UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ            Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2004.

OR

o            Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                      to                     .

Commission File No.: 0-26086

Yardville National Bancorp

Registrant’s telephone number, including area code: (609) 585-5100

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of voting Common Stock held by non-affiliates (computed by using the closing sales price on the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2004)) was $175,334,403. An aggregate of 10,528,544 shares of Common Shares were outstanding as of March 29, 2005.

Documents Incorporated By Reference

Portions of the definitive proxy statement for the Annual Meeting of Stockholders of Yardville National Bancorp to be held June 3, 2005 are incorporated by reference into Part III of this Form 10-K.

FORM 10-K

INDEX

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PART I

Item 1. Business

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contain statements that are forward-looking. These may include statements that relate to, among other things, profitability, liquidity, loan loss reserve adequacy, plans for growth, interest rate sensitivity, market risk, regulatory compliance, and financial and other goals. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. As forward-looking statements, these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results and, accordingly, such results may differ from those expressed in any forward-looking statements made by, or on behalf of, the Company. Factors that could cause actual results to differ materially from management’s current expectations include, among other things:

•	the results of our ongoing efforts to execute our retail strategy;

•	adverse changes in our loan portfolio and the resulting credit risk-related losses and expenses;

•	interest rate fluctuations and other economic conditions;

•	continued levels of our loan quality and origination volume;

•	our ability to attract core deposits;

•	continued relationships with major customers;

•	competition in product offerings and product pricing;

•	adverse changes in the economy that could increase credit-related losses and expenses;

•	adverse changes in the market price of our common stock;

•	compliance with laws, regulatory requirements and Nasdaq standards;

•	other factors, including those matters discussed in additional detail under the heading “Risk Factors;” and

•	other risks and uncertainties detailed from time to time in our filings with the SEC.

Although forward-looking statements help to provide complete information about us, readers should keep in mind that forward-looking statements may not be reliable. Readers are cautioned not to place undue reliance on the forward-looking statements. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

General

Yardville National Bancorp, referred to as “we” or the “Company,” is a registered financial holding company headquartered in Mercer County, New Jersey with total assets of $2.81 billion, total deposits of $1.81 billion and total stockholders’ equity of $160.2 million at December 31, 2004. We conduct a general commercial and retail banking business through our principal operating subsidiary, The Yardville National Bank, referred to as the “Bank,” which commenced operations as a commercial bank in 1925. We provide a broad range of lending, deposit and other financial products and services with an emphasis on commercial real estate and commercial and industrial lending to small- to mid-sized businesses and individuals. Our existing and target markets are located in the corridor between New York City and Philadelphia. We currently operate 23 full-service branches, including 15 branches in our primary market of Mercer County. Over the past several years, as part of our retail strategy, we have expanded into the demographically attractive markets of Hunterdon, Somerset and Middlesex Counties in New Jersey and completed the first branch acquisition in our history, in Mercer County in 2003.

Due to continued consolidation among financial institutions, we have grown our asset base both in our existing markets and by expanding into contiguous markets, and we see opportunities for continued growth. We believe these markets have customers with banking needs that are not adequately served by smaller local institutions but who still desire the personalized service that larger institutions typically do not offer. We believe that the key differentiating factors between us and our larger competitors are our philosophy of relationship banking and our in-market expertise. Our ability to enter into larger loan relationships enables us to effectively compete against smaller institutions.

Our goals are to further develop the earnings power and increase the value of our franchise. In order to achieve these goals, we need to continue to generate commercial loans, reduce our cost of funds and increase our net interest income. Specifically in 2005, we plan to continue to execute our retail strategy by further expanding our branch network, strengthening our brand image and upgrading our technology infrastructure.

The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed by the Company with the Securities and Exchange Commission (referred to as the “SEC”) are available, without charge, under “Investor

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Relations” on the Company’s Internet web site, “http://www.ynb.com,” as soon as reasonably practicable after such materials are filed with the SEC. The Company’s Internet web site and the information contained in or connected with that web site are not intended to be incorporated by reference into this report.

Our principal and executive offices are located at 2465 Kuser Road, Hamilton, New Jersey 08690. Our telephone number is (609) 585-5100.

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Subsidiaries

The Company directly owns the Bank and six additional subsidiaries, Yardville Capital Trust, Yardville Capital Trust II, Yardville Capital Trust III, Yardville Capital Trust IV, Yardville Capital Trust V and Yardville Capital Trust VI. The Company is also the indirect owner, through the Bank, of eight subsidiaries, which provide insurance and financial services and own a portion of the real estate and securities utilized by the Bank. The assets, liabilities and results of operations of the Bank and its subsidiaries are consolidated with the Company for financial reporting purposes. The trusts are not consolidated subsidiaries. See Note 8 of the Notes to Consolidated Financial Statements.

Competition

The Bank’s primary market area in Central New Jersey is highly competitive for financial services and the Bank faces significant competition both in making loans and in attracting deposits. The Bank is subject to competition in all aspects of its business from other financial institutions such as commercial banks, savings banks, savings and loan associations, credit unions, insurance companies and finance and mortgage companies. Within the direct market area of the Bank, there are a significant number of competing financial institutions. The Bank competes in its market area with a number of larger commercial banks which have substantially greater resources, higher lending limits and larger branch systems, and which provide a broader array of banking products and services. Liberalized branching and acquisition laws have lowered barriers to entry into the banking business, and increased both competition for and opportunities to acquire other financial institutions. Savings banks, savings and loan associations and credit unions also actively compete for deposits and for various types of loans. In its lending business, the Bank is subject to competition from consumer finance companies and mortgage companies, which are subject to fewer regulatory restrictions than banks, and can often offer lower loan rates than banks. Financial institutions are intensely competitive in the interest rates they offer on deposits. In addition, the Bank faces competition for deposits from non-bank institutions such as brokerage firms, insurance companies and investment companies who offer the opportunity to invest in such instruments as short-term money market funds, corporate and government securities funds, mutual funds and annuities.

Supervision and Regulation

General

The Company and its subsidiaries are subject to extensive supervision and regulation under both Federal and state laws. The regulation and supervision of the Company and the Bank are designed primarily for the protection of the depositors of the Bank and the Federal Deposit Insurance Corporation (FDIC) deposit insurance fund and not the Company or its stockholders. These laws restrict permissible activities and investments and require compliance with various consumer protection provisions applicable to lending, deposit, brokerage and fiduciary activities. They also impose capital adequacy requirements and restrict the Company’s ability to repurchase stock or to receive dividends from the Bank. The Company and its subsidiaries are also subject to comprehensive examination and supervision by the Board of Governors of the Federal Reserve System (“FRB”) and the Office of the Comptroller of the Currency (“OCC”). The Company and its subsidiaries are also functionally regulated by the Securities and Exchange Commission (“SEC”) and state insurance regulators. These regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of the Company and the Bank. The consequences of noncompliance with these laws and regulations can include substantial monetary and nonmonetary penalties and sanctions. This supervisory framework could materially impact the conduct and profitability of the Company’s activities.

To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Company and the Bank.

Bank Holding Company Act

The Company is registered as a financial holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to regulation and supervision by the FRB. The BHC Act requires the Company to secure the prior approval of the FRB before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of, any bank or thrift, or merges or consolidates with another bank or thrift holding company.

In addition, bank holding companies are restricted in the types of activities in which they may engage, directly or indirectly through subsidiaries, and prior approval of the FRB may be required before engaging in certain activities. The Company has elected to be a “financial holding company” under the Gramm-Leach-Bliley Act of 1999 (“GLB Act”). The GLB Act amended the BHC Act to allow a “financial holding company” to engage in certain activities that were not previously permitted for a bank holding company, and to engage on less restrictive terms in certain activities that were previously permitted. These expanded activities include securities underwriting and dealing, insurance underwriting and sales, and merchant banking activities. In order to maintain its status as a financial holding company, the Company and the Bank must be “well capitalized” and “well managed”, and have a “satisfactory” rating under the Community Reinvestment Act (“CRA”). For

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bank holding companies that are not financial holding companies, the permissible activities are limited to those previously determined by the FRB to be so “closely related to banking” as to be a “proper incident thereto.” The Company became a financial holding company in March 2000. The Company is not currently engaged in any activity that would not be permissible if it ceased to be a financial holding company.

There are a number of restrictions imposed on the Company and the Bank by Federal law that are designed to reduce potential loss exposure to the depositors of the Bank and the FDIC insurance funds in the event the Bank should become insolvent. For example, FRB policy requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks and to commit resources to support such institutions in circumstances where it might not do so otherwise. The FRB has, in some cases, entered orders for bank holding companies to take affirmative action to strengthen the finances or management of subsidiary banks.

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Supervision and Regulation of the Bank

The operations and investments of the Bank are also limited by Federal and state statutes and regulations. The primary Federal regulator of the Bank is the OCC. The Bank and its operating subsidiaries may engage in any activities that are determined by the OCC to be part of or incidental to the business of banking. Under the GLB Act, the Bank may engage in expanded activities through the formation of a “financial subsidiary.” The Bank has filed a financial subsidiary certification with OCC and thus may engage through a financial subsidiary in such expanded activities as insurance sales and securities underwriting.

In order to be eligible to establish or acquire a financial subsidiary, the Bank must be “well capitalized” and “well managed” and may not have less than a “satisfactory” CRA rating. In calculating its risk-based capital, the Bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary, and the assets of the financial subsidiary from the Bank’s consolidated assets. If the Bank were to fail to meet the “well capitalized” or “well managed” criteria, it would not be permitted to continue these expanded activities. In addition, if the Bank receives less than a “satisfactory” CRA rating, it would not be permitted to engage in any new activities or to make new investments in reliance on the financial subsidiary authority.

OCC banking laws and regulations generally govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain, loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches. In addition, the OCC possesses broad powers to prohibit the Bank from engaging in any activity that it determines would be an unsafe and unsound banking practice.

The Bank is also subject to Federal laws that limit the amount of transactions between the Bank and its nonbank affiliates, including the Company. Under these provisions, transactions (such as a loan or investment) by the Bank with any nonbank affiliate are generally limited to 10% of the Bank’s capital and surplus for all covered transactions with such affiliate or 20% of capital and surplus for all covered transactions. Any extensions of credit, with limited exceptions, must be secured by eligible collateral in specified amounts. The Bank is also prohibited from purchasing any “low quality” asset from an affiliate. The GLB Act imposes similar restrictions on transactions between the Bank and its financial subsidiaries.

Under the CRA, the record of a bank holding company and its subsidiary banks must be considered by the appropriate Federal banking agencies in reviewing and approving or disapproving a variety of regulatory applications including approval of a branch or other deposit facility, office relocation, a merger and certain acquisitions of bank shares. Regulators are required to assess the record of the Company and the Bank to determine if they are meeting the credit needs of the communities they serve. Regulators make publicly available an evaluation of banks’ records in meeting credit needs in their communities, including a descriptive rating and a statement describing the basis for the rating.

Deposit Insurance

The deposits of the Bank are insured up to $100,000 per insured depositor by the FDIC. The premiums paid by insured depository institutions range from $0.00 to $0.27 per $100 of insured deposits, and are based on an institution’s relative risk to the deposit insurance funds, as measured by the institution’s regulatory capital position and other supervisory factors. The Bank currently does not pay any FDIC insurance premiums based on this risk assessment.

Since 1996, the FDIC has not assessed banks in the most favorable capital and risk assessment categories due to a surplus in the FDIC’s deposit insurance fund. This has resulted in a significant cost savings to all insured banks. There can be no assurance that this surplus will continue, and the FDIC may be required to assess deposit insurance premiums against insured banks in the most favorable capital and risk assessment categories. If the FDIC assesses premiums for all deposits, the net funding costs of the Bank would increase and its net income would be reduced. In addition, since FDIC deposit insurance premiums are “risk-based,” higher premiums would be charged to banks that have lower capital ratios or higher risk profiles. Consequently, a decrease in the Bank’s capital ratios, or a negative evaluation by the OCC, as the Bank’s primary Federal banking regulator, may also increase the Bank’s net funding costs and reduce its net income.

All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a Federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds (commonly referred to as FICO bonds) were issued to capitalize the Federal Savings and Loan Insurance Corporation. FDIC-insured depository institutions paid approximately 1.5 cents per $100 of assessable deposits in 2004. The FDIC established the FICO assessment rate effective for the first quarter of 2005 at approximately 1.4 cents annually per $100 of assessable deposits.

Capital Rules

Under risk-based capital requirements for bank holding companies, the Company is required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of eight percent. At least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangible assets (“Tier 1 Capital”). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of the allowance for loan losses (“Tier 2 Capital” and, together with Tier 1 Capital, “Total Capital”). At December 31, 2004, the Company’s Tier 1 Capital and Total Capital ratios were 10.1 percent and 11.4 percent, respectively.

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In addition, the Federal Reserve Board has established minimum leverage ratio requirements for bank holding companies. For bank holding companies that meet certain specified criteria, including having the highest regulatory rating and not experiencing significant growth or expansion, these requirements provide for a minimum leverage ratio of Tier 1 Capital to adjusted average assets, equal to three percent. Other bank holding companies that fail to meet such criteria will generally be required to maintain a leverage ratio of four to five percent. The Company’s leverage ratio at December 31, 2004, was 8.0 percent.

The Bank is subject to similar capital requirements adopted by the OCC. The OCC has not advised the Bank of any specific minimum leverage ratios applicable to it. The capital ratios of the Bank are set forth below.

Both the FRB and the OCC risk-based capital standards explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution’s general capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates to be considered by the agency as a factor in evaluation the Bank’s capital adequacy. The FRB has issued additional guidelines for certain bank holding companies that engage in trading activities. The Company does not believe that consideration of these additional factors will affect the regulators’ assessment of the Company’s or the Bank’s capital position.

In addition to the required minimum capital levels described above, Federal law establishes a system of “prompt corrective actions” which Federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a federally regulated depository institution falls. The extent of these powers depends upon whether the institution in question is considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Generally, the smaller an institution’s capital base relative to its total assets, the greater the scope and severity of the agencies’ powers. The capital thresholds for a “well capitalized” institution and “adequately capitalized” institution are set forth below. An institution will be deemed “undercapitalized” if it fails to meet the minimum capital requirements, “significantly undercapitalized” if it has a Total Capital ratio that is less than 6.0 percent, a Tier 1 Capital ratio that is less than 3.0 percent, or a leverage ratio that is less than 3.0, percent and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0 percent.

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The following table sets forth the minimum capital ratios that a bank must satisfy in order to be considered adequately capitalized or well capitalized under the prompt corrective action regulations, and the Bank’s capital ratios at December 31, 2004:

The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on payment of dividends, a limitation on asset growth and expansion, in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person.” Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring, a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership.

This classification of depository institutions is primarily for the purpose of applying the agencies’ prompt corrective action rules and is not intended to be and should not be construed as a representation of the overall financial condition or prospects of any financial institution.

Under currently applicable guidance, subordinated debentures recorded on the Company’s balance sheet (issued in connection with trust preferred securities) are included in Tier 1 Capital of the Company, up to a maximum of 25% of Tier 1 Capital. Historically, this capital treatment was based on the accounting for these instruments. As a result of recent accounting guidance, trust preferred securities are no longer consolidated under GAAP. Partly in response to this accounting change, the FRB amended its risk-based capital standards for bank holding companies to allow for the continued inclusion of outstanding and prospective issuances of trust preferred securities in Tier 1 Capital subject to stricter quantitative limits and qualitative standards. Under the amended rule, the aggregate amount of trust preferred securities and certain other capital instruments would be limited to 25% of Tier 1 Capital, net of goodwill less any deferred tax liability. The amount of trust preferred securities and certain other capital instruments in excess of the limit could be included in Tier 2 Capital, subject to restrictions. The amended rule provides a five-year transition period for the application of the quantitative limits. The Company would continue to follow GAAP in accounting for these instruments for regulatory reporting purposes. The amended rule would not impact the Company’s existing treatment of trust preferred securities for purposes of computing its Tier 1 Capital, nor would it affect the capital adequacy rating of the Bank, which remains “well capitalized.” See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Limitations on Payment of Dividends

Under applicable New Jersey law, the Company is not permitted to pay dividends on its capital stock if, following the payment of the dividend, (1) it would be unable to pay its debts as they become due in the usual course of business or (2) its total assets would be less than its total liabilities. Further, it is the policy of the FRB that bank holding companies should pay dividends only out of current earnings and only if future retained earnings would be consistent with the Company’s capital, asset quality and financial condition.

Since it has no significant independent sources of income, the ability of the Company to pay dividends is dependent on its ability to receive dividends from the Bank. Under national banking laws, the Bank must obtain the approval of the OCC before declaring any dividend which, together with all other dividends declared by the Bank in the same calendar year, will exceed the total of the bank’s net profits of that year combined with its retained net profits of the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock. Net profits are to be calculated without adding back any provision for the Bank’s allowance for loan losses. Furthermore, the Bank, as an FDIC-insured institution, may not pay dividends or make distributions that would cause the institution to fail to meet minimum capital requirements. These restrictions would not prevent the Bank from paying dividends from current earnings to the Company at this time.

In addition, as a bank whose deposits are insured by the FDIC, the Bank may not pay dividends or distribute any of its capital assets while it remains in default of any assessment due to the FDIC. The Bank is not in default under any of its obligations to the FDIC.

Federal regulators also have authority to prohibit banks and bank holding companies from paying a dividend if they deem such payment to be an unsafe or unsound practice.

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Effect of Government Monetary Policies

The earnings of the Company are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The FRB has had, and will likely continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The FRB has a major effect upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member banks’ deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

USA PATRIOT Act

The USA PATRIOT Act authorizes the Secretary of the Treasury, in consultation with the other Federal financial institution regulatory agencies, to adopt special measures applicable to financial institutions. Among its provisions, the USA PATRIOT Act requires each financial institution to (1) establish an anti-money laundering program, (2) establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private bank accounts and correspondent accounts maintained for non-United States persons or their representatives, and (3) avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA PATRIOT Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to request for information from Federal banking agencies within 120 hours.

The USA PATRIOT Act also requires the Federal banking regulators to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

The Department of Treasury has issued regulations implementing the due diligence requirements of the USA PATRIOT Act. These regulations require minimum standards to verify customer identity and maintain accurate records, encourage cooperation among financial institutions, Federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, prohibit the anonymous use of “concentration accounts,” and require all covered financial institutions to have in place an anti-money laundering compliance program.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, auditing and accounting, executive compensation and corporate reporting for entities, such as the Company, with equity or debt securities registered under the Securities Exchange Act of 1934. Among other things, Sarbanes-Oxley and its implementing regulations have established new membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between the Company and its outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our chief executive officer and chief financial officer, expanded the disclosure requirements for our corporate insiders, and required our management to evaluate the Company’s disclosure controls and procedures and its internal control over financial reporting, and required our auditors to issue a report on our internal control over financial reporting. The Nasdaq Stock Market, Inc. (“NASDAQ”) has also adopted corporate governance rules that have been approved by the SEC. The changes required by the Sarbanes-Oxley Act and new SEC and NASDAQ rules are intended to allow stockholders to more easily and efficiently monitor the performance of companies and directors. The Company and its Board of Directors have, as appropriate, adopted or modified the Company’s policies and practices in order to assure compliance with these regulatory requirements and to enhance the Company’s corporate governance practices.

As of the date of this report, the Company is in the process of carrying out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the Company’s internal control over financial reporting. To date, our review of our internal control over financial reporting has not brought any material weaknesses to our attention, and our independent registered public accounting firm has not communicated, any finding of such a material weakness to us. However, we have not yet completed our assessment and material weaknesses may be identified.

Other Laws and Regulations

The Company and the Bank are subject to a variety of laws and regulations which are not limited to banking organizations. In lending to commercial and consumer borrowers, and in owning and operating its own property, the Bank is subject to regulations and potential liabilities under state and Federal environmental laws.

Legislation and Regulatory Changes

Legislation and regulations may be enacted which increase the cost of doing business, limit or expand permissible activities, or affect the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions are frequently made in Congress and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Company and the Bank.

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Employees

At December 31, 2004, the Company employed 351 full-time employees and 25 part-time employees.

Statistical Disclosure

The Company’s statistical disclosure information, required of bank holding companies, is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is set forth in Item 7 of this report.

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Risk Factors

The following is a discussion of certain significant risk factors that could potentially negatively impact our financial condition and results of operations.

We may not be able to continue to grow our business, which may adversely impact our results of operations.

During the last five years, our total assets have grown substantially from $1.62 billion at December 31, 2000 to $2.81 billion at December 31, 2004. Our business strategy calls for continued expansion, but we do not anticipate growth to continue at this rate. Our ability to continue to grow depends, in part, upon our ability to open new branch locations, successfully attract deposits to existing and new branches, and identify favorable loan and investment opportunities. In the event that we do not continue to grow, our results of operations could be adversely impacted.

We may not be able to manage our growth, which may adversely impact our financial results.

As part of our expansion strategy, we plan to open new branches in our existing and target markets. However, we may be unable to identify attractive locations on terms favorable to us or to hire qualified management to operate the new branches. In addition, the organizational and overhead costs may be greater than we anticipated or we may not be able to obtain the regulatory approvals necessary to open new branches. New branches may take longer than expected to reach profitability, and we cannot assure that they will become profitable. The additional costs of starting new branches may adversely impact our financial results.

Our ability to manage growth successfully will depend on whether we can continue to fund this growth while maintaining cost controls and asset quality, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends. If we are not able to control costs and maintain asset quality, such growth could adversely impact our earnings and financial condition.

The Company’s continued pace of growth may require it to raise additional capital in the future, but that capital may not be available when it is needed.

The Company is required by Federal regulatory authorities to maintain adequate levels of capital to support its operations. The Company may at some point need to raise additional capital to support continued growth. The Company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside the Company’s control, and on its financial performance. Accordingly, the Company cannot assure you of its ability to raise additional capital if needed or on terms acceptable to the Company. If the Company cannot raise additional capital when needed, the ability to further expand its operations could be materially impaired.

Our exposure to credit risk, because we focus on commercial lending, could adversely affect our earnings and financial condition.

There are certain risks inherent in making loans. These risks include interest rate changes over the time period in which loans may be repaid, risks resulting from changes in the economy, risks inherent in dealing with borrowers and, in the case of a loan backed by collateral, risks resulting from uncertainties about the future value of the collateral.

Commercial loans are generally viewed as having a higher credit risk than residential real estate or consumer loans because they usually involve larger loan balances to a single borrower and are more susceptible to a risk of default during an economic downturn. Commercial and industrial loans and commercial real estate loans, which comprise our commercial loan portfolio, were 82.6% of our total loan portfolio at December 31, 2004. Construction and development loans, which are included as part of our commercial real estate loans, were 10.7% of our total loan portfolio at December 31, 2004. Construction financing typically involves a higher degree of credit risk than commercial mortgage lending. Risk of loss on a construction loan depends largely on the accuracy of the initial estimate of the property’s value at completion of construction compared to the estimated cost (including interest) of construction. If the estimated property value proves to be inaccurate, the loan may be undersecured.

Because our loan portfolio contains a significant number of commercial real estate loans and commercial and industrial loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in nonperforming loans. An increase in nonperforming loans could cause an increase in the provision for loan losses and an increase in loan charge offs, which could adversely impact our results of operations and financial condition.

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Adverse economic and business conditions in our market area may have an adverse effect on our earnings.

Substantially all of our business is with customers located within Mercer County and contiguous counties. Generally, we make loans to small to mid-sized businesses, most of whose success depends on the regional economy. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. Adverse economic and business conditions in our market area could reduce our growth rate, affect our borrowers’ ability to repay their loans and, consequently, adversely affect our financial condition and performance. Further, we place substantial reliance on real estate as collateral for our loan portfolio. A sharp downturn in real estate values in our market area could leave many of our loans undersecured. If we are required to liquidate the collateral to satisfy the debt securing a loan during a period of reduced real estate values, our earnings could be adversely affected.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings would decrease.

In an attempt to mitigate any loan losses we may incur, we maintain an allowance for loan losses based on, among other things, national and regional economic conditions, and historical loss experience and delinquency trends among loan types. However, we cannot predict loan losses with certainty and we cannot assure you that charge offs in future periods will not exceed the allowance for loan losses. In addition, regulatory agencies, as an integral part of their examination process, review our allowance for loan losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination. Factors that require an increase in our allowance for loan losses could reduce our earnings.

Loss of our key personnel or an inability to hire and retain qualified personnel could adversely affect our business.

Our future operating results are substantially dependent on the continued service of Patrick M. Ryan, our President and Chief Executive Officer, Jay G. Destribats, our Chairman of the Board, and other key personnel. The loss of the services of Mr. Ryan would have a negative impact on our business because of his lending expertise and years of industry experience. In addition, the loss of the services of Mr. Ryan or Mr. Destribats could have a negative impact on our business because of their business development skills and community involvement. Our success also depends on the experience of our branch managers and our lending officers and on their relationships with the communities they serve. The loss of these or other key persons could negatively impact our banking operations. Although we have employment agreements with Mr. Ryan, Mr. Destribats and our other key personnel, our employees may voluntarily terminate their employment at any time. We cannot assure you that we will be able to retain our key personnel or attract the qualified personnel necessary for the management of our business.

Changes in interest rates may adversely affect our earnings and financial condition.

Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds.

Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets.

We may not be able to successfully integrate acquisitions, which may adversely affect our business.

We intend to consider future strategic acquisitions, some of which could be material to us and which may include companies that are substantially equivalent or larger in size compared to us. We continually explore and conduct discussions with third parties regarding possible acquisitions. As of the date of this report, we have not entered into any definitive agreement and we do not have any definitive plans relating to any specific acquisitions.

We will have to integrate any acquisitions into our business. The difficulties of combining the operations, technologies and personnel of companies we acquire include coordinating and integrating geographically separated organizations and integrating personnel with diverse business backgrounds. We may not be able to effectively manage or integrate the acquired companies. Further, we may not be successful in implementing appropriate operational, financial and management systems and controls to achieve the benefits expected to result from these acquisitions. Our efforts to integrate these businesses could be affected by a number of factors beyond our control, such as regulatory developments, general economic conditions and increased competition. In addition, the process of integrating these businesses could cause an interruption of, or loss of momentum in, the activities of our existing business and the loss of key personnel and customers. The diversion of

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management’s attention and any delays or difficulties encountered in connection with the transition and integration of these businesses could negatively impact our business and results of operations if any of the above adverse effects were to occur. Further, the benefits that we anticipate from any acquisitions may not be obtained.

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Competition from other financial institutions in originating loans and attracting deposits may adversely affect our profitability.

We face substantial competition in originating loans. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans.

In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations and increase our cost of funds.

We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition.

Government regulation significantly affects our business.

The banking industry is extensively regulated. Banking regulations are intended primarily to protect depositors, and the FDIC deposit insurance funds, not the stockholders of the Company. We are subject to regulation and supervision by the FRB. The Bank is subject to regulation and supervision by the OCC. Regulatory requirements affect our lending practices, capital structure, investment practices, dividend policy and growth. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. We are subject to various regulatory capital requirements, which involve both quantitative measures of our assets and liabilities and qualitative judgments by regulators regarding risks and other factors. Failure to meet minimum capital requirements or comply with other regulations could result in actions by regulators that could adversely affect our ability to pay dividends or otherwise adversely impact operations. In addition, changes in laws, regulations and regulatory practices affecting the banking industry may limit the manner in which we conduct our business. Such changes may adversely affect us, including our ability to offer new products and services, obtain financing, attract deposits, make loans and achieve satisfactory spreads and impose additional costs on us. The Bank is also subject to a number of Federal laws which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. The Bank’s compliance with these laws will be considered by the Federal banking regulators when reviewing bank merger and bank holding company acquisitions or commence new activities or make new investment in reliance on the GLB Act. As a public company, we are also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act of 2002, as well as any rules or regulations promulgated by the SEC or NASDAQ.

The evaluation of our internal control over financial reporting by our management and our independent auditors is not complete, and it is possible that significant deficiencies or material weaknesses could be noted.

We and our independent auditors are currently evaluating our internal control over financial reporting in order to allow management to report on, and our independent auditors to attest to, management’s assessment of such control as required by Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC thereunder. In the course of our evaluation, we or our independent auditors may identify significant deficiencies or material weaknesses that have not presently been identified.

We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements, which could reduce our ability to effectively compete.

The financial services industry is undergoing rapid technological changes with frequent introduction of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We cannot assure you that we will be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete.

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Our hardware and software systems are vulnerable to damage that could harm our business.

We rely upon our existing information systems for operating and monitoring all major aspects of our business, including deposit and loan information, as well as various internal management functions. These systems and our operations are vulnerable to damage or interruption from natural disasters, power loss, network failure, improper operation by our employees, security breaches, computer viruses or intentional attacks by third parties. Any disruption in the operation of our information systems could adversely impact our operations, which may affect our results of operations and financial condition.

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Item 2. Properties

As of March 15, 2005, the Company and the Bank were conducting their business through 23 banking branches, an operations center and a maintenance center.

The executive offices for the Company and the Bank are located at 2465 Kuser Road, Hamilton, New Jersey (also the location of one of our branches). The Bank leases the offices at this location pursuant to a lease that began in October 1999, has an initial term of 14 years ending in 2013, and is renewable for two additional five-year periods thereafter. The monthly rental payments under the lease are $56,387 during the second five years of the lease, which commenced in October 2004. The monthly rental will be adjusted every five years in accordance with a formula based on the Consumer Price Index, provided that the monthly rental payment for any lease period may not vary by more than 3% from the monthly rental payment in the immediately preceding lease period. The Bank has the option to purchase the property at a purchase price equal to the fair market value of the property at the time the option is exercised.

Of the 23 banking branches, five of the buildings and the land on which they are located are owned and 18 buildings and the land on which they are located are leased. The operations center and the land on which it is located is leased.

Item 3. Legal Proceedings

The Company and the Bank are party, in the ordinary course of business, to litigation involving collection matters, contract claims and other miscellaneous causes of action arising from their business. Management does not consider that any such proceedings depart from usual routine litigation, and in its judgment, the Company’s consolidated financial position or results of operations will not be affected materially by the final outcome of any pending legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s common stock is traded in The Nasdaq Stock Market, Inc.’s National Market under the symbol YANB. The following table shows the high and low closing sales prices of the common stock in the The Nasdaq Stock Market, Inc.’s National Market during 2003 and 2004.

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Holders

As of December 31, 2004, the Company had approximately 3,400 holders of record of our common stock, which included approximately 650 registered holders and an estimate of individual participants who hold our common stock through registered clearing agencies and their nominees.

Dividends

In 2003, the Company paid four quarterly cash dividends on the common stock in the aggregate amount of $4.8 million. In 2004, the Company paid four quarterly cash dividends on the common stock in the aggregate amount of $4.8 million. Dividends paid per share in 2004 totaled $0.46. Cash dividends are generally paid quarterly or four times a year. In the first quarter of 2005, the Company paid a cash dividend in the amount of $0.115 per share on the common stock. Because substantially all of the funds available for the payment of cash dividends are derived from the Bank, future cash dividends will depend primarily upon the Bank’s earnings, financial condition, need for funds, and government policies and regulations applicable to both the Bank and the Company. The Company has also agreed with the holders of the trust preferred securities issued by subsidiary trusts (see Note 8 of the Notes to Consolidated Financial Statements) that the Company will not pay dividends if an event of default should occur (and remain uncured) under the terms of the trust preferred securities. As of December 31, 2004, the net profits of the Bank available for distribution to the Company as dividends without regulatory approval were approximately $23.0 million. The Company expects to pay quarterly cash dividends for the remaining three quarters in 2005 to holders of common stock, subject to the conditions described above.

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Item 6. Selected Financial Data

The following table sets forth certain historical financial data with respect to Yardville National Bancorp. This table should be read in conjunction with the consolidated financial statements and related notes thereto included in this Annual Report.

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Note:   The net interest margin is presented on a tax equivalent basis. We believe that this presentation provides comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice. Although we believe that this financial measure enhances investors’ understanding of our business and performance, these measures should not be considered an alternative to GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Average Balances, Yields and Costs.”

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion and analysis is to provide the reader with pertinent information to understanding and assessing Yardville National Bancorp’s results of operations for each of the past three years and financial condition for each of the past two years. Throughout this annual report the terms “YNB,” “Company,” “we,” “us,” “our,” and “corporation” will refer to Yardville National Bancorp, our wholly owned banking subsidiary The Yardville National Bank (the “Bank”), and other subsidiaries as a consolidated entity, except where noted. The following discussion and analysis should be read in conjunction with the consolidated financial statements, notes and tables included elsewhere in this report.

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements with respect to the financial condition, results of operations and business of YNB. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements are set herein under the caption “Forward-looking Statements” on page 54.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the preparation of our financial statements we are required to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

YNB’s significant accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. Note 1 to the Consolidated Financial Statements contains a summary of our significant accounting policies. Two of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern the allowance for loan losses and income tax liabilities. Management has reviewed and approved these critical accounting policies and has discussed these policies with the Audit Committee.

The allowance for loan losses represents management’s estimate of possible credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses has been determined in accordance with accounting principles generally accepted in the United States of America, under which we are required to maintain adequate allowances for loan losses. The allowance for loan losses is determined based on our assessment of several factors. Those factors include reviews and evaluations of specific loans, current economic conditions, historical loan loss experience and the level of classified and nonperforming loans. We believe that our allowance for loan losses is adequate to cover specificially identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. Note 1 of the Notes to Consolidated Financial Statements describes the methodology used to determine the allowance for loan losses.

We account for income taxes by recognizing the amount of taxes payable for the current year and deferred tax liabilities and assets for the estimated future tax consequences, which require judgment of events, that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact YNB’s consolidated financial statements or results of operations. Notes 1 and 9 of the Notes to Consolidated Financial Statements include further explanation on the accounting for income taxes.

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Results of Operations

2004 Executive Summary

Yardville National Bancorp is a $2.81 billion financial holding company headquartered in Hamilton, New Jersey. We provide a broad range of lending, deposit, and other financial products and services. We emphasize commercial real estate and commercial and industrial lending to small- to mid-sized businesses. Headquartered in Mercer County since 1925, YNB offers its style of personalized community banking to customers throughout New Jersey and Eastern Pennsylvania. Our focus is to provide top quality products and exceptional service to customers, and to build long-term, sustainable shareholder value by expanding and extending the YNB franchise.

Located in the dynamic business corridor connecting New York City and Philadelphia, YNB operates 23 full-service branches through our wholly owned banking subsidiary, The Yardville National Bank, in Mercer, Hunterdon, Somerset, Middlesex and Burlington Counties in New Jersey and Bucks County, Pennsylvania.

We generate substantially all of our income from our loan and securities portfolios. Our earning asset base is primarily funded through deposits, and to a lesser degree, borrowed funds. Increasing net interest income is critical in reaching our financial goals. To accomplish our goals, we must effectively manage our cost of funds and expand our loan portfolio. Loan opportunities in our markets have put pressure on our branch network to provide lower cost deposits to fund our growth. Our retail strategy is designed to increase the number of branches in our markets, enhance our brand image and introduce our products and services to an expanded geographic area. This strategy, however, requires investment of resources in people, facilities, marketing and technology. While we have seen many positive results, we have not yet fully realized all of the benefits of this ongoing strategic initiative.

During 2004, we opened one branch, continued enhancing our brand image, introduced new products and services, and lowered our cost of funds. Looking forward, we expect to open several branches in 2005 and introduce new products and services in our markets. We believe that by continuing to grow our commercial loan business, expanding our geographic footprint and attracting lower cost core deposits to fund our growth, we will enhance profitability and the value of the YNB franchise.

We earned net income of $18.5 million or $1.71 per diluted share for the year ended December 31, 2004, compared to $10.3 million or $0.97 per diluted share for the year ended December 31, 2003. This represents an increase of 79.7% and 76.3%, respectively. The rebound in our financial performance in 2004 was due to strong net interest income growth of $17.5 million or 33.0%, primarily due to continued robust commercial loan growth. Partially offsetting the improvement in net interest income was a $4.5 million increase in non-interest expense, as well as higher income tax expense due to notably better financial performance. Return on average assets for 2004 increased to 0.70% compared with 0.44% in 2003, while the return on average equity increased to 12.38% in 2004 compared to 7.09% in 2003.

During 2004, total loans increased $339.2 million or 23.5% to $1.78 billion. At the same time, overall credit quality strengthened as net loan charge offs declined to $6.8 million for 2004, compared to almost $9.0 million in 2003. Nonperforming asset levels were stable at $10.0 million or 0.36% of total assets at December 31, 2004, compared to $10.6 million or 0.44% of total assets at the same date in 2003.

One of our retail strategy objectives, which was ongoing throughout 2004, was to attract lower cost deposits, reduce our cost of funds and increase net interest income. During 2004, we successfully introduced Simply Better Checking^SM, our featured interest bearing demand deposit account, in our home Mercer County market. Combined with our other markets, we attracted over $200 million in deposits with this product. The cost of interest bearing deposits declined 38 basis points for 2004 despite the gradually increasing interest rate environment in the second half of the year. Total deposits increased $326.2 million or 22.0% to $1.81 billion from $1.48 billion at December 31, 2003. Lower cost savings, money markets and interest bearing demand deposits increased $238.9 million or 73.2% of the total increase in overall deposits.

YNB’s non-interest expenses increased 11.8% due primarily to our growth, which resulted in higher salaries and employee benefit costs. In addition, non-interest expenses rose due to increased director and committee fees, the costs associated with Sarbanes-Oxley 404 compliance and expenses related to the ongoing execution of our retail strategy. In spite of the increase in non-interest expenses, YNB’s efficiency ratio improved to 54.19% in 2004 from 62.28% in 2003 due to the significant growth in net interest income.

We have positioned our balance sheet to take advantage of an environment of gradually increasing interest rates during 2005. We believe that we will continue to have opportunities to attract quality commercial borrowers while credit quality strengthens. With the anticipation of several new branches during 2005, we believe the expansion of our footprint and attractive core deposit products and services will result in a modestly higher cost of funds and an improving net interest margin. We are optimistic about our prospects for financial success in 2005.

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Net Interest Income

Net interest income is the largest and most significant component of our operating income. Net interest income is the difference between income on interest earning assets and expense on interest bearing liabilities. Net interest income depends upon the relative amounts and types of interest earning assets and interest bearing liabilities, and the interest rate earned or paid on them. Net interest income is also impacted by changes in interest rates and the shape of market yield curves.

The following table sets forth an analysis of net interest income by each major category of average interest earning assets and interest bearing liabilities and the related yields and costs for the years ended December 31, 2004, 2003, 2002, 2001 and 2000. Average yields for each year are derived by dividing income by the average balance of the related assets, and average costs are derived by dividing expense by the average balance of the related liabilities. The yields and costs include fees, costs, premiums and discounts, which are considered adjustments to interest rates.

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Financial Summary
Average Balances, Yields and Costs

(1)		Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual loans with no related interest income.
(2)		The interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities.
(3)		The net interest margin is equal to net interest income divided by average interest earning assets.
(4)		In order to present pre-tax income and resultant yields on tax-exempt investments and loans on a basis comparable to those on taxable investments and loans, a tax equivalent adjustment is made to interest income. The tax equivalent adjustment has been computed using the appropriate Federal income tax rate for the period and has the effect of increasing interest income by $1,678,000, $1,419,000, $1,245,000, $1,062,000 and $921,000 for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, respectively.

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Changes in net interest income and margin result from the interaction between the volume and composition of interest earning assets, interest bearing liabilities, related yields, and associated funding costs. The following table demonstrates the impact on tax equivalent net interest income of changes in the volume of interest earning assets and interest bearing liabilities and changes in interest rates earned and paid.

RATE/VOLUME ANALYSIS

(1) Loan origination fees are considered an adjustment to interest income.

One of our major objectives in 2004 was to continue the improvement in our net interest margin. The table below lists various components relating to our net interest margin by quarter for 2004 and 2003.

Net interest income totaled $70.7 million in 2004, an increase of $17.5 million or 33.0% from net interest income of $53.2 million in 2003. The primary factor contributing to the increase in net interest income in 2004 was an increase in interest income of $18.4 million resulting from a 17.5% increase in interest and fees on loans, due to increased volumes for the comparative periods. Also contributing to the net interest income improvement was a 34 basis point decline in the cost of interest bearing liabilities, partially offset by a 12.5% increase in average interest bearing liabilities.

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YNB’s financial success in 2004 was primarily the result of a higher net interest margin. We have continued to take advantage of our strength as a commercial business lender while building momentum from our retail strategy. The combination of a low interest rate environment, the expansion of our branch network in new markets and attractive core deposit products resulted in a lower cost of funds and a higher net interest margin in 2004. The net interest margin, on a tax equivalent basis, was 2.83% for the twelve months ended December 31, 2004 compared with 2.42% for the same period in 2003. With anticipated continued success in our commercial lending business, the key to moving our net interest margin higher will depend on our ability to cost effectively fund commercial loan growth.

During 2004, interest income rose to $139.9 million, compared to $121.5 million for 2003. Average interest earning assets increased by $297.6 million or 13.2% to $2.56 billion for 2004, compared to $2.26 billion in 2003. The growth in average earning assets was complemented by a 10 basis point increase on the yield of our earning assets to 5.47% despite a decline in our average loan yield.

Loans averaged $1.63 billion for 2004, representing an increase of $303.2 million or 22.9% when compared with $1.32 billion for 2003. During this same time period, loan yields declined 28 basis points to 6.18%, partially offsetting the impact of higher loan balances on interest income. That said, interest and fees on loans increased $15.0 million or 17.5%. The principal factor that accounted for the lower loan yield, even with an increase of 125 basis points in short-term interest rates in the second half of 2004. The composition of our commercial loans portfolio, consisting of commercial real estate and commercial and industrial loans, contributed to the decrease in the overall loan yield. The majority of commercial loans booked in 2004 were floating rate. Initially, these floating rate loans had a lower yield than fixed rate loans and had the effect of lowering the loan portfolio yield. Approximately 50% of our commercial loans have floating interest rates, typically tied to the prime rate of interest. In 2004, the average prime rate increased to 4.35% compared to 4.12% in 2003. Over the last few years we instituted floors on a significant portion of our floating rate commercial loans, totaling approximately $716 million, to protect interest income in the lower interest rate environment we were experiencing. Over the last six months of 2004, the floating rates on many of our commercial loans have risen above their floors. The timing of these commercial loans coming off of their floors as rates increased affected the level of yield improvement. At year-end 2004, approximately 90% of the rates on floating rate commercial loans had come off of their floors. With short-term interest rates expected to increase in 2005, we expect our loan yields to move higher as well.

During 2004, consistent with our historical performance, our level of nonaccrual loans had only a modestly negative impact to our loan yield and interest income. Nonaccrual loans totaled $10.0 million at December 31, 2004, a modest decrease of $632,000 from the $10.6 million reported in 2003. Had these nonaccrual loans performed at original contract terms, we would have recognized additional interest income of approximately $600,000 in 2004 and $541,000 in 2003 and our tax equivalent net interest margin would have been higher by 2 basis points in 2004 and 2003.

Also contributing to net interest income and margin improvement was a higher yield on our securities portfolio. Securities averaged $879.8 million in 2004, representing a $1.1 million increase from the prior year, while yields increased 37 basis points to 4.39% in 2004 from 4.02% in 2003. Interest on securities increased $3.3 million or 9.5% from 2003. The improvement in interest income on securities resulted primarily from a higher yield on securities. As a result of our experience with premium purchased mortgage-backed securities in 2003, we strategically moved in a different direction in 2004. Our goal in 2004 was to purchase mortgage-backed securities closer to par with stable cash flows. This action alone, we believed, would reduce the level of premium amortization in the portfolio and protect securities yields from higher prepayment speeds. In addition, we purchased modestly longer duration securities, which accounted for the increased yield on the securities portfolio. Of note, our Investment Growth Strategy, or securities purchased using borrowed funds to enhance return on average stockholders’ equity and earnings per share, totaled only $17.8 million or less than 1% of total assets at December 31, 2004 compared to $56.6 million or 2.3% of our assets at December 31, 2003.

Average interest bearing liabilities rose $255.3 million to $2.30 billion, while overall funding costs declined 34 basis points to 3.01% during 2004. The higher volume of average interest bearing liabilities resulted in increased interest expense of $856,000 or 1.3% to $69.1 million when compared to $68.3 million in 2003.

The principal objective of our retail strategy is to reduce or better manage our cost of funds to raise our net interest margin. To achieve that objective, we have focused on attracting lower cost core deposits and changing the composition of our deposit base. In addition, our philosophy of relationship banking has resulted in establishing long-term business relationships and higher interest free demand balances in 2004. Growth in average demand deposits of $46.1 million or 33.1% to $185.4 million in 2004 positively impacted our net interest margin. Total interest expense on interest bearing deposits remained the same for 2004 compared to 2003 as higher average interest bearing deposit balances of $244.7 million were offset by a 38 basis point decline in their cost. Average savings, money market and interest bearing demand deposits increased $217.9 million, or 32.9% to $880.1 million during this past year. The corresponding cost of funds declined 17 basis points to 1.47%. Average savings, money markets and interest bearing demand represented 58.6% of total average interest bearing deposits during 2004 compared to 52.7% for 2003. Average time deposits, including CDs of $100,000 or more, represented 36.8% of our average deposit base during 2004 compared to 42.6% during 2003. The cost of these time deposits declined to 2.64% for 2004 compared to 3.12% in 2003, in part due to our utilization of interest rate swaps on new two-year CD money attracted, which lowered the cost of this money. The changing composition of our deposit base, as a result of our retail strategy, has contributed to our lower overall cost of deposits in 2004.

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Average borrowed funds decreased by $4.8 million or 0.6% to $738.1 million during 2004, while related borrowing costs increased by seven basis points to 4.89%. The modest increase in interest expense was due to higher costs associate with floating rate advances from the Federal Home Loan Bank of New York (“FHLB”) that have repriced higher in the second half of 2004 as interest rates gradually moved higher. Part of our strategy for improving the net interest margin is to reduce our dependency on borrowed funds. Average borrowed funds declined to 27.8% of average assets in 2004 compared to 31.6% in 2003.

Average total subordinated debentures increased by $15.3 million to $55.7 million during 2004 compared to $40.4 million for 2003. Interest expense associated with these subordinated debentures increased $590,000 due to higher volumes as average costs decreased 107 basis points to 6.66% from 7.73% during 2003. In June 2004 we issued $15.5 million in additional subordinated debentures, which accounted for the increased volume. The decrease in the average interest rate is due to two factors. In 2003, we retired $11.9 million in fixed rate subordinated debentures with a cost of 9.25%. During 2003 and 2004 we issued $41.2 million in lower cost floating rate advances, all tied to three month LIBOR. In a gradually increasing interest rate environment we would expect interest expense on borrowed funds to continue to rise.

Meeting our profitability goals in 2005 will depend on increasing net interest income and improving our net interest margin. Our two-pronged strategic approach that was successful in 2004 will continue in 2005. Most important, from a liability perspective, we will continue to build upon the successes of our retail strategy. We will continue to open branches in new markets and neighborhoods, promote our brand image and market attractive core deposit products like Simply Better Checking and the recently introduced Simply Better Savings^SM. To effectively manage our cost of funds during our retail building process, we will use alternative funding sources such as Reserve Funds, which are money market balances acquired through an intermediary that places deposits from brokerage clients with banks. In addition, we will use interest rate swaps to change the pricing characteristics of certain interest bearing liabilities. We continue our efforts to reduce our reliance on higher cost time deposits and borrowed funds. From an earning asset perspective, we must continue to capitalize on opportunities to grow our higher yielding commercial loan portfolio. We believe our balance sheet is properly positioned to grow net interest income in a gradually increasing interest rate environment in 2005. We believe our strategy will give us the best opportunity to increase profitability and franchise value in 2005.

Provision for Loan Losses

We provide for possible loan losses by a charge to current income to maintain the allowance for loan losses at an adequate level determined according to our documented allowance adequacy methodology. The provision for loan losses totaled $9.6 million for 2004, an increase of $265,000 when compared to $9.4 million for 2003. The modest increase is reflective of the strong commercial loan growth experienced in 2004 partially offset by lower net charge offs. The allowance for loan losses increased by $2.8 million to $20.1 million at December 31, 2004 compared to $17.3 million at the end of 2003. The allowance for loan losses as a percentage of total loans was 1.13% at December 31, 2004 compared with 1.20% at December 31, 2003. (See “Asset Quality” and “Allowance for Loan Losses” for additional detail and information).

Non-Interest Income

We earn fee and other income from service charges on deposit accounts and other banking products and services. These continue to be the most significant components of our fee income. In addition, we derive considerable non-interest income from income on bank owned life insurance (BOLI) and net securities gains. Non-interest income totaled $8.0 million in 2004 compared to $8.1 million in 2003, a decrease of $115,000 or 1.4%. Non-interest income represented 5.4% of total revenues for 2004 compared to 6.2% for 2003.

Non-interest income, excluding net securities gains and the gain on sale of our operations building in 2003, rose $530,000 or 8.6% to $6.7 million for 2004 when compared to $6.2 million for 2003. The increase was primarily due to higher service charge income partially offset by a reduction in income on bank owned life insurance.

The components of non-interest income for the three-year period ended December 31, 2004 are presented in the following table.

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Service charges on deposit accounts represented the largest single source of core non-interest income in 2004. Service charges on deposit accounts increased $746,000 or 31.2% due to higher service charges and overdraft fees. Branches in new markets and targeted marketing campaigns have resulted in generating a larger base of lower cost checking accounts in 2004, which generates additional service charge and fee income.

At December 31, 2004, our investment in BOLI totaled $44.5 million. There were no BOLI assets purchased in 2004. In addition, there are no further premiums paid associated with BOLI assets after their initial purchase. We have purchased BOLI to offset the costs of deferred compensation plans and other employee benefits. Income on BOLI is tax-exempt and provides a high rate of return relative to alternative earning assets, while reducing our overall effective income tax rate. Income on BOLI was $1.8 million in 2004, a decrease of 13.3% when compared to $2.0 million in 2003. Earnings on BOLI are impacted by the interest-crediting rate determined on an annual basis by the insuring companies. During 2004, a lower interest-crediting rate resulted in a decrease in BOLI income compared to 2003, reflective of the lower interest rate environment that existed when the interest crediting rate was established.

Net securities gains totaled $1.3 million during 2004 compared to $1.5 million in 2003. During 2004, we made the decision to sell selected securities as part of our interest rate risk management process.

We also generate non-interest income from a variety of fees earned from general banking services. These include automated teller machine related fees, Second Check, wire transfer and check fees. Other service fees increased $111,000 to $1.5 million in 2004 from $1.4 million in 2003. Other non-interest income, which includes mortgage servicing and safe deposit box rentals, totaled $198,000 in 2004 compared to $701,000 in 2003. Included in our 2003 results was the sale of our former operations building to a board member, which resulted in a $429,000 gain.

As we continue to build our core retail and commercial customer bases in new markets, we expect to generate additional service fee income, which should translate into higher levels of non-interest income.

Non-Interest Expense

Non-interest expense totaled $42.7 million in 2004, an increase of $4.5 million or 11.8%, compared to $38.2 million in 2003. The largest increases in non-interest expense in 2004 were primarily in salaries and employee benefits, and directors and committee fees. To a somewhat lesser extent, expenses associated with Sarbanes-Oxley Section 404 compliance, which includes audit and consulting fees and outsourced services, contributed to the increase in non-interest expense.

We continuously assess the effectiveness of our operations. The efficiency ratio is used by the financial services industry to measure a company’s operating efficiency. The efficiency ratio measures total non-interest expense as a percentage of net interest income plus non-interest income. We also measure our efficiency, excluding securities gains and any items deemed to be non-recurring. YNB’s efficiency ratio improved in 2004 to 54.2% compared to 62.3% in 2003. Excluding net securities gains and the sale of our former operations building in 2003, our efficiency ratio was 55.1% and 64.3% for 2004 and 2003, respectively. The improvement in the efficiency ratio was principally due to the increasing level of net interest income. A decrease in the efficiency ratio is indicative of a more efficient use of resources, while an increase in this ratio indicates a less efficient use of resources.

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The following table presents the components of non-interest expense for the years ended December 31, 2004, 2003 and 2002.

Salaries and employee benefits, which represent the largest portion of non-interest expense, increased $2.0 million or 9.5% to $23.5 million for the year ended December 31, 2004 compared to $21.4 million for the same period in 2003. Full time equivalent employees increased to 364 at December 31, 2004 from 359 at December 31, 2003. The increase in salaries and employee benefits in 2004 was primarily due to additional salary expense. Salaries rose $1.9 million or 11.4% to $18.4 million in 2004, primarily due to additional lending staff and from growth. The full impact of 2003 hires, including the staffing of three new branches opened in 2003, is reflected in 2004 expense. We also increased staff in our risk management division as the result of current regulatory and Federal requirements. Benefits expense, which includes health benefits and payroll taxes, rose $166,000 or 3.4% to $5.1 million in 2004. The increase in benefits expense was relatively modest due to a non-recurring adjustment in our salary continuation costs for executives, which reduced benefits expense in the last quarter of 2004.

Net occupancy expense increased $349,000 or 8.9% to $4.3 million in 2004 from $3.9 million in 2003. Total rent expense on leased properties increased $273,000 or 78.3% of the total increase in occupancy expense due to a full year’s rent in 2004 on new branches opened in 2003 and normal rent increases. Also contributing to the increase were typical facilities-related expenses such as repairs and maintenance.

Equipment expense rose $168,000 or 5.7% to $3.1 million in 2004. The increase in equipment expense was primarily related to costs associated with our automated teller machines, equipment maintenance and depreciation costs. During 2004 we also continued to selectively upgrade technology and systems to ensure quality products and services.

In addition to the opening of branches, marketing continues to be a significant component of our retail strategy. During 2004 we continued to enhance our brand image while consistently marketing our products and services. Marketing expenses increased 6.4% to $1.8 million in 2004, compared to $1.7 million in 2003.

Outside services and processing expenses increased $664,000 or 81.1% to $1.5 million in 2004 from $819,000 in 2003. Outside services and processing expenses include services provided by third parties, outsourced services and consulting fees. Through our third party providers, we have been able to offer quality products and services to our customer base, such as cash management and state-of-the-art website services, including electronic bill payment. The cost to provide these services, in addition to other processing costs, was $738,000 in 2004 compared to $396,000 in 2003. The benefit of outsourcing labor intensive functions, like statement rendering and wire transfer processing, has been the resultant staff savings as we have grown. During 2004 consulting fees almost doubled to $654,000 compared to $328,000 in 2003, primarily as a result of expenses associated with Sarbanes-Oxley Section 404 (SOX 404) compliance.

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We estimate that the impact to pre-tax earnings of implementing SOX 404, as a result of additional expenses, was approximately $750,000 to $1,000,000 or 5 to 7 cents on diluted earnings per share in 2004. Audit and examination fees increased $307,000 or 42.3% to $1.0 million in 2004 compared to $725,000 in 2003 primarily due to higher audit fees associated with the review of our internal controls and the attestation of our financial statements. Fees paid to our consultant totaled approximately $350,000 for SOX 404. During 2004, additional staff was also hired to strengthen and address internal control issues. We also believe the significant time allocated by staff for this compliance effort throughout the Bank also resulted in lost revenue opportunities. We do expect costs associated with SOX 404 compliance to be comparatively less in 2005.

During 2004, we incurred a nonrecurring cost associated with our director deferred compensation plan. Under this plan, outside directors can defer all or a portion of their director, committee and annual retainer fees, while receiving a matching contribution and interest on their deferred funds. Changes and enhancements to the director deferred compensation plan resulted in the plan being underfunded. As a result, directors and committee fees increased to $1,355,000 for 2004 compared to $346,000 for 2003. We do not anticipate the same growth in directors and committee fees in 2005.

Other expenses totaled $2.8 million in 2004 compared to $3.1 million in 2003. Other expenses are comprised of a variety of professional fees, expenses associated with the origination of loans and other operating expenses.

We will continue to make investments in technology, our retail strategy and delivery systems to attract new customers and provide the ongoing quality products and services our customers expect. We anticipate our efficiency ratio may experience some upward pressure as we continue to grow, but we believe that our efficiency ratio should remain below 60% during 2005.

Income Tax

We have identified the accounting for income taxes as a critical accounting policy. The provision for income taxes, comprised of Federal and state taxes, was $7.9 million in 2004 compared to $3.4 million in 2003. The provisions for income taxes in 2004 and 2003 were at effective tax rates of 29.9% and 25.1%, respectively. The increase in tax expense and our effective tax rates was principally due to higher taxable income.

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FINANCIAL CONDITION

Total Assets

Total assets at December 31, 2004 were $2.81 billion, an increase of $374.7 million or 15.4%, as compared to total assets of $2.43 billion at December 31, 2003. Loans increased to $1.78 billion at December 31, 2004 from $1.44 billion at December 31, 2003, while deposits increased to $1.81 billion from $1.48 billion during the same time period.

Total interest earning assets increased 16.0% to $2.71 billion in 2004 from $2.34 billion in 2003. The growth in interest earning assets was primarily funded in 2004, as was the case in 2003, by the increase in lower cost savings, money markets and interest and non-interest bearing demand deposits.

We believe the balance sheet growth we have experienced is reflective of our relationship banking philosophy, strength as a commercial lender and the ongoing successful execution of our retail strategy. The introduction of Simply Better Checking into our home Mercer County market combined with the positive reception we have received in the relatively new demographically attractive markets of Hunterdon, Somerset and Middlesex Counties in New Jersey is reflected in the continued growth of lower cost core deposits in 2004. As a result, we experienced solid financial results in 2004 and enhanced the value of our franchise.

Loans

During 2004 we again experienced strong commercial loan demand as the result of the strength of New Jersey’s real estate market and business activity. Commercial loans, which include commercial real estate and commercial and industrial loans, grew 28.1% as a result of strong consistent growth in our home Mercer County market in addition to the further development of lending opportunities in our expanded marketplace. We emphasize commercial real estate and commercial and industrial lending to individuals and small-to mid-sized businesses. As a result of our strength as a commercial lender, relationship banking philosophy and market expansion, we have experienced robust lending growth from December 31, 2000 to December 31, 2004. During that period, loans have increased from $818.3 million to $1.78 billion, resulting in a compound annual growth rate of approximately 23%. During this period we have stressed quality growth, and product and industry diversification, emphasized relationships, and maintained strict underwriting standards.

The following table reflects the composition of the loan portfolio for the five years ended December 31, 2004.

Loans increased $339.2 million or 23.5% to $1.78 billion at December 31, 2004 from $1.44 billion at December 31, 2003. Commercial real estate and commercial and industrial loans experienced growth of $239.8 million and $82.8 million, respectively, in 2004. At December 31, 2004, these two loan types represented 82.6% of our total loans, compared to 79.6% in 2003.

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In underwriting commercial loans, which are primarily secured by real estate, we follow strict underwriting standards. These standards include varying limits on loan-to-value ratios based on property types, property condition, quality and experience of the organization or developer managing the property, and evaluation of the cash flow capability of the borrower to repay the loan. We also analyze the feasibility of these projects, which includes occupancy rates, tenants and lease terms. Additionally, our underwriting standards require independent appraisals, periodic property inspections and the monitoring of operating results. In addition to real estate, the majority of our commercial loans are secured by business assets and most are supported by personal guarantees and other assets of the principals.

Commercial real estate loans increased by $239.8 million, or 31.5% in 2004, to $1.0 billion from $760.9 million in 2003. Commercial real estate loans consist of investor occupied, owner occupied, and construction and development loans. Investor occupied and construction and development loans increased by $162.2 million and $66.8 million, respectively, in 2004. Growth in real estate loans accounted for 70.7% of the total loan growth in 2004 compared to 61.9% in 2003. Commercial real estate loans generally have a final maturity of five to fifteen years. Commercial mortgages are secured by professional office buildings, retail stores, shopping centers and industrial developments. Construction and development loans include land loans to acquire vacant land for future development in addition to residential and commercial projects. Residential construction loans include single family, multi-family and condominium projects. Commercial construction loans include office and professional development, retail development and other commercial related projects. Generally, construction loan terms run between one and two years and are interest only, with floating rates indexed to the prime rate.

Commercial and industrial loans include lines of credit, term loans and demand loans. Led by an increase in lines of credit of $82.8 million, total commercial and industrial loans grew 21.3% to $471.4 million at December 31, 2004 compared to $388.6 million at December 31, 2003. Commercial and industrial loans typically consist of term loans or lines of credit that finance equipment, inventory, receivables, and other working capital needs. As shown in the table below, we have maintained diversification of risk within industry classifications with the goal of limiting the risk of loss from any single unexpected event or trend.