-----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, SXKKisWZqWn90pCq3pRC7dtU33+Y0ADuEu8TfPEH895fSIPottF+R1YrduQvISTy lQF54qNemtULKGcoCVUtRA== 0000950116-99-002100.txt : 19991117 0000950116-99-002100.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950116-99-002100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 000-26086 FILM NUMBER: 99755389 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934 For the quarterly period ended September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934 For transition period from Commission File Number: 0-26086 YARDVILLE NATIONAL BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) New Jersey 22-2670267 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3111 Quakerbridge Road, Mercerville, New Jersey 08619 ------------------------------------------------------ (Address of principal executive offices) (609) 585-5100 ------------------------------------------------------ (Registrant's telephone number, including area code) Not Applicable ------------------------------------------------------ (Former name, former address and former fiscal year, if changed from last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 12, 1999 Common Stock, no par value 6,621,522 - -------------------------- ---------------------------- Class Number of shares outstanding 1 INDEX YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES PART 1 FINANCIAL INFORMATION PAGE NO. - -------------------------------------------------------------------------------- Item 1. Financial Statements Consolidated Statements of Condition September 30, 1999 and December 31, 1998 Consolidated Statements of Income Three months ended September 30, 1999 and 1998 Consolidated Statements of Income Nine months ended September 30, 1999 and 1998 Consolidated Statements of Cash Flows Nine months ended September 30, 1999 and 1998 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART 2 OTHER INFORMATION - ------------------------------- Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES Exhibit 27.1 Financial Data Schedule 2 Item 1. Financial Statements Yardville National Bancorp and Subsidiaries Consolidated Statements of Condition (Unaudited)
September 30, December 31, - ----------------------------------------------------------------------------------------------------------- (in thousands, except for share data) 1999 1998 - ----------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 16,476 $ 16,246 Federal funds sold 15,385 280 - ----------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents 31,861 16,526 - ----------------------------------------------------------------------------------------------------------- Interest bearing deposits with banks 806 733 Securities available for sale 279,580 185,577 Investment securities (market value of $105,906 in 1999 and $36,203 in 1998) 111,190 36,111 Loans 599,839 491,649 Less: Allowance for loan losses (8,357) (6,768) - ----------------------------------------------------------------------------------------------------------- Loans, net 591,482 484,881 Bank premises and equipment, net 8,197 6,251 Other real estate 4,696 4,957 Other assets 27,830 22,630 - ----------------------------------------------------------------------------------------------------------- Total Assets $1,055,642 $ 757,666 - ----------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: Deposits Non-interest bearing $ 83,735 $ 75,426 Interest bearing 590,150 444,217 - ----------------------------------------------------------------------------------------------------------- Total Deposits 673,885 519,643 - ----------------------------------------------------------------------------------------------------------- Borrowed funds Securities sold under agreements to repurchase 86,088 87,120 Federal Home Loan Bank advances 214,299 89,316 Obligation to Employee Stock Ownership Plan (ESOP) 1,700 -- Other 1,312 1,452 - ----------------------------------------------------------------------------------------------------------- Total Borrowed Funds 303,399 177,888 Company - obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust holding solely junior Subordinated Debentures of the Company 11,500 11,500 Other liabilities 8,455 7,879 - ----------------------------------------------------------------------------------------------------------- Total Liabilities $ 997,239 $ 716,910 - ----------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock: no par value Authorized 1,000,000 shares, none issued Common Stock: no par value Authorized 12,000,000 shares Issued 6,917,794 in 1999 and 5,138,474 shares in 1998 40,052 20,364 Surplus 2,205 2,205 Undivided profits 25,827 21,479 Treasury stock, at cost, 172,000 shares in 1999 and 170,300 shares in 1998 (3,030) (3,008) Unallocated ESOP shares (1,700) -- Accumulated other comprehensive income (4,951) (284) - ----------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 58,403 40,756 - ----------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,055,642 $ 757,666 - -----------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements. 3 Yardville National Bancorp and Subsidiaries Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, - -------------------------------------------------------------------------------------------------------------------- (in thousands, except for share data) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 12,126 $ 9,922 Interest on deposits with banks 9 76 Interest on securities available for sale 4,359 2,791 Interest on investment securities: Taxable 1,310 192 Exempt from Federal income tax 351 165 Interest on Federal funds sold 218 63 - -------------------------------------------------------------------------------------------------------------------- Total Interest Income 18,373 13,209 - -------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on savings account deposits 1,286 1,320 Interest on certificates of deposit of $100,000 or more 671 352 Interest on other time deposits 4,387 3,146 Interest on borrowed funds 3,868 2,371 Interest on trust preferred securities 266 266 - -------------------------------------------------------------------------------------------------------------------- Total Interest Expense 10,478 7,455 - -------------------------------------------------------------------------------------------------------------------- Net Interest Income 7,895 5,754 Less provision for loan losses 1,000 500 - -------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 6,895 5,254 - -------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Service charges on deposit accounts 349 317 Gains on sales of mortgages, net 5 11 Securities gains, net -- 24 Other non-interest income 427 444 - -------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 781 796 - -------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 2,602 2,120 Occupancy expense, net 333 286 Equipment expense 396 320 Other non-interest expense 1,263 1,186 - -------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 4,594 3,912 - -------------------------------------------------------------------------------------------------------------------- Income before income tax expense 3,082 2,138 Income tax expense 882 730 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 2,200 $ 1,408 - -------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Basic $ 0.33 $ 0.28 Diluted $ 0.33 $ 0.28 - -------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding: Basic 6,621 4,970 Diluted 6,648 5,013 - --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements. 4 Yardville National Bancorp and Subsidiaries Consolidated Statements of Income (Unaudited)
Nine Months Ended September 30, - -------------------------------------------------------------------------------------------------------------------- (in thousands, except for share data) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 34,201 $ 28,064 Interest on deposits with banks 37 159 Interest on securities available for sale 10,830 7,845 Interest on investment securities: Taxable 2,925 650 Exempt from Federal income tax 936 402 Interest on Federal funds sold 612 201 - -------------------------------------------------------------------------------------------------------------------- Total Interest Income 49,541 37,321 - -------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on savings account deposits 3,568 3,822 Interest on certificates of deposit of $100,000 or more 1,785 992 Interest on other time deposits 12,426 8,750 Interest on borrowed funds 9,552 6,348 Interest on trust preferred securities 798 798 - -------------------------------------------------------------------------------------------------------------------- Total Interest Expense 28,129 20,710 - -------------------------------------------------------------------------------------------------------------------- Net Interest Income 21,412 16,611 Less provision for loan losses 2,400 1,400 - -------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 19,012 15,211 - -------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Service charges on deposit accounts 974 937 Gains on sales of mortgages, net 35 36 Securities gains, net 18 70 Other non-interest income 1,237 1,173 - -------------------------------------------------------------------------------------------------------------------- Total Non-Interest Income 2,264 2,216 - -------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Salaries and employee benefits 7,330 6,060 Occupancy expense, net 967 781 Equipment expense 1,125 938 Other non-interest expense 3,845 3,310 - -------------------------------------------------------------------------------------------------------------------- Total Non-Interest Expense 13,267 11,089 - -------------------------------------------------------------------------------------------------------------------- Income before income tax expense 8,009 6,338 Income tax expense 2,265 2,214 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 5,744 $ 4,124 - -------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Basic $ 0.99 $ 0.82 Diluted $ 0.98 $ 0.81 - -------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding: Basic 5,810 5,034 Diluted 5,837 5,077 - --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements. 5 Yardville National Bancorp and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, - -------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income $5,744 $ 4,124 Adjustments: Provision for loan losses 2,400 1,400 Depreciation 822 682 Amortization and accretion 444 645 Gains on sales of securities available for sale (18) (70) Loss on sales of other real estate 1 5 Write down of other real estate 304 337 Increase in other assets (2,688) (4,572) Increase in other liabilities 576 976 - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 7,585 3,527 - -------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Net (increase) decrease in interest bearing deposits with banks (73) 859 Purchase of securities available for sale (138,075) (121,627) Maturities, calls, and paydowns of securities available for sale 25,519 60,271 Proceeds from sales of securities available for sale 11,014 28,693 Proceeds from maturities and paydowns of investment securities 2,664 7,361 Purchase of investment securities (77,810) (8,670) Net increase in loans (109,952) (76,970) Expenditures for bank premises and equipment (2,768) (1,601) Proceeds from sale of other real estate 908 258 - -------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (288,573) (111,426) - -------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Net increase in non-interest bearing demand, money market, and savings deposits 29,164 9,042 Net increase in certificates of deposit 125,078 55,585 Net increase in borrowed funds 125,511 44,555 Proceeds from issuance of common stock 19,688 330 Increase in unallocated ESOP shares (1,700) -- Treasury shares acquired (22) (3,008) Dividends paid (1,396) (1,078) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 296,323 105,426 - -------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 15,335 (2,473) Cash and cash equivalents as of beginning of period 16,526 20,423 - -------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents as of End of Period $31,861 $ 17,950 - -------------------------------------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Cash paid during period for: Interest expense 27,227 19,704 Income taxes 2,938 2,604 - -------------------------------------------------------------------------------------------------------------------- Supplemental Schedule of Non-cash Investing and Financing Activities: Transfers to other real estate from loans, net of charge offs 951 2,513 - --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Unaudited Consolidated Financial Statements. 6 Yardville National Bancorp and Subsidiaries Notes to Consolidated Financial Statements Three and Nine Months Ended September 30, 1999 (Unaudited) 1. Summary of Significant Accounting Policies Basis of Financial Statement Presentation: The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation reserve of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and other real estate, management obtains independent appraisals for significant properties. The consolidated financial data as of and for the three and nine months ended September 30, 1999 includes, in the opinion of management, all adjustments, consisting of only normal recurring accruals necessary for a fair presentation of such periods. The consolidated financial data for the interim periods presented is not necessarily indicative of the result of operations that might be expected for the entire year ending December 31, 1999. Consolidation The consolidated financial statements include the accounts of Yardville National Bancorp (the "Holding Company") and its subsidiaries, Yardville Capital Trust (the "Trust") and The Yardville National Bank (the "Bank"), and the Bank's wholly owned subsidiaries, Yardville National Investment Corporation, Brendan, Inc., Nancy Beth, Inc., Jim Mary, Inc., Yardville Real Estate Holding Co., Inc, YNB Financial Services, Inc., YNB Realty Inc., and YNB Capital Development (collectively, "YNB"). All significant inter-company accounts and transactions have been eliminated. Brendan, Inc., Nancy Beth, Inc. and Jim Mary, Inc. are utilized for the control and disposal of other real estate properties. Yardville Real Estate Holding Co., Inc. is utilized to hold Bank branch properties, YNB Financial Services, Inc., provides alternative investment services, and YNB Realty, Inc., a real estate investment trust, is utilized to more effectively manage a portion of the Bank's real estate related loans. YNB Capital Development is utilized for nontraditional lending opportunities. Allowance for Loan Losses The provision for loan losses charged to operating expense is determined by management and based upon a periodic review of the loan portfolio, past experience, the economy, and other factors that may affect a borrower's ability to repay the loan. This provision is based on 7 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 Bank's allowance for loan losses and the valuation of other real estate. Such agencies may require the Bank to recognize additions to the allowance or adjustments to the carrying value of other real estate based on their judgement about information available at the time of their examination. Company - Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company (Trust Preferred Securities) On October 16, 1997, Yardville Capital Trust, a statutory business trust and a wholly owned subsidiary of the Holding Company, issued $11,500,000 of 9.25% Trust Preferred Securities to the public and $356,000 of 9.25% Common Securities to the Holding Company. Proceeds from the issuance of the Trust Preferred Securities were immediately used by the Trust to purchase $11,856,000 of 9.25% Subordinated Debentures maturing November 1, 2027 from the Holding Company. The Trust exists for the sole purpose of issuing Trust Preferred Securities and investing the proceeds in Subordinated Debentures of the Holding Company. These Subordinated Debentures constitute the sole assets of the Trust. 2. Earnings Per Share Weighted average shares for the basic net income per share calculation for the three months ended September 30, 1999 and 1998 were 6,621,000 and 4,970,000 respectively. For the diluted net income per share computation, potential common stock of 27,000 and 43,000 are included for the three months ended September 30, 1999 and 1998, respectively. Weighted average shares for the basic net income per share calculation for the nine months ended September 30, 1999 and 1998 were 5,810,000 and 5,034,000 respectively. For the diluted net income per share computation, potential common stock of 27,000 and 43,000 are included for the nine months ended September 30, 1999 and 1998, respectively. 8 3. Comprehensive Income Listed below is the statement of comprehensive income for three and nine months ended September 30, 1999 and 1998. Comprehensive Income Three Months Ended September 30, ------------------------------------------------------------------------------- (in thousands) 1999 1998 - ------------------ ------------------------------------------------------------- Net Income $ 2,200 $ 1,408 ------------------------------------------------------------------------------- Other comprehensive income Net change in unrealized (loss) gain for the period, net of tax (1,106) 762 Reclassification of realized net gain on sale of securities available for sale, net of tax -- 16 ------------------------------------------------------------------------------- Holding (loss) gain arising during the period, net of tax and reclassification (1,106) 778 ------------------------------------------------------------------------------- Reclassification adjustment for realized net gain, net of tax -- (16) ------------------------------------------------------------------------------- Other comprehensive income for the period, net of tax (1,106) 762 ------------------------------------------------------------------------------- Total comprehensive income $ 1,094 $ 2,170 ------------------------------------------------------------------------------- Comprehensive Income Nine Months Ended September 30, ------------------------------------------------------------------------------- (in thousands) 1999 1998 ------------------------------------------------------------------------------- Net Income $ 5,744 $ 4,124 ------------------------------------------------------------------------------- Other comprehensive income Net change in unrealized (loss) gain for the period, net of tax (4,667) 460 Reclassification of realized net gain on sale of securities available for sale, net of tax 12 46 ------------------------------------------------------------------------------- Holding (loss) gain arising during the period, net of tax and reclassification (4,655) 506 ------------------------------------------------------------------------------- Reclassification adjustment for realized net gain, net of tax (12) (46) ------------------------------------------------------------------------------- Other comprehensive income for the period, net of tax (4,667) 460 ------------------------------------------------------------------------------- Total comprehensive income $ 1,077 $ 4,584 ------------------------------------------------------------------------------- 4. Employee Stock Ownership Plan The Bank established an Employee Stock Ownership Plan and related trust ("ESOP") for eligible employees. The ESOP is a tax-qualified plan subject to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Employees with twelve months of employment with the Bank and who have worked at least 1,000 hours are eligible to participate. The ESOP borrowed $2,000,000 from an unaffiliated financial institution and purchased 155,340 9 shares of common shares, no par value, of the Holding Company. 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 $87,000 for the three months and $262,000 for the nine months ended September 30, 1999. The fair value of unearned shares at September 30, 1999 is $1,777,000. 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. 10 YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES (YNB) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This financial review presents management's discussion and analysis of the financial condition and results of operations. It should be read in conjunction with the 1998 Annual Report to stockholders and Form 10-K for the fiscal year ended December 31, 1998 as well as with the unaudited consolidated financial statements and the accompanying notes in this Form 10-Q. This Form 10-Q report contains express and implied statements relating to the future financial condition, results of operations, plans, objectives, performance, and business of YNB, which are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements that relate to, among other things, profitability, liquidity, loan loss reserve adequacy, plans for growth, interest rate sensitivity, market risk, and year 2000 issues, and financial and other goals. Actual results may differ materially from those expected or implied as a result of certain risks and uncertainties, including, but not limited to, changes in economic conditions, interest rate fluctuations, continued levels of loan quality and origination volume, successful implementation of year 2000 technology changes by YNB, its vendors and suppliers, competitive product and pricing pressures within YNB's markets, continued relationships with major customers including sources for loans and deposits, personal and corporate customers' bankruptcies, legal and regulatory barriers and structure, inflation, and technological changes, as well as other risks and uncertainties detailed from time to time in the filings of YNB with the U.S. Securities and Exchange Commission. Financial Condition Assets Total consolidated assets at September 30, 1999 were $1,055,642,000, an increase of $297,976,000 or 39.3% compared to $757,666,000 at December 31, 1998. The growth in YNB's asset base, during the nine months of 1999, was primarily due to increases in loans (primarily commercial loans), available for sale securities, and investment securities. The increase in the loan portfolio was the product of an ongoing consistent strategy to improve the profitability of the organization through relationship banking and of consolidation in YNB's market place. Management anticipates continued loan opportunities due to this consolidation. YNB's asset base includes US agency securities of approximately $236,800,000 purchased utilizing primarily repurchase agreements and Federal Home Loan Bank advances (Investment Growth Strategy). The Investment Growth Strategy at September 30, 1999 increased $94,600,000 or 66.5% from the reported total of $142,200,000 at December 31, 1998. The primary goals of the Investment Growth Strategy, improving return on equity and earnings per share, continue to be achieved. 11 Federal funds sold At September 30, 1999 Federal funds sold totaled $15,385,000 compared to $280,000 at December 31, 1998. Average Federal funds sold for the nine months of 1999 was $16,793,000 compared to $4,826,000 for the same period in 1998. The higher amount of Federal funds sold at September 30, 1999 was due to increased certificate of deposit (CD) balances raised to fund loan growth and effectively manage liquidity. Management remains focused on maintaining adequate liquidity to fund loan growth and to improve the liquidity profile of YNB. Securities The following tables present the amortized cost and market value of YNB's securities portfolios as of September 30, 1999 and December 31, 1998.
Available For Sale Securities September 30, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market (in thousands) Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. Government agency securities 120,499 116,652 $ 55,051 $ 55,039 Mortgage-backed securities 146,531 141,888 120,410 119,986 Corporate obligations 2,717 2,590 2,867 2,867 All other securities 17,450 17,450 7,685 7,685 - ------------------------------------------------------------------------------------------------------------------- Total $ 287,197 279,580 $ 186,013 $ 185,577 - ------------------------------------------------------------------------------------------------------------------- Investment Securities September 30, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------------------------- Amortized Market Amortized Market (in thousands) Cost Value Cost Value - ------------------------------------------------------------------------------------------------------------------- Obligations of U.S. government Agencies 73,184 69,808 $ 4,994 $ 4,935 Obligations of state and political subdivisions 30,370 28,647 20,773 20,982 Mortgage-backed securities 7,636 7,451 10,344 10,286 - ------------------------------------------------------------------------------------------------------------------- Total $ 111,190 105,906 $ 36,111 $ 36,203 - -------------------------------------------------------------------------------------------------------------------
Securities represented 36.9% of total assets at September 30, 1999 and 29.3% at December 31, 1998. Total securities increased $169,082,000 or 76.3% at September 30, 1999 to $390,770,000, compared to $221,688,000 at year-end 1998. The available for sale portfolio represents 71.5% of the total security holdings of YNB at September 30, 1999, compared to 83.7% at year-end 1998. The net unrealized loss on available for sale securities as of September 30, 1999 was $8,617,000 compared to a net unrealized loss of $436,000 at December 31, 1998. Net unrealized loss, net of tax effect, totaling $4,951,000 was reported in Accumulated Other Comprehensive Income in Stockholders' Equity at September 30, 1999, compared to a net unrealized loss of $284,000 reported at December 31, 1998. The increase in the unrealized loss on available for sale 12 securities is primarily due to the rise in interest rates from December 31, 1998 to September 30, 1999 and the increased size of the available for sale securities portfolio. Securities available for sale increased $94,003,000 or 50.7% at September 30, 1999 when compared to the December 31, 1998 balance of $185,577,000. The largest area of increase was in U.S. Treasury and U.S. agency bonds, which increased $61,613,000 and was the major factor for the increase in securities available for sale. This increase was primarily comprised of an increase of $8,522,000 in US treasury bonds and a $43,542,000 increase in shorter-term callable agency bonds purchased to improve the liquidity profile of YNB. The callable agency bonds have maturity terms of 5 years or less. Another category of significant growth was in mortgage backed securities which increased $21,902,000 net of paydowns. This growth was almost entirely related to the Investment Growth Strategy and includes $30,912,000 in floating rate US agency collaterlized mortgage obligations. All other securities increased $9,765,000 or 127.1% and were the result of required purchases of Federal Home Loan Bank stock related to borrowings. Investment securities increased $75,079,000 or 207.9% to $111,190,000 at September 30, 1999 from $36,111,000 at December 31, 1998. The increase was due to a $68,190,000 increase in U.S. agency callable bonds primarily related to the Investment Growth Strategy and a $9,597,000 increase in tax free municipal bonds. Offsetting these increases was a $2,708,000 reduction in mortgage-backed securities reflecting paydowns. The Investment Growth Strategy increased $94,600,000 over the year-end 1998 level. The largest increase was in US agency callable bonds, which increased $70,190,000 and accounted for 74.2% of the total increase. The next largest growth was in floating rate US agency collateralized mortgage obligations that increased $29,450,000. Modest growth was also recorded in fixed rate mortgage backed securities, up $1,819,000 net of paydowns. Offsetting these increases, was a $6,878,000 decrease in adjustable rate mortgage backed securities. At September 30, 1999, the Investment Growth Strategy portfolio was comprised of 78.1% of fixed rate securities and 21.9% of adjustable or floating rate securities compared to 79.4% fixed rate securities and 20.6% adjustable rate securities at year end 1998. Loans Total loans, net of unearned income, increased $108,190,000 or 22.0% at September 30, 1999 to $599,839,000 from $491,649,000 at December 31, 1998. This growth reflects favorably when compared to the $73,716,000 in loan growth for the same period of 1998. YNB's loan portfolio represented 56.8% of total assets at September 30, 1999 compared to 64.9% at December 31, 1998. YNB's lending focus continues to be on commercial and industrial loans, and commercial real estate loans. The consolidation in YNB's market place and management's philosophy of relationship banking are key factors in continued strong loan growth. Strong competition from both bank and nonbank competitors could result in comparatively lower yields on new and established lending relationships. In addition, borrowers' concerns over the economy, real estate prices and interest rates could all be factors in future loan growth levels. Management anticipates continued loan growth for the fourth quarter of 1999. Continued profitable loan 13 growth is a key factor in meeting earnings growth goals. In May 1999, the Holding Company sold 1,610,000 shares of its common stock in a public offering, raising $17,620,000, net of expenses. This capital offering has resulted in an increase in the legal lending limit of the Bank and will allow for increased lending to existing customers as well as the ability to compete for larger loan relationships.
- --------------------------------------------------------------------------------------------- (in thousands) 9/30/99 12/31/98 Change % change - --------------------------------------------------------------------------------------------- Commercial real estate $ 217,771 $ 166,725 $ 51,046 30.6% Real estate - mortgage Residential 105,505 93,540 11,965 12.8 Home equity 23,264 23,474 (210) (0.9) Commercial and industrial 149,753 133,263 16,490 12.4 Real Estate - construction 69,719 38,386 31,333 81.6 Consumer 25,567 24,531 1,036 4.2 Other loans 8,260 11,730 (3,470) (29.6) - --------------------------------------------------------------------------------------------- Total loans $ 599,839 $ 491,649 $ 108,190 22.0% =============================================================================================
The table above lists the loan growth by type for the period of December 31, 1998 to September 30, 1999. Commercial real estate loans had the greatest growth, increasing $51,046,000 or 30.6%, and accounted for 47.2% of the increase in total loans. Real estate construction loans increased $31,333,000 or 81.6% and accounted for 29.0% of the increase in total loans. All other loan categories increased with the exception of home equity lines and other loans, which decreased $210,000 and $3,470,000 respectively. YNB continues to generate significant strong loan growth, particularly commercial loans, due to several reasons. First, management's focus on commercial lending has resulted in YNB's growing reputation as a business lender in our market place. This growing reputation, combined with the consolidation in the market place, has offered YNB the opportunity to generate new and larger loan relationships than have been available in the past. Second, YNB continues to offer competitive rates on both fixed and floating rate loans. Liabilities The following table provides information concerning YNB's deposit base at September 30, 1999 and December 31, 1998.
- ------------------------------------------------------------------------------------------ (in thousands) 9/30/99 12/31/98 Change % Change - ------------------------------------------------------------------------------------------ Non-interest bearing demand deposits $ 83,735 $ 75,426 $ 8,309 11.0% Interest bearing demand deposits 61,486 51,672 9,814 19.0 Money market deposits 50,794 44,661 6,133 13.7 Savings deposits 82,445 77,537 4,908 6.3 Certificates of deposit of $100,000 or over 62,865 29,525 33,340 112.9 Other time deposits 332,560 240,822 91,738 38.1 - ------------------------------------------------------------------------------------------ Total $ 673,885 $ 519,643 $ 154,242 29.7% ==========================================================================================
YNB's deposit base is the principal source of funds supporting interest-earning assets. Total deposits increased $154,242,000 or 29.7% to $673,885,000 at 14 September 30, 1999 compared to $519,643,000 at December 31, 1998. Certificates of deposit were competitively priced throughout the nine months of 1999 to fund new loan growth and improve liquidity. Growth in YNB's deposit base in 1999 continued to be principally in certificates of deposit. Certificates of deposit of $100,000 or over increased $33,340,000 or 112.9% to $62,865,000 from $29,525,000 and accounted for 21.6% of the total deposit growth for the period. Other time deposits increased $91,738,000 or 38.1% to $332,560,000 from $240,822,000 at December 31, 1998. Growth in certificates of deposit accounted for 81.1% of the total increase in deposits for the nine months of 1999. This growth rate has resulted in certificates of deposit increasing to 58.7% of total deposits at September 30, 1999 from 52.0% at year-end 1998. In March of 1998, YNB began to market its certificates of deposit through a nationwide computer based service. This service allows YNB to have access to a wider market to raise needed funding. At September 30, 1999, YNB had $75,380,000 in outstanding certificates of deposit raised through this service. This includes $50,980,000 raised in the nine months of 1999. Management anticipates that this market will continue to play an important role in funding future asset growth. Noninterest bearing demand deposits increased $8,309,000 or 11.0% to $83,735,000 as of September 30, 1999 when compared to $75,426,000 at December 31, 1998. This increase is partially due to the normal fluctuations in demand deposit balances but also reflects management's ongoing efforts to capture the deposit relationships of both new and existing customers. Interest bearing demand deposits increased $9,814,000 or 19.0% to $61,486,000 at September 30, 1999 from $51,672,000 at year-end 1998. This growth resulted from management's effort to attract lower cost deposits to fund earning asset growth. This includes marketing efforts with bonus certificates of deposit rates for customers who open new interest bearing demand accounts and increased efforts on cross selling lower cost deposit accounts to certificate of deposit customers. This effort to attract lower cost deposits is also reflected in the $4,908,000 or 6.3% increase in savings deposits, which totaled $82,445,000 at September 30, 1999, compared to $77,537,000 at year-end and in the $6,133,000 or 13.7% increase in money market balances to $50,794,000 at September 30, 1999 from $44,661,000 at December 31, 1998. While it is management's desire to fund earning asset growth with the lowest cost deposits, core deposit growth levels, excluding certificates of deposit, are not adequate to meet current or projected loan demand. YNB's ability to generate lower cost deposits is critical to achieving earnings targets and the increasing relevance on higher cost certificates of deposit to fund asset growth is a major factor in the continued pressure on YNB's net interest margin. YNB continues to seek lower cost funding sources. One source is opening new branches to serve a wider market area. In April 1999, YNB opened its 11th branch, which is located in Newtown, Bucks County, Pennsylvania. This branch opens a new market for YNB. Bucks County, Pennsylvania is located directly across the Delaware River from Mercer County, New Jersey, where all of YNB's other branches are currently located. In addition, a second new branch will open 15 in November 1999. This branch will be located in the YNB Corporate headquarters building. The headquarters building is to be located in Hamilton Township, Mercer County New Jersey. There are also plans to open a branch in Burlington County, New Jersey which is located directly south of Mercer County in the first quarter of the year 2000. We expect these new branches will improve YNB's ability to generate lower cost deposits and create additional lending opportunities. With the consolidation in YNB's market place, additional opportunities for new branches in both Pennsylvania and New Jersey are possible and management will evaluate these opportunities for new branches if they become available. Borrowed Funds Borrowed funds totaled $303,399,000 at September 30, 1999, an increase of $125,511,000 or 70.6% when compared to $177,888,000 at December 31, 1998. The majority of this funding has been in callable FHLB advances utilized to extend funding duration and reduce YNB's exposure to rising interest rates. Approximately $236,088,000 or 77.8% of borrowed funds at September 30, 1999 are related to the Investment Growth Strategy. The majority of the increase was in Federal Home Loan Bank advances used to fund the purchase of Investment Growth Strategy assets. Management continues to closely monitor the mix of funding used to support the Investment Growth Strategy. As Investment Growth Strategy funding matures or is called, management will replace it with funding that will reduce the overall interest rate risk profile of YNB. This will be accomplished by using callable FHLB advances with longer lockout terms, which have the benefit of improving performance in a rising interest rate environment. Management anticipates that funding costs associated with borrowed funds will increase as shorter term repurchase agreement mature and callable funding at below market rates are called. At September 30, 1999 $211,500,000 or 89.6% of the Investment Growth Strategy funding was in callable funding compared to $76,500,000 or 81.2% at December 31, 1998. Securities sold under agreements to repurchase totaled $86,088,000 at September 30, 1999 compared to $87,120,000 at December 31, 1998. $61,500,000 or 71.4% of the repurchase agreements outstanding at September 30, 1999 were callable compared to $61,500,000 or 70.6% at December 31, 1998. Callable repurchase agreements have terms of five to ten years and call dates of one year. There are $31,500,000 in callable repurchase agreements that have passed their lockout dates and these can be called every ninety days. With the recent rise in interest rates, management anticipates that repurchase agreement costs will rise as shorter-term repurchase agreements mature and below market rate callable repurchase agreements are called and are replaced at higher market rates. YNB had Federal Home Loan Bank of New York (FHLB) advances outstanding of $214,299,000 at September 30, 1999 an increase of $124,983,000 or 139.9% when compared to $89,316,000 at December 31, 1998. YNB continues to utilize callable FHLB advances to fund both Investment Growth Strategy purchases as well as other earning assets. During 1999, management has shifted Investment Growth Strategy funding from shorter-term repurchase agreements into FHLB callable advances in order to increase the duration of the funding. At September 30, 1999 callable advances totaled $209,500,000 or 97.8% of advances outstanding compared to $83,500,000 or 93.4% at December 31, 1998. Callable FHLB advances have terms of ten years and are callable after periods ranging from one to five years. There are $31,000,000 16 in callable advances with call dates in 1999 which have passed their initial lockout period and can be called every 90 days. Management anticipates that, if rates continue to rise, some or all of these advances will be called and will have to be replaced with higher costing advances. The callable FHLB Advances and repurchase agreements have allowed YNB to lower its borrowing costs, while at the same time extending the maturity of borrowings. In the event that rates rise, the callable borrowings will be called and will have to be replaced with higher costing funds. In the event of falling interest rates, callable borrowings will not be called and could remain outstanding until maturity. Borrowed funds included $1,700,000 related to the ESOP. The ESOP purchased 155,340 shares of common stock of the Holding Company with a loan from a nonaffiliated financial institution. The financing is for a term of five years with an interest rate of 7.00% and a maturity date in 2004. The interest rate is fixed for the period of the loan and the loan will be repaid in equal monthly installments over the term of the loan. The shares purchased by the ESOP were used as collateral for the loan. The Holding Company guarantees the repayment of the loan. YNB has the ability to borrow up to $37,845,000 from the FHLB through its line of credit program, subject to collateral requirements. In addition, YNB is eligible to borrow up to 30% of assets under the FHLB advance program subject to FHLB stock requirements, collateral requirements and other restrictions. YNB also maintains unsecured federal funds lines with four commercial banks totaling $25,000,000 for daily funding needs. YNB's funding strategy is to rely on deposits to fund new loan growth whenever possible and to rely on borrowed funds as a secondary funding source for loans. Company - Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company (Trust Preferred Securities) On October 16, 1997, the holding company through the Trust, completed the sale of $11,500,000, 9.25%, Trust Preferred Securities to the public. For regulatory capital purposes the entire amount of the issue is treated as Tier 1 capital at the Holding Company level. Capital On May 18, 1999, the Holding Company completed the sale of 1,610,000 shares of its common stock in an underwritten public offering. The common stock was offered at a price of $12.00 per share and generated gross proceeds of $19,320,000. Net proceeds after the underwriting discount and other offering costs was approximately $17,620,000. Of the net proceeds, $17,501,000 was contributed to the Bank to support future asset growth. Stockholders' equity at September 30, 1999 totaled $58,403,000, an increase of $17,647,000 or 43.3% compared to $40,756,000 at December 31, 1998. This net increase resulted from the following factors: (i) Net income of $5,744,000 less cash dividend payments of $1,396,000. 17 (ii) The unrealized loss on available for sale securities was $284,000 at December 31, 1998 compared to an unrealized loss of $4,951,000 at September 30, 1999. This shift resulted in a $4,667,000 reduction in stockholders' equity. (iii) Proceeds of $68,000 from exercised options, $2,000,000 from the issuance of common shares to the ESOP and approximately $17,620,000 from the capital offering. (iv) Repurchase of 1,700 shares of common shares for $22,000, which increased treasury shares to 172,000 and the cost of total stock repurchases to $3,030,000. (v) Commitment to ESOP of $1,700,000, representing the balance of the $2,000,000 loan used to finance the purchase of common stock by the ESOP. The improvement in the capital ratios from December 31, 1998 to September 30, 1999 was primarily due to the capital offering completed in May offset by the strong asset growth in 1999. Management remains committed to keeping YNB a well-capitalized institution under the prompt corrective action rules. The following table sets forth regulatory capital ratios for the Holding Company and the Bank as of September 30, 1999 and December 31, 1998
Amount Ratios - ------------------------------------------------------------------------------------------ dollars in thousands 09/30/99 12/31/98 09/30/99 12/31/98 - ------------------------------------------------------------------------------------------ Risk-based capital: Tier 1: Holding Company $ 74,843 $ 52,531 11.1% 9.9% Bank 74,697 50,948 11.1 9.6 - ------------------------------------------------------------------------------------------ Total: Holding Company 83,200 59,151 12.3 11.2 Bank 83,055 57,590 12.3 10.8 - ------------------------------------------------------------------------------------------ Tier 1 leverage: Holding Company 74,843 52,531 8.1 7.7 Bank $ 74,697 $ 50,948 8.0% 8.5% - ------------------------------------------------------------------------------------------
The minimum regulatory capital requirements for financial institutions require institutions to have a Tier 1 leverage ratio of 4.0%; a Tier 1 risk-based asset capital ratio of 4.0% and a total risked based capital ratio of 8.0%. To be considered "well capitalized" an institution must have a minimum Tier 1 capital and total risk-based capital ratio of 6.0% and 10.0%, respectively, and a minimum Tier 1 leverage ratio of 5.0%. At September 30, 1999, the ratios of the Holding Company and the Bank exceeded the ratios required to be considered well capitalized. On October 28, 1997, the Holding Company's Board of Directors authorized management to repurchase up to 172,000 shares of the Holding Company's common stock in the open market in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. As of September 30, 1999, as part of an overall capital plan, 172,000 shares had been repurchased at an average price of $17.62. 18 Credit Quality The following table sets forth nonperforming assets and risk elements in YNB's loan portfolio by type as of September 30, 1999 and December 31, 1998. Nonperforming Assets - --------------------------------------------------------------------- (in thousands) 09/30/99 12/31/98 - --------------------------------------------------------------------- Nonaccrual loans: Commercial and industrial $ 656 $ 232 Real estate - mortgage 1,090 570 Real estate - construction -- 684 Consumer 15 31 Other 312 529 - --------------------------------------------------------------------- Total 2,073 2,046 - --------------------------------------------------------------------- Restructured loans 598 634 - --------------------------------------------------------------------- Loans 90 days or more past due: Commercial and industrial 62 -- Real estate - mortgage 384 1,093 Real estate - construction 26 -- Consumer 98 100 - --------------------------------------------------------------------- Total 570 1,193 - --------------------------------------------------------------------- Total nonperforming loans 3,241 3,873 - --------------------------------------------------------------------- Other real estate 4,696 4,957 - --------------------------------------------------------------------- Total nonperforming assets $ 7,937 $ 8,830 ===================================================================== At September 30, 1999, nonperforming loans, consisting of loans 90 days and more past due, restructured loans and nonaccrual loans, totaled $3,241,000, a $632,000 or 16.3% decrease from the $3,873,000 at December 31, 1998. Nonperforming loans as a percentage of total loans were 0.54% compared to 0.79% at year-end. This decline was caused by both a decrease in nonperforming loans and an increase in loans outstanding. Other real estate (O.R.E.) at September 30, 1999 totaled $4,696,000, a $261,000 or 5.3% decrease when compared to $4,957,000 at December 31, 1998. Management uses an active strategy to liquidate these assets and re-deploy the proceeds into earning assets. One other real estate property totaling $1,800,000 is under contract of sale. Nonperforming assets at September 30, 1999 totaled $7,937,000; a $893,000 or 10.1% decrease from the $8,830,000 level at December 31, 1998. Total nonperforming assets as a percentage of total assets were 0.75% at September 30, 1999 compared to 1.17% at December 31, 1998. This decrease was due to a drop in both nonperforming loans and other real estate as well as an increase in assets. YNB continues to actively manage nonperforming assets with the goal of reducing these assets in relationship to the total loan portfolio. Whenever possible, existing nonperforming loan relationships are being restructured in an effort to return these loans to performing status. 19 Allowance for Loan Losses The allowance for loan losses totaled $8,357,000 at September 30, 1999, an increase of $1,589,000 from the $6,768,000 at year-end 1998. The provision for loan losses for the nine months of 1999 was $2,400,000 compared to $1,400,000 for the same period of 1998. Gross chargeoffs were $879,000 for the nine months of 1999 compared to $794,000 for the same period in 1998. Gross recoveries were $68,000 for the nine months of 1999 compared to $43,000 for the same period in 1998. Annualized net chargeoffs as a percentage of average loans were 0.19% for the nine months ended September 30, 1999 compared to 0.18% for the year ended December 31, 1999. Management maintains the allowance for loan losses at a level determined in accordance with management's documented allowance adequacy methodology. It is management's assessment, based on management's estimates, that the allowance is adequate in relation to the credit risk exposure levels. One measure of the adequacy of the allowance for loan losses is the ratio of allowance for loan losses to total loans. This ratio was 1.39% at September 30, 1999 compared to 1.38% at December 31, 1998. Another measure of the adequacy of the allowance for loan losses is the ratio of the allowance for loan losses to total nonperforming loans. This ratio was 257.9% at September 30, 1999 compared to 174.7% at December 31, 1998 Results of Operations Net Income YNB reported net income of $5,744,000 for the nine months ended September 30, 1999, an increase of $1,620,000 or 39.3% over the same period in 1998. The increase in net income for the nine months ended September 30, 1999, compared to the same period in 1998, is primarily attributed to higher net interest income, offset by a higher provision for loan losses and increased non-interest expense. Basic earnings per share for the nine months ended September 30, 1999 increased $0.17 or 20.7% to $0.99 from $0.82 for the same period in 1998. Diluted earnings per share increased $0.17 or 21.0% to $0.98 for the nine months ended September 30, 1999 from $0.81 for same period in 1998. On a quarterly basis, net income for the third quarter of 1999 was $2,200,000, an increase of $792,000 or 56.3% over the net income for the same period of 1998. On a per share basis, basic and diluted earnings per share for the third quarter of 1999 were $0.33 an increase of $0.05 or 17.9% when compared to the second quarter of 1998. The slower growth in earnings per share as compared to net income is due to the higher average shares outstanding due to the recently completed capital offering. The increase in net income and earnings per share for the quarter is due to the reasons discussed above. Net Interest Income YNB's net interest income for the nine months of 1999 was $21,412,000, an increase of $4,801,000 or 28.9% from the same period in 1998. The principal factor contributing to this increase was an increase in interest income of $12,220,000 resulting from increased loan and securities balances offset by an 20 increase of $7,419,000 in interest expense. This increase in interest expense was primarily due to higher volume of time deposits and borrowed funds. The net interest margin (tax equivalent basis) which is net income divided by average earning assets, for the nine months ended September 30, 1999, was 3.30% a 31 basis point or 8.6% decline compared to 3.61% for the same period in 1998. The principal factors causing the narrowing of the net interest margin were lower yields on and increased levels of securities and loans, and higher volumes of certificates of deposit and borrowed funds. The net interest margin for the 1999 and 1998 comparative periods was also negatively impacted by the Investment Growth Strategy. The targeted spread on this strategy is 75 basis points after tax. Because of the targeted spread on this strategy, there will be a negative impact to the net interest margin and return on assets. The balance outstanding in the Investment Growth Strategy at September 30, 1999, was approximately $236,800,000 compared to $153,293,000 at September 30, 1998. Conversely, this strategy increases both return on average equity and earnings per share, the primary goals of the strategy. On a quarterly basis, net interest income was $7,895,000, an increase of $2,141,000 or 37.2% when compared to the third quarter of 1998. The net interest margin (tax equivalent basis) for the three months ended September 30, 1999 was 3.31%, a 22 basis point or 6.2% decrease from the same period in 1998. The reasons for the decline are the same as discussed above. Interest Income For the nine months ended September 30, 1999 total interest income was $49,541,000, an increase of $12,220,000 or 32.7% when compared to interest income of $37,321,000 for the same period in 1998. This increase is due to higher average balances in both loans and securities, which is partially offset by lower yields on both earning asset types. Average loans increased $120,646,000 or 28.4% while the yield declined 44 basis points to 8.35% from 8.79%. The decline in loan yields reflects strong competition for loans in YNB's market as well as the overall lower interest rates in 1999 when compared to 1998. Interest and fees on loans for the nine months ended September 30, 1999 increased $6,137,000 or 21.9% to $34,201,000 from $28,064,000 for the same period in 1998. Average securities outstanding for the nine months ended September 30, 1999 increased $129,825,000 or 68.0% to $320,877,000 when compared to the $191,052,000 for the same period of 1998. Over the same period, the yield on the securities portfolio decreased 11 basis points to 6.10% from 6.21%. These factors resulted in interest on securities increasing $5,794,000 or 65.1% to $14,691,000 for the nine months ended September 30, 1999 compared to $8,897,000 for the same period in 1998. Overall, the yield on YNB's interest earning asset portfolio decreased 49 basis points to 7.47% for the nine months ended September 30, 1999 from the 7.96% for the same period in 1998. For the third quarter of 1999, total interest income was $18,373,000, an increase of $5,164,000 or 39.1% when compared to the $13,209,000 for the third quarter of 1998. The increase was due to higher average balances of both loans and securities offset by lower yields on both asset types. The overall yield on earning assets for the third quarter of 1999 was 7.52% a 40 basis point drop from the 7.92% reported for the same period of 1998. The decline in yield was 21 primarily due to the lower average prime rate of interest in 1999 when compared to 1998 and the increased level of lower yielding securities. Interest Expense Total interest expense increased $7,419,000 or 35.8% to $28,129,000 for the first nine months of 1999 compared to $20,710,000 for the same period in 1998. The increase in interest expense for the comparable time periods resulted from a larger deposit base, led by higher costing time deposits, and an increase in borrowed funds. Offsetting these higher balances were lower rates on deposits and borrowed funds. The average rate paid on interest bearing liabilities for the nine months ended September 30, 1999 decreased 24 basis points to 4.75% from 4.99% for the same period of 1998. Interest on other time deposits under $100,000 increased $3,676,000 to $12,426,000 for the nine months ended September 30, 1999 from $8,750,000 for the same period in 1998. This increase was caused by an increase in the average outstanding balance of $103,250,000 to $306,118,000 for the nine months ended September 30, 1999, when compared to the outstanding average balance of $202,868,000 for the nine months ended September 30, 1998. Partially offsetting this increase was a 34 basis point drop in the cost of time deposits under $100,000 to 5.41% for the first nine months of 1999 from 5.75% for the same period of 1998. Interest expense on certificates of deposit under $100,000 accounted for 44.2% of total interest expense for the period and 49.5% of the total increase in interest expense for the nine months ended September 30, 1999 when compared to the same period in 1998. During the first nine months of 1999, YNB offered attractive rates on CDs locally and nationwide to fund loan growth and improve the liquidity profile of YNB. Interest on certificates of deposit of $100,000 or more increased $793,000 to $1,785,000 for the nine months ended September 30, 1999 from $992,000 for the same period in 1998. This increase was caused by an increase in the average outstanding balance of $21,999,000 to $46,416,000 for the nine months ended September 30, 1999 when compared to the outstanding average balance of $24,417,000 for the nine months ended September 30, 1998. Partially offsetting this increase was a 29 basis point drop in the cost of time deposits of $100,000 or more to 5.13% for the nine months ended September 30, 1999 from the 5.42% for the same period in 1998. YNB anticipates that certificates of deposit of $100,000 or more will continue to play an important part in funding future earning asset growth. Interest expense on borrowed funds increased $3,204,000 to $9,552,000 for the first nine months of 1999 when compared to $6,348,000 for the same period in 1998. The increase was caused by a $92,978,000 increase in the average balance outstanding for the nine months ended September 30, 1999 when compared to the same period in 1998. The rate paid on borrowed funds declined 38 basis points for the nine months ended September 30, 1999 to 5.22% from the 5.60% for the same period last year. The primary cause for the increase in interest expense on borrowed funds is the higher level of borrowings used to fund the Investment Growth Strategy. The shifting of borrowed funds out of fixed term products into convertible products at lower interest rates and, to a lesser extent, lower yields on term repurchase agreements, caused the overall decrease in rate. 22 Total interest expense for the third quarter of 1999 increased $3,023,000 or 40.5% to $10,478,000 from $7,455,000 for the same period in 1998. The overall cost of interest bearing liabilities decreased 22 basis points to 4.82% from 5.04% for the third quarter of 1998. The reasons for the increase in interest expense for the third quarter are the same as discussed above. While YNB seeks to fund asset growth with lower cost savings, money market, interest bearing checking and non-interest bearing demand deposits, this is not always possible, as asset growth rates continue to exceed the growth rate in these deposit types. To meet the required funding needs, YNB anticipates continued reliance on higher cost retail CDs and, to a lesser extent, borrowed funds. The ability of YNB to continue to lower the cost of interest bearing liabilities is dependent on market conditions. If interest rates should continue to rise, YNB's interest expense will also increase. Provision for Loan Losses YNB provides for possible loan losses by a charge to current operations. The provision for loan losses for the nine months ended September 30, 1999 was $2,400,000, a 71.4% increase over the $1,400,000 provision recorded for the same period of 1998. For the three months ended September 30, 1999 the provision for possible loan losses was $1,000,000, a $500,000 or 100.0% increase from the third quarter of 1998. The increase in the provision for both the quarter and year to date comparisons was primarily due to the strong loan growth. Management believes that the reserve for loan losses is adequate in relation to the credit risk exposure levels. Non-interest Income Total non-interest income for the first nine months of 1999 was $2,264,000, an increase of $48,000 or 2.2% over non-interest income of $2,216,000 for the same period in 1998. The increase was primarily due to growth in other non-interest income, offset by a decrease in the gains on sale of securities. Other non-interest income increased $64,000 or 5.5% for the first nine months of 1999 compared to the same period in 1998. The increase is principally due to additional income derived from bank owned life insurance assets, which totaled $573,000 and represented a $49,000 or 9.4% increase over the $524,000 for the same period last year and accounted for 76.6% of the increase in other non-interest income. The increase is due to higher average balances of life insurance assets offset by a lower yield. The income earned on these assets is used to offset expenses on deferred compensation programs. Other categories of non-interest income reflect modest growth due to the increased size of YNB. For the three months ended September 30, 1999 total non-interest income decreased $15,000 or 1.9%. Of particular importance was the drop in gains on sale of securities, which decreased $24,000 or 100.0%. Excluding the impact of this decline, the increase in total non-interest income would have been $9,000 or 1.2%. 23 The ability of YNB to generate higher levels of non-interest income remains a critical factor in increasing net income. Management continues to closely evaluate both traditional and non-traditional sources of new non-interest income as part of a longer-term strategy to increase earnings. Non-interest Expense Total non-interest expense increased $2,178,000 or 19.6% to $13,267,000 for the first nine months 1999 compared to $11,089,000 for the same period in 1998. The increase in non-interest expenses was due to increases in salary and employee benefits, equipment expense, occupancy expense and other non-interest expense. Total non-interest expenses, on an annualized basis, as a percentage of average assets were 1.91% for the first nine months of 1999 compared to 2.22% for the same period of 1998. The improvement in this ratio is due to the strong asset growth in the first nine months of the year. YNB's efficiency ratio for the first nine months of 1999 was 56.0%, a decrease from the 58.9% for the same period in 1998. The efficiency ratio is computed by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same or greater volume of income while a decrease would indicate a more efficient allocation of resources. Salary and employee benefits increased $1,270,000 or 21.0% to $7,330,000 for the first nine months of 1999 compared to $6,060,000 for the same period in 1998. Salary and benefits expense accounted for 55.2% of total non-interest expenses for the first nine months of 1999. Salary expense increased $778,000 or 13.7% reflecting increased staffing levels associated with the Pennington and Newtown branches, new hires in other areas of YNB, and normal salary increases. Benefit expense increased $492,000 or 42.0%. In 1999, YNB created the ESOP for the benefit of employees. The compensation expense portion of the ESOP was $262,000 and accounted for 53.3% of the increase in benefit expense and 20.6% of the total increase in salary and employee benefits. Equipment expense increased $187,000 or 19.9% to $1,125,000 for the first nine months of 1999 from $938,000 for the same period in 1998. The equipment costs increase reflects the continuing efforts of YNB to maintain and upgrade technology in order to provide the highest quality service, increase productivity, and address Year 2000 issues. Equipment costs included depreciation on equipment, which totaled $661,000 for the first nine months of 1999 reflecting an increase of $139,000 or 26.6% from the $522,000 for the same period in 1998. The increase in depreciation accounted for 74.3% of the total increase in equipment expense. Occupancy expense for the first nine months of 1999 was $967,000, an increase of $186,000 or 23.8% compared to $781,000 for the same period in 1998. The increase was primarily due to higher costs associated with the lease payments and other operating costs of the Pennington and Newtown branches opened in August 1998 and April 1999, respectively. Total rent expense on leased properties increased $78,000 and accounted for 41.9% of the total increase for the period. Another component of occupancy expense that had a significant increase was repairs and maintenance, which increased $41,000. In October, YNB began to occupy its new corporate headquarters building. The 45,000 square foot building will house all the loan functions, senior management and a branch. The estimated monthly 24 expenses associated with the building are approximately $90,000. This estimated expense includes all lease costs, depreciation of leasehold improvements, furniture and equipment and utility costs. Other non-interest expenses increased $535,000 or 16.2% to $3,845,000 for the first nine months of 1999 when compared to the $3,310,000 for the same period in 1998. The increase in other non-interest expenses accounted for 24.6% of the increase in total non-interest expenses. Expenses, including write downs, related to other real estate owned increased $224,000 or 99.1% for the nine months ended September 30, 1999 when compared to the same period in 1998. This increase accounted for 41.9% of the increase in other non-interest expense and 10.3% of the total increase in non-interest expense. Marketing expenses increased $161,000 or 40.6% to $558,000 for the nine months ended September 30, 1999 when compared to the same period last year. This increase reflects the higher costs associated with increased marketing efforts related to attracting deposits and increased costs of marketing to the wider market area now serviced by YNB. For the three months ended September 30, 1999 total non-interest expense increased $682,000 or 17.4% to $4,594,000 from $3,912,000 for the same period in 1998. Total non-interest expense, on an annualized basis, as a percentage of average assets was 1.80% for the three months ended September 30, 1999 compared to 2.20% for the same period in 1998. YNB's efficiency ratio for the three months ended September 30, 1999 was 52.95, an improvement over the 59.73% for the same period in 1998. Salary and employee benefit expense increased $482,000 or 22.7% to $2,602,000 from $2,120,000 for the same period in 1998. The increase in salary and employee benefit expenses accounted for 70.7% of the total increase in non-interest expense for the three months ended September 30, 1999 when compared to the same period in 1998. Occupancy expense increased $47,000 or 16.4% to $333,000 from $286,000 for the same period in 1998. Equipment expense increased $76,000 or 23.8% to $396,000 from $320,000 for the same period in 1998. Other non-interest expense increased $77,000 or 6.5% to $1,263,000 from $1,186,000 for the same period last year. The reasons for the increase in non-interest expense for the quarter are the same as discussed above. Income Tax Expense The effective income tax rate for the three and nine months ended September 30, 1999 was 28.6% and 28.3% respectively, as compared to 34.1% and 34.9% for the same periods in 1998. The decrease in the effective tax rate was primarily due to the use of a state income tax planning strategy initiated in 1998. Management anticipates that this strategy will continue to reduce state income tax expense in 1999. Higher levels of tax-free income also reduced Federal income taxes in 1999 when compared to 1998. Total income tax expense for the nine months ended September 30, 1999 was $2,265,000, an increase of $51,000 or 2.3% from the $2,214,000 for the same period in 1998. The increase in tax expense resulted from higher taxable income partially offset by a lower effective tax rate. For the three months ended September 30, 1999 tax expense was $882,000 a $152,000 or 20.8% increase from the $730,000 for the same period in 1998. The increase was due to higher taxable income partially offset by the lower tax rate. 25 Year 2000 (Y2K) General Issues surrounding Y2K arise out of the fact that many existing computer programs use only two digits to identify a year in the date field. Additionally, Y2K is not just a computer issue, but involves communication, building and environmental systems as well as office equipment. Y2K readiness can be affected to the extent that other entities such as loan customers and key vendors are unsuccessful in addressing this issue. Y2K issues affect virtually all aspects of YNB's organization. YNB began taking a proactive approach to this issue in 1997. YNB's response includes a written compliance plan. Management has also prepared a cash contingency plan designed to insure that YNB has adequate liquidity to meet anticipated deposit outflows that could occur towards the end of 1999. Management believes that the level of resources committed to the project is adequate and the oversight provided by senior management and the Board of Directors is appropriate. YNB is on schedule with its Y2K compliance plan. State of Readiness YNB has identified six distinct areas for its Y2K compliance efforts. The Technology Committee, which consists of four directors and all of the executive management team, and the System and Operations committee are the primary groups coordinating YNB's Y2K efforts. The Board of Directors receives monthly reporting on the progress of YNB's Y2K compliance efforts. In addition, YNB receives guidance from the Federal Financial Institutions Examination Council (FFIEC), the formal interagency group responsible for uniform principles, standards, and procedures for the examination of financial institutions by the federal regulatory agencies, and participates in scheduled federal Year 2000 examinations. These examinations are being conducted to assess each financial institution's Year 2000 efforts. Core Computer Systems: YNB utilizes Information Technology System's (ITI) software for processing all deposit, loan and general ledger activity. In June 1998, YNB completed preliminary testing of all loan and deposit functions at a remote disaster recovery site utilizing Y2K testing software purchased from ITI. Results of the preliminary testing were satisfactory. Due to the recent hardware upgrades, YNB successfully completed testing on deposit, loan functions and general ledger in April of 1999. Management does not anticipate any major Y2K compliance problems with the ITI system. Significant Alliances: YNB depends on many outside vendors and suppliers to function efficiently. However, management has identified three systems that have significant Y2K compliance issues due to their reliance on computer hardware and software. These systems are the Federal Reserve Bank's Fed Line wire system, the MAC network which supports YNB's automatic teller machines (ATM) and Automated Clearing House (ACH) which YNB uses to process direct deposit activities including payrolls. YNB requires vendors and suppliers to provide representations that their systems are Y2K compliant and has a system in place 26 to track vendors' Y2K compliance efforts. Testing of the Fed Line wire system, the MAC network and ACH transactions has been successfully completed YNB has also identified our provider of mortgage servicing, Wendover Financial Services Corporation, as a significant alliance. Wendover is a subsidiary of Electronic Data Systems, which is one of the largest service providers of data processing applications in the United States. Wendover utilizes software provided by ALLTEL Incorporated. YNB has been provided detailed plans and strategies from both companies regarding Y2K compliance. ALLTEL has advised YNB that their systems are Y2K compliant at December 31, 1998. Based on reports received June 11, 1999, management has determined that Wendover is in compliance with FFIEC Y2K servicer guidelines. Management does not anticipate any major Y2K compliance problems with either Wendover Financial Services or ALLTEL. End User Computing: YNB's plan to ensure compliance of desktop computers throughout the company includes the replacement of non-compliant computers and related software. All mission critical personal computers are now Y2K complaint. YNB is in the process of testing non-mission critical personal computers and replacing them as necessary. YNB has determined that some personal computers, in non-mission critical areas, will only function if the internal clocks are manually reset to January 1, 2000. Management has successfully tested these computers by manually resetting the date to January 1, 2000 and determined that the computers function correctly once the date is changed. Rather than replace these personal computers, YNB has a plan in place to manually reset the dates on the affected personal computers to January 1, 2000. Management does not anticipate any major Y2K complaince issues with its personal computers. Technical Infrastructure: The most critical part of YNB's technical infrastructure is the communication network hardware and software that links all of YNB's departments and branches to the ITI system and allows them to process deposit, loan and general ledger activities. To ensure Y2K compliance the network was successfully tested at each location. Management does not anticipate any significant Y2K compliance issues with its network. Physical Property and Infrastructures: YNB's physical properties and infrastructures include energy and security systems as well as date sensitive equipment. Testing in this area is complete and management does not anticipate any significant Y2K issues resulting from this area. Commercial Loan Relationships: YNB has identified its commercial loan customers as a potential area of YNB's Y2K exposure. To the extent that a borrower's financial position is weakened as a result of Y2K issues, credit quality could be adversely affected. Management has reviewed the commercial loan portfolio to identify loan types having significant Y2K exposure. Loan calling officers are in the process of contacting loan customers and assessing their Y2K exposure and compliance efforts. All significant new commercial loan applications include an assessment of the Y2K exposure and compliance efforts of the customer. While YNB continues to closely monitor its commercial loan customers, management cannot predict whether its customers will be successful in becoming Y2K complaint. 27 Y2K Program Status Core Computer Systems Plan: 100% compliant by 3/31/99. Present Status: 100% completed. Significant Alliances Plan: 100% ready* by 6/30/99. Present Status: 100% completed. End User Computing Plan: 100% compliant by 6/30/99. Present Status: 100% completed. Technical Infrastructure Plan: 100% compliant by 6/30/99. Present Status: 100% completed. Physical Properties and Plan: 100% compliant by 3/31/99. Infrastructure Present Status: 100% completed. Commercial Loan Customers Plan: 100% ready* by 6/30/99. Present Status: 100% completed. *Ready means having a comprehensive Y2K program in place and a plan that will achieve compliance before January 1, 2000. Y2K Costs YNB's Y2K related costs for 1998 were approximately $810,000. This includes approximately $615,000 in equipment related purchases that will be depreciated over five years. The remaining expense includes additional compensation expense and costs related to testing and upgrading systems. Management anticipates 1999 expenditures to decline significantly as most of the significant hardware and software purchases have been completed. Total Y2K costs are projected to be between $50,000 and $100,000 in 1999. As of September 30, 1999, YNB has expensed approximately $31,000 in Y2K related costs. This level could rise in the event that unanticipated Y2K compliance issues are uncovered. Y2K Contingency Plans YNB has established Y2K contingency plans as part of its overall disaster recovery plan. These plans identify all mission critical systems and include strategies to overcome Y2K related problems. These plans continue to be reviewed and will be modified from time to time based on the results of the ongoing Y2K compliance efforts. Management believes that the contingency plans should allow YNB to continue to operate in the event of Y2K disruptions with a minimum of disruption and moderate increased costs. 28 Y2K Risks The most reasonable worst case scenario for YNB with respect to the Y2K problem is an adverse effect on the credit quality of its commercial loan portfolio. This could be caused by the inability of customers to service their bank debt due to their own Y2K problems or that of their key customers or suppliers. This could result in lower interest income and higher loan chargeoffs should the Y2K problems become very serious. Management cannot predict the number of customers that will experience Y2K related problems or the amount of revenue that could be lost due to them. In addition, without electrical power and telephone communication it would be very difficult for YNB to effectively operate. Item 3: Quantitative and Qualitative Disclosure about Market Risk There have been no material changes in YNB's market risk from December 31, 1998 except as discussed below. For information regarding YNB's market risk refer to the Company's 1998 Annual Report to stockholders. Changes in Earnings Risk Net interest income over the next twelve-month period indicates a reduction in the risk to lower rates (-200 basis points) at September 30, 1999 than reported at December 31, 1998. Comparing the simulation results of this low rate scenario to the flat rate interest rate scenario indicates a -3.9% change in net interest income compared to -6.7% at year end 1998. The 1998 results reflect rate changes of up or down 300 basis points. At the same time, YNB's exposure to higher rates (+200 basis points) shifted to a 0.8% change in net interest income compared to a 1.8% change at year-end 1998. The cumulative one-year gap turned negative $90,948,000 or -8.6% of total assets at September 30, 1999 compared to positive $12,718,000 or 1.7% of assets at year-end 1998. The dollar change in the gap was $103,666,000. The most important reasons for this change in short-term earnings risk profile include: 1. The addition of $143,059,000 in securities with repricing or maturity dates beyond one year. 2. The origination of $78,148,000 in loans with repricing or maturity dates beyond one year. 3. Offsetting the increase in assets with repricing or maturity dates beyond one year were $50,474,000 in deposits and $53,484,000 in borrowed funds with repricing or maturity dates beyond one year. Changes in Market risk Management measures longer term market risk by changes in the Economic Value of Portfolio Equity (EVPE) as a percentage of total assets with rate shifts of +/- 200 basis points. EVPE analysis is an indication of long-term market risks in the balance sheet. It measures the present value of asset and liability cash flows based on current inventory and market rates to determine the present value of equity. The present 29 value of equity is subsequently measured by shifting interest rates by +/- 200 basis points to observe the variances as a percentage of total assets. It is management's intention to maintain modest changes in this measure with a target variance not to exceed 3% of total assets. At September 30, 1999, the EVPE changes by -4.02% for rate shifts of +200 and - -0.21% for rate shifts of -200 basis points. The non-symmetry of the results is indicative of the callable funding utilized to fund earning asset growth. This compares to changes of -2.35% and -2.74% respectively at December 31, 1998 and - -4.26% and -0.14% at June 30, 1999. The primary causes for this increase in risk to rising rates since year-end 1998 are discussed below: Liability durations had a significant impact falling to 1.52 years at September 30, 1999 from 1.84 years at December 31, 1998. This resulted from the increased level of shorter duration funding associated with the investment growth strategy. In addition, the recent upward shift in the yield curve has shortened the expected conversion dates of callable funding. The 1.52 year liability duration at September 30, 1999 is an increase from the 1.40 years at June 30, 1999. Asset durations increased to 2.44 years at September 30, 1999 from 1.99 years at December 31, 1998. The primary cause of this lengthening was a shift in borrowers' preference to fixed rate loans from floating rate loans. This has resulted in the duration of the loan portfolio extending to 1.62 years at September 30, 1999 compared to 1.33 years at December 31, 1999. Another factor was an increase in the investment portfolio duration to 4.77 years from 4.12 years. This lengthening resulted in additional Investment Growth Strategy purchases, the purchase of long-term tax-free municipal bonds, extending of expected call dates on callable bonds and slower prepayment speeds extending the average lives of mortgage backed securities. The asset duration of 2.44 years at September 30, 1999 is a decrease from the 2.46 years at June 30, 1999. The EVPE change to rising rates of -4.02% exceeds the target limit of 3.0%. While still above the target limit of 3.0%, the ratio is an improvement from the - -4.26% ratio at June 30, 1999. The improvement in this ratio was accomplished by the above mentioned increase in the liability duration while at the same time reducing the asset duration. Management is currently implementing a strategy to lower the ratio below the 3.0% limit by the end of 1999. This strategy involves extending the duration of liabilities. This will be accomplished by offering longer term certificates of deposit and extending the duration on borrowed funds. This strategy is dependent on YNB's ability to sell longer-term certificates of deposit to its customers. On the asset side, new security purchases will have a shorter duration than the existing portfolio. This should result in a gradual lowering of the investment portfolio duration. Rising interest rates could modestly extend the investment portfolio duration and mitigate to a degree management's actions. Another factor influencing the asset duration is the increased demand for fixed rate loans. Should this demand continue to increase, the ability of management to reduce the overall asset duration will be limited. 30 Lowering the change in EVPE to the 3.0% limit by year-end will be dependent on management's ability to lower the duration of the earning asset portfolio while at the same time extending the duration of the funding liabilities. PART II: OTHER INFORMATION Item 1: Legal Proceedings Not Applicable. Item 2: Changes in Securities and Use of Proceeds Not Applicable. Item 3: Defaults Upon Senior Securities Not Applicable. Item 4: Submission of Matters to a Vote of Securities Holders Not Applicable. Item 5: Other Information Not Applicable Item 6: Exhibits and Reports on Form 8-K See attached exhibits. There were no Form 8-K reports filed during the quarter for which this report is filed. 31 INDEX TO EXHIBITS
Exhibit Number Description Page - ----------------------------------------------------------------------------------------------------------- (G) 3.1 Restated Certificate of Incorporation of the Company, as amended by the Certificate of Amendment thereto filed on March 6, 1998. (B) 3.2 By-Laws of the Company (B) 4.1 Specimen Share of Common Stock (I) 4.2 See Exhibits 3.1 and 3.2 for the Registrant's Certificate of Incorporation and By-Laws, which contain provisions defining the rights of stockholders of the Registrant. (I) 4.3 Amended and Restated Trust Agreement dated October 16, 1997, among the Registrant, as depositor, Wilmington Trust Company, as property trustee, and the Administrative Trustees of Yardville Capital Trust. (I) 4.4 Indenture dated October 16, 1997, between the Registrant and Wilmington Trust Company, as trustee, relating to the Registrant's 9.25% Subordinated Debentures due 2027. (I) 4.5 Preferred Securities Guarantee Agreement dated as of October 16, 1997, between the Registrant and Wilmington Trust Company, as trustee, relating to the Preferred Securities of Yardville Capital Trust. (L) 10.1 Employment Contract between Registrant and Patrick M. Ryan. (L) 10.2 Employment Contract between Registrant and Jay G. Destribats (L) 10.3 Employment Contract between Registrant and Stephen F. Carman (L) 10.4 Employment Contract between Registrant and James F. Doran (L) 10.5 Employment Contract between Registrant and Richard A. Kauffman (L) 10.6 Employment Contract between Registrant and Mary C. O'Donnell (L) 10.7 Employment Contract between Registrant and Frank Durand III (D) 10.8 Salary Continuation Plan for the Benefit of Patrick M. Ryan
32 INDEX TO EXHIBITS (continued)
Exhibit Number Description Page - -------------------------------------------------------------------------------------------------------- (D) 10.9 Salary Continuation Plan for the Benefit of Jay G. Destribats (E) 10.10 1988 Stock Option Plan (L) 10.11 Employment Contract between Registrant and Thomas L. Nash (A) 10.12 Directors' Deferred Compensation Plan (B) 10.13 Lease Agreement between Jim Cramer and the Bank dated November 3, 1993 (L) 10.14 Lease between Gardeners Property Partnership and the Bank (A) 10.15 Agreement between the Lalor Urban Renewal Limited Partnership and the Bank dated October, 1994 (C) 10.16 Survivor Income Plan for the Benefit of Stephen F. Carman (C) 10.17 Lease Agreement between Devon Inc. and the Bank dated as of February 9, 1996 (F) 10.18 1997 Stock Option Plan (L) 10.19 Employment Contract between Registrant and Howard N. Hall (L) 10.20 Employment Contract between Registrant and Sarah J. Strout (L) 10.21 Employment Contract between Registrant and Nina D. Melker (L) 10.22 Employment Contract between Registrant and Timothy J. Losch (G) 10.23 Survivor Income Plan for the Benefit of Timothy J. Losch (G) 10.24 Lease Agreement between the Ibis Group and the Bank dated July 1997 (H) 10.25 Lease Agreement between Hilton Realty Co. of Princeton and the bank dated March 31, 1998.
33 INDEX TO EXHIBITS (continued)
Exhibit Number Description Page - -------------------------------------------------------------------------------------------------------- (H) 10.26 1994 Stock Option Plan. (J) 10.27 Lease agreement between Crestwood Construction and the Bank dated May 25, 1998 (K) 10.29 Yardville National Bank Employee Stock Ownership Plan, as amended (L) 10.30 Lease Agreement between Sycamore Street Associates and the Bank dated October 30, 1998 (M) 10.31 List of Subsidiaries of the Registrant 27.1 Financial Data Schedule - ------------------------------------------------------------------------------------------------------- (A) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB/A filed on July 25, 1995 (B) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 (Registration No. 33-78050) (C) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB for fiscal year ended December 31, 1995 (D) Incorporate by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (E) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997, as amended by Form 10-Q/A filed on August 15, 1997 (F) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-28193) (G) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (H) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998, as amended by Form 10-Q/A filed June 9, 1998
34
(I) Incorporated by reference to the Registrant's Registration Statement on Form S-2 (Registration Nos. 333-35061 and 333-35061-01) (J) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (K) Incorporated by reference to the Registration Statement on Form S-8 (Registration No. 333-71741). (L) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 as amended by Form 10-K/A filed on April 20, 1999.
35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. YARDVILLE NATIONAL BANCORP ----------------------------------- (Registrant) Date: November 15, 1999 By: /s/ Stephen F. Carman ----------------------------- ------------------------------ Stephen F. Carman Executive Vice President and Chief Financial Officer 36 EX-10.29 2 EXHIBIT 10.29 YARDVILLE NATIONAL BANK EMPLOYEE STOCK OWNERSHIP PLAN EFFECTIVE JANUARY 1, 1999 AS AMENDED JULY 28, 1999 YARDVILLE NATIONAL BANK EMPLOYEE STOCK OWNERSHIP PLAN TABLE OF CONTENTS ----------------- Page ---- ARTICLE I DEFINITIONS.............................................................2 "Account"...............................................................2 "ESOP Stock Account"....................................................2 "ESOP Cash Account".....................................................2 "Account Balance".......................................................2 "Acquisition Loan"......................................................2 "Administrator".........................................................2 "Affiliated Company"....................................................3 "Alternate Payee".......................................................3 "Benefits Committee"....................................................3 "Board of Directors"....................................................3 "Break in Service"......................................................3 "Code" ...............................................................4 "Company"...............................................................4 "Compensation"..........................................................4 "Covered Employee"......................................................5 "Credited Service"......................................................5 "Direct Rollover".......................................................5 "Distributee"...........................................................5 "Effective Date"........................................................5 "Election Period".......................................................5 "Eligible Employee".....................................................5 "Eligible Retirement Plan"..............................................6 "Eligible Rollover Distribution"........................................6 "Employee"..............................................................6 "Entry Date"............................................................6 "ERISA" ...............................................................6 "ESOP Stock"............................................................6 "Financed Shares".......................................................7 "Hour of Service".......................................................7 "Limitation Year".......................................................7 "Loan Suspense Account".................................................7 "Normal Retirement Date"................................................8 "Participant"...........................................................8 "Participating Company".................................................8 "Plan" ...............................................................8 "Plan Year".............................................................8 i "Qualified Domestic Relations Order"....................................8 "Qualified Participant".................................................8 "Required Beginning Date"...............................................8 "Spouse" ...............................................................9 "Total Disability"......................................................9 "Trust" ...............................................................9 "Trust Agreement".......................................................9 "Trust Investment Committee"............................................9 "Trustee"...............................................................9 "Valuation Date"........................................................10 ARTICLE II PARTICIPATION...........................................................11 2.1 Participation..................................................11 2.2 Participation Not Guarantee of Employment......................12 2.3 Beneficiary Designation........................................12 2.4 Participation After Reemployment...............................12 2.5 Data...........................................................13 2.6 Credit for Military Service....................................13 ARTICLE III PLAN CONTRIBUTIONS......................................................14 3.1 Participating Company Contributions............................14 3.2 Participant Contributions......................................14 3.3 Trust..........................................................15 3.4 Timing of Contributions........................................15 ARTICLE IV ALLOCATION OF PARTICIPATING COMPANY CONTRIBUTIONS AND FORFEITURES...........................................17 4.1 Allocation.....................................................17 4.2 Maximum Allocation.............................................17 ARTICLE V PARTICIPANTS' ACCOUNTS..................................................19 5.1 Separate Accounting............................................19 5.2 Investment of Trust............................................19 5.3 Valuation......................................................20 5.4 Adjustment of Accounts.........................................20 5.5 Accounting for Allocations.....................................22 5.6 Restricted Assets..............................................22 5.7 Participant Statements.........................................22 5.8 Registration of Securities.....................................22 5.9 Voting Of Employer Stock.......................................23 5.10 Tender or Exchange Offer.......................................24 5.11 Acquisition Loans..............................................24 5.12 Restrictions on Allocations....................................26 5.13 Dividends on ESOP Stock........................................26 ii ARTICLE VI VESTING AND DISTRIBUTION OF ACCOUNT BALANCES............................28 6.1 Retirement or Total Disability.................................28 6.2 Death..........................................................28 6.3 Termination of Employment other than as a Result of Death, Retirement or Total Disability..........................28 6.4 Forfeitures and Restoration of Forfeited Amounts upon Reemployment..............................................29 6.5 Mode of Distribution...........................................30 6.6 Pre-Retirement Diversification Rights..........................32 6.7 Timing of Benefit Distributions................................33 6.8 Valuation for Distribution.....................................36 6.9 Direct Rollover................................................36 ARTICLE VII DEATH BENEFITS..........................................................37 7.1 Beneficiary....................................................37 7.2 Form of Payment................................................37 ARTICLE VIII MANAGEMENT OF FUNDS.....................................................38 8.1 Designation of Trustee.........................................38 8.2 Exclusive Benefit..............................................38 8.3 No Interest in Trust...........................................38 8.4 Trust Investment Committee.....................................38 ARTICLE IX ADMINISTRATION..........................................................40 9.1 Administrator..................................................40 9.2 Benefits Committee.............................................40 9.3 Ministerial Functions..........................................40 9.4 Duties and Powers of Benefits Committee........................40 9.5 Functioning of Benefits Committee..............................41 9.6 Disputes.......................................................41 9.7 Indemnification................................................42 9.8 Expenses.......................................................43 ARTICLE X AMENDMENT AND TERMINATION...............................................44 10.1 Power of Amendment and Termination.............................44 10.2 Merger.........................................................44 10.3 Change in Control. ............................................45 ARTICLE XI TOP-HEAVY PROVISIONS....................................................46 11.1 General........................................................46 11.2 Definitions....................................................46 11.3 Minimum Contribution for Non-Key Employees.....................50 11.4 Change in Vesting Schedule.....................................51 11.5 Social Security................................................51 11.6 Adjustment to Maximum Allocation Limitation....................51 iii ARTICLE XII RIGHTS OF ALTERNATE PAYEES..............................................53 12.1 General.......................................................53 12.2 Death Benefits................................................53 ARTICLE XIII GENERAL PROVISIONS......................................................54 13.1 Source of Benefits.............................................54 13.2 Alienation of Benefits.........................................54 13.3 Facility of Payment............................................54 13.4 Interest and Dividends on Distributions........................54 13.5 Applicable Law.................................................54 SCHEDULE A PARTICIPATING COMPANIES................................................A-1 SCHEDULE B TRUST INVESTMENT COMMITTEE CHARTER.....................................B-1 iv WHEREAS, Yardville National Bank (the "Company") desires to adopt a written employee stock ownership plan to permit eligible employees of the Company and certain participating subsidiaries to share in the growth of the Company through stock ownership; and WHEREAS, the plan is intended (1) to comply with the applicable requirements of the Employee Retirement Income Security Act of 1974, as amended, (2) to comply with the applicable requirements of sections 401(a), 409 and 4975(e)(7) of the Internal Revenue Code of 1986, as amended, and (3) to be an employee stock ownership plan within the meaning of section 4975(e)(7) of the Code; and WHEREAS, the plan is designed to invest primarily in "employer securities," as defined in section 409(l) of the Internal Revenue Code; and WHEREAS, the plan is also intended to accommodate purchases from shareholders of the Company that qualify for tax treatment under section 1042 of the Code, whether or not such purchases are in fact made; NOW, THEREFORE, effective January 1, 1999, the Yardville National Bank Employee Stock Ownership Plan, is established as hereinafter set forth: 1 ARTICLE I DEFINITIONS ----------- Except where otherwise clearly indicated by context, the masculine pronoun shall include the feminine and the singular shall include the plural, and vice versa. Any term used in the Plan without an initial capital letter that is used in a provision of the Code with which this Plan must comply to meet the requirements of section 401(a) of the Code shall be interpreted as having the meaning used in such provision of the Code, if necessary for the Plan to comply with such provision. "Account" means the entries maintained in the records of the Trustees which represent the Participant's interest in the Trust. The term "Account" shall refer, as the context requires, to any or all of the following: "ESOP Stock Account" -- the Account to which is credited ESOP Stock allocated to a Participant under the Plan attributable to Company contributions, as adjusted for distributions, earnings, losses and expenses attributable thereto, to the extent held in the form of ESOP Stock. "ESOP Cash Account" -- the Account to which are credited Company contributions allocated to a Participant under the Plan, as adjusted for distributions, earnings, losses and expenses attributable thereto, to the extent held in any form other than ESOP Stock. "Account Balance" means, for each Participant, the aggregate credit standing to his Account. "Acquisition Loan" means a loan or other extension of credit used by the Trustee to finance the acquisition of ESOP Stock, as set forth in Section 5.11. "Administrator" means the Company. 2 "Affiliated Company" means (a) any subsidiaries of the Company (or companies under common control with the Company) which are members of the same controlled group of corporations as the Company, as determined under section 414(b) of the Code; (b) any member of an affiliated service group, as determined under section 414(m) of the Code, of which the Company is a member; and (c) any trades or businesses under common control with the Company, as determined under section 414(c) of the Code. "50% Affiliated Company" means an Affiliated Company described in (a) or (c) above, but applied as if the phrase "more than 50%" were substituted for the phrase "at least 80%" each time it appears in section 1563(a) of the Code. "Alternate Payee" means any Spouse, former Spouse, child or other dependent of a Participant who is recognized by a domestic relations order (within the meaning of section 414(p)(1)(B) of the Code) as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Participant. "Benefits Committee" means the person or persons appointed by the Board of Directors to supervise the administration of the Plan pursuant to Article IX. "Board of Directors" means the board of directors of the Company. "Break in Service" means any Plan Year during which an Employee receives credit for not more than 500 Hours of Service. Notwithstanding the foregoing, if an Employee is absent from work by reason of pregnancy, childbirth, or adoption, or for purposes of the care of such Employee's child immediately after birth or adoption, such Employee shall be credited, solely for purposes of this Section, with the Hours of Service which otherwise would have been credited to such individual for such absence or, if such hours cannot be determined, at the rate of eight hours per normal workday, except that the total number of hours counted as Hours of Service for this purpose will not exceed 501. The hours described in this Section shall be treated as Hours of Service: 3 (a) only in the Plan Year in which the absence from work begins, if an Employee would be prevented from incurring a Break in Service in such Plan Year solely because the period of absence is treated as Hours of Service under this Section; or (b) in any other case, in the immediately following Plan Year. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means Yardville National Bank, and its successors. "Compensation" (a) In General. Except as otherwise provided in this definition, the term 'Compensation' means an Employee's base pay for each calendar year ending with or within a Plan Year and which is includible in the Employee's gross income for federal income tax purposes. The term 'Compensation' shall include amounts deferred or contributed under a salary reduction agreement with a Participating Company and excludible from gross income for federal income tax purposes pursuant to section 125 or 402(g) of the Code. Except as otherwise provided above with respect to amounts excludible from gross income under section 402(g) of the Code, the term 'Compensation' shall not include contributions to this Plan or any other contributions by or on behalf of the Employee to any other plan of deferred compensation. (b) Statutory Limit on Compensation. Except as otherwise provided in the Plan, only the first $160,000 of a Participant's Compensation (or such greater amount as may be allowable under section 401(a)(17), as determined by the Secretary of the Treasury) will be considered for any purpose of the Plan. 4 "Covered Employee" means any Employee who is employed by a Participating Company other than: (a) an Employee who is covered by a collective bargaining agreement, unless such agreement specifically provides for participation hereunder; or (b) an individual who is an Employee solely by reason of being a leased employee within the meaning of section 414(n) of the Code. "Credited Service" means that portion of an Employee's employment with the Company and all Affiliated Companies which is used to calculate the Employee's vesting status hereunder. An Employee shall earn one year of Credited Service for each Plan Year beginning on or after the Effective Date during which he is credited with 1000 Hours of Service. "Direct Rollover" means a payment by the Plan to an Eligible Retirement Plan specified by the Distributee. "Distributee" means a Participant or a Participant's surviving spouse or Alternate Payee. "Effective Date" means January 1, 1999. "Election Period" means, with respect to any Participant, the 90-day period immediately following the end of (1) the Plan Year in which such Participant becomes a Qualified Participant and (2) each of the five succeeding Plan Years. "Eligible Employee" means an Employee who has become an Eligible Employee as set forth in Article II, whether or not he is a Participant, and who has remained a Covered Employee at all times thereafter. 5 "Eligible Retirement Plan" means: (a) an individual retirement account described in section 408(a) of the Code; (b) an individual retirement annuity described in section 408(b) of the Code; (c) a qualified trust described in section 401(a) of the Code; and (d) an annuity plan described in section 403(a) of the Code. Paragraphs (c) and (d) shall not apply if the distributee of an Eligible Rollover Distribution is the Participant's surviving spouse. "Eligible Rollover Distribution" means any distribution under the Plan to a Distributee, to the extent that such distribution is not required under section 401(a)(9) of the Code. "Employee" means any individual employed by the Company or any Affiliated Company, including officers, shareholders or directors who are employees. An individual who is not otherwise employed by the Company or an Affiliated Company shall be deemed to be an Employee by the Company if he is a leased employee with respect to the Company or an Affiliated Company within the meaning of section 414(n) of the Code. "Entry Date" means January 1st or July 1st. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ESOP Stock" means the common stock of Yardville National Bancorp, par value $.01 per share, or such other security that meets the requirements of Section 409(l) of the Code. 6 "Financed Shares" means shares of ESOP Stock acquired by the Trustee with the proceeds of an Acquisition Loan. "Hour of Service" means an hour for which: (a) an Employee is directly or indirectly paid or entitled to payment by the Company or an Affiliated Company for the performance of employment duties; (b) an Employee is entitled, either by award or agreement, to back pay from the Company or an Affiliated Company, irrespective of mitigation of damages; (c) an Employee is directly or indirectly paid or entitled to payment by the Company or an Affiliated Company on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence. There shall be excluded from the foregoing those periods during which payments are made or due under a plan maintained solely for the purpose of complying with applicable workers' compensation, unemployment compensation, or disability insurance laws. No more than 501 Hours of Service shall be credited under Subsection (c) on account of any single continuous period during which no duties are performed, except to the extent otherwise provided in this Plan. An Hour of Service shall not be credited where an Employee is being reimbursed solely for medical or medically-related expenses. Hours of Service shall be credited in accordance with the rules set forth in U.S. Department of Labor Reg. ss. 2530.200b-2(b) and (c). "Limitation Year" means the Plan Year. "Loan Suspense Account" means an account established to hold Financed Shares pending repayment of the Acquisition Loan used to purchase such Financed Shares. 7 "Normal Retirement Date" means a Participant's 65th birthday. "Participant" means an individual for whom an Account is maintained under the Plan. "Participating Company" means the Company and each of the Affiliated Companies listed on Schedule A that, with the consent of the Board of Directors, adopts the Plan for the benefit of its Eligible Employees. "Plan" means the Yardville National Bank Employee Stock Ownership Plan as set forth in this plan document and the Trust Agreements, and, as it may be amended from time to time. "Plan Year" means the 12-consecutive-month period extending from January 1st and ending December 31st. "Qualified Domestic Relations Order" means a domestic relations order (within the meaning of section 414(p)(1)(B) of the Code) which creates or recognizes the existence of an Alternate Payee's rights to, or assigns to an Alternate Payee the right to receive all or a portion of the benefits payable with respect to a Participant under the Plan, and is determined by the Benefits Committee to satisfy the requirements of section 414(p) of the Code. "Qualified Participant" means a Participant who has attained age 55 and who has completed 10 years of participation in the Plan. "Required Beginning Date" means the earlier of the dates determined under (a) or (b) where: (a) is the later of (1) the 60th day after the close of the Plan Year in which the Participant reaches Normal Retirement Date, or (2) the 60th day after the close of the Plan Year in which the Participant terminates employment with the Company and all Affiliated Companies; and 8 (b) is April 1st of the calendar year following the later of (1) the calendar year in which the Participant reaches age 70 1/2, or (2) the calendar year in which the Participant terminates employment with the Company and all Affiliated Companies; provided, however, that clause (2) shall not apply with respect to a Participant who is a 5-percent owner (as defined in section 416(i)(1)(B)(i) of the Code) of the Company or any Affiliated Company. "Spouse" means the person to whom a Participant is married as of the date of reference. "Total Disability" means a physical or mental condition of such severity and probable prolonged duration as to entitle the Participant to disability retirement benefits under the Federal Social Security Act. "Trust" means the fund established for this Plan, administered under the Trust Agreement and out of which benefits payable under this Plan will be paid. "Trust Agreement" means any agreement and declaration of trust executed under this Plan. "Trust Investment Committee" means the person or persons appointed by the Board of Directors to exercise the responsibilities assigned to such Committee under the Plan and Trust Agreement. The operation of the Trust Investment Committee shall be governed by the Charter attached as Schedule B and incorporated herein by reference. "Trustee" means the corporate trustee(s) and/or any group of one or more individuals collectively appointed by the Board of Directors, to act as trustee, pursuant to the terms of the Plan and Trust Agreement. "Valuation Date" means the last day of each Plan Year and each interim date on which the Trust Investment Committee determines that a valuation of the Trust shall be made. 9 ARTICLE II PARTICIPATION 2.1 Participation. 2.1.1 Each Covered Employee as of the Effective Date who has reached the first anniversary of his employment with a Participating Company as of the Effective Date shall become an Eligible Employee as of the Effective Date. Each other Covered Employee shall become an Eligible Employee on the Entry Date next following nearest the first anniversary of his commencement of employment with the Company, provided he is a Covered Employee as of such Entry Date. 2.1.2 If an individual is not a Covered Employee as of the Entry Date or next following the first anniversary of his commencement of employment with the Company, he shall become an Eligible Employee as of the next following Entry Date on which he is a Covered Employee. 2.1.3 Except as otherwise provided in this Section 2.1.3, an Eligible Employee shall share in contributions and forfeitures under Section 4.1 for a Plan Year only if he receives Compensation, is credited with 1,000 or more Hours of Service for such Plan Year and is a Covered Employee on the last day of such Plan Year. An Eligible Employee who is not a Covered Employee on the last day of a Plan Year solely on account of layoff, leave of absence approved in writing in advance by the Participating Company, military leave to the extent that his right to rehire is protected by law, or transfer approved by the Company to any Affiliated Company that is not a Participating Company shall share in contributions and forfeitures under Section 4.1 for such Plan Year only if he receives Compensation and is credited with 1,000 or 10 more Hours of Service for such Plan Year. Notwithstanding the foregoing, an Eligible Employee who is not a Covered Employee on the last day of a Plan Year solely on account of death, Total Disability or termination of employment on or after Normal Retirement Date during such Plan Year shall share in contributions and forfeitures under Section 4.1 without regard to whether he is credited with 1,000 or more Hours of Service for such Plan Year. 2.2 Participation Not Guarantee of Employment. Participation in the Plan does not constitute a guarantee or contract of employment and will not give any Employee the right to be retained in the employ of the Company or an Affiliated Company. 2.3 Beneficiary Designation. Upon becoming a Participant in the Plan, an Employee may designate, in the manner specified by the Benefits Committee and in accordance with Section 7.1, a beneficiary or beneficiaries to whom his Account Balance shall be paid in the event of his death. A Participant may change his beneficiary designation at any time by written notice to the Benefits Committee in a form approved by the Benefits Committee. 2.4 Participation After Reemployment. 2.4.1 An individual who is a Participant, who terminates employment with the Company and all Affiliated Companies and is subsequently reemployed by a Participating Company as a Covered Employee shall again become an Eligible Employee as of his reemployment date, provided that such individual is so reemployed before incurring his fifth consecutive Break in Service. 2.4.2 An individual who is a Participant, who terminates employment with the Company and all Affiliated Companies employment at a time when he has a nonforfeitable interest in his Account Balance and who is subsequently reemployed by a Participating Company as a Covered Employee shall again become an Eligible Employee as of 11 his reemployment date, whether or not such individual is so reemployed before incurring his fifth consecutive Break in Service. 2.4.3 An individual who is a Participant, who terminates employment with the Company and all Affiliated Companies at a time when he has no nonforfeitable interest in his Account Balance under the Plan and who subsequently becomes an Employee after incurring five consecutive Breaks in Service shall be treated as a new Employee for purposes of determining his eligibility to participate and of calculating Credited Service under the Plan. 2.5 Data. Each Employee shall furnish to the Benefits Committee such data as the Benefits Committee may consider necessary for the determination of the Employee's rights and benefits under the Plan and shall otherwise cooperate fully with the Benefits Committee in the administration of the Plan. 2.6 Credit for Military Service. Notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with section 414(u) of the Code. 12 ARTICLE III PLAN CONTRIBUTIONS ------------------ 3.1 Participating Company Contributions. Subject to the conditions and limitations of the Plan, for each Plan Year the Company (or such other Participating Companies as the Board of Directors shall designate) shall contribute to the Trust cash equal to, or ESOP Stock having an aggregate fair market value equal to, such amount, if any, as the Board of Directors shall determine by resolution; provided, however, that the contribution for any Plan Year shall not exceed the lesser of the maximum amount deductible by the Company for Federal income tax purposes, or the maximum amount which may be credited that year in accordance with the contribution limitation provisions of Section 4.2. To the extent provided in an Acquisition Loan between the Company and the Trust pursuant to which the Company lends to the Trust amounts attributable to the proceeds of a loan between the Company and an unrelated third-party lender and intended for the acquisition of ESOP Stock by the Trust, the Company's payment of principal and interest pursuant to such loan shall be treated as the contribution of cash to the Trust pursuant to this Section 3.1, and the repayment of such Acquisition Loan as described in Section 5.11.2. 3.2 Participant Contributions. No Participant shall be required or permitted to make any contributions to the Plan. 3.3 Trust. 13 3.3.1 The contributions deposited in the Trust in accordance with this Article shall constitute a fund held for the benefit of Participants and their eligible beneficiaries under and in accordance with this Plan. No part of the principal or income of the Trust shall be used for, or diverted to, any purpose other than the exclusive benefit of such Participants and their eligible beneficiaries (including necessary administrative costs); provided that in the case of a contribution made (1) as a mistake of fact, (2) for which a tax deduction is disallowed, in whole or in part, by the Internal Revenue Service, or (3) which is conditioned upon the initial qualification of the Plan under section 401(a) of the Code, if the Plan is the subject of an adverse determination with respect to its initial qualification, the Participating Company that made such contribution shall be entitled to its refund. 3.3.2 Any refund of contributions described in Section 3.3.1 must be made within one year (1) after payment of a contribution made as a mistake of fact, (2) after disallowance of the tax deduction, to the extent of such disallowance, or (3) of the date on which the initial qualification of the Plan is denied by the Internal Revenue Service, but only if the application for determination is made by the time prescribed by law for filing the Company's federal income tax return for the taxable year in which the Plan is adopted or such later date as may be permitted by applicable Treasury Regulation or other applicable administrative pronouncements, as the case may be. 3.4 Timing of Contributions. Participating Company contributions for any Plan Year under this Article shall be made no later than the last date on which amounts so paid may be deducted for federal income tax purposes for the taxable year of the employer in which the Plan Year ends. All contributions hereunder are expressly conditioned upon their deductibility for federal income tax purposes. 14 ARTICLE IV ALLOCATION OF PARTICIPATING COMPANY ----------------------------------- CONTRIBUTIONS AND FORFEITURES ----------------------------- 4.1 Allocation. Each Participating Company contribution, plus any forfeitures arising during the Plan Year and any amount held in suspense in accordance with Section 4.2.2, shall be allocated as of the last day of the Plan Year for which the contribution is made to the Account of each Eligible Employee who is entitled to share in such contribution under Section 2.1.3 in the proportion that his Compensation for that portion of the Plan Year during which he was an Eligible Employee bears to such Compensation of all such Eligible Employees for the Plan Year. 4.2 Maximum Allocation. 4.2.1 Notwithstanding anything in this Article to the contrary, in no event shall amounts allocated to a Participant's Account under this Plan and any other defined contribution plan maintained by the Company or a 50% Affiliated Company exceed the limitations set forth in section 415 of the Code, which are hereby incorporated by reference into the Plan. 4.2.2 If the amounts otherwise allocable to the Account of a Participant under this Plan and any other defined contribution plan maintained by the Company or a 50% Affiliated Company would exceed the limitation set forth in section 415(c) of the Code as a result of the reallocation of forfeitures, a reasonable error in estimating the Participant's compensation or such other circumstances as permitted by law, the excess amount shall be held in a suspense account by the Trustee until the following Plan Year (or any succeeding Plan Years), at which time such amount shall be allocated in the manner described in Section 4.1 15 before any contributions by the Company may be made for such Plan Year. Amounts held in the suspense account shall share in investment gains and losses of the Trust. 4.2.3 If, in any Limitation Year beginning prior to January 1, 2000, a Participant is a participant in one or more defined benefit plans sponsored by the Company or a 50% Affiliated Company, the annual additions to the Account of the Participant under the Plan shall be reduced only to the extent necessary to meet the combined plan limits of section 415(e) of the Code and only if the annual benefit under the defined benefit plan(s) is not reduced to the extent necessary to meet such limits. 4.2.4 Notwithstanding anything in this Plan to the contrary, the maximum allocation provisions of this Section shall be construed in accordance with the requirements of section 415 of the Code and the regulations promulgated thereunder. 16 ARTICLE V PARTICIPANTS' ACCOUNTS ---------------------- 5.1 Separate Accounting. Separate Accounts shall be maintained for each Participant. These Accounts shall represent the Participant's individual interest in the Trust. 5.2 Investment of Trust. Except as otherwise provided in Sections 6.6 and 5.4.4, the assets of the Trust shall be primarily invested in ESOP Stock. The Trustee shall invest contributions that are not applied to the payment of principal and interest on any Acquisition Loan in ESOP Stock, except that subject to the direction of the Trust Investment Committee, the Trustee shall be authorized to invest a portion of such contributions received in other securities as a reserve for the payment of administrative expenses and cash distributions. The Trustee shall be specifically authorized to invest in interest-bearing deposit accounts or certificates of deposit of any affiliate of the Trustee. The Trustee shall also be authorized to invest contributions not applied to the payment of principal and interest on any Acquisition Loan and income received on Plan assets in other securities pending investment in ESOP Stock or pending distribution to Participants. In accordance with the directions of the Trust Investment Committee, shares of ESOP Stock may be purchased from any Company shareholder or from the Company or an Affiliated Company. All purchases of ESOP Stock by the Trustee shall be made only as directed by the Trust Investment Committee. The Trust Investment Committee may direct the Trustee to sell shares of ESOP Stock to any person (including the Company or an Affiliated Company). Except as otherwise provided in Section 6.6, the Trust Investment Committee may direct the Trustee to hold up to 100% of assets allocated to Participants' Accounts in ESOP Stock. 17 5.3 Valuation. The value of the Trust shall be computed by the Trustee as of the close of business of each Valuation Date on the basis of the fair market value of the assets of the Trust. All valuations of ESOP Stock shall be made in accordance with section 401(a)(28)(C) of the Code, section 3(18) of ERISA, and applicable regulations issued under such sections. 5.4 Adjustment of Accounts. As of each Valuation Date, the following adjustments shall be made to each Participant's Account, in the order described below. 5.4.1 The Account of each Participant shall be charged with all distributions and payments made to him, or on his behalf, since the last preceding Valuation Date that have not been charged previously, including payments by the Trustee in accordance with Section 5.13 of cash dividends paid with respect to shares of ESOP Stock allocated to the Participant's ESOP Stock Accounts. 5.4.2 Any appreciation, depreciation, gains or losses experienced by the Trust hall be allocated among and correspondingly credited to or charged against each Participant's ESOP Stock Accounts and ESOP Cash Accounts, respectively, in proportion to the balance in each of such Accounts as of such Valuation Date, after the application of Section 5.4.1. 5.4.3 Any cash dividends paid by the Company with respect to Shares of ESOP Stock allocated to a Participant's ESOP Stock Account which are not applied to the repayment of any Acquisition Loan shall be credited to the ESOP Cash Account of such Participant. 5.4.4 If dividends paid on shares of ESOP Stock that have not been allocated to Participants' ESOP Stock Accounts are applied to the repayment of any Acquisition Loan, then shares will be released from the Loan Suspense Account as described in Section 18 5.11.3 and allocated to each Eligible Employee's ESOP Stock Account as a Company contribution in accordance with Section 4.1. 5.4.5 If dividends paid on shares of ESOP Stock that have been allocated to Participants' ESOP Stock Accounts (regardless of whether such shares were acquired with the proceeds of an Acquisition Loan) are applied to the repayment of any Acquisition Loan, the shares thereby released from the Loan Suspense Account shall be allocated directly to the ESOP Stock Account of each Participant for whose benefit the dividends would otherwise have been allocated. If the fair market value of the shares so allocated to each Participant's Account is less than the amount of the dividend that would otherwise have been allocated to such Account, then contributions and/or forfeitures will be allocated to such Participant's Account until the total allocation made pursuant to this Section 5.4.5 is equal to the amount of the dividend that would otherwise have been allocated to such Account. Any allocation of ESOP Stock made under this Section 5.4.5 shall be made for the Plan Year in which the dividend would otherwise have been allocated. 5.4.6 Contributions and forfeitures shall be allocated to each Eligible Employee's Account in accordance with Section 4.1; provided, however, that to the extent that such contributions or forfeitures are applied to the repayment of any Acquisition Loan, then shares will be released from the Loan Suspense Account as described in Section 5.11.3 and allocated to each Eligible Employee's ESOP Stock Account as a Company contribution in accordance with Section 4.1. 5.4.7 Each Participant's ESOP Stock Account shall be credited with the shares of ESOP Stock, if any, that have been purchased with amounts from his corresponding ESOP Cash Account since the last preceding Valuation Date, and such ESOP Cash Account shall 19 be charged with the amount of cash, or the value of such other Plan assets, if any, used to purchase such shares of ESOP Stock. 5.5 Accounting for Allocations. The Benefits Committee shall establish or provide for the establishment of accounting procedures for the purpose of making the allocations, valuations and adjustments to Participants' Accounts. From time to time, such procedures may be modified for the purpose of achieving equitable and nondiscriminatory allocations among the Accounts of Participants in accordance with the general concepts of the Plan and the provisions of this Article. 5.6 Restricted Assets. Financed Shares which are pledged as collateral for an Acquisition Loan as provided in Section 5.11 shall not be considered part of the Trust for purposes of determining the Trust's income and appreciation or depreciation for a valuation period. Such Financed Shares shall be considered part of the Trust for such purposes only after they are released from the Loan Suspense Account and allocated to Accounts under Section 5.11. 5.7 Participant Statements. Each Participant will be entitled to an annual statement showing the additions to and subtractions from his or her account since the last Valuation Date and the fair market value of his Account as of the current Valuation Date. 5.8 Registration of Securities. If the Trustee invests any part of the Trust, pursuant to the directions of the Trust Investment Committee, in ESOP Stock and the Trust Investment Committee thereafter directs the Trustee to dispose of such investment, or any part thereof, under circumstances which, in the opinion of counsel for the Trustee, require registration of the securities under the Securities Act of 1933 or the registration or qualification of the securities under the Blue Sky laws or other laws of any state of states, the Company will take any and all such action as may be necessary or appropriate to effect such registration or qualification. 20 5.9 Voting Of Employer Stock. The Trustee will vote shares of ESOP Stock in accordance with this Section 5.9. 5.9.1 If the Company has a registration-type class of securities (as described in section 409(e)(4) of the Code), each Participant (or beneficiary of a deceased Participant) to whose account shares of ESOP Stock have been allocated will, as a named fiduciary (within the meaning of section 403(a)(2) of ERISA), have the right to direct the Trustee as to the voting of such ESOP Stock. 5.9.2 If the Company does not have a registration-type class of securities (as described in section 409(e)(4) of the Code), the following voting procedure will apply: 5.9.2.1 Each Participant (or beneficiary of a deceased Participant) to whose account shares of ESOP Stock have been allocated will, as a named fiduciary (within the meaning of section 403(a)(2) of ERISA), have the right to direct the Trustee as to the voting of such ESOP Stock with respect to any of the following corporate matters involving the Company or any Affiliated Company: (i) mergers or consolidations; (ii) recapitalizations; (iii) reclassifications; (iv) liquidations; (v) dissolutions; (vi) sales of substantially all assets of a trade or business; or (vii) such similar transactions as may be prescribed in Treasury Regulations. 5.9.2.2 The Trust Investment Committee will, as a named fiduciary (within the meaning of section 403(a)(2) of ERISA), direct the Trustee as to the voting of all shares of ESOP Stock with respect to corporate matters not described in Section 5.9.2.1. 5.9.3 Shares of ESOP Stock that have not been allocated and shares of ESOP Stock that have been allocated but for which no direction is received pursuant to Sections 5.9.1 or 5.9.2.1 will be voted by the Trustee in identical proportion to the votes of shares of ESOP Stock for which direction has been received pursuant to Sections 5.9.1 or 5.9.2.1 21 5.9.4 The Company shall furnish such proxy materials to the Trustee as are necessary to effectuate the voting procedures described in this Section. 5.10 Tender or Exchange Offer. ESOP Stock that becomes the subject of a tender or exchange offer will be tendered or exchanged by the Trustee in accordance with this Section 5.10. 5.10.1 Each Participant (or beneficiary of a deceased Participant) to whose account shares of ESOP Stock have been allocated will, as a named fiduciary (within the meaning of section 403(a)(2) of ERISA), have the right to direct the Trustee as to the tender or exchange of such ESOP Stock. 5.10.2 Shares of ESOP Stock that have not been allocated and shares of ESOP Stock that have been allocated but for which no direction has been received pursuant to Sections 5.10.1 will be tendered or exchanged by the Trustee in identical proportion to the shares of ESOP Stock for which direction has been received pursuant to Sections 5.10.1. 5.11 Acquisition Loans. The Trust Investment Committee may, from time to time, direct the Trustee to incur one or more Acquisition Loans to finance the acquisition of ESOP Stock for the Trust or to repay a prior Acquisition Loan, subject to the following provisions. 5.11.1 An Acquisition Loan shall be for a specific term, shall bear a reasonable rate of interest, and shall not be payable on demand. An Acquisition Loan may be secured by pledge of Financed Shares acquired with the proceeds of such Acquisition Loan, or with the proceeds of a prior Acquisition Loan which is being refinanced and repaid with the proceeds of such current Acquisition Loan. No other assets of the Plan or Trust may be pledged as collateral for an Acquisition Loan, and no lender shall have recourse against any other Plan or 22 Trust assets. If the lender is a party in interest under ERISA, the Acquisition Loan must provide for a transfer of Trust assets upon default only upon and to the extent of the failure of the Trust to meet the payment schedule of the Acquisition Loan. 5.11.2 Payments of principal and/or interest on any Acquisition Loan shall be made by the Trustee only from Company contributions paid in cash to enable the Trustee to repay such loan or from earnings attributable to such contributions. In addition, the Trust Investment Committee may direct the Trustee to apply any cash dividends received by the Trustee on shares of ESOP Stock (whether or not allocated to Participants' Accounts) to pay principal and interest on an Acquisition Loan; provided, however, that dividends paid on such shares may be used to repay only an Acquisition Loan the proceeds of which were used to acquire such shares for the Trust. In the event that the Trustee is unable to make payments of principal and/or interest on an Acquisition Loan when due, the Trust Investment Committee may direct the Trustee to sell any Financed Shares that have not been allocated to Participants' Accounts or to obtain an Acquisition Loan in an amount sufficient to make such payments. 5.11.3 Any pledge of Financed Shares must provide for the release of shares so pledged as payments are made on the Acquisition Loan by the Trustee. Financed Shares shall initially be credited to the Loan Suspense Account and shall be transferred for allocation to Participants' ESOP Stock Accounts as payments are made on the Acquisition Loan by the Trustee. The number of shares so released shall bear the same relationship to the number of Financed Shares held immediately before release for any Plan Year as the amount of principal and interest paid for such year bears to the total amount of principal and interest to be paid for such year and all following years. 23 5.12 Restrictions on Allocations. 5.12.1 Notwithstanding any other provision in this Plan, if shares of ESOP Stock are sold to the Plan by a Company shareholder in a transaction for which such shareholder elects nonrecognition treatment pursuant to section 1042 of the Code, no assets attributable to such Stock may be allocated, during the nonallocation period, to the Account of any of the following: 5.12.1.1 the selling shareholder; 5.12.1.2 any person who is related to that shareholder (within the meaning of section 267(b) of the Code), but excluding lineal descendants of such shareholder as long as no more than five percent of the aggregate amount of all ESOP Stock sold by such shareholder in a transaction to which Code section 1042 applies is allocated to such lineal descendants; or 5.12.1.3 any other person who owns (after application of section 318(a) of the Code), more than 25 percent in value of outstanding securities of the Company at any time during the 1-year period ending on the date of sale of such ESOP Stock. Further, no allocation of contributions may be made to the Accounts of persons described in Sections 5.12.1.1 through 5.12.1.3 unless additional allocations are made to other Participants, in accordance with the provisions of sections 401(a) and 410 of the Code. The nonallocation period is the period beginning on the date of sale and ending 10 years thereafter, or if later, on the date of the allocation attributable to the final payment on the Acquisition Loan incurred with respect to the sale. 5.13 Dividends on ESOP Stock. Any cash dividends paid with respect to shares of ESOP Stock allocated to Participants' ESOP Stock Accounts which are not applied to the repayment of any Acquisition Loan may, as determined by the Company, be (1) paid by the Company directly in cash to the Participants for whose benefit such ESOP Stock is held under the Plan, (2) paid to the Trustee and distributed by the Trustee to the Participant no later than 90 days after the end of the Plan Year in which paid to the Trustee or (3) paid to the Trustee and invested in accordance with Section 5.2. 24 ARTICLE VI VESTING AND DISTRIBUTION OF ACCOUNT BALANCES -------------------------------------------- 6.1 Retirement or Total Disability. Any Participant whose employment with the Company and all Affiliated Companies terminates (1) on or after his Normal Retirement Date or (2) at any time because of Total Disability shall be deemed to have retired under the Plan and shall be entitled to receive his entire Account Balance as provided in Sections 6.5 and 6.7. 6.2 Death. If a Participant's employment with the Company and all Affiliated Companies terminates as a result of his death, his beneficiary shall be entitled to receive his entire Account Balance as provided in Sections 6.5 and 6.7. If distributions have begun before the date of the Participant's death, distributions shall continue to be made to the Participant's beneficiary on the same basis as in effect before the Participant's death. 6.3 Termination of Employment other than as a Result of Death, Retirement or Total Disability. Any Participant whose employment with the Company and all Affiliated Companies terminates for any reason other than under Sections 6.1 and 6.2 shall be entitled to receive his nonforfeitable interest in his Account Balance as provided in Section 6.5. Except as otherwise provided in Section 11.4, a Participant shall vest in his Account Balance in accordance with the following schedule: Years of Credited Service Nonforfeitable Percentage ------------------------- ------------------------- after January 1, 1999 of Account Balance --------------------- ------------------ less than 1 0 1 20 2 40 3 60 4 80 5 or more 100 25 6.4 Forfeitures and Restoration of Forfeited Amounts upon Reemployment. 6.4.1 If a Participant who has terminated employment does not thereafter complete an Hour of Service before the end of the Plan Year in which occurs the earlier of: 6.4.1.1 the date on which he receives a distribution of the nonforfeitable portion of his Account; or 6.4.1.2 the date on which he incurs his fifth consecutive Break in Service, his Account shall be closed, and any forfeitable portion of his Account shall be forfeited. For purposes of this Section 6.4.1, a Participant who has a termination of employment at a time when his nonforfeitable interest in the Plan is zero shall be deemed to have received a distribution of his entire Account on the date of such termination of employment. 6.4.2 If a Participant who has received (or who was deemed to have received) a distribution described in Section 6.4.1.1, whereby any part of his Account has been forfeited, becomes an Employee again prior to incurring five consecutive Breaks in Service, the amount so forfeited shall be restored to his new Account. Unallocated contributions or forfeitures will be used to fund the restoration of Accounts pursuant to this Section 6.4.2; provided, however, that if such unallocated contributions and forfeitures are insufficient for this purpose, additional Participating Company contributions will be made to fund such restorations. If forfeitures for a Plan Year exceed the amount necessary for the restoration of accounts pursuant to this Section 6.4.2, such excess shall be allocated as an additional Participating Company contribution in accordance with Section 4.1. 26 6.5 Mode of Distribution. 6.5.1 Except as otherwise provided in this Article VI, the nonforfeitable portion of a Participant's Account, valued in accordance with Section 6.8, shall be paid to him or applied for his benefit in substantially equal periodic installments over a period of five years, plus one additional year (but not more than five additional years) for each $100,000 (or such higher amount as may be applicable under Section 409(o) of the Code), or portion thereof by which such Account Balance exceeds $500,000 (or such higher amount as may be applicable under Section 409(o) of the Code). The undistributed portion of the Employee's Account shall continue to be invested as provided in the Plan. 6.5.2 Notwithstanding Section 6.5.1, if a Participant's nonforfeitable interest in his Account Balance is $5,000 or less, his Account shall be distributed in a single sum payment. 6.5.3 The distribution of a Participant's nonforfeitable interest in his ESOP Cash Account shall be made in cash. The distribution of a Participant's nonforfeitable interest in his ESOP Stock Account shall be made in whole shares of ESOP Stock and in cash equal to the value of any fractional share. Notwithstanding the foregoing, if shares of ESOP Stock are not traded on an established market, a Participant (or beneficiary, if applicable) shall have the right to receive a cash distribution in lieu of shares of ESOP Stock. 6.5.4 If the distribution is made in shares of ESOP Stock and such shares are not traded on an established market, the former Participant (or his beneficiary, if applicable) will have the right to sell such shares to the Company at a price equal to their fair market value as of the last Valuation Date preceding the exercise of such right, as determined by an independent appraiser in accordance with section 401(a)(28) of the Code. Such right, known as a "put 27 option," may be exercised at any time during the two option periods described below. The first put option period shall be a period of 60 days commencing on the date the ESOP Stock is distributed to the Participant or beneficiary. If the put option is not exercised within that period, it will temporarily lapse. Upon the close of the Plan Year in which such temporary lapse of the put option occurs, the Trustee shall establish the value of the ESOP Stock, as determined by an independent appraiser, and shall notify each Participant (or beneficiary) who did not exercise the put option during the first option period of the revised value of the ESOP Stock. The second period during which the put option may be exercised shall commence on the date such notice of revaluation is given and shall permanently terminate 60 days thereafter. 6.5.5 Financed Shares distributed to a Participant (or his beneficiary) shall be subject to a right of first refusal as provided in this Section 6.5.5, if such Financed Shares are not publicly traded at the time the right of first refusal may be exercised. Financed Shares distributed to a Participant (or his beneficiary) shall not be transferable to any person other than the Plan or the Company unless (i) the Participant or beneficiary receives a good faith written offer for the purchase of such Financed Shares from a person other than the Plan or the Company; (ii) the Participant or beneficiary provides written notice to the Trust Investment Committee of the receipt of such offer in a form reasonably acceptable to the Trust Investment Committee; (iii) such written notice includes a copy of such offer and a description of the terms and conditions of such offer; and (iv) the Plan fails to purchase such Financed Shares before the close of the 14th day following the Trust Investment Committee's receipt of such written notice. In exercising its right of first refusal under this Section 6.5.5, the Plan may not purchase Financed Shares for an amount less than the greater of (A) the purchase price and other terms offered by the offeror for such Financed Shares or (B) the value of such Financed Shares as 28 determined pursuant to Treasury Regulation ss. 54.4975-11(d)(5). The Trust Investment Committee shall immediately notify the Board of Directors of its receipt of a written notice from a Participant or beneficiary of any offer to purchase Financed Shares that are subject to the right of first refusal hereunder, and of its intentions regarding the exercise of such right of first refusal. If the Trust Investment Committee notifies the Board of Directors on behalf of the Plan that the Plan shall decline to exercise such right, the Company shall have the right to exercise such right to the same extent as the Plan, provided that such right must be exercised before the close of the 14th day following the Trust Investment Committee's receipt of the Participant's or beneficiary's notice of such offer. Such notice shall be deemed received on the date actually received by the Trust Investment Committee. 6.6 Pre-Retirement Diversification Rights. The Benefits Committee shall establish a procedure pursuant to which, during an Election Period, each Qualified Participant may direct the Trustee as to the investment of the value (determined as of the immediately preceding Valuation Date) of at least 25% of the number of shares of ESOP Stock credited to his Account. The amount with respect to which a Qualified Participant may direct the investment during any Election Period subsequent to the Qualified Participant's initial Election Period shall be determined by multiplying the number of shares of ESOP Stock credited to his Account by 25% (or, with respect to a Participant's final election, 50%), reduced by the aggregate number of shares subject to any prior elections by such Qualified Participant pursuant to this Section. The procedure established by the Benefits Committee may provide that the Qualified Participant may direct the investment of the amount determined pursuant to this Section by instructing the Trustee to: 29 6.6.1 distribute such amount to him within ninety (90) days after the Election Period; 6.6.2 if the Benefits Committee selects three or more investment options other than ESOP Stock for purposes of this Section, to invest such amount, within ninety (90) days after the Election Period, in one or more of such investment options; or 6.6.3 if the Company maintains another qualified defined contribution plan that permits participant direction of investments, to transfer such amount, within ninety (90) days after the Election Period, to such other plan. The procedure established by the Benefits Committee, and the effectuation of a Qualified Participant's elections made pursuant to such procedure, shall comply with section 401(a)(28) of the Code. 6.7 Timing of Benefit Distributions. 6.7.1 Special Distribution Rules. The following special distribution rules shall supersede the general distribution rules of Sections 6.7.2 through 6.7.3: 6.7.1.1 Required Beginning Date. Notwithstanding any other provision of the Plan, benefits to a Participant (or to a Participant's beneficiary following the Participant's death before benefits have begun to be paid), shall begin to be paid not later than the Required Beginning Date. 6.7.1.2 Small Dollar Cash-Outs. If the value of the nonforfeitable Account Balance of a Participant who separates from service to the Company and all Affiliated Companies is $5,000 or less, his Account Balance shall be distributed in a single sum as soon as administratively practicable following the Participant's separation from service. 30 6.7.1.3 Financed Shares. Except for distributions subject to Sections 6.7.1.1 and 6.7.1.2 and notwithstanding any other Plan provision, to the extent a Participant's Account Balance holds Financed Shares, distributions shall not begin before the Acquisition Loan with respect to such Financed Shares has been repaid in full. 6.7.1.4 Required Consent to Distribution. Except for distributions (i) subject to Section 6.7.1.2, (ii) payable following a Participant's death or (iii) payable following a Participant's Normal Retirement Date, no distribution will be made without the Participant's consent. Moreover, for such consent to be valid, it must be given not more than 90 days before the date as of which distributions begin. If a Participant does not consent to a distribution of his nonforfeitable interest in his Account Balance at the time that it first becomes distributable, such nonforfeitable interest shall continue to be held in the Plan until the earlier of: (i) the close of the Plan Year in which the Participant reaches Normal Retirement Date or dies, or (ii) as soon as practicable following such time as the Participant submits a written request for such distribution to the Benefits Committee. 6.7.2 Normal Retirement, Total Disability or Death. 6.7.2.1 Normal Retirement or Total Disability. Except as otherwise provided in Section 6.7.1, distributions with respect to a Participant who separates from service to the Company and all Affiliated Companies on or after his Normal Retirement Date or on account of a Total Disability shall begin as soon as administratively practicable following such separation from service, but not later than the close of the Plan Year following the Plan Year during which such separation from service occurs. 6.7.2.2 Death. If a Participant separates from service to the Company and all Affiliated Companies because of death, but the commencement of the 31 distribution is delayed beyond the close of the Plan Year following the Plan Year during which such separation from service occurs because of the application of Section 6.7.1.3 (regarding the effect of the existence of an Acquisition Loan on the timing of distributions), then, notwithstanding any other provision of this Article VI to the contrary: (i) if (and to the extent that) the Participant's beneficiary is a person or entity that is not the Participant's surviving spouse, distribution with respect to such Participant shall be made in a single sum as soon as practicable following the repayment of the Acquisition Loan in full, or, if earlier, by the last day of the calendar year which contains the fifth anniversary of the Participant's date of death; and (ii) if (and to the extent that) the Participant's beneficiary is the Participant's spouse, distribution with respect to such Participant shall be paid in the form described in Section 6.5.1, and shall begin to be paid as soon as practicable following the repayment of the Acquisition Loan, or, if earlier, the date the Participant would have attained age 70 1/2. 6.7.3 Other Separation From Service. Except as otherwise provided in Section 6.7.1, distributions with respect to a Participant who separates from service to the Company and all Affiliated Companies before his Normal Retirement Date, or as a result of his Total Disability or death, shall begin as soon as administratively practicable following the fifth anniversary of such separation from service, but not later than the close of the sixth Plan Year beginning after such separation from service, provided that distributions shall not begin under this Section 6.7.3 if the Participant is reemployed by the Company or an Affiliated Company before the close of the sixth Plan Year beginning after the Participant's separation from service. 32 6.8 Valuation for Distribution. For the purposes of paying the amounts to be distributed to a Participant or his beneficiaries under the provisions of this Article, the value of a Participant's Account shall be determined in accordance with Article V as of the Valuation Date immediately preceding the date of payment and shall be adjusted for any contributions or forfeitures which have been allocated to the Participant's Account since that Valuation Date. 6.9 Direct Rollover. Notwithstanding any provision of the Plan, a Distributee may elect, at the time and in the manner prescribed by the Benefits Committee, to have any portion of an Eligible Rollover Distribution paid directly to the Eligible Retirement Plan specified by that Distributee as a Direct Rollover. 33 ARTICLE VII DEATH BENEFITS -------------- 7.1 Beneficiary. Following the death of a married Participant, his entire Account Balance shall be paid to his surviving spouse unless the Participant has designated a different beneficiary in the manner prescribed by the Benefits Committee pursuant to Section 2.3, and (i) the Participant's Spouse has consented to that designation in writing, in an instrument that acknowledges the effect of the designation and that is witnessed by a representative of the Benefits Committee or by a notary public, or (ii) the Benefits Committee concludes that such consent cannot be obtained because the Participant has no Spouse or because the Spouse cannot be located or because such consent is not required under such circumstances as are prescribed by governmental regulations. If the Participant is not married on the date of his death, his beneficiary shall be the person or persons designated by him pursuant to Section 2.3. Any portion of the Participant's Account Balances which is undisposed of due to the failure to designate a beneficiary or to the failure of the designated beneficiary or Spouse to survive the Participant shall be paid to the Participant's estate. 7.2 Form of Payment. Death benefits shall be payable in the form described in Section 6.5. 34 ARTICLE VIII MANAGEMENT OF FUNDS ------------------- 8.1 Designation of Trustee. The Trust Investment Committee shall name and designate a Trustee and shall enter into a Trust Agreement with such Trustee on behalf of the Participating Companies. The Trust Investment Committee shall have the power to amend the Trust Agreement, remove any Trustee, and designate a successor Trustee, as provided in the Trust Agreement. All of the assets of the Plan shall be held by the Trustee for use in accordance with this Plan in providing for the benefits hereunder. 8.2 Exclusive Benefit. Prior to the satisfaction of all liabilities under the Plan in the event of termination of the Plan, no part of the corpus or income of the Trust shall be used for or diverted to purposes other than for the exclusive benefit of Participants and their beneficiaries except as expressly provided in this Plan and in the Trust Agreement. 8.3 No Interest in Trust. No person shall have any interest in or right to any part of the assets or income of the Trust, except to the extent expressly provided in this Plan and in the Trust Agreement. 8.4 Trust Investment Committee. The Trust Investment Committee shall be the named fiduciary with respect to management and control of Plan assets held by the Trustee and shall have exclusive and sole responsibility for investment thereof in accordance with the Trust Agreement and the provisions of the Plan. The Trustee shall have the exclusive and sole responsibility for the custody of Plan assets held by it in accordance with the Trust Agreement and the provisions of the Plan, for following the directions of the Trust Investment Committee and of Participants as required by the Plan and Trust Agreement, and for selecting short-term investment funds for the investment of cash balances held by the Trust. 35 ARTICLE IX ADMINISTRATION -------------- 9.1 Administrator. The Company shall control and manage the operation of the Plan and shall be the Plan Administrator. 9.2 Benefits Committee. The Company shall delegate its discretionary authority and control with respect to Plan administration to the Benefits Committee, which Benefits Committee shall consist of not less than three persons who will serve at the pleasure of the Board of Directors. The Benefits Committee members may be, but need not be, employees of the Company or members of the Trust Investment Committee. They shall be entitled to reimbursement of expenses but to no compensation for their service on the Benefits Committee. Any reimbursement of expenses of the Benefits Committee shall be paid directly by the Company. 9.3 Ministerial Functions. The Benefits Committee shall delegate its ministerial duties or functions to such person or persons as the Benefits Committee shall select. Such person or persons shall be responsible for the general administration of the Plan under the policy guidance of the Benefits Committee. Such person or persons may be employees of the Company and shall be compensated for services and expenses by the Company according to its normal employment policies, without special or additional compensation for service hereunder. 9.4 Duties and Powers of Benefits Committee. In addition to the duties and powers described elsewhere hereunder, the Benefits Committee shall have the following specific duties and powers: 36 9.4.1 to enact uniform and non-discriminatory rules, regulations, and procedures necessary or desirable to carry out the provisions of the Plan; 9.4.2 to interpret the provisions of the Plan and to resolve questions or disputes relating to or arising under the Plan; 9.4.3 to establish reasonable procedures to determine the qualified status of domestic relations orders which relate to the Plan, as provided in section 414(p) of the Code; and 9.4.4 to retain such consultants, accountants, and attorneys as may be deemed necessary or desirable to render statements, reports, and advice with respect to the Plan, and to assist the Benefits Committee in complying with all applicable rules and regulations affecting the Plan. Any consultants, accountants, or attorneys may be the same as those retained by the Company. 9.5 Functioning of Benefits Committee. The Benefits Committee shall keep accurate records and minutes of meetings, interpretations, and decisions. The Benefits Committee shall act by majority vote of its members, and such action shall be evidenced by written documents. 9.6 Disputes. 9.6.1 In the event that the Benefits Committee denies, in whole or in part, a claim for benefits by a Participant or his beneficiary, the Benefits Committee shall furnish notice of the denial to the claimant, setting forth (1) the specific reasons for the denial, (2) specific reference to the pertinent Plan provisions on which the denial is based, (3) a description of any additional information necessary for the claimant to perfect the claim and an explanation of why such information is necessary, and (4) appropriate information as to the steps to be taken 37 if the claimant wishes to submit his claim for review. Such notice shall be forwarded to the claimant within 90 days of the Benefits Committee's receipt of the claim; provided, however, that in special circumstances the Benefits Committee may extend the response period for up to an additional 90 days, provided that the Benefits Committee notifies the claimant in writing of the extension and specifies the reason or reasons for the extension. 9.6.2 Within 60 days of receipt of a notice of claim denial, a claimant or his duly authorized representative may petition the Benefits Committee in writing for a full and fair review of the denial. The claimant or his duly authorized representative shall have the opportunity to review pertinent documents and to submit issues and comments in writing to the Benefits Committee. The Benefits Committee shall review the denial and shall communicate its decision and the reasons therefor to the claimant in writing within 60 days of receipt of the petition; provided, however, that the Benefits Committee may extend the 60-day response period in special circumstances for up to an additional 60 days. Written notice of the extension shall be sent to the claimant prior to the commencement of the extension. 9.7 Indemnification. Each member of the Benefits Committee, the Trust Investment Committee and any other person who is an Employee or director of the Company or an Affiliated Company, or any person serving as Trustee, shall be indemnified by the Company against expenses (other than amounts paid in settlement to which the Company does not consent) reasonably incurred by him in connection with any action to which he may be a party by reason of his performance of administrative functions and duties under the Plan, except in relation to matters as to which he shall be adjudged in such action to be personally guilty of willful misconduct in the performance of his duties. The foregoing right to indemnification shall be in addition to such other rights as the Benefits Committee member or other person may enjoy as a matter of law or by reason of insurance coverage of any kind. Rights granted hereunder shall be in addition to and not in lieu of any rights to indemnification to which the Benefits Committee member or other person may be entitled pursuant to the by-laws of the Company. 9.8 Expenses. The expenses incident to the operation of the Plan and the Trust shall be paid or reimbursed from the Trust, unless they are paid directly by the Company and the Company does not seek reimbursement for such payment. 38 ARTICLE X AMENDMENT AND TERMINATION ------------------------- 10.1 Power of Amendment and Termination. It is the intention of the Company that this Plan will be permanent. However, the Company reserves the right to amend the Plan or terminate the Plan at any time by action of the Board of Directors or its delegate. Except as expressly provided elsewhere in the Plan, prior to the satisfaction of all liabilities with respect to the benefits provided under this Plan, no such amendment or termination shall cause any part of the monies contributed hereunder to revert to the Company or to be diverted to any purpose other than for the exclusive benefit of Participants and their beneficiaries. Except as otherwise permitted by law, no amendment shall have the effect of retroactively depriving Participants of benefits already accrued under the Plan. In the event of a termination, a partial termination, or a complete discontinuance of contributions, or in the event that the Company is dissolved, liquidated, or adjudicated bankrupt, the interests of the affected Participants, their estates, and their beneficiaries shall be fully vested. Any amendment shall become effective as of the date designated by the Board of Directors. 10.2 Merger. The Plan shall not be merged with or consolidated with, nor shall its assets be transferred to, any other qualified retirement plan unless each Participant would receive a benefit after such merger, consolidation, or transfer (assuming the surviving or transferee plan then terminated) which is of equal or greater actuarial value than the benefit he would have received if the Plan had been terminated on the day before such merger, consolidation, or transfer. The Plan shall not accept a transfer of any amounts which would cause the Plan to be a direct or indirect transferee of a plan to which the joint and survivor annuity and pre-retirement survivor annuity requirements of sections 401(a)(11) and 417 of the Code apply. 10.3 Change in Control. 10.2.1 In the event of a Change in Control, as defined in Section 10.2.2, the interests of the affected Participants, their estates, and their beneficiaries shall be fully vested. 10.2.2 "Change in Control" shall mean: 10.2.2.1 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 Yardville National Bank (the "Bank") or Yardville National Bancorp (the Bank's "Holding Company"); or 10.2.2.2 the sale of all or substantially all of the assets of the Bank or Holding Company; or, 10.2.2.3 any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in sections 10.2.2.1 or 10.2.2.2. 39 ARTICLE XI TOP-HEAVY PROVISIONS -------------------- 11.1 General. The following provisions shall apply automatically to the Plan and shall supersede any contrary provisions for each Plan Year in which the Plan is a Top-Heavy Plan. It is intended that this Article shall be construed in accordance with the provisions of section 416 of the Code. 11.2 Definitions. The following definitions shall supplement those set forth in Article I of the Plan: 11.2.1 "Aggregation Group" shall mean: 11.2.1.1 each plan (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of the Company or an Affiliated Company in which a Key Employee is a participant, 11.2.1.2 each other plan (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of the Company or an Affiliated Company which enables any plan in which a Key Employee participates to meet the requirements of sections 401(a)(4) and 410 of the Code, and 11.2.1.3 each other plan (including a frozen plan or a plan which has been terminated during the 60-month period ending on the Determination Date) of the Company or an Affiliated Company which is included by the Benefits Committee if the Aggregation Group, including such a plan, would continue to meet the requirements of sections 401(a)(4) and 410 of the Code. 40 11.2.2 "Determination Date" shall mean the last day of the preceding Plan Year. 11.2.3 "Key Employee" shall mean any Employee or former Employee who at any time during the 60-month period ending on the Determination Date is described below. Key Employee shall also include the beneficiaries of such persons. Notwithstanding the foregoing, the number of persons described in Section 11.2.3.2 for the entire 60-month period shall be limited to 10. 11.2.3.1 An officer of the Company or an Affiliated Company having annual compensation, as defined in section 414(q) of the Code, from the Company and all Affiliated Companies for a Plan Year during such period greater than fifty percent (50%) of the amount in effect under section 415(b)(1)(A) of the Code for such Plan Year. 11.2.3.2 One of the 10 Employees with annual compensation, as defined in section 414(q) of the Code, from the Company and all Affiliated Companies greater than the amount described in section 415(c)(1)(A) of the Code who own (or are considered as owning, within the meaning of section 318 of the Code) the largest interests in the Company or any Affiliated Company, provided that such interest exceeds one-half percent (0.5%) of the total share ownership of the Company or Affiliated Company. 11.2.3.3 A five-percent (5%) owner of the Company or any Affiliated Company. 11.2.3.4 A one-percent (1%) owner of the Company or any Affiliated Company who has annual compensation, as defined in section 414(q) of the Code, from the Company and all Affiliated Companies which, in the aggregate, is in excess of $150,000. 41 The above determinations will be made in accordance with section 416(i) of the Code. No more than 50 employees (or, if less, the greater of three employees or ten percent (10%) of the greatest number of employees, including leased employees within the meaning of section 414(n) of the Code, employed by the Company and all Affiliated Companies during the 60-month period ending on the Determination Date) shall be treated as officers, for which purpose employees described in section 414(q)(8) of the Code shall not be taken into account. 11.2.4 "Key Employee Ratio" shall mean the ratio for any Plan Year, calculated as of the Determination Date of such Plan Year, determined by comparing the amount described in Section 11.2.4.1 with the amount described in Section 11.2.4.2 after deducting from each such amount any portion thereof described in Section 11.2.4.3. 11.2.4.1 The sum of (i) the present value of all accrued benefits of Key Employees under all qualified defined benefit plans included in the Aggregation Group, (ii) the balances in all of the accounts of Key Employees under all qualified defined contribution plans included in the Aggregation Group, and (iii) the amounts distributed from all plans in such Aggregation Group to or on behalf of any Key Employee during the period of five Plan Years ending on the Determination Date, except benefits paid on account of death in excess of the accrued benefit or account balances immediately prior to death. 11.2.4.2 The sum of (i) the present value of all accrued benefits of all participants under all qualified defined benefit plans included in the Aggregation Group, (ii) the balances in all of the accounts of all participants under all qualified defined contribution plans included in the Aggregation Group and (iii) the amounts distributed from all plans in such Aggregation Group to or on behalf of any participant during the period of five Plan Years ending on the Determination Date. 42 11.2.4.3 The sum of (i) all rollover contributions (or fund to fund transfers) to the Plan by an Employee from a plan sponsored by an employer which is not the Company or an Affiliated Company, (ii) any amount that is included in Sections 11.2.4.1 and 11.2.4.2 for a person who is a Non-Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year, and (iii) any amount that is included in Sections 11.2.4.1 and 11.2.4.2 for a person who had not performed any services for the Company during the five-year period ending on the Determination Date. 11.2.4.4 The present value of accrued benefits under all qualified defined benefit plans included in the Aggregation Group shall be determined on the basis of the 1984 Unisex Mortality Table and an interest rate of seven percent (7%). 11.2.5 "Non-Key Employee" shall mean any person who is an Employee or a former Employee of the Company or an Affiliated Company in any Plan Year but who is not a Key Employee as to that Plan Year. Non-Key Employee shall also include the beneficiaries of such persons. 11.2.6 "Super Top-Heavy Plan" shall mean each plan in an Aggregation Group if, as of the applicable Determination Date, the Key Employee Ratio in the plan exceeds ninety percent (90%), determined in accordance with section 416 of the Code. 11.2.7 "Top-Heavy Plan" shall mean each plan in an Aggregation Group if, as of the applicable Determination Date, the Key Employee Ratio exceeds sixty percent (60%), determined in accordance with section 416 of the Code. 43 11.3 Minimum Contribution for Non-Key Employees. 11.3.1 In each Plan Year in which the Plan is a Top-Heavy Plan, each Participant who is a Non-Key Employee (except a Participant who is a Non-Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year) and who is actively employed by a Participating Company on the last day of such Plan Year will receive a total minimum allocation of Participating Company contributions (including forfeitures) under all plans described in Section 11.2.1.1 and 11.2.1.2 of not less than three percent (3%) of the Participant's annual compensation, as defined in Treas. Reg. ss.1.415-2(d). Salary reduction contributions to such plans made on behalf of a Participant shall not be deemed to be Participating Company contributions for the purpose of this Section 11.3.1. 11.3.2 The percentage set forth in Section 11.3.1 shall be reduced to the percentage at which contributions, including forfeitures, are made (or are required to be made) for a Plan Year for the Key Employee for whom such percentage is the highest for that Plan Year. This percentage shall be determined for each Key Employee by dividing the contribution for such Key Employee (including salary reduction contributions to such plans made on behalf of such Key Employee) by his compensation, as defined in Treas. Reg. ss.1.415-2(d), for the Plan Year. All defined contribution plans required to be included in an Aggregation Group shall be treated as one plan for the purpose of this Section; however, this Section shall not apply to any plan which is required to be included in an Aggregation Group if such plan enables a defined benefit plan in the group to meet the requirements of section 401(a)(4) or section 410 of the Code. 11.3.3 If a Non-Key Employee described in Section 11.3.1 participates in both a defined benefit plan and a defined contribution plan described in Section 11.2.1.1 and 44 11.2.1.2, the Company is not required to provide such Employee with both the minimum benefit under the defined benefit plan and the minimum contribution. In such event, the Non-Key Employee shall receive the minimum benefit provided under the defined benefit Top-Heavy Plan. 11.4 Change in Vesting Schedule. Each Participant who has an Hour of Service in any Plan Year beginning on or after the first day of the first Plan Year for which the Plan is a Top-Heavy Plan, shall have a 100 percent nonforfeitable interest in his Account after completing three years of Credited Service. 11.5 Social Security. The Plan, for each Plan Year in which it is a Top-Heavy Plan, must meet the requirements of this Article without regard to any Social Security or similar contributions or benefits. 11.6 Adjustment to Maximum Allocation Limitation. The following rules shall apply only with respect to Plan Years beginning before January 1, 2000: 11.6.1 For each Plan Year in which the Plan is (1) a Super Top-Heavy Plan or (2) a Top-Heavy Plan and the Board of Directors does not make the election described in Section 11.6.2 and for which a similar election has not been made as to another plan in the Aggregation Group, the 1.25 factor in the defined benefit and defined contribution fractions described in sections 415(e)(2) and (e)(3) of the Code shall be reduced to 1.0. The adjustment described in this Section 11.6.1 shall not apply to any Participant during any period in which the Participant earns no additional accrued benefit under any defined benefit plan and has no employer contributions, forfeitures, or voluntary contributions allocated to his accounts under any defined contribution plan. 11.6.2 If, in any Plan Year in which the Plan is a Top-Heavy Plan but not a Super Top-Heavy Plan, the Aggregation Group described in Section 11.2.1.1 and 11.2.1.2 also includes a defined benefit plan, the Board of Directors may elect to use a factor of 1.25 in computing the denominator of the defined benefit and defined contribution fractions described in sections 415(e)(2) and (e)(3) of the Code. In the event of such an election, the minimum Company contribution described in Section 11.3.1 for each Non-Key Employee who is not covered under a defined benefit plan shall be increased to four percent (4%), and the minimum Company contribution described in Section 11.3.3 for each Non-Key Employee who is covered under a defined benefit plan shall be increased to seven and one-half percent (7 1/2%). 45 ARTICLE XII RIGHTS OF ALTERNATE PAYEES -------------------------- 12.1 General. Except as otherwise provided in this Article, an Alternate Payee shall have no rights to a Participant's benefit and shall have no rights under this Plan other than those rights specifically granted to the Alternate Payee pursuant to a Qualified Domestic Relations Order. Notwithstanding the foregoing, an Alternate Payee shall have the right to appeal the denial of a claim for any benefits awarded to the Alternate Payee pursuant to a Qualified Domestic Relations Order, as provided in Section 9.6. Any interest of an Alternate Payee in the Account of a Participant, other than an interest payable solely upon the Participant's death pursuant to a Qualified Domestic Relations Order that provides that the Alternate Payee shall be treated as the Participant's surviving spouse, shall be separately accounted for by the Trustee in the name and for the benefit of the Alternate Payee. 12.2 Death Benefits. Unless a Qualified Domestic Relations Order provides otherwise, an Alternate Payee shall have the right to designate a beneficiary, in the same manner as provided in Section 7.1 with respect to a Participant (except that no spousal consent shall be required), who shall receive benefits payable to the Alternate Payee which have not been distributed at the time of the Alternate Payee's death. If the Alternate Payee does not designate a beneficiary, or if the beneficiary predeceases the Alternate Payee, benefits payable to the Alternate Payee which have not been distributed at the time of the Alternate Payee's death shall be paid to the Alternate Payee's estate. 46 ARTICLE XIII GENERAL PROVISIONS ------------------ 13.1 Source of Benefits. The provisions of the Plan shall not create any obligation or liability of the Company to pay any benefit under the Plan beyond the funds of the Plan available for such payment. 13.2 Alienation of Benefits. Except with respect to qualified domestic relations orders pursuant to Code section 414(p), or an amount necessary to satisfy a federal tax levy made pursuant to Code section 6331, payments from and benefits under the Plan are neither alienable nor assignable, and are not subject to attachment by creditors of or through legal processes against any Participant or his beneficiary. 13.3 Facility of Payment. If the Administrator deems any person incapable of receiving benefits to which he is entitled by reason of minority, illness, infirmity, or other incapacity, it may direct that payment be made directly for the benefit of such person or to any person selected by the Plan Administrator to disburse it, whose receipt shall be a complete acquittance therefor. Such payments shall, to the extent thereof, discharge all liability of the Administrator, the Company and the party making the payment. 13.4 Interest and Dividends on Distributions. The amount of the distribution shall be determined as of the date provided in Article VI, without adjustment for earnings, gains, or losses between such date and the date of actual payment. 13.5 Applicable Law. Except as provided by federal law, the Plan shall be governed by and construed in accordance with the laws of the State of New Jersey. 47 SCHEDULE A TO THE YARDVILLE NATIONAL BANK EMPLOYEE STOCK OWNERSHIP PLAN PARTICIPATING COMPANIES ----------------------- The following companies have been designated by the Board of Directors of Yardville National Bank as Participating Companies in the Yardville National Bank Employee Stock Ownership Plan (the "Plan"), and have adopted the Plan for the benefit of their eligible employees, effective as of the Effective Date of the Plan: 1. Yardville National Bank A-1 SCHEDULE B TO THE YARDVILLE NATIONAL BANK EMPLOYEE STOCK OWNERSHIP PLAN TRUST INVESTMENT COMMITTEE CHARTER ---------------------------------- 1. Background. Eligible employees of Yardville National Bank (the "Company") and certain of its affiliates participate in the Yardville National Bank Employee Stock Ownership Plan (the "Plan"). The Plan is subject to the special provisions of the Internal Revenue Code, as amended (the "Code") that apply to plans that are designed primarily to invest in employer securities, and to the fiduciary provisions of Part 4 of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Company's Board of Directors (the "Board") has created the Trust Investment Committee ("TIC") to perform certain investment functions, as enumerated below, with respect to the Plan. 2. Membership. The Board shall appoint the membership of TIC. Unless otherwise determined pursuant to a Board resolution, TIC shall consist of not less than three voting members, including a Chairman, who shall also be appointed by the Board. Members may, but need not be employees of the Company or an affiliate. Members who are employees of the Company or an affiliate shall not be separately compensated for their service to TIC. Other members shall be compensated by the Company as separately agreed to between the Company and such member. Members shall be reimbursed for reasonable out-of-pocket expenses in accordance with the Company's regular reimbursement policies. Members shall serve on TIC at the pleasure of the Board, and may be removed by the Board at any time, with or without cause. The Chairman, at his discretion, may invite one or more employees of the Company or an affiliate who are not voting members to attend meetings of TIC as non-voting members of TIC. 3. Meetings. 3.1 Membership Meetings. TIC shall hold regular meetings of its membership, at least annually, to review the business of the committee and prepare regular reports for the Board. Special meetings shall be held as the Chairman may deem appropriate. 3.2 Reports to the Board. The Chairman of TIC shall prepare and deliver an annual written report to the Board, or such committee of the Board as the Board may designate. Such report shall summarize the business of TIC for the preceding year, evaluate the performance of the trustee of the trust established under the Plan and the Plan's independent valuation advisor for employer securities held by the Plan, and the anticipated short-, medium- and long-term cash needs of the Plan for debt amortization and repurchase of employer securities from eligible employees who separate from service with a nonforfeitable interest in their Plan Accounts. The Chairman of TIC shall make such additional reports and request additional Board or Board committee consideration at such time or times as the Chairman shall deem necessary or appropriate. B-1 3.3 Valuation Advisors. TIC or its members shall conduct such meetings with current or prospective independent valuation advisors, and other consultants and advisors as it may deem appropriate. 4. Jurisdiction. TIC shall have the following responsibilities under the Plan and related trust: 4.1 The appointment, retention and termination of an independent valuation advisor to provide valuation reports with respect to employer securities held by the trust; 4.2 The appointment, retention and termination of the trustee; 4.3 To vote employer securities held by the trust, except to the extent otherwise provided in the Plan and trust; 4.4 To decide whether to tender or exchange employer securities held by the trust; 4.5 To direct the trustee of the trust to purchase employer securities from the Company and shareholders, to determine the price at which such purchase shall be closed based on the advice of an independent valuation advisor, and, in connection with each such purchase, to approve the terms and conditions under which the trust will finance acquisitions of employer securities; and 4.6 To take all other actions and make all other decisions assigned to it under the Plan and trust. 6. Amendment. The Board shall have the authority to amend this Charter. Adopted this 27th day of January, 1999. [Corporate Seal] YARDVILLE NATIONAL BANK ATTEST:___________________ By: ___________________________ Title: ___________________________ B-2 EX-10.31 3 EXHIBIT 10.31 Yardville National Bancorp Subsidiaries Exhibit 10.31 - -------------------------------------------------------------------------------- 1 Yardville National Bank - -------------------------------------------------------------------------------- 2 Yardville Capital Trust - -------------------------------------------------------------------------------- 3 Yardville National Investment Corporation (wholly-owned subsidiary of Bank) - -------------------------------------------------------------------------------- 4 YNB Real Estate Holding Company (wholly-owned subsidiary of Bank) - -------------------------------------------------------------------------------- 5 Brendan, Inc. (wholly-owned subsidiary of Bank) - -------------------------------------------------------------------------------- 6 YNB Financial, Inc. (wholly-owned subsidiary of Bank) - -------------------------------------------------------------------------------- 7 Nancy-Beth, Inc. (wholly-owned subsidiary of Bank) - -------------------------------------------------------------------------------- 8 YNB Realty, Inc. (wholly-owned subsidiary of Bank) - -------------------------------------------------------------------------------- 9 Jim Mary, Inc. (wholly-owned subsidiary of Bank) - -------------------------------------------------------------------------------- 10 YNB Capital Development, Inc. (wholly-owned subsidiary of Bank) - -------------------------------------------------------------------------------- EX-27 4 FINANCIAL DATA SCHEDULE
9 9-MOS DEC-31-1999 SEP-30-1999 16,476 806 15,385 0 279,580 111,190 105,906 599,839 8,357 1,055,642 673,885 303,399 8,455 11,500 0 0 40,052 18,351 1,055,642 34,201 14,691 649 49,541 17,779 28,129 21,412 2,400 18 13,267 8,009 2,265 0 0 5,744 0.99 0.98 7.52 2,073 570 598 0 6,678 879 68 8,357 8,357 0 0
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