will occur in the near future and the shares of common stock in the YNB Stock Fund will be purchased by the YNB Employee Stock Ownership Plan. As of October 31, 2002 (the most recent date for which data was available), there was a total of approximately $5.2 million held in investments by participants in the 401(k) savings plan, of which approximately $738,000 was invested in the YNB Stock Fund (which owned approximately 41,847 shares of common stock as of such date). While it is possible that the Corporation may have liability based on the requirements applicable to the 401(k) savings plan, the Corporation does not believe that any such liabilities or claims, if asserted, would have a material adverse effect on the financial condition or results of operations based on our year-end stock price. That conclusion is based in part on the expectation that the sale of shares of the Corporation's common stock in the YNB Stock Fund will occur in the near future and at a price at or near the year-end market price of our common stock. There can be no assurances that the Corporation will be able to complete the sale of shares by the 401(k) plan in the time period or at the prices currently contemplated. The Corporation also maintained a dividend reinvestment and stock purchase plan (YNB DRIP) pursuant to which shareholders may elect to have their cash dividends used to purchase shares of the Corporation's common stock and may make additional purchases (up to monthly limits) of shares of the Corporation's common stock through the YNB DRIP. In addition, employees of the Corporation are permitted to purchase shares F-20 through the YNB DRIP through payroll withholding (subject to monthly limits), and such employees need not otherwise be shareholders or participate in the dividend reinvestment feature of the YNB DRIP. All purchases of shares were handled by an independent administrator and were purchased in open market transactions at prevailing market prices. Shares acquired through the YNB DRIP are held by an independent custodian until a participant directs that they be distributed. The Corporation covered the administrative costs of the YNB DRIP and all brokerage costs relating to purchases and sales of shares in the YNB DRIP. In connection with the dividend reinvestment feature only, in 1997 the Corporation modified the YNB DRIP to permit participating shareholders to acquire the shares in the YNB DRIP at a 3% discount to the market price on the date of purchase. This discount is not provided for other direct purchases by shareholders or employees in the YNB DRIP. In connection with the addition of the 3% discount to the dividend reinvestment feature of the YNB DRIP, the Corporation inadvertently did not register with the Securities and Exchange Commission the shares of common stock acquired by the YNB DRIP and may not have distributed certain information to plan participants as required by securities laws. After recently being advised of those requirements, the Corporation promptly temporarily suspended operation of the YNB DRIP and has remitted to plan participants cash funds equal to all amounts not yet used to acquire shares of common stock. The Corporation is currently preparing to register the shares of common stock acquired (and to be acquired) by the YNB DRIP, and expect the registration to be completed in the near future. In addition, the Board of Directors has approved an offer to be made to all YNB DRIP participants to rescind their purchases of common stock through the YNB DRIP since December 1, 1997. Approximately 125,993 shares of common stock (as adjusted for stock splits and stock dividends) have been acquired through the YNB DRIP since December 1, 1997, at prices ranging from $8.88 to $19.93 per share. As of December 31, 2002, the market price of the Corporation's common stock was $17.24 per share. It is anticipated that the rescission offer will commence in the near future (subject to completion of required filings with the Securities and Exchange Commission). It is management's belief that participants will not be likely to accept the rescission offer if the market price of the common stock is then close to or higher than the rescission price (an amount equal to the original purchase price of the shares, plus interest at a statutory rate since the date of purchase and less any amounts received by the participant with respect to such shares, including subsequent cash dividends whether or not they were reinvested in shares of common stock). In the event some participants do accept the rescission offer, it is management's belief, based upon the year-end market price of the common stock, that the aggregate amount of rescission payments would not have a material adverse effect on the Corporation's financial condition or results of operations. There can be no assurances that the Corporation will be able to complete the rescission offer in the time period currently contemplated. 12. OTHER NON-INTEREST EXPENSE Other non-interest expense included the following: Year Ended December 31, - ---------------------------------------------------------------------- (in thousands) 2002 2001 2000 - ---------------------------------------------------------------------- Marketing $1,104 $ 957 $1,144 Stationery and supplies 823 633 628 Communication and postage 809 694 601 Outside services and processing 595 400 269 Audit and examination fees 570 501 396 ORE expenses 418 831 893 Attorneys' fees 258 238 257 Insurance (other) 205 152 156 FDIC insurance premium 200 180 161 Amortization of trust preferred expenses 190 210 176 Other 2,052 2,278 2,252 - ---------------------------------------------------------------------- Total $7,224 $7,074 $6,933 ====================================================================== 13. RELATED PARTY TRANSACTIONS The Corporation has had and expects in the future to have other transactions in the ordinary course of business with many of its directors, senior officers and other affiliates (and their associates) on substantially the same terms as those prevailing for comparable transactions with others. For a discussion of credit transactions, see Note 4 - Loans and Allowance for Loan Losses. Listed below is a summary of material relationships or transactions with the Corporation's directors, senior officers and other affiliates. In October 1999, upon expiration of the initial five year term, the Bank renewed its lease for a five year period for its Trenton, New Jersey branch office, which is owned by The Lalor Urban Renewal Limited Partnership. The Lalor Corporation, which is the general partner of the limited partnership is owned by Sidney L. Hofing, a director of the Corporation and the Bank. Under the lease, the Bank is obligated to pay approximately $2,600 per month, excluding utilities and maintenance expenses. In July 2000, the Bank signed a ten year lease with 4 five year renewal options for its Lawrence, New Jersey branch office. The property is owned by Union Properties LLC. Sidney L. Hofing, a director of the Corporation and the Bank, has an ownership interest in Union Properties LLC. Under the terms of the lease, the Bank is obligated to pay approximately $7,300 per month, excluding utilities and maintenance expense. In May 2001, the Bank signed a ten year lease with 3 five year renewal options for its Bordentown, New Jersey branch office. The Bank acquired the property from the bankruptcy estate of a borrower and sold the property to BYN LLC a limited liability company of which Mr. Hofing, a director of the Corporation and the Bank is a member. The purchase price was $529,237. Under the terms of the lease, the Bank is obligated to pay approximately $7,000 per month, excluding utilities and maintenance expenses. F-21 In October 2001, the Bank signed a fifteen year lease with 3 five year renewal terms for its Hunterdon County Regional Headquarters. The property is owned by FYNB, LLC. Sidney Hofing, a director of the Corporation and the Bank had an ownership interest in FYNB, LLC, but several members of Mr. Hofing's family including his spouse continue to have an ownership interest. Under the terms of the lease, the Bank is obligated to pay approximately $17,500 per month, excluding utilities and maintenance expenses. Except as described in Note 4 - Loans and Allowance for Loan Losses, there were no new material relationships or transactions with Directors, senior officers or their affiliates established in 2002. Subsequent to year-end 2002, on February 24, 2003, the Bank entered into a contract of sale on its former operations center to Christopher S. Vernon, a director of the Corporation and the Bank. The purchase price is $650,000 and the Bank will record a gain on the sale of the property at closing. The transaction should close in the second quarter of 2003. The sale is contingent on Mr. Vernon and the Bank finalizing a lease on basement space in that building for a term of less than one year. 14. 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, 2002 and 2001 for commitments to extend credit were $243.1 million and $191.8 million, respectively. For letters of credit, the contract amounts were $17.8 million and $13.4 million, respectively. As part of its normal course of business, the Corporation issues standby letters of credit as part of an overall lending relationship. These standby letters of credit are primarily related to performance guarantees on real estate development. At December 31, 2002, the amount of standby letters of credit outstanding and the maximum liability of the Corporation was $16.6 million. The Corporation typically obtains collateral to secure standby letters of credit. At December 31, 2002, total collateral securing standby letters of credit was $14.1 million and is available to offset potential losses. Commitments to extend credit and letters of 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 four of its correspondent banks. There were $25.0 million in lines of credit available as of December 31, 2002. Subject to collateral requirements, the Corporation also maintains lines of credit with the FHLB and three brokerage firms. There were approximately $300.0 million in lines available at December 31, 2002. The Corporation leases various banking offices, its corporate headquarters and operations center. Total lease rental expense was $1.9 million, $1.3 million, and $1.0 million for the years ended December 31, 2002, 2001, and 2000, respectively. Minimum rentals under the terms of the leases are approximately $2.1 million per year in 2003 through 2007. 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. 15. 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 to risk-weighted assets, and of Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2002, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2002, 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 $14.3 million as of December 31, 2002. The Federal Deposit Insurance Corporation Improvement Act of 1991 (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 mandatory supervisory measures on savings associations and banks. F-22 The following table presents the Corporation's and Bank's actual capital amounts and ratios:
- --------------------------------------------------------------------------------------------------------------------------- REGULATORY CAPITAL Per Regulatory Guidelines - --------------------------------------------------------------------------------------------------------------------------- Actual Minimum "Well Capitalized" - --------------------------------------------------------------------------------------------------------------------------- (amounts in thousands) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------- As of December 31, 2002: Corporation Total capital (to risk-weighted assets) $187,897 13.0% $115,626 8.0% $144,533 10.0% Tier I capital (to risk-weighted assets) 171,076 11.8 57,813 4.0 86,720 6.0 Tier I capital (to average assets) 171,076 8.2 83,817 4.0 104,772 5.0 Bank Total capital (to risk-weighted assets) $181,251 12.6% $115,515 8.0% $144,393 10.0% Tier I capital (to risk-weighted assets) 164,430 11.4 57,757 4.0 86,636 6.0 Tier I capital (to average assets) 164,430 7.9 83,493 4.0 104,367 5.0 As of December 31, 2001: Corporation Total capital (to risk-weighted assets) $138,919 11.3% $ 98,752 8.0% $123,441 10.0% Tier I capital (to risk-weighted assets) 123,838 10.0 49,376 4.0 74,064 6.0 Tier I capital (to average assets) 123,838 6.9 71,575 4.0 89,469 5.0 Bank Total capital (to risk-weighted assets) $134,163 10.9% $ 98,476 8.0% $123,095 10.0% Tier I capital (to risk-weighted assets) 120,621 9.8 49,238 4.0 73,857 6.0 Tier I capital (to average assets) 120,621 6.8 71,309 4.0 89,136 5.0 ===========================================================================================================================
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. Bank holding companies and banks are subject to extensive supervision and regulation under both Federal and state laws. The regulation and supervision is designed primarily for the protection of consumers, depositors and the FDIC, and not the Corporation or its stockholders. Enforcement actions for failure to comply with applicable requirements 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. In addition, private parties may assert claims. If any enforcement action is taken by a banking regulator or private claims are asserted, the value of an equity investment in the Corporation could be subtantially reduced or eliminated. 16. 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. Interest Bearing Deposits with Banks. For interest bearing deposits with banks, 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 is based on bid prices published in financial newspapers or bid quotations received from securities dealers. Loans. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial and industrial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans, except residential mortgage loans, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. F-23 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 convertible securities sold under agreements to repurchase and FHLB advances, option adjusted spread pricing (OAS) was obtained from sources believed to be reliable. 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, 2002 - ---------------------------------------------------------------------- Carrying Fair (in thousands) Value Value - ---------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 101,093 $ 101,093 Interest bearing deposits with banks 2,501 2,501 Securities available for sale 820,665 820,665 Investment securities 54,690 56,710 Loans, net 1,178,322 1,192,076 Financial Liabilities: Deposits 1,272,286 1,285,063 Borrowed funds 757,711 847,216 Trust preferred securities 32,500 35,084 ====================================================================== December 31, 2001 - ---------------------------------------------------------------------- Carrying Fair (in thousands) Value Value - ---------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 66,731 $ 66,731 Interest bearing deposits with banks 2,320 2,320 Securities available for sale 746,483 746,483 Investment securities 65,753 64,887 Loans, net 994,431 1,003,888 Financial Liabilities: Deposits 1,092,690 1,099,097 Borrowed funds 707,113 748,604 Trust preferred securities 32,500 34,223 ====================================================================== 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. F-24 17. 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) 2002 2001 - ----------------------------------------------------------------------------- Assets: Cash $ 5,696 $ 2,224 Securities available for sale -- 105 Investment in subsidiaries 172,798 121,992 Other assets 1,630 3,418 - ----------------------------------------------------------------------------- Total Assets $180,124 $127,739 - ----------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Other liabilities $ 275 $ 184 Obligation for ESOP 400 800 Subordinated debentures 33,510 33,510 Stockholders' equity 145,939 93,245 - ----------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $180,124 $127,739 ============================================================================= F-25 CONDENSED STATEMENTS OF INCOME Year Ended December 31, - ------------------------------------------------------------------------------ (in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------ Operating Income: Dividends from subsidiary $ 6,647 $ 6,294 $ 4,648 Interest income 2 12 14 Other income 444 472 501 - ------------------------------------------------------------------------------ Total Operating Income 7,093 6,778 5,163 - ------------------------------------------------------------------------------ Operating Expense: Interest expense 3,143 3,024 1,909 Other expense 996 833 668 - ------------------------------------------------------------------------------ Total Operating Expense 4,139 3,857 2,577 - ------------------------------------------------------------------------------ Income before income taxes and equity in undistributed income of subsidiaries 2,954 2,921 2,586 Federal income tax benefit (1,243) (1,144) (701) - ------------------------------------------------------------------------------ Income before equity in undistributed income of subsidiaries 4,197 4,065 3,287 Equity in undistributed income of subsidiaries 9,807 4,488 7,054 - ------------------------------------------------------------------------------ Net Income $14,004 $ 8,553 $10,341 ============================================================================== CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, - ------------------------------------------------------------------------------ (in thousands) 2002 2001 2000 - ------------------------------------------------------------------------------ Cash Flows from Operating Activities: Net Income $ 14,004 $ 8,553 $ 10,341 Adjustments: Decrease (increase) in other assets 1,788 (1,606) (196) Equity in undistributed income of subsidiaries (9,807) (4,488) (7,054) Increase in other liabilities 91 56 98 - ------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 6,076 2,515 3,189 - ------------------------------------------------------------------------------ Cash Flows from Investing Activities: Investing in subsidiaries (33,787) (10,895) (22,626) - ------------------------------------------------------------------------------ Net Cash Used by Investing Activities (33,787) (10,895) (22,626) - ------------------------------------------------------------------------------ Cash Flows from Financing Activities: Decrease in obligation for ESOP (400) (400) (400) Proceeds from issuance of subordinated debentures -- 6,190 15,464 Proceeds from shares issued 35,253 7,845 7,304 Treasury shares acquired (124) -- -- Dividends paid (3,546) (3,341) (2,840) - ------------------------------------------------------------------------------ Net Cash Provided by Financing Activities 31,183 10,294 19,528 - ------------------------------------------------------------------------------ Net increase in cash 3,472 1,914 91 Cash as of beginning of year 2,224 310 219 - ------------------------------------------------------------------------------ Cash as of end of year $ 5,696 $ 2,224 $ 310 ============================================================================== F-26 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, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As disclosed in Note 7 to the consolidated financial statements, the Corporation adopted Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" effective December 31, 2002. KPMG LLP Short Hills, New Jersey January 27, 2003, except for Note 8, which is as of February 20, 2003 F-27 INDEX TO EXHIBITS
Exhibit Number Description - ------------------------------------------------------------------------------------------------------------------ 3.1 Restated Certificate of Incorporation of the Company, as corrected by the Certificate of Correction thereto filed on July 6, 1995 and as amended by the Certificate of Amendment thereto filed on March 6, 1998. (A) 3.2 By-Laws of the Company (A) 4.1 Specimen Share of Common Stock (B) 4.2 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. (B) 4.3 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. (B) 4.4 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. 4.5 The Registrant will furnish to the Commission upon request copies of the following documents relating to the Registrant's Series A 9.50% Junior Subordinated Deferrable Interest Debentures due June 22, 2030: (i) Amended and Restated Declaration of Trust dated June 23, 2000, among the Registrant, The Bank of New York, as property trustee, and the Administrative Trustees of Yardville Capital Trust II; (ii) Indenture dated as of June 23, 2000, between the Registrant and The Bank of New York, as trustee, relating to the Registrant's Series A 9.50% Junior Subordinated Deferrable Interest Debentures due June 22, 2030; and (iii) Series A Capital Securities Guarantee Agreement dated as of June 23, 2000, between the Registrant and The Bank of New York, as trustee, relating to the Series A Capital Securities of Yardville Capital Trust II. 4.6 The Registrant will furnish to the Commission upon request copies of the following documents relating to the Registrant's Series A 10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031: (i) Amended and Restated Declaration of Trust dated March 28, 2001, among the Registrant, Wilmington Trust Company, as property trustee, and the Administrative Trustees of Yardville Capital Trust III; (ii) Indenture dated as of March 28, 2001, between the Registrant and Wilmington Trust Company, as trustee, relating to the Registrant's Series A 10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031; and (iii) Series A Capital Securities Guarantee Agreement dated as of March 28, 2001, between the Registrant and Wilmington Trust Company, as trustee, relating to the Series A Capital Securities of Yardville Capital Trust III.
E-1 INDEX TO EXHIBITS
Exhibit Number Description - ------------------------------------------------------------------------------------------------------------------ 4.7 The Registrant will furnish to the Commission upon request copies of the following documents relating to the Registrant's Floating Rate Junior Subordinated Deferrable Interest Debentures due March 1, 2033: (i) Amended and Restated Declaration of Trust dated February 19, 2003, among the Registrant, Wilmington Trust Company, as property trustee, and the Administrative Trustees of Yardville Capital Trust IV; (ii) Indenture dated as of February 19, 2003, between the Registrant and Wilmington Trust Company, as trustee, relating to the Registrant's Floating Rate Junior Subordinated Deferrable Interest Debentures due March 1, 2033; and (iii) Capital Securities Guarantee Agreement dated as of February 19, 2003, between the Registrant and Wilmington Trust Company, as trustee, relating to the Floating Rate Capital Securities of Yardville Capital Trust IV. 10.1 Employment Contract between Registrant and Stephen F. Carman* 10.2 Employment Contract between Registrant and Jay G. Destribats* 10.3 Employment Contract between Registrant and James F. Doran* 10.4 Employment Contract between Registrant and Frank Durand III* 10.5 Employment Contract between Registrant and Howard N. Hall* 10.6 Employment Contract between Registrant and Timothy J. Losch* 10.7 Employment Contract between Registrant and Eugene C. McCarthy* 10.8 Employment Contract between Registrant and Daniel J. O'Donnell* 10.9 Employment Contract between Registrant and Patrick M. Ryan* 10.10 Employment Contract between Registrant and John P. Samborski* 10.11 Employment Contract between Registrant and Sarah J. Strout* 10.12 Employment Contract between Registrant and Stephen R. Walker* 10.13 Supplemental Executive Retirement Plan* 10.14 Supplemental Executive Retirement Plan Summary for the Benefit of Jay G. Destribats* 10.15 Supplemental Executive Retirement Plan Summary for the Benefit of Patrick M. Ryan* 10.16 Supplemental Executive Retirement Plan Summary for the Benefit of Stephen F. Carman* 10.17 Supplemental Executive Retirement Plan Summary for the Benefit of Timothy J. Losch* 10.18 1988 Stock Option Plan* (D) 10.19 1994 Stock Option Plan* 10.20 Directors' Deferred Compensation Plan* (C) 10.21 1997 Stock Option Plan* (F) 10.22 Yardville National Bank Employee Stock Ownership Plan, as amended* (E) 10.23 Lease agreement between Crestwood Construction and the Bank dated May 25, 1998
E-2 INDEX TO EXHIBITS
Exhibit Number Description - ------------------------------------------------------------------------------------------------------------------ (G) 10.24 Real property lease between the Bank and BYN, LLC for our branch located at 1041 Route 206, Bordentown, New Jersey (G) 10.25 Real property lease between the Bank and FYNB, LLC for our branch located in Raritan, New Jersey (G) 10.26 Real property lease between the Bank and Union Properties, LLC for our branch located at 1575 Brunswick Avenue, Lawrence, New Jersey (G) 10.27 Real property lease between the Bank and The Lalor Urban Renewal Limited Partnership for our branch located in the Lalor Plaza in Trenton, New Jersey 21 List of Subsidiaries of the Registrant 23 Consent of KPMG, LLP 99.1 Certification by Patrick M. Ryan, President and CEO 99.2 Certification by Stephen F. Carman, Vice President and Treasurer (A) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-78050) (B) Incorporated by reference to the Registrant's Registration Statement on Form S-2 (Registration Nos. 333-35061 and 333-35061-01) (C) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-28193) (D) 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 (E) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998 (F) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-71741) (G) Incorporated by reference to the Registrant's Registration Statement on Form S-3 (Registration No. 333-99269) * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K.
E-3 EX-3.(I) 3 ex3-1.txt EX3-1.TXT RESTATED CERTIFICATE OF INCORPORATION of YARDVILLE NATIONAL BANCORP Pursuant to the provisions of Section 14A:9-5, Corporations, General of the New Jersey Statutes, the undersigned corporation (hereinafter the "Corporation") hereby executes the following Restated Certificate of Incorporation: ARTICLE I CORPORATION NAME The name of the Corporation shall be Yardville National Bancorp. ARTICLE II CORPORATE PURPOSE The purpose for which the Corporation is organized is to engage in any activities for which corporations may be organized under the New Jersey Business Corporation Act, subject to any restrictions which may be imposed from time to time by the laws of the United States or the State of New Jersey with regard to the activities of a bank holding company. ARTICLE III CAPITAL STOCK A. The total authorized capital stock of the corporation shall be 7,000,000 shares, consisting of 6,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock which may be issued in one or more classes or series. The shares of Common Stock shall constitute a single class and shall be without nominal or par value. The shares of Preferred Stock of each class or series shall be without nominal or par value, except that the amendment authorizing the initial issuance of any class or series, adopted by the Board of Directors of the Corporation (hereinafter, the "Board") as provided herein, may provide that shares of any class or series shall have a specified par value per share, in which event all of the shares of such class or series shall have the par value per share so specified. B. The Board is expressly authorized from time to time to adopt and to cause to be executed and filed without further approval of the shareholders amendments to this Restated Certificate of Incorporation authorizing the issuance of one or more classes or series of Preferred Stock for such consideration as the Board may fix. In an amendment authorizing any class or series of Preferred Stock, the Board is expressly authorized to determine: (1) the distinctive designation of the class or series and the number of shares which will constitute the class or series, which number may be increased or decreased (but not below the number of shares then outstanding) from time to time by action of the Board; (2) the dividend rate on the shares of the class or series, whether dividends will be cumulative, and, if so, from what date or dates; (3) the price or prices at which, and the terms and conditions on which, the shares of the class or series may be redeemed at the option of the Corporation; (4) whether or not the shares of the class or series will be entitled to the benefit of a retirement or sinking fund to be applied to the purchase or redemption of such shares and, if so entitled, the amount of such fund and the terms and provisions relating to the operation thereof; (5) whether or not the shares of the class or series will be convertible into, or exchangeable for, any other shares of stock of the Corporation or other securities, and if so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and any adjustments thereof, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (6) the rights of the shares of the class or series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (7) whether or not the shares of the class or series will have priority over, be on parity with, or be junior to the shares of any other class or series in any respect, whether or not the shares of the class or series will be entitled to the benefit of limitations restricting the issuance of shares of any other class or series having priority over or on parity with the shares of such class or series and whether or not the shares of the class or series are entitled to restrictions on the payment of dividends on, the making of other distributions in respect of, and the purchase or redemption of shares of any other class or series of Preferred Stock or Common Stock ranking junior to the shares of the class or series; (8) whether the class or series will have voting rights, in addition to any voting rights provided by law, and if so, the terms of such voting rights; and (9) any other preferences, qualifications, privileges, options and other relative or special rights and limitations of that class or series. ARTICLE IV CURRENT REGISTERED OFFICE AND CURRENT REGISTERED AGENT The address of the Corporation's current registered office is Woodland Falls Corporate Park,200 Lake Drive East, Suite 206, Cherry Hill, New Jersey 08002, and the name of its current registered agent at that address is Stradley, Ronon, Stevens & Young, Attention: Joseph V. Del Raso, Esquire. ARTICLE V BOARD OP DIRECTORS A. Number of Directors; Classification. The number of directors of the Corporation shall be not less than 5 nor more than 25 persons. The exact number of directors within such minimum and maximum limitations shall be fixed from time to time by the Board pursuant to a resolution adopted by a majority of the entire Board. The directors constituting the Board shall be classified, with respect to the time for which they hold office, into three classes, as nearly equal in number as possible. At the annual meeting of shareholders held in 1986, one class will be elected for a term of two years, and another class will be elected for a term of three years, each class to hold office until its successors are elected and qualified. At each annual meeting thereafter the successors of the class of directors whose term expires in that year shall be elected to hold office for a term of three years and thereafter until their successors are elected and qualified. B. Newly Created Directorships and Vacancies. Newly created directorships resulting from any increase in the number of directors may be filled by the Board and any vacancies on the Board resulting from death, resignation, disqualification, retirement, removal or other cause may be filled by the affirmative vote of a majority of the remaining directors even though less than a quorum of the Board, or by a sole remaining director. Any director chosen in accordance with the preceding sentence shall hold office until the next succeeding annual meeting of shareholders and until his successor shall have been elected and qualified. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director. C. Removal. Any director, or the entire Board, may be removed at any time by the shareholders, with or without cause, but only by the affirmative vote of the holders of at least 30% of the shares of the Corporation entitled to vote for the election of directors. The Board may remove any director for cause by a majority vote of the entire Board. D. Amendment, Repeal, Etc. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of at least 80% of the shares of the Corporation entitled to vote thereon shall be required to amend or repeal any provision in this Article V. Notwithstanding the foregoing, the Corporation may issue Preferred Stock, and classes and series thereof, which grant the holders of such Preferred Stock, or any class of series thereof, the right to elect (annually or otherwise), and to remove, additional directors in the event of dividend default or arrearage. E. Current Directors. The number of directors constituting the current Board of Directors is twelve (12). The name and address of each of the directors is as follows: Jay G. Destribats Edward N. Hendrickson 4 Bernath Drive 625 Medford Leas Trenton, NJ 08610 Medford, NJ 08055 Patrick H. Ryan Gilbert W. Lugossy 63 Corona Court 100 W. Park Avenue Old Bridge, NJ 08610 Trenton, NJ 08610 John C. Stewart Weldon J. McDaniel, Jr. 2238 Spruce Street 2238 Spruce Street Trenton, NJ 08638 Trenton, NJ 08620 C. West Ayres Samuel E. Proctor Route 130 & Jones Street 112 Mercer Street Burlington, NJ 08016 Hamilton Square, NJ 08690 Lorraine Buklad William J. Steiner, Jr. 2141 South Board Street 107 Brighton Drive Hamilton, NJ 08610 Mercerville, NJ 08619 Anthony M. Giampetro Kevin Tylus 643 North Ithan Avenue 4 Azalea Way Rosemont, PA 19010 Hamilton Square, NJ 08690 4 ARTICLE VI INDEMNIFICATION The Corporation shall indemnify its officers, directors, employees, and agents and formers off icexe, directors, employees and agents, and any other person serving at the request of the Corporation as an officer, director, employee or agent of another corporation, association, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees, judgments, fines, and amounts paid in settlement) incurred in connection with any pending or threatened action, suit, or proceeding, whether civil, criminal, administrative or investigative, with respect to which such officer, director, employee, agent or other person is a party, or is threatened to be made a party, to the full extent permitted by the New Jersey Business Corporation Act. The indemnification provided herein shall not be deemed exclusive of any other right to which any person seeking indemnification may be entitled under any by-law, agreement, or vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity, and shall inure to the benefit of the heirs, executors, and the administrators of any such person. The Corporation shall have the power to purchase and maintain insurance on behalf of any persons enumerated above against any liability asserted against him and incurred by him in any such capacity, arising out of his status as such, whether or not the Corporation could have the power to indemnify him against such liability under the provisions of this Article VI. ARTICLE VII SHAREHOLDER ACTION; SPECIAL MEETINGS Any action required or permitted to be taken by the shareholders of the Corporation shall be effected at a duly called annual or special meeting of shareholders of the Corporation and may not be effected by any consent in writing by such shareholders unless all the shareholders entitled to vote thereon consent thereto in writing. Special meetings of shareholders of the Corporation may be called only by the Board pursuant to a resolution approved by a majority of the entire Board, or by the Chairman of the Board, the President, or the Executive Committee of the Board. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at 80% of the shares of the Corporation entitled to vote thereon shall be required to amend or repeal this Article VII. Notwithstanding the foregoing, the Corporation may issue Preferred Stock, and classes and series thereof, which grant the holders of such Preferred Stock the right to call a special meeting and to act by non-unanimous written consent. 5 ARTICLE VIII BUSINESS COMBINATIONS A. Vote Required for Certain Business Combinations. In addition to any affirmative vote required by law or this Restated Certificate of Incorporation and except as otherwise expressly provided in paragraph B of this Article VIII, (1) any merger or consolidation of the Corporation or any Subsidiary (a~ hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or (b) any other corporation or other person (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder, or (2) any plan of exchange for all the outstanding shares of the Corporation or any Subsidiary or for any class of shares of either with (a) any Interested Shareholder or (b) any other corporation or other person (whether or not itself an Interested Shareholder) which is, or after such plan of exchange would be, an Affiliate of an Interested Shareholder, or (3) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions to or with any Interested Shareholder or Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $2,000,000 or more, or (4) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $2,000,000 or more, or (5) the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder, or (6) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder (any transaction referred to in any or more of clauses (1) through (6) of this paragraph is hereinafter referred to as a "Business Combination"), shall require the affirmative vote of the holders of at least 80% of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law, by this Restated Certificate of Incorporation or otherwise. 6 B. When Higher Vote is not Required. The provisions of paragraph A of this Article VIII shall not be applicable to any particular Business combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law and any other provision of this Restated Certificate of Incorporation, if the Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined) or all, of the following conditions shall have been met: (1) The aggregate of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest of the following: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it (i) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (ii) in the transaction in which it became an Interested Shareholder, whichever is higher; (b) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this Article VIII as the "Determination Date"), whichever is higher; and (c) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock determined pursuant to paragraph B(1) (b) above, multiplied by the ratio of (i) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it within the two--year period immediately prior to the Announcement Date to (ii) the Fair Market Value per share of Common Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of Common Stock. 7 (2) The consideration to be received by the holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of Voting Stock. If the Interested Shareholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (3) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any division of the Common Stock), except as approved by a majority of the continuing Directors, and (ii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Shareholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder. (4) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (5) A proxy or information statement describing the proposed Business Combination, and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). 8 C. Certain Definitions and Interpretations. For the purpose of this Article VIII: (1) "Person" shall mean any individual, firm, corporation or other entity, (2) "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which (a) is the beneficial owner, directly or indirectly, of more than 10% of the outstanding Voting Stock, or (b) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock, or (c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two- year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. For the purpose of determining whether a person is an Interested Shareholder, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph C(3) of this Article VIII but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (3) A person shall be deemed the "beneficial owner" of any voting Stock (a) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly, or (b) which such person or any of its Affiliates or Associates has (1) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options or otherwise or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of Its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. 9 (4) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule l2B-2 of the General Rules and Regulations under the Securities and Exchange Act of 1934, as in effect on April 29, 1986. (5) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph C(2) of this Article VIII, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (6) "Continuing Director" means any member of the Board who was on the Board on April 29, 1986, and any subsequent member of the Board who is unaffiliated with the Interested Shareholder and was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. (7) "Fair Market Value" means (I) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stock, or if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date In question on the National Association of Securities Dealers, Inc.'s Automated Quotation System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith. (8) In the event of any Business Combination in which the Corporation survives, for purposes of paragraph B(1) and (2) of this Article VIII the consideration to be received shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. (9) The directors of the Corporation shall have the power and duty to determine for the purposes of this Article VIII, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Shareholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another and (d) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business combination has, an aggregate Fair Market Value of $2,000,000 or more. 10 D. No effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article VIII shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. E. Amendment, Repeal, Etc. Notwithstanding any other provisions of this Restated Certificate of Incorporation or the By--Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Restated Certificate of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of 80% or more of the shares of the then outstanding Voting Stock, voting together as a single class, shall be required to amend or repeal this Article VIII. ARTICLE IX LIMITATION OF LIABILITY OF DIRECTORS and OffICERS A. director or officer of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for breach of any duty owed to the Corporation or its shareholders, except that such provision shall not relieve a director or officer from liability for any breach of duty based upon an act or omission (i) in breach of such person's duty of loyalty to the Corporation or its shareholders, (ii) not in good faith or involving a knowing violation of law, or (iii) resulting in receipt by such person of an improper personal benefit. If the New Jersey Business Corporation Act is amended after March 17, 1987, to authorize corporate action further eliminating or limiting the personal liability of directors or officers, then the liability of a director and/or officer of the Corporation shall be eliminated or limited to the fullest extent permitted by the New Jersey Business Corporation Act as so amended. B. Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation or otherwise shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. 11 ARTICLE X CONSIDERATIONS OP NON-ECONOMIC FACTORS IN CONSIDERING A TAKEOVER BID The Board, when evaluating any offer of another party to (i) purchase or exchange any securities or property for any outstanding equity securities of the Corporation, (ii) merge or consolidate the Corporation with another corporation, or (iii) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation (each of the foregoing, an "Acquisition Proposal") shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, give due consideration not only to the price or other consideration being offered but also to all other relevant factors, including without limitation the financial and managerial resources and future prospects of the other party, the possible effects of the Acquisition Proposal on the business of the Corporation and its subsidiaries and on the employees, customers, suppliers and creditors of the Corporation and its subsidiaries, and the effects of the Acquisition Proposal on the communities in which the Corporation's facilities are located. In so evaluating any Acquisition Proposal, the Board of Directors shall be deemed to be performing their duly authorized duties and acting in good faith and in the best interests of the Corporation within the meaning of the New Jersey Business Corporation Act, as it may be amended from time to time. YARDVILLE NATIONAL BANCORP By: /s/ Patrick M. Ryan ---------------------------------- Name: Patrick M. Ryan Title: President/CEO 12 CERTIFICATE REQUIRED TO BE FILED WITH THE RESTATED CERTIFICATE OF INCORPORATION OF YARDVILLE NATIONAL BANCORP To: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:9-5(5), Corporations, General, of the New Jersey Statutes, the undersigned corporation (hereinafter, the "Corporation") hereby executes the following certificate: FIRST: The name of the corporation is Yardville National Bancorp. SECOND: The Restated Certificate of Incorporation of the Corporation was adopted by the board of directors of the Corporation on the 22nd day of February, 1995. THIRD: This Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of the Corporation by designating the following new registered office and the following new registered agent at that address: Registered Office: Woodland Falls Corporate Center 200 Lake Drive East, Suite 206 Cherry Hill, New Jersey 08002 Registered Agent: Stradley, Ronon, Stevens & Young Attention: Joseph V. Del Raso, Esquire Dated: February 22, 1995 YARDVILLE NATIONAL BANCORP By: /s/ Patrick M. Ryan ----------------------------- Name: Patrick M. Ryan Title: President/CEO Mail to: Secretary of State, CN-308, Trenton, NJ 08625 TYPE ALL INFORMATION EXCEPT SIGNATURE /X/ Title 14A:1-6(5) New Jersey Business Corporation Act (File in DUPLICATE) / / Title 15A:1-7(e) New Jersey Nonprofit Corporation Act (File in TRIPLICATE) CERTIFICATE OF CORRECTION OF: Corporation Name: YARDVILLE NATIONAL BANCORP ------------------------------------------------ Corporation Number: ------------------------------------------------ (For use by Domestic, Foreign, Profit and Nonprofit Corporations) The undersigned hereby submits for filing a Certificate of Correction executed on behalf of the above named Corporation, pursuant to the provisions of the appropriate Statute, checked above, of the New Jersey Statues. 1. The Certificate to be corrected it: Restated Certificate of Incorporation Dated Filed: March 31. 1995 2. The Inaccuracy in the Certificate is (indicate inaccuracy or defect): The Certificate of Incorporation, as amended to March 31, 1995, required the affirmative vote of the holders of at least 80% of the shares of the Corporation entitled to vote for the election of directors in order to remove a director or the entire Board of Directors. Article V.C. of the Restated Certificate of Incorporation incorrectly stated that provision to read as follows: C. Removal. Any director, or the entire Board, may be removed at any time by the shareholders, with or without cause, but only by the affirmative vote of the holders of at least 30% of the shares of the Corporation entitled to vote for the election of directors. The Board may remove any director for cause by a majority vote of the entire Board. 3. The Certificate of Correction hereby reads as follows: Article V.C. of the Restated Certificate of Incorporation is hereby corrected to read as follows: C. Removal. Any director, or the entire Board, may be removed at any time by the shareholders, with or without cause, but only by the affirmative vote of the holders of at least 80% of the shares of the Corporation entitled to vote for the election of directors. The Board may remove any director for cause by a majority vote of the entire Board. Signature: /s/ Patrick M. Ryan ----------------------------------------- Name: Patrick M. Ryan ----------------------------------------- Title: President/CEO ----------------------------------------- (Must be Ch. of Bd., Pres. or Vice Pres.) The purpose of this form is to simplify the filing requirements of the Secretary of State and does not replace the need for competent legal advise. CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF Yardville National Bancorp To: The Secretary of State State of New Jersey EIN #22-2670267 Pursuant to the provisions of Section 14A:9-2(2), and Section 14A:9-4(2), Corporations, General, of the New Jersey Statutes (the "Business Corporation Act"), the undersigned corporation (hereinafter the "Corporation") executes the following Certificate of Amendment to its Certificate of Incorporation: 1. The name of the Corporation is Yardville National Bancorp. 2. Pursuant to Section 14A:7-15.1 of the Business Corporation Act, the board of directors of the Corporation adopted a resolution on December 23, 1997, approving the issuance on January 20,1998, to each holder of record of the Common Stock, no par value, of the Corporation (the "Common Stock") on January 5, 1998 (the "Record Date"), of a dividend payable in additional shares of authorized but unissued shares of Common Stock at the rate of one share of Common Stock for each share of Common Stock held of record by each holder on the Record Date (the "Share Dividend"). The number of shares of Common Stock subject to the Share Dividend was 2,479,049 and the number of shares of Common Stock issued pursuant to the Share Dividend was 2,479,049. 3. In connection with the Share Dividend, pursuant to Section 14A:7-15.1 of the Business Corporation Act, the board of directors of the Corporation adopted the following amendment to the Corporation's Certificate of Incorporation (the "Certificate"): RESOLVED, that the first sentence of Article III.A. of the Certificate shall be amended and restated as follows: "The total authorized capital stock of the Corporation shall be 13,000,000 shares, consisting of 12,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock which may be issued in one or more classes or series." 4. The foregoing amendment to the Certificate will not adversely affect the rights or preferences of the holders of outstanding shares of any class or series and will not result in the percentage of authorized shares that remains unissued after the Share Dividend exceeding the percentage of authorized shares that was unissued before the Share Dividend. Dated: 2/27/1998 YARDVILLE NATIONAL BANCORP By: /s/ Patrick M. Ryan ------------------------------------- Patrick M. Ryan, President and Chief Executive Officer EX-10 4 ex10-1.txt EXHIBIT 10.1 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 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, the 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, 2003 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 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 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, 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 any 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 to the Officer an annual salary of not less than $175,000.00, in the first year of the contract period and salary increase consideration of not less than 2.5%, if performance levels are met, in the second year of the contract period; which salary shall be paid in bi-weekly installments. The Board or a duly appointed committee shall review such salary thereof at least annually and the Board shall fix any adjustments in the amount of salary on said review from time to time. (B) The Officer 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 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: (i) The Bank shall pay for all reasonable travel and other reasonable expenses incurred by the Officer 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 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 of Federal law concerning employee rights to benefits upon termination. 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 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 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 Officer shall be entitled to receive two (2) 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. 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 an 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 the 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 WITHNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANCORP /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ Stephen F. Carman - ------------------------------ --------------------------------- Stephen F. Carman Executive Vice President & Chief Financial Officer EX-10 5 ex10-2.txt EXHIBIT 10.2 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this 31st day of January, 2003 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 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, the Executive shall serve as Chairman of the Board of the Yardville National Bank (the "Bank") reporting to the Board of Directors of the Bank and Yardville National Bancorp reporting to 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 Chairman of the Board of the Bank or 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, 2003 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 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 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 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 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. (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 this agreement, the Bank shall pay to the Executive an annual salary of not less than $270,000.00 any increase in the annual salary for the second year of this agreement will be subject to the recommendation and approval of the Directors' Organization and Compensation Committee. This Committee will utilize the services of an outside consultant to assist in the determination of the second year annual salary. (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. (ii) The Executive shall be eligible for an annual cash bonus, based upon the Bank's performance during the fiscal year. In the first year of the contract period the cash bonus allowance will be set at .93% of profits, after taxes and prior to shareholder dividend payments, if earnings, in the fiscal year, exceed $15,000,000.00. If earnings should fall below $15,000,000.00 the cash bonus allowance will be set at .84%, after taxes and prior to shareholder dividend payment. The cash bonus for year two of this agreement will be subject to the recommendation and approval of the Directors' Organization and Compensation Committee. This Committee will utilize the services of an outside consultant to assist in its determination of the second year bonus. 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 three (3) years' salary at the base salary currently being paid, and the cash bonus paid for the most recent prior calendar year, which payment shall be made in a lump sum within 30 days 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 within 30 days 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 and the cash bonus paid for the most recent prior calendar year. 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 an 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. 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 or twelve (12) months salary, whichever is greater, at the annual salary currently being paid with said payment to be a lump sum payable within 30 days after termination. 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. 10. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or checks 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. 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 WITHNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January 2003. ATTEST: YARDVILLE NATIONAL BANCORP /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President & CEO /s/ /s/ F. Kevin Tylus - ------------------------------ --------------------------------- F. Kevin Tylus, Chairman Directors' Organization & Compensation Committee WITNESS /s/ /s/ Jay G. Destribats - ------------------------------ --------------------------------- Jay G. Destribats Chairman of the Board EX-10 6 ex10-3.txt EXHIBIT 10.3 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 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, the 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 Sr. Lending Officer of the Yardville National Bank (the "Bank") reporting to the President & Chief Executive Officer. 2. TERMS AND DUTIES (A) The period of the Officer's employment agreement shall commence as of January 31, 2003 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 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, 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 any 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 to the Officer an annual salary of not less than $107,500.00, and salary increase consideration of not less than 2.5% if performance levels are met, in the second year of the contract period; which salary shall be paid in bi-weekly installments. The Board or a duly appointed committee shall review such salary 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 provided by the Bank with an automobile for his individual use: (i) The Bank shall provide pay for all reasonable travel and other reasonable expenses incurred by the Officer 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 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 of Federal law concerning employee rights to benefits upon termination. 7. CHANGE IN CONTROL (A) 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 an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (B) 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. 8. TERMINATION UPON DISABILITY (A) In the event that the Officer experiences a Disability during the period of employment, salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by an 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 personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and the 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 hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANK /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ James F. Doran - ------------------------------ --------------------------------- James F. Doran First Senior Vice President EX-10 7 ex10-4.txt EXHIBIT 10.4 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 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, the 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 Bank Administration Officer of the Yardville National Bank (the "Bank") reporting to the President & Chief Executive Officer. 2. TERMS AND DUTIES (A) The period of the Officer's employment agreement shall commence as of January 31, 2003 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 Bank Administration 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, 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 any 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 to the Officer an annual salary of not less than $100,000.00, and salary increase consideration of not less than 2.5% if performance levels are met, in the second year of the contract period; which salary shall be paid in bi-weekly installments. The Board or a duly appointed committee shall review such salary 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 an annual expense stipend of $7,000.00 for associated expenses incurred for extensive travel and vehicle maintenance in the performance of his duties as First Senior Vice President & Bank Administration Officer of a commercial bank. 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 extent 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 IN CONTROL (A) 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 an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (B) 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. 8. TERMINATION UPON DISABILITY (A) In the event that the Officer experiences a Disability during the period of employment, salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by an 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 personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and the 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 hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANK /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ Frank Durand III - ------------------------------ --------------------------------- Frank Durand III First Senior Vice President EX-10 8 ex10-5.txt EXHIBIT 10.5 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 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, the 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 Capital Markets Officer of the Yardville National Bank (the "Bank") reporting to the Executive Vice President & Chief Financial Officer. 2. TERMS AND DUTIES (A) The period of the Officer's employment agreement shall commence as of January 31, 2003 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 Captial Markets 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, 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 any 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 to the Officer an annual salary of not less than $125,000.00, and salary increase consideration of not less than 2.5% if performance levels are met, in the second year of the contract period; which salary shall be paid in bi-weekly installments. The Board or a duly appointed committee shall review such salary 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 provided by the Bank with an automobile for his individual use: (i) The Bank shall provide pay for all reasonable travel and other reasonable expenses incurred by the Officer 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 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 of Federal law concerning employee rights to benefits upon termination. 7. CHANGE IN CONTROL (A) 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 an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (B) 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. 8. TERMINATION UPON DISABILITY (A) In the event that the Officer experiences a Disability during the period of employment, salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by an 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 personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and the 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 hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANK /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ Howard N. Hall - ------------------------------ --------------------------------- Howard N. Hall First Senior Vice President EX-10 9 ex10-6.txt EXHIBIT 10.6 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 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 "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, the 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 Operating 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, 2003 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 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 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, 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 any 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 to the Officer an annual salary of not less than $170,000.00, in the first year of the contract period and salary increase consideration of not less than 2.5%, if performance levels are met, 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 on said review shall be fixed by Board from time to time. (B) The Officer 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 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: (i) The Bank shall pay for all reasonable travel and other reasonable expenses incurred by the Officer 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 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 of Federal law concerning employee rights to benefits upon termination. 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 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 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 Officer shall be entitled to receive two (2) 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. 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 an 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 the 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 WITHNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANCORP /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ Timothy J. Losch - ------------------------------ --------------------------------- Timothy J. Losch EVP/Chief Operating Officer EX-10 10 ex10-7.txt EXHIBIT 10.7 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Eugene C. McCarthy (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, the 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 Market Manager of the Northern Region 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, 2003 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 Market 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 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, 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 any 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 to the Officer an annual salary of not less than $112,500.00, and salary increase consideration of not less than 2.5% if performance levels are met, in the second year of the contract period; which salary shall be paid in bi-weekly installments. The Board or a duly appointed committee shall review such salary 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 an annual expense stipend of $5,000.00 for associated expenses incurred for extensive travel and vehicle maintenance in the performance of his duties as First Senior Vice President & Market Manager of a commercial bank. 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 extent 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 IN CONTROL (A) 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 an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (B) 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. 8. TERMINATION UPON DISABILITY (A) In the event that the Officer experiences a Disability during the period of employment, salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by an 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 personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and the 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 hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANK /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ Eugene C. McCarthy - ------------------------------ --------------------------------- Eugene C. McCarthy First Senior Vice President EX-10 11 ex10-8.txt EXHIBIT 10.8 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and Daniel J. 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, the 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 General Counsel of the Yardville National Bank (the "Bank") reporting to the Chairman of the Board. 2. TERMS AND DUTIES (A) The period of the Officer's employment agreement shall commence as of January 31, 2003 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 General Counsel 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, 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 any 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 to the Officer an annual salary of not less than $120,000.00, and salary increase consideration of not less than 2.5% if performance levels are met, in the second year of the contract period; which salary shall be paid in bi-weekly installments. The Board or a duly appointed committee shall review such salary 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 an annual expense stipend of $3,000.00 for associated expenses incurred for extensive travel and vehicle maintenance in the performance of his duties as First Senior Vice President & General Counsel of a commercial bank. 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 extent 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 IN CONTROL (A) 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 an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (B) 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. 8. TERMINATION UPON DISABILITY (A) In the event that the Officer experiences a Disability during the period of employment, salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by an 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 personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and the 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 hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANK /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ Daniel J. O'Donnell - ------------------------------ --------------------------------- Daniel J. O'Donnell First Senior Vice President EX-10 12 ex10-9.txt EXHIBIT 10.9 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this 31st day of January, 2003 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, the 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, the 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, 2003 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 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 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, (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 this agreement, the Bank shall pay to the Executive an annual salary of not less than $414,000.00. Any increase in the annual salary for the second year of this agreement will be subject to the recommendation and approval of the Directors' Organization and Compensation Committee. This Committee will utilize the services of an outside consultant to assist in the determination of the second year annual salary. 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 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. (ii) The Executive shall be eligible for an annual cash bonus, based upon the Bank's performance during the fiscal year. In the first year of the contract period the cash bonus allowance will be set at 1.4% of profits, after taxes and prior to shareholder dividend payments, if earnings, in the fiscal year, exceed $15,000,000.00. If earnings should fall below $15,000,000.00 the cash bonus allowance will be set at 1.25%, after taxes and prior to shareholder dividend payment. The cash bonus for year two of this agreement will be subject to the recommendation and approval of the Directors' Organization and Compensation Committee. This Committee will utilize the services of an outside consultant to assist in its determination of the second year bonus. 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 three (3) years' salary at the base salary currently being paid, and the cash bonus paid for the most recent prior calendar year, which payment shall be made in a lump sum within 30 days 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 within 30 days 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 and the cash bonus paid for the most recent prior calendar year. 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 an 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. 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 or twelve (12) months salary, whichever is greater, at the annual salary currently being paid with said payment to be a lump sum payable within 30 days after termination. 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. 10. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or checks 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. 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 WITHNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January 2003. ATTEST: YARDVILLE NATIONAL BANCORP /s/ /s/ Jay G. Destribats - ------------------------------ --------------------------------- Jay G. Destribats Chairman of the Board /s/ /s/ F. Kevin Tylus - ------------------------------ --------------------------------- F. Kevin Tylus, Chairman Directors' Organization & Compensation Committee WITNESS /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan the Executive EX-10 13 ex10-10.txt EXHIBIT 10.10 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 by and between THE YARDVILLE NATIONAL BANK (the "Bank"), a corporation organized under the laws of the State of New Jersey, and John P. Samborski (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, the 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 & Loan Officer for the Northern Region of the Yardville National Bank (the "Bank") reporting to the First Senior Vice President & Market Manager for the Northern Region. 2. TERMS AND DUTIES (A) The period of the Officer's employment agreement shall commence as of January 31, 2003 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 Chief Credit & Loan 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, 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 any 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 to the Officer an annual salary of not less than $100,000.00, and salary increase consideration of not less than 2.5%, if performance levels are met, in the second year of the contract period; which salary shall be paid in bi-weekly installments. The Board or a duly appointed committee shall review such salary 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 an annual expense stipend of $5,000.00 for associated expenses incurred for extensive travel and vehicle maintenance in the performance of his duties as First Senior Vice President & Chief Credit & Loan Officer of a commercial bank. 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 extent 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 IN CONTROL (A) 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 an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (B) 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. 8. TERMINATION UPON DISABILITY (A) In the event that the Officer experiences a Disability during the period of employment, salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by an 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 personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and the 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 hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANK /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ John P. Samborski - ------------------------------ --------------------------------- John P. Samborski First Senior Vice President EX-10 14 ex10-11.txt EXHIBIT 10.11 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 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, the 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 Administration Officer of the Yardville National Bank (the "Bank") reporting to the President & Chief Executive Officer. 2. TERMS AND DUTIES (A) The period of the Officer's employment agreement shall commence as of January 31, 2003 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 Chief Credit Administration 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, 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 any 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 to the Officer an annual salary of not less than $100,000.00, and salary increase consideration of not less than 2.5%, if performance levels are met, in the second year of the contract period; which salary shall be paid in bi-weekly installments. The Board or a duly appointed committee shall review such salary 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 an annual expense stipend of $3,000.00 for associated expenses incurred for extensive travel and vehicle maintenance in the performance of her duties as First Senior Vice President & Chief Credit Administration Officer of a commercial bank. 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 extent 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 IN CONTROL (A) 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 an annual salary currently being paid, which payment shall be made in a lump sum promptly after the occurrence of such voluntary resignation. (B) 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. 8. TERMINATION UPON DISABILITY (A) In the event that the Officer experiences a Disability during the period of employment, salary shall continue at the same rate as was in effect on the day of the occurrence of such Disability, reduced by an 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 personal representative, terminate the Officer's employment with no further notice. 9. GOVERNING LAW This Agreement and the 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 hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANK /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ Sarah J. Strout - ------------------------------ --------------------------------- Sarah J. Strout First Senior Vice President EX-10 15 ex10-12.txt EXHIBIT 10.12 EMPLOYMENT CONTRACT This AGREEMENT is made effective as of this thirty-first day of January, 2003 by and between THE YARDVILLE NATIONAL BANCORP (the "Holding Company"), a corporation organized under the laws of the State of New Jersey, and Stephen R. Walker (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, the 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 Information 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, 2003 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 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 Information 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, 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 any 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 to the Officer an annual salary of not less than $165,000.00, in the first year of the contract period and salary increase consideration of not less than 2.5%, if performance levels are met, 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 on said review shall be fixed by Board from time to time. (B) The Officer 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 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: (i) The Bank shall pay for all reasonable travel and other reasonable expenses incurred by the Officer 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 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 of Federal law concerning employee rights to benefits upon termination. 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 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 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 Officer shall be entitled to receive two (2) 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. 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 an 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 the 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 WITHNESS WHEREOF, the parties have hereunto executed this Agreement on the 31st day of January, 2003. ATTEST: YARDVILLE NATIONAL BANCORP /s/ /s/ Patrick M. Ryan - ------------------------------ --------------------------------- Patrick M. Ryan President/CEO WITNESS /s/ /s/ Stephen R. Walker - ------------------------------ --------------------------------- Stephen R. Walker EVP/Chief Information Officer EX-10 16 ex10-13.txt EXHIBIT 10.13 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF YARDVILLE NATIONAL BANK Purpose The purpose of the Yardville National Bank Supplemental Executive Retirement Plan is to provide those officers of Yardville National Bank listed in Appendix A attached hereto with supplemental retirement benefits in addition to those otherwise provided to employees of Yardville National Bank. The Plan is an unfunded plan maintained for the purpose of providing deferred compensation for selected officers of the Bank, each of whom is a member of a select group of management or highly compensated employees for purpose of Title I of the Employee Retirement Income Security Act of 1974, as amended. Previously, the officers listed in Appendix A were participants in either the Yardville National Bank Salary Continuation Plan or the Yardville National Bank Survivor Income Plan (collectively the "Prior Plans"). In order to achieve administrative efficiency, the Board has decided to combine the Prior Plans in this restated Plan. Accordingly, Yardville National Bank hereby adopts the Plan, effective January 1, 2001 (the "Effective Date") pursuant to the terms and provisions set forth below: ARTICLE 1 Definitions For purposes hereof, unless otherwise clearly apparent from the context, the following phrases and terms shall have the indicated meanings: 1.1. "Accrued Benefit" shall mean a Participant's Target Benefit, multiplied by a factor, no greater than one, the numerator of which is his or her Years of Participation and the denominator of which is the full number of years beginning on a Participant's Eligibility Date and ending on his or her Normal Retirement Date. 1.2. "Actuarial Equivalent" shall mean an amount or a series of payments that, at a given point in time, is determined to have the same or equivalent value, at that point in time, as another given amount or another given series of payments, taking into consideration the time value of money, mortality and such other actuarial factors as may be appropriate. 1.3. "Beneficiary" shall mean those persons designated by the Participant to receive benefits under the Plan as described in Article 6 upon the death of the Participant. 1.4. "Board" shall mean the Board of Directors of Yardville National Bank. 1.5. "Cause" is defined in Section 6.3 of this Plan. 1.6. "Change of Control" is defined in Article 10 of this Plan. 1.7. "Committee" shall mean the administrative committee appointed to manage and administer this Plan in accordance with the provisions of Article 13. 1.8. "Company" shall mean Yardville National Bank and any of its subsidiaries that are selected by the Board to participate in this Plan. 1.9. "Considered Compensation" shall mean the total of all payments (including salary, bonuses and all other elements of cash compensation except as specifically provided otherwise herein) made to a Participant on account of employment with the Company for services rendered, including any amounts of salary that the Participant may from time to time elect to defer under the Company's 401(k) Plan (or any similar successor plan or plans) or under any cafeteria plan (within the meaning of Section 125 of the Internal Revenue Code of 1986, as amended) or any nonqualified deferred compensation plan from time to time maintained by the Company, but excluding: (a) Payments arising from any stock bonus, stock option, stock appreciation rights or restricted stock plan; (b) Contributions to and payments from any qualified or nonqualified employee benefit plan of the Company (except as provided above); and (c) Cost of living differential, and automobile allowances. Considered Compensation in a particular period shall include salary payments actually received in that period as well as any amounts of salary that would have been received in that period had payment not been deferred through participation in the Company's 401(k) Plan (or any similar successor plan or plans) or in a cafeteria plan or nonqualified deferred compensation plan of the Company. 1.10. "Disability" shall mean a condition which qualifies for receipt of disability income payments under the Disability Plan. 1.11. "Disability Offset Amount" shall mean the sum of the following: (a) The annual amount of any disability income payments received by a Participant or his or her family members under the Social Security Act; and (b) The annual amount of disability income payments received by the Participant under the Disability Plan. 1.12. "Disability Plan" shall mean the long-term disability plan of the Company, if any, as now or hereafter amended, including any similar successor plan. -2- 1.13. "Eligibility Date" shall mean the date the Participant began accruing benefits under the Plan. This date shall be established from the Prior Plan for those individuals listed in Appendix A as of the Effective Date, except as otherwise provided by the Board. For any other individuals, this date will be established by the Board. 1.14. "Final Average Earnings" shall mean the average of the highest annual Considered Compensation received by a Participant during the three calendar years out of the current and preceding five calendar years during which his considered Compensation was the highest. At any point in time, Final Average Earnings shall be computed to the date of determination by taking into account actual Considered Compensation during the current calendar year (without annualization) and the five preceding calendar years. 1.15. "Normal Retirement Age" shall mean attainment of age 65 or attainment of both age 60 and 20 years of service, or such other date as described in a Prior Plan. 1.16. "Normal Retirement Date" shall mean the first day of the month following the month in which a Participant attains his or her Normal Retirement Age. 1.17. "Participant" shall mean an executive of the Company designated by the Board of Directors of the Company and approved by the Committee who is a member of a select group of management or highly compensated employees within the meaning of Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended. 1.18. "Plan" shall mean this Yardville National Bank Supplemental Executive Retirement Plan. 1.19. "Prior Plan" shall mean either the Yardville National Bank Salary Continuation Plan or the Yardville National Bank Survivor Income Plan previously established by the Company for any Participant listed on Appendix A as of the Effective Date. 1.20. "Plan Year" shall mean the 12-consecutive-month period ending December 31 of each year. 1.21. "Target Benefit" shall mean an amount equal to a stated percentage of a Participant's Final Average Earnings as described in Appendix A. 1.22. "Trust" shall mean the Supplemental Executive Retirement Plan Trust Agreement of Yardville National Bank. 1.23. "Vested Amount" shall mean the percentage of a Participant's Accrued Benefit which is nonforfeitable. The Vested Amount with respect to a Participant shall be 100% upon the occurrence of any of the following events: (a) attainment of his or her Normal Retirement Age, (b) the Participant's Disability as provided in Article 4, (c) the Participant's death as provided in Article 5, and (d) a Change of Control as described in Article 10. Upon a Participant's termination of employment for any other reason, except as provided in Section 6.2, the Participant's nonforfeitable percentage shall be equal to the percentage used in determining his or her Accrued Benefit. If a Participant's termination of employment is subject to Section 6.2, his or her nonforfeitable percentage shall be zero. -3- 1.24. "Year of Participation" shall mean for a Participant the full year measured from a Participant's Eligibility Date and anniversaries thereafter. ARTICLE 2 Participation 2.1. Participation. Upon nomination by the Board of Directors of the Company and approval by the Committee, an executive of the Company shall become a Participant effective as of the date specified in the nomination document. ARTICLE 3 Retirement 3.1. Normal Retirement Benefit. Except as provided in Section 6.2, upon retirement from the Company at or after his or her Normal Retirement Date, a Participant shall be entitled to receive an annual retirement benefit equal to his or her Target Benefit. 3.2. Form and Time of Retirement Payments Pursuant to Articles 3 and 6. (a) Form of Payment. The automatic form of benefits pursuant to Articles 3 and 6 shall be monthly installments for a period ending at the later of: (i) the Participant's death or (ii) one hundred eighty (180) months measured from the date on which benefits commence hereunder. Upon approval by the Board, a Participant may elect, before his or her termination of employment, not to receive his or her benefit in the automatic form, but to have his or her benefit paid in a single cash payment that is the Actuarial Equivalent of the automatic form of benefit otherwise payable to the Participant. Installment payments that would otherwise be payable in amounts less than $100 per month shall automatically be commuted to single cash payment that is the Actuarial Equivalent of the automatic form of benefit otherwise payable to the Participant. (b) Time of Payment. Payments shall be made in equal monthly installments commencing on the Normal Retirement Date or the actual date of retirement if the Participant defers his retirement beyond the Normal Retirement Date. A single cash payment, if elected, shall be paid within 90 days following the Participant's termination of employment. Neither installment payments nor a single cash payment shall be adjusted on account of a Participant's deferral of retirement past his or her Normal Retirement Date, except to the extent such adjustment results from changes in a Participant's Final Average Earnings. The Company may withhold from any payment any income tax or other amounts as required by law. -4- ARTICLE 4 Disability 4.1. Disability Benefit. If a Participant suffers a Disability while employed by the Company prior to his or her Normal Retirement Date for which he or she receives disability income payments under the Disability Plan, the Participant shall be entitled to receive a monthly disability benefit under this Plan equal to 1/ 12th of an amount equal to 100% of the Participant's Final Average Earnings, as of the date which is the first day of the seventh month following an onset of the Disability, reduced by the Disability Offset Amount. 4.2. Form and Duration of Disability Payment. The annual disability benefit under Section 4.1 shall be payable in equal monthly installments commencing on the date specified under Section 4.1 and continuing until the earliest of the following dates: (a) The date the Participant returns to active employment with either the Company or another employer; (b) The date that disability income payments cease under the Disability Plan; or (c) The Participant's Normal Retirement Date or date of death. 4.3. Benefits on Cessation of Disability Payments. After a Participant's disability benefits cease pursuant to Section 4.2, the Participant shall be entitled to benefits under this Plan determined as follows: (a) If the Participant's disability benefits cease because the Participant returns to active employment with the Company, or if they cease pursuant to Section 4.2(b) and the Participant returns to active employment with the Company within six (6) months following such cessation, then (i) the Participant shall be credited with Years of Participation for the period during which disability benefits were provided under this Plan; and (ii) the Participant shall thereafter be entitled to receive such benefits, if any, as are available under the other provisions of this Plan. (b) If the Participant's disability benefits cease because the Participant returns to active employment with another employer, or if they cease pursuant to Section 4.2(b) and the Participant does not return to active employment with the Company within six (6) months following such cessation, then (i) the Participant shall, for purposes of this Plan, be considered to have terminated employment as of the date of onset of his or her Disability and shall be credited with no further Years of Participation after that date; and (ii) the Participant shall thereafter be entitled to receive such benefits, if any, as are available under the other provisions of this Plan. (c) If the Participant's disability benefits cease because the Participant reaches his or her Normal Retirement Date or dies, then (i) the Participant shall be credited with Years of Participation for the period during which disability benefits were provided under this Plan; and (ii) the Participant shall be entitled to receive the benefit specified in Section 3.1, as if he or she had retired on that date, or the Participant's beneficiary shall be entitled to receive any death benefit specified in Section 5.1 or 5.2, as the case may be. Such benefit shall be computed as of the Participant's Normal Retirement Date or date of death, as the case may be, based on the Participant's Final Average Earnings as of the date of onset of the Participant's Disability, without reduction for disability benefits paid under this Plan. Such benefit shall be paid at the time and in the form specified in Section 3.2, 5.l or 5.2, as the case may be, except that, in the case of payments pursuant to Section 3.2, if any Disability Offset Amounts continue to be paid following the Participant's Normal Retirement Date, the payments shall be offset by such Amounts so long as they continue to be paid. 4.4. Disability After Normal Retirement Date. If a Participant suffers a Disability after his or her Normal Retirement Date but prior to actual retirement, the Participant shall be deemed to have retired as of the date of onset of the Disability and shall thereafter be entitled to receive the benefit specified in Section 3.1. Such benefit shall be computed as of the Participant's deemed date of retirement. Such benefit shall be paid at the time and in the form specified in Section 3.2, except that, if any Disability Offset Amounts are paid following the Participant's deemed retirement, the annuity payments shall be offset by such amounts so long as they continue to be paid. -5- ARTICLE 5 Death Benefit 5.1. Death Prior to Benefit Commencement. If a Participant dies before receiving any benefits under Article 3 of this Plan, then, the Participant's Beneficiary shall be entitled to receive an annual benefit, payable in monthly installments equal to 100% of the monthly retirement benefit that the Participant would have been entitled to receive under Section 3.1 if the Participant had retired immediately prior to his or her death and such benefit had been paid pursuant to Section 3.2. Such benefits will be payable to the Beneficiary for the same period as described in Section 3.2(a). 5.2. Death After Benefit Commencement. If a Participant dies after receiving any benefits under this Plan, then, the Participant's Beneficiary will receive any remaining payments which otherwise are due under Section 3.2(a). 5.3. Lack of Beneficiary Designation. In the absence of any effective beneficiary designation by the Participant, any amounts becoming due and payable upon the death of the Participant shall be paid to his or her executor or administrator. ARTICLE 6 Termination of Employment 6.1. Termination Prior to Normal Retirement Date. Except as provided in Sections 6.2 and 10.2, a Participant who terminates employment with the Company prior to his or her Normal Retirement Date for a reason other than death or Disability shall be entitled to receive an annual benefit commencing on his or her Normal Retirement Date equal to the Vested Amount of his or her Accrued Benefit as of the date of termination from employment. 6.2. Termination With Cause. If the Company terminates a Participant's employment with cause, then, except as expressly provided in Section 10.2 below, the Participant shall not thereafter be entitled to any benefits under this Plan. 6.3. Definition of Cause. As used in this Article 6, the term "Cause" shall include, without limitation, willful misconduct, fraud, violation of any federal or state law involving the commission of a crime against the Company, commission of a felony, or commission of a gross misdemeanor. The term "willful misconduct," as used in this Section 6.3, shall mean any act or failure to act which is done in bad faith with the intent to injure the Company's business or reputation. ARTICLE 7 Company/Participant Liability 7.1. General Assets. Amounts payable to a Participant shall be paid exclusively from the general assets of the Company. However, the Company has established the Trust to which the Company may make contributions in order to provide for the payment of benefits under the Plan. Notwithstanding the foregoing, Trust assets shall be treated as assets of the Company and shall remain subject to the claims of the general creditors of the Company under the circumstances set forth in the Trust. -6- 7.2. Company's Liability. The Company's liability for the payment of benefits shall be defined only by this Plan. 7.3. Limitation of Obligation. Except as expressly provided for in this Plan, the Company shall have no obligation under this Plan to a Participant or his or her Beneficiary, if any. 7.4. Participant Cooperation. A Participant must at all times cooperate with the Company and the Committee and furnish all information requested by the Company or the Committee in order to facilitate the determination of benefits or the administration of this Plan. Such cooperation shall include, without limitation, taking a physical or mental examination if so requested by the Company or the Committee. If a Participant fails promptly to cooperate or furnish requested information, the Committee, in its sole and absolute discretion, may withhold benefits from the Participant. 7.5. Unsecured General Creditor. A Participant and his or her Beneficiary, if any, shall not have, by reason of this Plan, any legal or equitable rights, claims or interests in any property or assets of the Company nor shall they be beneficiaries of, or have any legal or equitable rights, claims or interest in the life insurance policies or annuities or the proceeds therefrom owned, or which may be acquired, by the Company. Any and all of the Company's assets shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligations under this Plan shall be merely those of an unfunded and unsecured promise of the Company to pay money in the future. ARTICLE 8 No Guarantee of Employment 8.1. No Guarantee of Employment. Nothing in this Plan shall alter in any manner the employment relationship with a Participant. ARTICLE 9 Plan Amendment and Termination 9.1. Amendment. The Company may amend this Plan at any time so long as the rights required to be preserved on termination under Section 9.2 are not reduced. No amendment of this Plan or waiver of any of the specific provisions of this Plan shall be valid unless made pursuant to a duly executed written document. 9.2. Termination. Subject to Article 10, the Company may terminate this Plan at any time, for any reason, as follows: (a) Termination shall be by notice to the Committee, which shall notify Participants of the termination. The effective date of the termination shall not be earlier than the first day of the month in which notice is given.. (b) After the effective date of termination, no further executives shall be selected for participation and no further benefits shall accrue for existing Participants. -7- (c) In the event of termination, the retirement benefits of each existing Participant shall be paid at the time and in the amount and form specified under the terms of this Plan as in effect on the day before termination, except that the Participants' respective Accrued Benefits and Vested Amounts shall be based on their Final Average Earnings, Years of Service and Years of Participation as of the effective date of Plan termination. Notwithstanding the foregoing, the Company shall be entitled to provide retirement benefits in any alternative form that is the Actuarial Equivalent of the form in which the retirement benefits were payable under the provisions of this Plan in effect before termination. (d) Unless otherwise expressly provided at the time of termination of the Plan, no Participant shall be entitled to any benefit under this Plan on account of any Disability that commences following the effective date of Plan termination. ARTICLE 10 Change of Control 10.1. Change of Control. For purposes of this Plan, the term "Change of Control" means: (a) The acquisition by any person or entity of the power, directly or indirectly, to exercise a controlling influence over the management or policies of the Company (either alone or pursuant to an arrangement or understanding with one or more other persons or entities), whether through ownership of voting securities, through one or more intermediaries, by contract, or otherwise; or (b) The acquisition directly or indirectly by any person or entity (either alone or pursuant to an arrangement or understanding with one or more other persons or entities) of the ownership of or power to vote forty percent (40%) or more of the outstanding voting securities of the Company. 10.2. Termination of Employment Following a Change of Control. If, during the three-year period following a Change of Control, the employment of a Participant terminates prior to his or her Normal Retirement Date, then, except as provided in the next to last sentence of this Section 10.2, the Participant shall be deemed to have retired at or after his or her Normal Retirement Date under the provisions of this Plan, and shall be entitled to receive a retirement benefit in an annual amount equal to the Participant's Target Benefit (with the Target Benefit to be determined based on the Final Average Earnings of the Participant as of the date of termination). Such retirement benefit shall be paid in accordance with the provisions of Section 3.2 of this Plan effective as of the first month following the Participant's termination. The Participant's Target Benefit shall not be payable under this Section 10.2 if the Participant voluntarily terminates his or her employment (unless such employment has been constructively terminated within the meaning of Section 10.3 and the Participant terminates within six (6) months thereafter following written notice to the Company of the reason for such termination), if the Company terminates the Participant's employment for Cause, or if the Participant's employment terminates on account of Disability or death. If the Participant's employment terminates under any condition of the previous sentence, then Participant shall be limited to the other compensation and benefits payable under Articles 4, 5 and 6 of this Plan. -8- 10.3. Constructive Termination of Employment. A Participant's employment shall be deemed to be constructively terminated if: (a) The Participant's salary is either reduced by more than ten percent, or not increased for a period of two years, unless the salaries of all other Participants and officers of the Company are reduced in equal proportions or are not increased during the same period; (b) The title, duties or responsibilities of the Participant's job are substantially reduced from those existing immediately prior to the Change of Control; (c) The Participant's place of employment is changed by a distance of more than twenty-five miles without such Participant's consent; or (d) The Participant's salary is reduced by twenty-five percent or more. ARTICLE 11 Other Benefits and Agreements 11.1. Coordination with Other Benefits. The benefits under this Plan for a Participant and his or her Beneficiary, if any, are in addition to any other benefits available under any other plan or program for employees of the Company. This Plan shall supplement and shall not supersede, modify or amend any other such plan or program. ARTICLE 12 Restrictions on Alienation of Benefits 12.1. Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey, in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof. No part of the amounts payable hereunder shall, prior to actual payment, be subject to any claims of creditors and, in particular, they shall not be subject to attachment, garnishment, seizure or sequestration by any creditor for the payment of any debts, judgments, obligations, alimony or separate maintenance owed by a Participant or his or her Beneficiary, if any. ARTICLE 13 Administration of Plan 13.1. Committee Administration. The general administration of this Plan, as well as construction and interpretation hereof, shall be the responsibility of the Committee, the number of members of which shall be designated from time to time by the Board and the members of which shall be appointed from time to time by, and shall serve at the pleasure of, the Board. -9- 13.2. Committee Authority. The Committee shall have the exclusive right and authority-- (a) To from time to time establish rules, forms and procedures for the administration of this Plan; (b) To interpret this Plan and to correct any defect, supply any information and reconcile any inconsistency in such manner and to such extent as the Committee, in its sole and absolute discretion, shall deem necessary or advisable to carry out the purpose of this Plan; and (c) To make all other determinations that the Committee, in its sole and absolute discretion, shall deem necessary or advisable in connection with the administration of this Plan, including, without limitation, determination of (i) the benefit amounts to which a Participant is entitled (and the appropriate Final Average Earnings, Disability Offset Amount, Years of Participation to be used in determining such benefit amounts); (ii) whether Cause existed for the termination of employment of a Participant; (iii) whether a Participant's employment has been constructively terminated (within the meaning of Section 10.3) and (iv) whether benefits are to be withheld or terminated pursuant to Section 7.4. Subject to the claims procedures set forth in Article 14, all rules, procedures, interpretations and determinations made by the Committee in good faith shall be final, conclusive and binding upon all persons having or claiming to have any right or interest under this Plan. 13.3. Committee Indemnity. No member of the Committee shall be liable for any act or omission of any other member of the Committee, nor for any act or omission on his or her own part, excepting his or her own gross negligence. The Company shall indemnify and save harmless each member of the Committee against any and all expenses and liabilities arising out of his or her membership on the Committee, with the exception of expenses and liabilities arising out of his or her own gross negligence. ARTICLE 14 Claims Procedures 14.1. Presentation of Claim. Any Participant or the surviving Beneficiary, if any, of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from this Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. The claim must state with particularity the determination desired by the Claimant. -10- 14.2. Notification of Decision. The Committee shall consider a Claimant's claim within a reasonable time and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or (b) that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant; (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) specific reference(s) to pertinent provisions of this Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.3. 14.3. Review of Denied Claim. Within sixty (60) days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than thirty (30) days after filing of the written request for review, the Claimant (or the Claimant's duly authorized representative): (a) may review pertinent documents; (b) may submit written comments or other documents; and/or (c) may request a hearing, which request the Committee, in its sole and absolute discretion, may grant. 14.4. Decision on Review. The Committee shall render its decision on review promptly, and not later than sixty (60) days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within one hundred twenty (120) days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: (a) specific reasons for the decision; (b) reference to the specific Plan provisions on which the decision is based; and -11- (c) such other matters as the Committee deems relevant. Any decision on review made by the Committee in good faith shall be final, conclusive and binding upon the Claimant, unless the decision is determined to have been arbitrary and capricious. ARTICLE 15 Grantor Trust 15.1. Funding of Trust. The Company may from time to time transfer to the trustee of the Trust such assets as the Committee determines, in its sole and absolute discretion, should be transferred thereto. 15.2. Interrelationship of the Plan and the Trust. The provisions of this Plan shall govern the rights of a Participant and his or her Beneficiary to distributions pursuant to this Plan. The provisions of the Trust shall govern the rights of the Company, Participants and their Beneficiaries and the creditors of the Company to the assets, if any, transferred to the Trust. The Company shall at all times remain liable to carry out its obligations under this Plan. The Company's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust. ARTICLE 16 Miscellaneous 16.1. Notice. Any notice required or permitted to be given under this Plan by a Participant or a Claimant shall be in writing and shall be hand delivered against receipt, or mailed via registered or certified mail return receipt requested, to: Board of Directors Yardville National Bank 2465 Kuser Road Hamilton, NJ 08690 Any notice to a Participant or his or her Beneficiary, if any, required or permitted to be given under this Plan by the Committee or the Board shall be in writing and shall be hand delivered to the Participant or Beneficiary, or mailed via registered or certified mail, return receipt requested, to the last known address for the Participant or Beneficiary as shown on the records of the Company. 16.2. Successors. This Plan shall be binding upon the Company and its successors and assigns, and upon a Participant, the Participant's Beneficiary, if any, and their permitted assigns, heirs, executors and administrators. 16.3. Governing Law. This Plan shall be governed by and construed under the laws of the State of New Jersey to the extent such laws are not superseded by federal law. -12- 16.4. Pronouns. Masculine pronouns wherever used shall include feminine pronouns and the singular shall include the plural. 16.5. Headings. The headings of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 16.6. Validity. In the event any provision of this Plan shall be illegal or invalid for any reason, the illegality or invalidity of that provision shall not affect the remaining provisions hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 16.7. Incapacity of Recipient. If any person entitled to a benefit under the Plan is deemed by the Company to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such benefit or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor. -13- APPENDIX A The Company has designated the following persons as Participants in its Supplemental Executive Retirement Plan as of the Effective Date with (i) Years of Participation measured from the Eligibility Date and (ii) the Target Benefit equal to the percentage of Final Average Earnings as noted below 1. Jay G. Destribats Eligibility Date: December 31, 1994 Target Benefit: 60% of Final Average Earnings 2. Patrick M. Ryan Eligibility Date: October 28, 1994 Target Benefit: 60% of Final Average Earnings 3. Stephen F. Carman Eligibility Date: January 22, 1996 Target Benefit: 40% of Final Average Earnings 4. Timothy J. Losch Eligibility Date: January 1, 1998 Target Benefit: 40% of Final Average Earnings -14- EX-10 17 ex10-14.txt EXHIBIT 10.14 YARDVILLE NATIONAL BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP") SUMMARY OF TERMS FOR JAY DESTRIBATS o Eligibility. The Board has established your eligibility to participate in the SERP. Your Eligibility Date of 12/31/94 will be carried forward from the prior salary continuation plan between you and the Bank. o Accrued Benefit. Your accrued benefit under the SERP will be equal to a Target Benefit (60% of Final Average Earnings) multiplied by a fraction: "Years of Participation" over the full number of years beginning on your Eligibility Date and ending on your Normal Retirement Date. Years of Participation means the number of full years measured from your Eligibility Date. Final Average Earnings is the average of the high three years' compensation out of the last five years of employment. Compensation taken into account includes salary, bonus and pre-tax deferrals under other benefit arrangements, but excludes payments received under equity compensation arrangements, any cost of living differential and automobile allowances. Normal Retirement Age is age 70. Based on your date of birth of March 27, 1935, your Normal Retirement Date will be April 1, 2005. o Vesting. The Vested Amount will be determined by using a vesting percentage which is the same percentage as is used to determine the Accrued Benefit. However, special rules apply in the case of death, Disability and termination following a Change in Control. For example, assume you terminate employment voluntarily with the Bank in May, 2003 at age 68. Your Vested Amount is a fraction equal to the full number of years of participation in the SERP (8) over the full number of years from your Eligibility Date to your Normal Retirement Date (10). Thus, you are 80% vested in whatever pension you have earned to that point. Complete vesting (in the accrued benefit you have earned to date) occurs upon: o retirement after your Normal Retirement Date o termination of employment by the Bank within three years following a Change in Control (after three years, the regular rules apply, and you will earn vesting credit over your years of service until normal retirement) o voluntary termination of employment by you within six months following a Change in Control, under limited circumstances -1- In addition, you will qualify for benefits if your employment terminates due to death or disability. Disability means a condition that qualifies you for receipt of disability income payments under the Bank's long-term disability plan. Your benefits under the Plan will be forfeited if you are terminated for cause at any time. "Change in Control" means an acquisition directly or indirectly by any person or entity of the ownership of or power to vote 40% or more of the outstanding voting securities of the Bank. "Cause" means a significant deficiency in performance, disloyalty, fraud, violation of federal or state law involving commission of a crime against the Bank and the commission of a felony or gross misdemeanor against others. o Distributions Distributions will generally be paid in 180 monthly installments beginning on the first day of the month following the later of termination of employment or your Normal Retirement Age. Distributions that would be payable in monthly amounts less than $100 will be automatically commuted to an actuarially equivalent lump-sum. You may request payment in a lump-sum rather than in monthly installments. Distributions will be accelerated upon death, Disability or certain circumstances following a Change in Control as described above. In those instances, payments will begin on the first day of the month following the triggering event. Distributions upon death are payable to your designated Beneficiary. If no effective designation has been made, payments will be made to the your estate. In the event of Disability, a pension is payable to you in an amount equal to 100% of your Final Average Earnings as of the first day of the 7th month following the onset of your Disability. Any Disability payments you receive under the SERP will be reduced by Social Security disability benefits and by any amounts received by you under the Bank's long-term disability plan. Your disability pension ends at the same time as your Bank-provided disability insurance. After that, the usual rules of the SERP apply, and you will qualify for a SERP benefit based on your years of service at termination of employment. o Administration The Plan is administered by a committee appointed by the Board (the "Committee"). The Committee has the discretion to take remedial action, resolve discrepancies and establish rules, forms and procedures for the administration of the Plan. The Plan also contains a detailed Claims procedure. This is a summary of the Supplemental Executive Retirement Plan and how it applies to you. In the case of any discrepancy, the terms of the formal SERP document, as interpreted by the administrative committee appointed by the Board, control. -2- EX-10 18 ex10-15.txt EXHIBIT 10.15 YARDVILLE NATIONAL BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP") SUMMARY OF TERMS FOR PATRICK M. RYAN o Eligibility. The Board of Directors has established your eligibility to participate in the SERP. Your Eligibility Date of 10/28/94 will be carried forward from the prior salary continuation plan between you and the Bank. o Accrued Benefit. Your accrued benefit under the SERP will be equal to a Target Benefit (60% of Final Average Earnings) multiplied by a fraction: "Years of Participation" over the full number of years beginning on your Eligibility Date and ending on your Normal Retirement Date. Years of Participation means the number of full years measured from your Eligibility Date. Final Average Earnings is the average of the high three years' compensation out of the last five years of employment. Compensation taken into account includes salary, bonus and pre-tax deferrals under other benefit arrangements, but excludes payments received under equity compensation arrangements, any cost of living differential and automobile allowances. Normal Retirement Age is age 65. Based on your date of birth of June 21, 1944, your Normal Retirement Date will be July 1, 2009. o Vesting. The Vested Amount will be determined by using a vesting percentage which is the same percentage as is used to determine the Accrued Benefit. However, special rules apply in the case of death, Disability and termination following a Change in Control. For example, assume you terminate employment voluntarily with the Bank in December, 2007 at age 63. Your Vested Amount is a fraction equal to the full number of years of participation in the SERP (13) over the full number of years from your Eligibility Date to your Normal Retirement Date (15). Thus, you are about 87% vested in whatever pension you have earned to that point. Complete vesting (in the accrued benefit you have earned to date) occurs upon: o retirement after your Normal Retirement Date o termination of employment by the Bank within three years following a Change in Control (after three years, the regular rules apply, and you will earn vesting credit over your years of service until normal retirement) o voluntary termination of employment by you within six months following a Change in Control, under limited circumstances -1- In addition, you will qualify for benefits if your employment terminates due to death or disability. Disability means a condition that qualifies you for receipt of disability income payments under the Bank's long-term disability plan. Your benefits under the Plan will be forfeited if you are terminated for cause at any time. "Change in Control" means an acquisition directly or indirectly by any person or entity of the ownership of or power to vote 40% or more of the outstanding voting securities of the Bank. "Cause" means a significant deficiency in performance, disloyalty, fraud, violation of federal or state law involving commission of a crime against the Bank and the commission of a felony or gross misdemeanor against others. o Distributions Distributions will generally be paid in 180 monthly installments beginning on the first day of the month following the later of termination of employment or your Normal Retirement Age. Distributions that would be payable in monthly amounts less than $100 will be automatically commuted to an actuarially equivalent lump-sum. You may request payment in a lump-sum rather than in monthly installments. Distributions will be accelerated upon death, Disability or certain circumstances following a Change in Control as described above. In those instances, payments will begin on the first day of the month following the triggering event. Distributions upon death are payable to your designated Beneficiary. If no effective designation has been made, payments will be made to the your estate. In the event of Disability, a pension is payable to you in an amount equal to 100% of your Final Average Earnings as of the first day of the 7th month following the onset of your Disability. Any Disability payments you receive under the SERP will be reduced by Social Security disability benefits and by any amounts received by you under the Bank's long-term disability plan. Your disability pension ends at the same time as your Bank-provided disability insurance. After that, the usual rules of the SERP apply, and you will qualify for a SERP benefit based on your years of service at termination of employment. o Administration The Plan is administered by a committee appointed by the Board (the "Committee"). The Committee has the discretion to take remedial action, resolve discrepancies and establish rules, forms and procedures for the administration of the Plan. The Plan also contains a detailed Claims procedure. This is a summary of the Supplemental Executive Retirement Plan and how it applies to you. In the case of any discrepancy, the terms of the formal SERP document, as interpreted by the administrative committee appointed by the Board, control. -2- EX-10 19 ex10-16.txt EXHIBIT 10.16 YARDVILLE NATIONAL BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP") SUMMARY OF TERMS FOR STEPHEN F. CARMAN o Eligibility. The Board has established your eligibility to participate in the SERP. Your Eligibility Date of 01/22/96 will be carried forward from the prior survivor income plan between you and the Bank. o Accrued Benefit. Your accrued benefit under the SERP will be equal to a Target Benefit (40% of Final Average Earnings) multiplied by a fraction: "Years of Participation" over the full number of years beginning on your Eligibility Date and ending on your Normal Retirement Date. Years of Participation means the number of full years measured from your Eligibility Date. Final Average Earnings is the average of the high three years' compensation out of the last five years of employment. Compensation taken into account includes salary, bonus and pre-tax deferrals under other benefit arrangements, but excludes payments received under equity compensation arrangements, any cost of living differential and automobile allowances. Normal Retirement Age is age 60. Based on your date of birth of October 12, 1956, your Normal Retirement Date will be November 1, 2016. o Vesting. The Vested Amount will be determined by using a vesting percentage which is the same percentage as is used to determine the Accrued Benefit. However, special rules apply in the case of death, Disability and termination following a Change in Control. For example, assume you terminate employment voluntarily with the Bank in December, 2014 at age 58. Your Vested Amount is a fraction equal to the full number of years of participation in the SERP (20) over the full number of years from your Eligibility Date to your Normal Retirement Date (22). Thus, you are about 91% vested in whatever pension you have earned to that point. Complete vesting (in the accrued benefit you have earned to date) occurs upon: o retirement after your Normal Retirement Date o termination of employment by the Bank within three years following a Change in Control (after three years, the regular rules apply, and you will earn vesting credit over your years of service until normal retirement) o voluntary termination of employment by you within six months following a Change in Control, under limited circumstances -1- In addition, you will qualify for benefits if your employment terminates due to death or disability. Disability means a condition that qualifies you for receipt of disability income payments under the Bank's long-term disability plan. Your benefits under the Plan will be forfeited if you are terminated for cause at any time. "Change in Control" means an acquisition directly or indirectly by any person or entity of the ownership of or power to vote 40% or more of the outstanding voting securities of the Bank. "Cause" means a significant deficiency in performance, disloyalty, fraud, violation of federal or state law involving commission of a crime against the Bank and the commission of a felony or gross misdemeanor against others. o Distributions Distributions will generally be paid in 180 monthly installments beginning on the first day of the month following the later of termination of employment or your Normal Retirement Age. Distributions that would be payable in monthly amounts less than $100 will be automatically commuted to an actuarially equivalent lump-sum. You may request payment in a lump-sum rather than in monthly installments. Distributions will be accelerated upon death, Disability or certain circumstances following a Change in Control as described above. In those instances, payments will begin on the first day of the month following the triggering event. Distributions upon death are payable to your designated Beneficiary. If no effective designation has been made, payments will be made to the your estate. In the event of Disability, a pension is payable to you in an amount equal to 100% of your Final Average Earnings as of the first day of the 7th month following the onset of your Disability. Any Disability payments you receive under the SERP will be reduced by Social Security disability benefits and by any amounts received by you under the Bank's long-term disability plan. Your disability pension ends at the same time as your Bank-provided disability insurance. After that, the usual rules of the SERP apply, and you will qualify for a SERP benefit based on your years of service at termination of employment. o Administration The Plan is administered by a committee appointed by the Board (the "Committee"). The Committee has the discretion to take remedial action, resolve discrepancies and establish rules, forms and procedures for the administration of the Plan. The Plan also contains a detailed Claims procedure. This is a summary of the Supplemental Executive Retirement Plan and how it applies to you. In the case of any discrepancy, the terms of the formal SERP document, as interpreted by the administrative committee appointed by the Board, control -2- EX-10 20 ex10-17.txt EXHIBIT 10.17 YARDVILLE NATIONAL BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP") SUMMARY OF TERMS FOR TIMOTHY J. LOSCH o Eligibility. The Board has established your eligibility to participate in the SERP. Your Eligibility Date of 01/01/98 will be carried forward from the prior survivor income plan between you and the Bank. o Accrued Benefit. Your accrued benefit under the SERP will be equal to a Target Benefit (40% of Final Average Earnings) multiplied by a fraction: "Years of Participation" over the full number of years beginning on your Eligibility Date and ending on your Normal Retirement Date. Years of Participation means the number of full years measured from your Eligibility Date. Final Average Earnings is the average of the high three years' compensation out of the last five years of employment. Compensation taken into account includes salary, bonus and pre-tax deferrals under other benefit arrangements, but excludes payments received under equity compensation arrangements, any cost of living differential and automobile allowances. Normal Retirement Age is age 65. Based on your date of birth of May 22, 1950, your Normal Retirement Date will June 1, 2015. o Vesting. The Vested Amount will be determined by using a vesting percentage which is the same percentage as is used to determine the Accrued Benefit. However, special rules apply in the case of death, Disability and termination following a Change in Control. For example, assume you terminate employment voluntarily with the Bank in January, 2013 at age 62. Your Vested Amount is a fraction equal to the full number of years of participation in the SERP (15) over the full number of years from your Eligibility Date to your Normal Retirement Date (17). Thus, you are 88% vested in whatever pension you have earned to that point. Complete vesting (in the accrued benefit you have earned to date) occurs upon: o retirement after your Normal Retirement Date o termination of employment by the Bank within three years following a Change in Control (after three years, the regular rules apply, and you will earn vesting credit over your years of service until normal retirement) o voluntary termination of employment by you within six months following a Change in Control, under limited circumstances -1- In addition, you will qualify for benefits if your employment terminates due to death or disability. Disability means a condition that qualifies you for receipt of disability income payments under the Bank's long-term disability plan. Your benefits under the Plan will be forfeited if you are terminated for cause at any time. "Change in Control" means an acquisition directly or indirectly by any person or entity of the ownership of or power to vote 40% or more of the outstanding voting securities of the Bank. "Cause" means a significant deficiency in performance, disloyalty, fraud, violation of federal or state law involving commission of a crime against the Bank and the commission of a felony or gross misdemeanor against others. o Distributions Distributions will generally be paid in 180 monthly installments beginning on the first day of the month following the later of termination of employment or your Normal Retirement Age. Distributions that would be payable in monthly amounts less than $100 will be automatically commuted to an actuarially equivalent lump-sum. You may request payment in a lump-sum rather than in monthly installments. Distributions will be accelerated upon death, Disability or certain circumstances following a Change in Control as described above. In those instances, payments will begin on the first day of the month following the triggering event. Distributions upon death are payable to your designated Beneficiary. If no effective designation has been made, payments will be made to the your estate. In the event of Disability, a pension is payable to you in an amount equal to 100% of your Final Average Earnings as of the first day of the 7th month following the onset of your Disability. Any Disability payments you receive under the SERP will be reduced by Social Security disability benefits and by any amounts received by you under the Bank's long-term disability plan. Your disability pension ends at the same time as your Bank-provided disability insurance. After that, the usual rules of the SERP apply, and you will qualify for a SERP benefit based on your years of service at termination of employment. o Administration The Plan is administered by a committee appointed by the Board (the "Committee"). The Committee has the discretion to take remedial action, resolve discrepancies and establish rules, forms and procedures for the administration of the Plan. The Plan also contains a detailed Claims procedure. This is a summary of the Supplemental Executive Retirement Plan and how it applies to you. In the case of any discrepancy, the terms of the formal SERP document, as interpreted by the administrative committee appointed by the Board, control -2- EX-10 21 ex10-18.txt EXHIBIT 10.18 YARDVILLE NATIONAL BANCORP 1988 STOCK OPTION PLAN (1.) Purposes of Plan. This 1988 Stock Option Plan (the "Plan") is designed to assist Yardville National Bancorp (the "Company") in attracting and retaining highly qualified persons as Employees of the Company and its Subsidiaries and to provide such key employees with incentives to contribute to the growth and development of the business of the Company. This Plan will be effected through the granting of stock options on the terms and conditions hereinafter provided, which options are intended to qualify as "incentive stock options" within the meaning of section 422A of the Internal Revenue Code of 1986, as amended. (2.) Definitions Unless the context otherwise indicates the following terms have the following meanings: "Board" - means the Board of Directors of the Company. "Code" - means the Internal Revenue Code of 1986, as the same may from time to time be amended. "Committee" - means the Committee referred to in Section 4 hereof. "Common Stock" - means the Common Stock, no par value, of the Company. "Designated Beneficiary" - means the person designated by an optionee to be entitled on his death to any remaining rights arising out of an option, such designation to be made in accordance with such regulations as the Committee may implement from time to time. "Employee" - means any employee (including an officer) of the Company or any subsidiary of the Company. "Fair Market Value" - means the fair market value of Common Stock as determined by the Committee in a manner consistent with the Code and any regulations thereunder. "Incentive Stock Options" - means stock options which constitute incentive stock options within the meaning of Section 422A, or any successor section, of the Code having the provisions specified in the Plan for such incentive stock options and otherwise qualifies as a "Non Employee director" under Rule 16b-3 under the Exchange Act. "Parent" - means "parent corporation" as defined in Section 425(e), or any successor section, of the Code. "Stock Option Agreement"-- means a stock option agreement entered into pursuant to the Plan substantially in the form of Exhibit A hereto. "Subsidiary" - means "subsidiary corporation" as defined in Section 425(f), or any successor section, of the Code. "Ten Percent Stockholder" - shall mean any person who, immediately after any option is granted to such person owns, within the meaning of Section 422A(b) (6) (or any successor section of the Code) more than 10% of the total combined voting power of all classes of stock of the Company, its parent, if any, or its Subsidiaries. (3.) Stock Subject to Plan. The shares to be issued upon exercise of the options granted under the Plan shall be Common Stock. The maximum number of shares of Common Stock for which options may be granted under the Plan shall be 22,000 shares (subject to adjustment as provided in section 10 hereof). The Common Stock to be issued upon exercise of the options may be authorized but unissued shares or treasury shares, as determined from time to time by the Committee. If any option granted under the Plan shall expire or terminate for any reason whatsoever without having been exercised in full, the unpurchased shares of Common Stock previously subject to such option shall become available for new options. (4.) Administration. (a) The Plan shall be administered by a Stock Option Committee of not less than two Directors. The Board shall annually appoint the members of the Stock Option Committee at the annual organizing meeting of the Board. (b) The Board shall fill all vacancies on the Committee and may remove any member of the Committee at any time with or without cause. The Committee shall select its own chairman and shall adopt, alter or repeal such rules and procedures as it may deem proper and shall hold its meetings at such times and places as it may determine. The Committee shall keep minutes of its proceedings. Action by a majority of the Committee members present at any meeting at which a quorum is present, or action approved in writing by all members of the Committee without a meeting, shall constitute the acts of the Committee. (c) Subject to the provisions of the Plan, the Committee shall have the full and final authority to (i) determine the Employees to whom, and the times at which, options shall be granted and the number of shares subject to each option; (ii) prescribe, amend and determine the provisions of options granted under the Plan (which need not be identical) and, with the consent of the holder thereof, amend or modify any option; (iii) determine the provisions 2 of options granted under the Plan (which need not be identical) and, with the consent of the holder thereof, amend or modify any option; (iv) interpret the Plan and the respective options; and (v) make all other determinations necessary or advisable for administering the Plan. All determinations and interpretations by the Committee shall be binding upon all parties. No member of the Committee or the Board shall be liable for any action or determination made in good faith in respect of the Plan or any option granted under it. (d) The provisions of this Section 4 shall survive any termination of the Plan. (5.) Eligibility for Award of Options. (a) Options may be granted only to officers and other key employees of the Company and its Subsidiaries. Any reference in the Plan to "employment by the Company" shall also be deemed to include employment by any Subsidiary of the Company. Determination by the Committee or the Board as to who are eligible employees shall be conclusive. (b) A person who is a director of the Company, or any subsidiary, shall not be considered an officer or employee for the purpose of the Plan solely because he or she is a director. However, a person who otherwise is an eligible officer or employee shall not be disqualified by virtue of being a director of the Company or any Subsidiary. (c) More than one option may be granted to any eligible Employee. (6.) Option Price. (a) The purchase price of the Common Stock under each option shall be determined by the Committee. The purchase price shall be at least 100 percent (100%) of the fair market value of the Common Stock on the date of grant of the option. The purchase price under an option granted to an officer or employee who is a Ten Percent Stockholder shall be at least 110% of the fair market value of the Common Stock on the date of the grant of the option. (b) It is anticipated that the purchase price of the Common Stock under the option will be 100% of the fair market value, except that with respect to a Ten Percent Stockholder the purchase price will be 110% of the fair market value. The fair market value is expected to be the price most recently quoted by the market makers in the Common Stock. If there is no asked quotation, the fair market value is expected to be the bid quotation. If there is both a bid and asked quotation, the fair market value is expected to be the average of the bid and asked quotations. This paragraph shall not be binding on the Committee. The Committee in its discretion may issue stock options with a purchase price in excess of the fair market value and may utilize a different measure of the fair market value than that set forth here. 3 (7.) Annual Limitation on Grants To One Officer or Employee. No option shall be granted during any calendar year to any individual under the Plan if the aggregate fair market value (as of the time the option is granted) of the Common Stock with respect to which incentive stock options are exercisable for the first time by such individual during any calendar year (under the Plan and any other plan of the Company, its Parent, if any, and its Subsidiaries) exceeds $100,000. (8.) Terms and Exercise of Options. (a) Maximum 10 year Termination Date. Each option shall expire no later than ten years after the date on which it shall have been granted, but the Committee in its discretion may prescribe a shorter period for any individual option or options. Any Incentive Stock Option granted to a person who is a Ten Percent Stockholder shall terminate no later than 5 years after the date on which the option was granted. The date of termination pursuant to this paragraph is referred to hereinafter as the "termination date of the option." (b) Vesting. (i) Options shall be exercisable at such times and in such installments, if any, as the Committee may determine. In the event any option is exercisable in installments, any shares which may be purchased during any year or other period which are not purchased during such year or other period may be purchased at any time or from time to time during any subsequent year or period during the term of the option unless otherwise provided in the Stock Option Agreement. (ii) While the Committee may set any vesting schedule which it wishes, it is the expectation of the Board in adopting this Plan that the options vest during a period of up to five years after the date of grant. For example, the Committee may provide that only 25% of the shares granted under the option may be purchased during the first year after the date of grant, an additional 25% of the shares may be purchased commencing two years after the date of grant, an additional 25% of the shares may be purchased at any time three years after the date of grant and 100% of the stock may be purchased only four years after the date of grant. (iii) In connection with any proposed sale or conveyance of all or substantially all of the assets of the Company or of any proposed consolidation or merger of the Company or of any proposed Change in Control of the Company, the Board in its discretion may accelerate the vesting schedule of any or all options. In the event the Board does determine to accelerate the vesting schedule, it shall notify each holder of an option whose vesting schedule has been accelerated. 4 (c) Means of Exercise of Option. An option shall be exercised by written notice to the Secretary or Treasurer of the Company at its principal office. The notice shall specify the number of shares as to which the option is being exercised and shall be accompanied by payment in full of the purchase price for such shares. An optionee at his discretion may, in lieu of cash payment, deliver Common Stock already owned, with a Fair Market Value (on the date of exercise) equal to the purchase price for the shares being acquired pursuant to exercise of the option, as payment for the exercise of any option. In the event an option is being exercised in whole or in part, by any person other than the optionee, a notice of election shall be accompanied by proof satisfactory to the Company of the rights of such person to exercise said option. An optionee shall not, by virtue of granting of an option, be entitled to any rights of a shareholder in the Company and he shall not be considered a record holder of shares purchased by him until the date on which he shall actually be recorded as the holder of such shares upon the stock records of the Company. The Company shall not be required to issue any fractional shares upon exercise of any option and shall not be required to pay to the person exercising the option the cash equivalent of any fractional share interest unless so determined by the Committee. (d) Options Are Non-Transferrable. No stock options may be transferred by the optionee (except in connection with death or disability as provided in Section 8 (f) and (g). (e) Options Lapse 3 Months After Termination of Employment. In the event of the termination of an optionee's employment by the Company or its Subsidiaries at any time for any reason (excluding disability or death), his options and all rights thereunder shall be exercisable by the optionee at any time within three (3) months thereafter but only to the extent exercisable by him on the date of termination of his employment and in no event later than the termination date of his option. (f) Option Exercisable 12 Months After Termination in Event of Disability. In the event an employee is permanently and totally disabled (within the meaning of Section 422(c)(6), or any successor section, of the Code), his option and all rights thereunder shall be exercisable by the optionee at any time within twelve (12) months of his termination of employment, but in no event later than the termination date of the option. (g) Options Exercisable 12 Months After Date of Death. If an optionee shall die while in the employ of the Company or any of its Subsidiaries, his options may be exercised at any time within twelve (12), months after the date of his death, but only to the extent exercisable by the optionee at his death and the option may not be exercised later than the termination date of the option. (h) No Right to Continued Employment. Nothing in the Plan or in any option granted pursuant hereto shall confer on any individual any right to continue in the employ of the Company or any of its Subsidiaries or prevent or interfere in any way with the right of the Company or its Subsidiaries to terminate his employment at any time, with or without cause. 5 (i) Options Must Be Evidenced by Writing. Each option granted pursuant to the Plan shall be evidenced by a written Stock Option Agreement, duly executed by the Company and the optionee, in such form and containing such provisions as the Committee or Board may from time to time authorize or approve. (j) In the event of an Employee's death or disability (within the meaning of Section 422(c)(6) or any successor section, of the Code), such Employee's Designated Beneficiaries, legal representative or executor shall have the right to exercise such Employee's options to the same extent as such Employee would have under Section 8(e), (f) or (g), as applicable, as of the date on which such Employee's employment by the Company or any Subsidiary terminated. (9.) Adjustments. The Stock Option Agreement shall contain appropriate provisions for the adjustment of the kind and number of shares subject to each outstanding option and the purchase price under each option in the event of any changes in the outstanding Common Stock of the Company by reason of stock dividends, stock splits, recapitalization, reorganizations, mergers, consolidations, combinations or exchange of shares, and the like. In the event of any such change or changes in the outstanding Common Stock, and as often as the same shall occur, the kind and aggregate number of shares available under the Plan shall be appropriately adjusted by the Committee or Board, whose determination shall be binding and conclusive. (10.) Amendment and Termination. (a) Unless the Plan shall have been sooner terminated as provided herein, no incentive stock option shall be granted hereunder after February 24, 1998. The Board may at any time prior to that date alter, suspend or terminate the Plan as it may deem advisable, except that it may not without further shareholder approval (i) increase the maximum number of shares subject to the Plan (except for changes pursuant to Section 10), (ii) extend the period during which options may be granted or exercised or (iii) make any other change unless the Board determines that the change would not materially increase the cost of the Plan to the Company. Except as otherwise hereinafter provided, no alteration, suspension or termination of the Plan may, without the consent of the employee to whom any option shall have theretofore been granted (or the person or persons entitled to exercise such option under Section 8(f) or (g) of the Plan), terminate his option or adversely affect his rights thereunder. (b) Anything herein to the contrary notwithstanding, in the event that the Board shall at any time declare it advisable to do so in connection with any 6 proposed sale or conveyance of all or substantially all of the assets of the Company or of any proposed consolidation or merger of the Company, the Company may give written notice to the holder of any option that his option may be exercised only within thirty (30) days after the date of such notice but not thereafter, and all rights under said option which shall not have been so exercised shall terminate at the expiration of such thirty (30) days, provided that the proposed sale, conveyance, consolidation or merger to which such notice shall relate shall be consummated within six (6) months after the date of such notice. In the event such notice shall have been given, any such option may be exercised either in whole or in part notwithstanding the vesting period required under the terms of the option for the exercise thereof. If such proposed sale, conveyance, consolidation or merger shall not be consummated within said time period, no unexercised rights under any option shall be affected by such notice except that such option may not be exercised between the date of expiration of such thirty (30) days and the date of the expiration of such six (6) months. (11.) Indemnification. Any member of the Committee or the Board who is made, or threatened to be made, a party to any action or proceeding, whether civil or criminal, by reason of the fact that he is or was a member of the Committee or the Board insofar as relates to the Plan shall be indemnified by the Company, and the Company may advance his related expenses, to the full extent permitted by law and/or the By-Laws of the Company. (12.) Effective Date of the Plan. The Plan shall become effective on, and options may be granted thereunder after February 24 1988, provided, however, that if the Plan shall not be approved by the holders of a majority of the outstanding voting stock of the Company within twelve months of said date, the Plan and all options granted thereunder shall be and become null and void, and provided, further, that no options granted by the Committee may be exercised prior to the approval of the Plan by shareholders. (13.) Expenses. The Company shall pay all fees and expenses incurred in connection with the establishment and administration of the Plan. (14.) Government Regulations, Registration and Listing of Stock. (a) The Plan, and the grant and exercise of options thereunder, and the Company's obligation to sell and deliver stock under such options, shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency as may be required. 7 (b) Unless a registration statement under the Securities Act of 1933 and the applicable rules and regulations thereunder (collectively the "Act") is then in effect with respect to shares issued upon exercise of any option (which registration shall not be required), the Company shall require that the offer and sale of such shares be exempt from the registration provisions of said Act. In furtherance of such exemption, the Company may require, as a condition precedent to the exercise of any option, that the person exercising the option give to the Company a written representation and undertaking, satisfactory form and substance to the Company, that he is acquiring the shares for his own resale thereof and otherwise establish to the Company's satisfaction that the offer or sale of the shares issuable upon exercise of the option will not constitute or result in any breach or violation of the Act or any similar state act or statute or any rules or regulations thereunder. In the event a registration statement under the Act is not then in effect with respect to the shares of Common Stock issued upon exercise of an option, the Company shall place upon any stock certificate an appropriate legend referring to the restrictions or disposition under the Act. (c) In the event the class of shares issuable upon the exercise of any option is listed on any national securities exchange, the Company shall not be required to issue or deliver any certificate for shares upon the exercise of any option prior to the listing of the shares so issuable on such national securities exchange and prior to the registration of the same under the Securities Exchange Act of 1934 or any similiar act or statute. EX-10 22 ex10-20.txt EXHIBIT 10.20 YARDVILLE NATIONAL BANK DIRECTORS DEFERRED COMPENSATION PLAN 1. Effective Date. The Effective Date of the YARDVILLE NATIONAL BANK DIRECTORS DEFERRED COMPENSATION PLAN (the "Plan") shall be January 1, 1995. 2. Purpose and Definitions. (a) The purpose of this plan is to provide eligible members of the Board of Directors ("Board Member") of the YARDVILLE NATIONAL BANK ("Bank') with an opportunity to defer payment of certain portions of their compensation, at. their election, in accordance with the provisions hereof. (b) For purposes of this Plan, the following definitions shall apply: (1) "Board Members" shall mean persons, other than employees of YARDVILLE NATIONAL BANK ("Bank"), who constitute the Board of Directors of the Bank and who, by electing to defer part or all of their Board Members' Eligible Compensation, have elected to participate in this nonqualified deferred compensation Plan. (2) "Committee" shall mean those members of the Board who shall be responsible for the administration of the Plan. (3) "Eligible Compensation" shall include all fees payable to an eligible Board Member but shall not include (i) any compensation payable to an eligible Board Member in a form other than cash, or (ii) any retainer fee to any eligible Board Member for services rendered during the last calendar quarter preceding The effective date of this Plan. Eligible Compensation shall also mean those fees payable to an eligible Board Member during a Plan Year for attendance at a meeting of any Board or committees thereof, and all fees payable to such eligible Board Member during such year by way of retainer for service as a member or chairman of any Board or committees thereof, regardless of the number of meetings attended. (4) Plan Year shall mean the calendar year. 3. Deferral Elections. With respect to each Plan Year, an eligible Board Member may elect to have payment of any part or all of his or her Eligible Compensation for such year deferred, and to have payment of such portion made under the terms of this Plan. Any such election shall be made in accordance with the following rules: (a) A deferral election shall be made in writing, on a form provided by the Bank for such purpose. (b) In the election form, the eligible Board Member (i) shall specify, by percentage (which must be an even multiple of the portion of his or her Eligible Compensation that the eligible Board Member wishes to defer hereunder (the amounts so deferred are hereinafter referred to as the eligible Board Member's Deferred Amounts"), and (ii) shall specify, by percentage (which must he art even multiple of 5%), the portions of the eligible Board Member's deferred amounts that he or she wishes to have allocated, respectively, to an account established for the eligible Board Member pursuant to Section 5. (c) An eligible Board Member's election to defer Eligible Compensation for any Plan Year shall be filed with the Committee (i) by no later than December 31st of the year preceding the calendar year for which the eligible Board Member wishes to deter a portion or all of his or her Eligible Compensation (d) Notwithstanding the provisions of paragraph (b) above, a newly elected eligible Board Member may make an initial deferral election hereunder with respect to Eligible Compensation for the Plan Year in which he or she is first elected to serve as a member of the Board and, if so elected after January 1st of such year, for the next following Plan Year, by filing his or her election form with the Committee by no later than the last day of the year in which he or she became an eligible Board Member. Any deferral election so made shall be effective only with respect to Eligible Compensation earned for services performed after the date on which the eligible Board Member's initial deferral election has been filed with the Committee. (e) Any deferral election made by an eligible Board Member with respect to his or her Eligible Compensation for a Plan Year, and any election made hereunder as to the allocation of the deferred amounts for such year of his or her Account, shall be irrevocable. 4. Contributions by Yardville National Bank. (a) The Bank shell make a contribution to a Board Member's Account equal to twenty-five percent (25%) of such Board Member's deferral contribution, if he or she has elected to defer part of his or her compensation pursuant to paragraph 3(a). (b)(1) An eligible Board Member who voluntarily resigns his or her employment during the year shall receive his or her deferred Board Member's fee with any earnings to the date of resignation. (2) A Board Member whose term in office is involuntarily terminated other than for cause or who is granted a leave of absence during the year shall receive his or her deferred Board Member's fee with any earnings to the date of termination of employment. (3) A Board Member whose term in office terminates due to dismissal for cause, of which the Committee shall be the sole judge, shall lose any right to receive a deferred fee or any earnings thereon under paragraph 3 which had not yet been paid to his or her account maintained under this Plan. An eligible Board Member who acts or conducts himself in a manner inimical or in any way contrary to the best interests of the Bank, of which the Committee shall he the sole judge, shall lose his rights to earn out unearned deferred compensation payments; except that no installment or amount paid or delivered to the irrevocable trust established in conjunction with this Plan prior to the date of the decision of the Bank shall be required to be returned to the Bank. 5. Accounts. For each participating Board Member, there shall be established on the books and records of the Bank, for bookkeeping purposes only, an account to reflect the Board Member's interest under the Plan. The Account so established for each Participant shall be maintained in accordance with the following provisions: (a) The Account shall be credited, respectively, with amounts equal to the portions of the Board Member's deferred amounts for each Plan Year that the Board Member has elected under Section 3 to have allocated to his or her Account. Such amounts shall be so credited as of the first day of the calendar month following the month in which the amounts in question would have been paid to the Board Member, had he or she not elected under Section 3 to have payment of such amounts deferred under this Plan. (b) Each Board Member's Account shall be adjusted to reflect all additional interest and earnings to be credited to such Account by determining the percentage by which the value of the Board Member's Account for such month exceeds, or is less than, the value of such Account, as of the valuation date (which for this purpose shall be the last day of each month) for the immediately preceding month and all payments made with respect to such account pursuant to Section 6. (c) A Board Member's interest in his or her Account shall be fully vested and nonforfeitable at all times. (d) Payment under this Plan and such other amounts arising out of the administration of this Plan as the Bank may determine shall he charged to a deferral reserve. Balances retained in the deferral reserve each year, except to the extent otherwise directed by the Bank, shall be carried forward and be available in a future year or years, if not otherwise paid to the irrevocable trust pursuant to the terms of this Plan. 6. Payment of Account Balances. Payment with respect to a Board Member's Account shall he made on Direction of the Committee from the irrevocable trust established pursuant to Section 7 in accordance with the following provisions: (a) The balance of a Board Member's Account shall become payable upon the Board Member's ceasing to be a member of the Board, for any reason. (b) Except as otherwise provided in paragraph (c) below, payment with respect to a Board Member's Account shall be made in the form of a lump sum. (c) Each installment payment to he made with respect to a Board Member's Account shall be made in cash, in an amount determined by dividing (i) the balance of such Account determined to of the last day of the Plan Year preceding the year in which such payment is to be made, by (ii) the number of installment payments remaining to be made. (d) If a Board Member should die prior to retirement or before receiving all payments required to be made hereunder with respect to his or her Account, any payments remaining to he made at the date of the Board Member's death shall be made to the Board Member's beneficiary as follows: (i) Payment with respect to the balance remaining in a Board Member's Account shall be made in the form of a series of ten (10) annual installments which shall be the actuarial equivalent of the projected benefit for each eligible Board Member, The first such installment payment shall be made on the last business day of the Plan Year in which the Board Member ceases to be a member of any Board, and the remaining installments shall he made on the last business day of each succeeding Plan Year. (ii) Subject to subparagraph (iii) below, in the event that a Board Member shall die while serving as such for the Bank, or after his or her retirement and prior to the time when all of the deferred compensation allocated to his or her account shall have been paid, the Bank shall direct payment as provided for in the preceding paragraph from the irrevocable trust to the Board Member's designated beneficiary or beneficiaries, or if there be none then living, then to the estate of the Board Member, of all of the deferred compensation allocated to such deceased Board Member's Account and held in the irrevocable trust pursuant to this Plan, unless the Committee and Board Member otherwise agree in writing that such other payment schedule shall he made in such amounts at such times and manner as the Bank and Board Member shall determine after considering such facts and circumstances relating to the Board Member and his beneficiaries as they deem appropriate. Each Board Member shall notify the Bank in writing of the name and address of his primary and alternative beneficiaries, which may be changed from time to time by the Board Member by notice in writing to the Committee. (iii) If a life insurance policy has been purchased on the life of an Board Member and if such policy is held as an asset of the Plan [irrevocable trust], the Bank shall receive, as a beneficiary, that portion of the death benefit, if any, needed to pay the alternative minimum tax that is imposed upon the receipt of such death benefit. The balance, if any, of the death benefit shall be paid from the proceeds of the insurance to the Board Member's beneficiary as specified in subparagraph (ii) above. (iv) Any payment made hereunder to the Board Member's beneficiary shall he made as soon as practicable after the date of the Board Member's death. (e) if the Board Member's employment is terminated because of disability while he is in the employ of the Bank, then the Board Member shall be considered to have retired on the date of his having become disabled and payments shall be made pursuant to subparagraph (b) above. A Board Member shall be deemed to have become disabled for purposes of this subparagraph (d) if the Bank shall find on the basis of satisfactory medical evidence (as determined by the Bank) that the Board Member is totally disabled, mentally or physically, so as to be prevented from engaging in further employment by the Bank in a position essentially similar to that held by him prior to his disability and that such disability will be permanent and continuous during the remainder of his life. (f) Notwithstanding any other provision of this Section 6 to the contrary, payment with respect to any part or all of the Board Member's Account balance may be made to the Board member on any date earlier than the date on which such payment is to be made pursuant to such other provisions of this Section 6 if (i) the Board Member requests such early payment and (ii) the Committee, in its sole discretion, determines that such early payment is necessary to help the Board Member meet an "unforeseeable emergency" within the meaning of section 1.457- 2(h)(4) of the federal Income Tax Regulations. The amount that may he so paid may not exceed the amount necessary to meet such emergency. (g) There shall be deducted from the amount of any payment otherwise required to he made under the Plan, all Federal, state and local taxes required by law to be withheld with respect to such payment. 7. Establishment of Irrevocable Trust. Upon the receipt of a deferred compensation contribution made pursuant to the terms of Section 3 above and contributions made by the Bank pursuant to Section 4 above, such payments shall be paid to the irrevocable trust established in conjunction with this Plan and shall thereafter be governed pursuant to the terms of the Plan and the irrevocable trust. Eligible Board Members' deferrals and Bank contributions for any year shall be paid in cash to the irrevocable trust established by the Bank and shall be credited with interest equal to the prime rate as established and adjusted from time to time by the Bank from the date paid to the irrevocable trust until the date paid to the Board Member. 8. Amendment or Termination of Plan. While it is contemplated that deferred compensation awards will be paid annually pursuant to Paragraph 3 hereof, the Bank shall have the right from time to time to modify or suspend this plan. 9. Alienation and Assignment of Benefits Under the Plan. The right of the Board Member or any other person to the payment of deferred compensation or other benefits under this Plan shall not he assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution. 10. Designation of Beneficiary. (a) Each participating Board Member shall file with the Committee a written designation of one or more persons as the beneficiary who shall be entitled to receive any amount, payable under the Plan by reason of his or her death. A Board Member may, from time to time, revoke or change his or her beneficiary designation without the consent of any previously designated beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall he effective unless received by the Committee prior to the participating Board Member's death, and in no event shall it be effective as of a date prior to such receipt. If, at the date of participating Board Member's death, there is no designation of a beneficiary in effect for the Board Member pursuant to the provisions of this Section 10, or if no beneficiary designated by the Board Member in accordance with the provisions hereof survives to receive any amount payable under the Plan by reason of the participating Board Member's death, the Board Member's estate shall be treated as the beneficiary for purposes of the Plan. (b) If the Bank shall find chat any person to whom any payment is payable under this Plan is unable to care for his affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may he paid to the spouse, a child, a parent, or to any poison deemed by the Committee to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Committee may determine. Any such payment shall be a complete discharge of the liabilities of the Bank under this Plan. 11. Rights Conferred Under this Plan. Nothing contained herein shall be construed as conferring upon the Board Member the right to continue in the employ of the Bank as a Director or in any other capacity. 12. Interpretation of Plan. The Committee shall have full power and authority to interpret, construe and administer this Plan and the Committee's interpretations and construction thereof, and actions hereunder, including any valuation of an Board Member's deferred compensation account as held in the irrevocable trust, or the amount or recipient of the payment to be made therefrom, shall he binding and conclusive on all persons for all purposes. No officer or Board Member of the Bank shall he liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to his own willful misconduct or gross negligence. 13. Right to Bring Action. Any and all right of action by any Board Member (past, present or future) against the Bank with respect to a payment of under this Plan or with respect to an alleged violation of this Plan, irrespective of the place where action may be brought, shall cease and be barred by the expiration of three years (a) from the date of the act or omission in respect of which such right of action arises or (b) from the date of final determination of the respective bonus award or awards by the Bank, whichever date is later. 14. Administration of Plan. (a) The expenses of administering this Plan shall be borne by the Bank and not charged against the Account of an eligible Board Member. (b)(1) The Plan shall be administered by a Committee composed of at least three Board members who shall be appointed by the Board of Directors from among Board members who are not eligible Board Members. If at any time there are less than three such Board members, additional members of the Committee shall be appointed form among those Board members who have never participated in the Plan, or, in the absence of any such Board Members, from among any senior officers of the Bank or any of its affiliated companies. All decisions, actions or interpretations of, the Committee under the Plan shall be final, conclusive and binding upon all parties. (2) No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member or on his or her capacity as a member of the Committee nor for any mistake of judgment made in good faith, and the bank shall indemnify and hold harmless each member of the Committee, and each employee, officer, director or trustee of the Bank or any of its affiliated companies to whom any duty or power relating to the administration or interpretation of the Plan may be delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Board of Directors) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or bad faith. 15. Change in Fiscal Year of Bank. In the event of a change in the Bank's fiscal year, this plan shall apply, with pro rata adjustment in the deduction for net capital, to any intermediate period not consisting of 12 months and shall then apply to each fiscal year following. 16. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New Jersey. EX-21 23 ex21.txt EX21.TXT Exhibit 21 Yardville National Bancorp Subsidiaries 1. The Yardville National Bank, a national banking association organized under the laws of the United States (the "Bank") 2. Yardville Capital Trust, a Delaware business trust 3. Yardville Capital Trust II, a Delaware business trust 4. Yardville Capital Trust III, a Delaware business trust 5. Yardville Capital Trust IV, a Delaware business trust 6. Yardville National Investment Corporation, a New Jersey corporation (wholly-owned subsidiary of the Bank) 7. YNB Real Estate Holding Co., Inc., a New Jersey corporation (wholly-owned subsidiary of the Bank) 8. Brendan, Inc., a New Jersey corporation (wholly-owned subsidiary of the Bank) 9. YNB Financial Services, Inc., a New Jersey corporation (wholly-owned subsidiary of the Bank) 10. Nancy Beth, Inc., a New Jersey corporation (wholly-owned subsidiary of the Bank) 11. YNB Realty, Inc., a New Jersey corporation (wholly-owned subsidiary of the Bank) 12. Jim Mary, Inc., a New Jersey corporation (wholly-owned subsidiary of the Bank) 13. YNB Capital Development, Inc., a New Jersey corporation (wholly-owned subsidiary of the Bank) EX-23 24 ex23-1.txt EXHIBIT 23.1 Exhibit 23 Independent Auditors' Consent The Board of Directors Yardville National Bancorp: We consent to the incorporation by reference in Registration Statements (No. 33-98076, No. 333-28193, No. 333-71741, No. 333-100217 and No. 333-102932) on Form S-8 of Yardville National Bancorp of our report dated January 27, 2003, except for Note 8, which is as of February 20, 2003, relating to the consolidated statements of condition of Yardville National Bancorp and subsidiaries as of December 31, 2002 and 2001, 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, 2002, which report is incorporated by reference in the Annual Report on Form 10-K of Yardville National Bancorp for the year ended December 31, 2002. Our report refers to Yardville National Bancorp's adoption of Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB No. 13, and Technical Corrections" in 2002. KPMG LLP Short Hills, New Jersey March 31, 2003 EX-99 25 ex99-1.txt EX99-1.TXT Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Yardville National Bancorp (the "Company") on Form 10-K for the fiscal year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Patrick M. Ryan, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Patrick M. Ryan - --------------------------------------- Patrick M. Ryan President and Chief Executive Officer March 31, 2003 A signed original of this written statement required by Section 906 has been provided to Yardville National Bancorp and will be retained by Yardville National Bancorp and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 26 ex99-2.txt EX99-2.TXT Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Yardville National Bancorp (the "Company") on Form 10-K for the fiscal year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen F. Carman, Vice President and Treasurer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Stephen F. Carman - ------------------------------------- Stephen F. Carman Vice President and Treasurer March 31, 2003 A signed original of this written statement required by Section 906 has been provided to Yardville National Bancorp and will be retained by Yardville National Bancorp and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----