Yardville National Bancorp 10Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________

FORM 10-Q

______________

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2007

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For transition period from

Commission File Number: 0-26086

______________

YARDVILLE NATIONAL BANCORP

(Exact name of registrant as specified in its charter)

______________

22-2670267

(IRS Employer Identification No.)

New Jersey

(State or other jurisdiction of incorporation or organization)

2465 Kuser Road, Hamilton, New Jersey 08690

(Address of principal executive offices)

(609) 585-5100

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [x]

Indicate the number of share outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 3, 2007 the following class and number of shares were outstanding:

Common Stock, no par value		11,181,137
Class		Number of shares outstanding

INDEX

YARDVILLE NATIONAL BANCORP AND SUBSIDIARIES

PART I	FINANCIAL INFORMATION	PAGE NO.
Item 1.	Financial Statements (unaudited)

	Consolidated Statements of Condition
	June 30, 2007 (unaudited) and December 31, 2006	3

	Consolidated Statements of Income
	Three and six months ended June 30, 2007 and 2006 (unaudited)	4

	Consolidated Statements of Changes in Stockholders’ Equity
	Six months ended June 30, 2007 and 2006 (unaudited)	5

	Consolidated Statements of Cash Flows
	Six months ended June 30, 2007 and 2006 (unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	37

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Submission of Matters to a Vote of Security Holders	38

Item 5.	Other Information	38

Item 6.	Exhibits	38

Signatures		39

Exhibit Index		E-1

Part I: FINANCIAL INFORMATION

Item 1. Financial Statements

Yardville National Bancorp and Subsidiaries

Consolidated Statements of Condition

	(Unaudited)
(in thousands, except share data)	June 30, 2007			December 31, 2006
Assets:
Cash and due from banks	$	33,552		$	30,355
Federal funds sold		23,725			3,265
Cash and Cash Equivalents		57,277			33,620
Interest bearing deposits with banks		6,789			32,358
Securities available for sale		408,356			402,641
Investment securities (market value of $102,661 in 2007 and $98,037 in 2006)		103,139			96,072
Loans		1,900,657			1,972,881
Less: Allowance for loan losses		(24,692	)		(24,563	)
Loans, net		1,875,965			1,948,318
Bank premises and equipment, net		12,384			12,067
Other real estate		385			385
Bank owned life insurance		50,565			49,651
Other assets		47,246			45,619
Total Assets	$	2,562,106		$	2,620,731
Liabilities and Stockholders' Equity:
Deposits
Non-interest bearing	$	196,499		$	197,126
Interest bearing		1,803,289			1,806,157
Total Deposits		1,999,788			2,003,283
Borrowed funds
Securities sold under agreements to repurchase		10,000			10,000
Federal Home Loan Bank advances		263,000			324,000
Subordinated debentures		62,892			62,892
Obligation for Employee Stock Ownership Plan (ESOP)		1,406			1,688
Other		1,391			1,593
Total Borrowed Funds		338,689			400,173
Other liabilities		34,643			31,181
Total Liabilities	$	2,373,120		$	2,434,637
Commitments and Contingent Liabilities
Stockholders' equity:
Preferred stock: no par value
Authorized 1,000,000 shares, none issued
Common stock: no par value
Authorized 20,000,000 shares
Issued 11,371,731 shares in 2007 and 11,250,592 shares in 2006		110,882			108,728
Surplus		2,205			2,205
Undivided profits		91,799			86,100
Treasury stock, at cost: 180,594 shares		(3,160	)		(3,160	)
Unallocated ESOP shares		(1,406	)		(1,688	)
Accumulated other comprehensive loss		(11,334	)		(6,091	)
Total Stockholders' Equity		188,986			186,094
Total Liabilities and Stockholders' Equity	$	2,562,106		$	2,620,731

See Accompanying Notes to Unaudited Consolidated Financial Statements.

Yardville National Bancorp and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands, except per share amounts)	2007		2006		2007		2006
INTEREST INCOME:
Interest and fees on loans	$	35,950	$	37,307	$	73,086	$	72,728
Interest on deposits with banks		678		336		896		566
Interest on securities available for sale		5,379		8,842		10,762		17,804
Interest on investment securities:
Taxable		16		26		36		49
Exempt from Federal income tax		1,102		1,025		2,167		2,035
Interest on Federal funds sold		263		152		340		280
Total Interest Income		43,388		47,688		87,287		93,462
INTEREST EXPENSE:
Interest on savings account deposits		7,164		6,974		14,261		13,121
Interest on certificates of deposits $100,000 or more		3,323		2,500		6,522		4,784
Interest on other time deposits		8,376		6,443		16,223		11,963
Interest on borrowed funds		3,519		9,392		7,230		18,696
Interest on subordinated debentures		1,400		1,360		2,791		2,666
Total Interest Expense		23,782		26,669		47,027		51,230
Net Interest Income		19,606		21,019		40,260		42,232
Less provision for loan losses		1,800		1,800		2,450		4,150
Net Interest Income After Provision for Loan Losses		17,806		19,219		37,810		38,082
NON-INTEREST INCOME:
Service charges on deposit accounts		658		777		1,275		1,436
Securities gains, net		-		-		7		-
Income on bank owned life insurance		472		440		914		861
Other non-interest income		753		576		1,429		1,157
Total Non-Interest Income		1,883		1,793		3,625		3,454
NON-INTEREST EXPENSE:
Salaries and employee benefits		7,973		7,572		15,775		15,223
Occupancy expense, net		1,875		1,368		3,661		2,795
Equipment expense		841		856		1,680		1,652
Other non-interest expense		4,911		4,510		9,239		8,014
Total Non-Interest Expense		15,600		14,306		30,355		27,684
Income before income tax expense		4,089		6,706		11,080		13,852
Income tax expense		958		1,649		2,821		3,627
Net Income	$	3,131	$	5,057	$	8,259	$	10,225
EARNINGS PER SHARE:
Basic	$	0.28	$	0.46	$	0.75	$	0.94
Diluted		0.27		0.45		0.72		0.90
Weighted average shares outstanding:
Basic		11,088		10,938		11,065		10,911
Diluted		11,416		11,339		11,411		11,326

See Accompanying Notes to Unaudited Consolidated Financial Statements.

Yardville National Bancorp and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Six Months Ended June 30, 2007 and 2006

(Unaudited)

																Accumulated
													Unallocated			other
(in thousands, except share	Common		Common				Undivided			Treasury			ESOP			Comprehensive
amounts)	shares		stock		Surplus		profits			stock			Shares			income (loss)			Total
BALANCE, December 31, 2005		10,914,737	$	105,122	$	2,205	$	85,896			(3,160	)	$	(2,250	)	$	(10,355	)	$	177,458
Net income								10,225												10,225
Unrealized loss - securities
available for sale,
net of tax of benefit of $5414																	(8,941	)		(8,941	)
Total comprehensive income																				1,284
Cash dividends paid
($0.22 per share)								(2,522	)											(2,522	)
ESOP fair value adjustment				5																5
Common stock issued:
Exercise of stock options and
related tax benefit		83,041		1,615																1,615
Stock option expense				149																149
Dividend reinvestment plan		5,875		205																205
ESOP shares allocated														281						281
BALANCE, June 30, 2006		11,003,653	$	107,096	$	2,205	$	93,599			(3,160	)	$	(1,969	)	$	(19,296	)	$	178,475

BALANCE, December 31, 2006		11,069,998	$	108,728	$	2,205	$	86,100			(3,160	)	$	(1,688	)	$	(6,091	)	$	186,094
Net income								8,259												8,259
Unrealized gain - securities
available for sale,
net of tax benefit of $3,270																	(4,735	)		(4,735	)
Less reclassification of realized
net gain on sale of
securities available for
sale, net of tax of $2																	(5	)		(5	)
Adjustment to recognize funded
status of retirement plan, net
of tax benefit of $271																	(503	)		(503	)
Total comprehensive income																				3,016

Cash dividens paid
($0.23 per share)								(2,560	)											(2,560	)
ESOP fair value adjustment				14																14
Common stock issued:
Exercise of stock options and
related tax benefit		66,094		1,347																1,347
Exercise of stock warrants		50,000		600																600
Stock option expense				18																18
Dividend reinvestment plan		5,045		175																175
ESOP shares allocated														282						282
BALANCE, June 30, 2007		11,191,137	$	110,882	$	2,205	$	91,799			(3,160	)	$	(1,406	)	$	(11,334	)	$	188,986

See Accompanying Notes to Unaudited Consolidated Financial Statements.

Yardville National Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	June 30,
(in thousands)	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	8,259		$	10,225
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,450			4,150
Depreciation		1,228			1,293
ESOP fair value adjustment		14			6
Option expense		18			149
Amortization of deposit intangible		102			102
Amortization and accretion on securities		(127	)		(121	)
Gain on sale of securities available for sale		(7	)		-
Increase (decrease) in other assets		127			(3,738	)
Increase in other liabilities		3,462			2,749
Net Cash Provided by Operating Activities		15,526			14,815
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest bearing deposits with banks		25,569			(45,960	)
Purchase of securities available for sale		(40,567	)		(9,185	)
Maturities, calls and paydowns of securities available for sale		26,627			33,264
Proceeds from sales of securities available for sale		330			-
Purchase of investment securities		(8,111	)		(5,360	)
Proceeds from maturities and paydowns of investment securities		1,061			1,645
Net decrease (increase) in loans		69,903			(66,206	)
Expenditures for bank premises and equipment		(1,545	)		(1,174	)
Net Cash Provided by (Used in) Investing Activities		73,267			(92,976	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand, money market, and savings deposits		(46,091	)		21,756
Net increase in certificates of deposit		42,596			52,510
�� Proceeds from borrowed funds (needs to be updated and 2006 reviewed)		40,000			-
Paydowns of borrowed funds		(101,484	)		(10,855	)
Proceeds from issuance of common stock		2,054			1,423
Tax benefit related to stock-based compensation		67			396
Allocation of ESOP Shares		282			281
Dividends Paid		(2,560	)		(2,522	)
Net Cash (Used in) Provided by Financing Activities		(65,136	)		62,989
Net increase (decrease) in cash and cash equivalents		23,657			(15,172	)
Cash and cash equivalents as of beginning of period		33,620			63,486
Cash and Cash Equivalents as of End of Period	$	57,277		$	48,314
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	51,890		$	50,976
Income taxes		348			2,485
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Transfer from loans, net of charge offs	$	-		$	502

See Accompanying Notes to Unaudited Consolidated Financial Statements.

Yardville National Bancorp and Subsidiaries

Notes to (Unaudited) Consolidated Financial Statements

Three and Six Months Ended June 30, 2007

1. Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP). In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the statements of condition, and the reported amounts of revenues and expenses for the periods. Actual results could differ significantly from those estimates and assumptions.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.

The consolidated financial data as of and for the three and six months ended June 30, 2007 include, in the opinion of management, all adjustments, consisting of only normal recurring accruals, necessary for a fair presentation at such dates and for such periods. The consolidated financial data presented for the three and six months ended June 30, 2007 is not necessarily indicative of the results of operations that might be expected for the entire year ending December 31, 2007.

A. Consolidation

The consolidated financial statements include the accounts of Yardville National Bancorp and its subsidiary, The Yardville National Bank, and the Bank’s direct and indirect subsidiaries (collectively, the “Company”). All significant inter-company accounts and transactions have been eliminated in consolidation.

B. Reclassification

Certain reclassifications have been made in the consolidated financial statements for prior periods to conform to the classification presented in 2007.

Critical Accounting Policies and Estimates

Note 1 to the Audited Consolidated Financial Statements included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2006, contains a summary of our significant accounting policies. We believe our policies governing the allowance for loan losses, income taxes and asset impairments, including other than temporary declines in the value of our securities, are critical accounting policies. These policies are deemed 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. Our critical accounting policies and their application are periodically discussed with the audit committee of the Company’s board of directors.

The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses has been determined in accordance with GAAP, under which we are required to maintain an adequate allowance 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 specifically identifiable loan losses, as well as losses inherent in our portfolio which are probable but not specifically identifiable.

The provision for loan losses charged to operating expense is determined by management and is based upon a periodic review of the loan portfolio, past experience, the economy, and other factors that may affect a borrower’s ability to repay a loan. The provision is based on management’s estimates and actual losses may vary from estimates. Estimates are reviewed and adjustments, as they become necessary, are reported in the periods in which they become known.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly in New Jersey, and due to other factors described above. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. For additional information on the methodology for determining the allowance for loan losses see “Allowance for Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations later in this report.

We are subject to the income tax laws of the United States and the states where we conduct our business. We account for income taxes by recognizing the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for estimated future tax consequences, which require judgment of events that have been recognized in our consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements or results of operations.

Certain of our assets are carried in our consolidated statements of condition at fair value or at the lower of cost or fair value. Valuation allowances are established when necessary to recognize impairment of such assets. We periodically perform analyses to test for impairment of various assets. In addition to our impairment analyses related to loans, another significant analysis relates to other than temporary declines in the value of our securities. We conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its carrying value and whether any such decline is other than temporary. If any such decline is deemed other than temporary, we adjust the carrying value of the security by writing down the security to fair market value through a charge to current period earnings. At June 30, 2007 we have determined that all unrealized losses were temporary in nature.

2. Earnings Per Share

Weighted average shares for the basic net income per share computation for the three months ended June 30, 2007 and 2006 were 11,088,000 and 10,938,000, respectively. For the diluted net income per share computation, common stock equivalents of 328,000 and 401,000 are included for the three months ended June 30, 2007 and 2006, respectively. Common stock equivalents that were antidilutive for the three months ended June 30, 2007 and 2006 were 39,000 and 42,000, respectively.

Weighted average shares for the basic net income per share computation for the six months ended June 30, 2007 and 2006 were 11,065,000 and 10,911,000, respectively. For the diluted net income per share computation, common stock equivalents of 346,000 and 415,000 are included for the six months ended June 30, 2007 and 2006, respectively. Common stock equivalents that were antidilutive for the six months ended June 30, 2007 and 2006 were 12,000 and 42,000, respectively.

3. Stock-Based Compensation

The Company has three share-based compensation plans under which incentive and nonqualified stock options, restricted stock or other stock-based awards may be granted periodically to certain employees and directors. Options granted to employees have been granted at an exercise price equal to the fair value of the underlying shares at the date of grant and vest based on continued service with the Company for a specified period, generally five years with a maximum of ten years. Options granted to directors vest immediately and typically have five-year terms. While the Company has a plan that allows for the granting of restricted stock or other stock-based awards, no restricted stock or other stock-based awards have been granted under the plan as of June 30, 2007.

The Company uses the Black-Scholes option-pricing model to determine the fair value of options at the date of grant. The Black-Scholes, option-pricing model requires several inputs, including the stock price volatility, expected term and dividend rate. Changes in input assumptions can materially affect the fair value estimates.

The Company did not grant any options in the first and second quarters of 2007. Expense for the first half of 2007 relating to options granted prior to the first quarter of 2007 was $18,000. There was $149,000 in expense relating to stock options in 2006. At June 30, 2007, there was $51,000 in unamortized option expense that will be expensed over the next four years.

4. Relationships and Transactions with Directors and Officers

The Bank has extended credit in the ordinary course of business to directors, senior officers, and their associates on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other customers of the Bank. None of these loans were past due or on nonaccrual status at June 30, 2007 and 2006. The following table summarizes activity with respect to such loans. Included in repayments and other changes for the six months ended June 30, 2006, is a $25.4 million reduction due to the resignations of directors Lorraine Buklad and Sidney L. Hofing on December 31, 2005.

	Six Months Ended
	June 30,
(in thousands)	2007		2006
Balance as of beginning of period	$	18,932	$	57,414
New loans		2,488		1,981
Repayments and other changes		1,734		27,103
Balance as of end of the period	$	19,686	$	32,292

In addition, the Company has had, and expects in the future to have other transactions in the ordinary course of business with a number of its directors, senior officers and other affiliates (and their associates) on substantially the same terms as those prevailing for comparable transactions with unaffiliated third parties. No new material relationships or transactions were commenced, and no material changes were made to existing relationships or transactions, during the quarter ended June 30, 2007.

5. Derivative Financial Instruments

As part of our interest rate risk management process, we periodically enter into interest rate derivative contracts. These derivative interest rate contracts may include interest rate swaps, caps and floors, and are utilized to modify the repricing characteristics of specific assets and liabilities. There were $105.0 million in pay floating swaps outstanding at June 30, 2006. These swaps increased interest expense by approximately $1.1 million in the first six months of 2006. There were no derivative financial instruments outstanding at June 30, 2007 or December 31, 2006.

6. Regulatory Matters

On August 31, 2005, the Bank entered into a formal agreement with the Office of the Comptroller of the Currency (the “OCC”) regarding the conduct of certain of its operations, maintaining specified capital levels, obtaining prior approvals of dividend payments, and addressing other concerns identified in the OCC’s Report of Examination for the examination that commenced on January 3, 2005. The agreement will continue until terminated by the OCC.

Among other things, the agreement requires the Bank to achieve and maintain a total risk-based capital ratio of at least 10.75%, a Tier 1 risk-based capital ratio of at least 9.75% and a leverage ratio of at least 7.50%. To ensure compliance with these capital ratios we raised approximately $8.7 million in a private offering of the Company’s common stock in November 2005, of which substantially all of the proceeds were contributed to the Bank. We were in compliance with all required capital ratios at December 31, 2006 and June 30, 2007. The OCC approved all four quarterly dividend payments from the Bank to the Company in 2006 and the first and second quarter dividend payments in 2007.

Under the agreement, the Bank will not be deemed to be “well capitalized” for certain regulatory purposes. Such capital category may not, however, accurately represent the Bank’s general financial condition or prospects.

In January 2006, the Company received a supervisory letter from its primary regulator the Federal Reserve Bank of Philadelphia. Among other things, the letter requires that the Company obtain prior approval before declaring and paying dividends to shareholders. The Federal Reserve Bank of Philadelphia has approved all four quarterly dividend payments in 2006 and the first and second quarter 2007 dividend payments to shareholders.

7. Recent Accounting Pronouncements

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140” (Statement 156). Statement 156 requires recognition of a servicing asset or liability at fair value each time an obligation is undertaken to service a financial asset by entering into a servicing contract. Statement 156 also provided guidance on subsequent measurement methods or each class of separately recognized servicing assets and liabilities and specifies financial statement presentation and disclosure requirements. This statement is effective for fiscal years beginning after September 15, 2006, or January 1, 2007 for the Company. The Company had elected to continue amortizing mortgage servicing rights over the estimated lives of the underlying loans. As a result, the adoption of this standard did not impact the Company’s consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). The interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” Specifically, the interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006 or January 1, 2007 for the Company. The Company evaluated the impact of FIN 48 on all tax positions and determined that there is no material impact of adopting FIN 48 upon any recognized tax positions as of December 31, 2006.

In September 2006, the FASB issued Statement of Financial Standards No. 157, “Fair Value Measurement” (Statement 157). Statement 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles, and expands disclosure requirements for fair value measurement.

Statement 157 does not require any new fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 or January 1, 2008 for the Company. The Company does not expect the adoption of Statement 157 to have a material impact on the consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Standards No. 159, “The Fair Value for Financial Assets and Financial Liabilities” (Statement 159). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Statement is effective as of the beginning of an entities fiscal year that begins after November 15, 2007 with early adoption permitted as of the beginning of a fiscal year that begins on or before November 15, 2007. The Company does not expect the adoption of Statement 159 to have a material impact on the consolidated financial statements.

Item 2. 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 information pertinent to understanding and assessing Yardville National Bancorp’s results of operations for the three and six months ended June 30, 2007 and the financial condition at June 30, 2007. It should be read in conjunction with our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2006, as well as the unaudited consolidated financial statements and the accompanying notes in this Form 10-Q. Throughout this report, the terms “YNB,” “Company,” “we,” “us,” “our,” and “corporation” refer to Yardville National Bancorp, our wholly owned banking subsidiary, The Yardville National Bank (the “Bank”), and other direct and indirect subsidiaries of the Bank, as a consolidated entity except where noted.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Form 10-Q and other material we file with the Securities and Exchange Commission, referred to as the “SEC,” as well as information included in oral statements or other written statements made, or to be made, by us, contain statements that are forward-looking. These may include statements that relate to, among other things, profitability, liquidity, adequacy of our allowance for loan losses, plans for growth, interest rate sensitivity, market risk, regulatory compliance, and financial and other goals. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be realized. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from expected results and, accordingly, from those expressed in any forward-looking statements made by us or on our behalf. Factors that could cause actual results to differ materially from our current expectations include among other things: our ability to consummate a planned transaction with PNC; adverse changes in our loan quality and the resulting credit risk-related losses and expenses; levels of our loan origination volume; the results of our efforts to implement our retail strategy and attract core deposits; compliance with laws and regulatory requirements, including our formal agreement with the Office of the Comptroller of the Currency; interest rate changes and other economic conditions; 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; 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 forward-looking statements. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events except as may be required by applicable law or regulation.

Results of Operations

2007 Overview

Yardville National Bancorp is a $2.56 billion registered bank holding company headquartered in Hamilton, New Jersey. Positioned in the dynamic Central New Jersey business corridor connecting New York City with Philadelphia, we operate 35 full-service branches through our wholly-owned banking subsidiary, The Yardville National Bank, in Mercer, Hunterdon, Somerset, Middlesex, Burlington, and Ocean Counties in New Jersey and Bucks County in Pennsylvania.

On June 6, 2007, we entered into an agreement and plan of merger with The PNC Financial Services Group, Inc., a Pennsylvania corporation, referred to as "PNC." The merger agreement provides that, upon the terms and subject to the conditions set forth in the merger agreement, Yardville National Bancorp will merge with and into PNC, with PNC continuing as the surviving corporation.

We have made representations, warranties and covenants in our agreement with PNC, including, among others, covenants to conduct our businesses in the ordinary course consistent with past practice until the consummation of the transaction; not

to engage in certain kinds of transactions during this period; and to use our reasonable best efforts to consummate the transaction, including using our reasonable best efforts to take all steps necessary to obtain required governmental and third-party consents. Consummation of the PNC transaction is subject to customary conditions and our agreement with PNC contains certain termination rights for both YNB and PNC. The foregoing description of our agreement with PNC does not purport to be complete and is qualified in its entirety by reference to the agreement, which has been filed as Exhibit 2.1 to our current report on Form 8 K, filed with the SEC on June 8, 2007.

We anticipate that our preparations for the planned transaction with PNC, including our compliance with the covenants set forth in the merger agreement, will impact our results of operations and financial condition throughout the balance of 2007.

Located in Mercer County since 1925, we offer relationship-based community banking to customers throughout New Jersey and Eastern Pennsylvania. We provide a broad range of lending, deposit, and other financial products and services. We emphasize the origination of commercial real estate and commercial and industrial loans to small to mid-sized businesses funded primarily by deposits generated through our expanding branch network.

Our strength as a commercial business lender provides us opportunities to generate higher yielding earning assets. We generate substantially all of our revenue from interest income earned on loans and securities. Throughout 2006 and for much of the first half of 2007 we experienced a flat to inverted interest rate yield curve. This has produced an exceptionally challenging interest rate environment. At the same time, competition for both loans and deposits has been strong. Despite generating new business opportunities in the second quarter, these factors have negatively impacted net interest income levels and our net interest margin.

In 2007, we continued our branch expansion opening a branch in North Brunswick, our third in Middlesex County. In addition, we opened two new branches in July 2007. We also introduced our Capital Builder Money Market account for our small to medium sized business customers and are aggressively marketing our small business suite of deposit and loan products.

Late in the fourth quarter of 2006, we restructured a portion of our balance sheet. The balance sheet restructure increased our net interest margin and has supported our net interest income in 2007, while reducing our interest rate risk and enhancing our liquidity profile. To achieve these results, we sold lower yielding securities and used the proceeds, as well as other funds, to retire $320.0 million in higher cost Federal Home Loan Bank (FHLB) advances. We also refinanced $100.0 million in FHLB advances to further reduce interest expense. The restructure was successful and was the key factor in the improvement of our net interest margin for the first six months of 2007 compared to the same period in 2006.

Net Income

We earned net income of $8.3 million for the six months ended June 30, 2007, a decrease of $1.9 million compared to net income of $10.2 million for the same period in 2006. Lower net interest income due to the prolonged inverted yield curve and higher non-interest expenses, partially offset by the benefits of our balance sheet restructure and a lower provision for loan losses, were the principal reasons for the lower 2007 results. Diluted earnings per share for the first six months of 2007 decreased 20.0% to $0.72 compared to $0.90 for the same period in 2006. The decrease in diluted earnings per share resulted primarily from lower net income.

On a quarterly basis, net income for the second quarter of 2007 was $3.1 million, a decrease of 38.1% compared to $5.1 million for the second quarter of 2006. The decrease in net income for the comparative periods resulted primarily from lower net interest income and higher non-interest expenses. Non-interest expenses increased primarily due to costs associated with our consideration of strategic alternatives and the

planned transaction with PNC. Second quarter net interest income levels were negatively impacted due to the higher cost of interest bearing deposits and lower average loans outstanding in the second quarter of 2007 compared to the same period in 2006, partially offset by the benefits of our balance sheet restructure. Diluted earnings per share decreased $0.18 to $0.27 for the second quarter of 2007 compared to $0.45 for the second quarter of 2006. The decrease in earnings per share was primarily due to lower net income for the second quarter of 2007 compared to the second quarter of 2006.

Net Interest Margin and 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.

Our net interest income for the first six months of 2007 was $40.3 million, a decrease of $1.9 million or 4.7% from $42.2 million for the same period in 2006. The most notable factor relating to the decrease in net interest income was the increase in the cost of interest bearing deposits, which was mitigated to a certain extent by the balance sheet restructure completed in the fourth quarter of 2006.

The net interest margin is calculated by dividing net interest income by average earning assets. We present our net interest margin on a tax equivalent basis. You should refer to note 4 of the Financial Summary table on page 16 for the adjustments used in the calculation of the tax equivalent net interest margin. We believe that this presentation provides comparability of net interest income from both taxable and non-taxable sources and is consistent with industry practice. Although we believe that these financial measures enhance investors’ understanding of our business and performance, these measures should not be considered an alternative to GAAP. For the first six months of 2007, our tax equivalent net interest margin was 3.29%, a 25 basis point or 8.2% increase when compared to the net interest margin of 3.04% for the same period in 2006. The yield on interest earning assets increased 37 basis points to 6.93% for the first six months of 2007, compared to 6.56% for the same period in 2006. On the liability side, the cost of interest bearing deposits increased 66 basis points to 4.04% for the first six months of 2007, compared to 3.38% for the same period in 2006. Partially offsetting this increase was the prepayment and refinancing of FHLB advances, which resulted in the cost of borrowed funds declining 78 basis points to 4.44% for the first six months of 2007, compared to 5.22% for the same period in 2006. These were the two principal factors for the 21 basis point increase in the overall cost of interest bearing liabilities to 4.23% for the first six months of 2007 compared to 4.02% for the same period in 2006. We believe that the benefits realized in the first six months of 2007 relating to our balance sheet restructure will continue throughout the remainder of 2007. At the same time, however, the costs of interest bearing deposits could continue to rise faster than earning asset yields, resulting in continued pressure on our net interest margin. Generating sufficient loans at acceptable rates will be critical if we are to maintain our net interest margin.

On a quarterly basis, the 2007 second quarter tax equivalent net interest margin was 3.21%, an increase of 20 basis points, compared to 3.01% for the same period in 2006. The most significant factor for the increase in the net interest margin was the balance sheet restructure completed in the fourth quarter of 2006. The improvement in the securities yield as a result of the restrucuture was the primary factor for the increase in the yield on earning assets to 6.89% for the second quarter of 2007 compared to 6.65% for the same period in 2006. While the cost of interest bearing deposits increased 54 basis points to 4.09% for the second quarter of 2007, compared to the 3.55% for the same period in 2006, the overall increase in the cost of interest bearing liabilities was limited to 13 basis points due to the reduction in the cost of borrowed funds associated with our balance sheet restructure. The cost of borrowed funds for the second quarter of 2007 was 4.48% reflecting a decrease of 77 basis points compared to 5.25% for the second quarter of 2006.

On a linked quarter basis our tax equivalent net interest margin decreased 16 basis point to 3.21% for the second quarter of 2007 compared to 3.37% for the first quarter of 2007. The primary factors for the decrease in the net interest margin was a lower yield on earning assets and a higher cost of interest bearing deposits. The yield on earning assets declined 8 basis points to 6.89% for the second quarter of 2007, compared to 6.97% for the first quarter of 2007. The primary factors for this decrease was the $57.0 million decline in higher yielding average loans outstanding and a 2 basis point drop in the loan yield for the second quarter of 2007 compared to the first quarter of 2007. At the same time, the cost of interest bearing liabilities increased 9 basis points to 4.28% for the second quarter of 2007, compared to 4.19% for the first quarter of 2007. The increase in the cost of interest bearing liabilities was primarily due to a 12 basis point increase in the cost of certificates of deposit to 4.96% for the second quarter of 2007, compared to 4.84% for the first quarter of 2007. Should these trends continue, we will have limited ability to maintain our net interest margin.

The following tables set 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 three and six months ended June 30, 2007 and 2006. Average yields for each period are derived by dividing annualized income by the average balance of the related assets and average costs for each period are derived by dividing annualized 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.

Financial Summary

Average Balances, Yields and Costs

(Unaudited)

	Three Months Ended								Three Months Ended
	June 30, 2007								June 30, 2006
						Average								Average
	Average					Yield /			Average					Yield /
(in thousands)	Balance			Interest		Cost			Balance			Interest		Cost
INTEREST EARNING ASSETS:
Interest bearing deposits with banks	$	45,107		$	678		6.01	%	$	25,899		$	336		5.19	%
Federal funds sold		26,977			263		3.90			12,280			152		4.95
Securities		501,651			6,497		5.18			803,661			9,893		4.92
Loans (1)		1,943,760			35,950		7.40			2,025,995			37,307		7.37
Total interest earning assets	$	2,517,495		$	43,388		6.89	%	$	2,867,835		$	47,688		6.65	%
NON-INTEREST EARNING ASSETS:
Cash and due from banks	$	31,190							$	35,143
Allowance for loan losses		(25,212	)							(22,842	)
Premises and equipment, net		12,385								11,622
Other assets		84,123								83,236
Total non-interest earning assets		102,486								107,159
Total assets	$	2,619,981							$	2,974,994
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets, and interest bearing demand	$	903,457		$	7,164		3.17	%	$	963,732		$	6,974		2.89	%
Certificates of deposit of $100,000 or more		264,432			3,323		5.03			239,367			2,500		4.18
Other time deposits		678,273			8,376		4.94			588,335			6,443		4.38
Total interest bearing deposits		1,846,162			18,863		4.09			1,791,434			15,917		3.55
Borrowed funds		314,091			3,519		4.48			715,894			9,392		5.25
Subordinated debentures		62,892			1,400		8.90			62,892			1,360		8.65
Total interest bearing liabilities	$	2,223,145		$	23,782		4.28	%	$	2,570,220		$	26,669		4.15	%
NON-INTEREST BEARING LIABILITIES:
Demand deposits	$	186,429							$	209,379
Other liabilities		20,016								17,853
Stockholders' equity		190,391								177,542
Total non-interest bearing liabilities and
stockholders' equity	$	396,836							$	404,774
Total liabilities and stockholders' equity	$	2,619,981							$	2,974,994
Interest rate spread (2)							2.61	%							2.50	%
Net interest income and margin (3)				$	19,606		3.12	%				$	21,019		2.93	%
Net interest income and margin (tax equivalent basis)(4)				$	20,173		3.21	%				$	21,554		3.01	%

(1)	Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual balances with no related interest income.
(2)	The interest rate spread is the difference between the average yield on interest earning assets and average rate paid on interest bearing liabilities.
(3)	The net interest margin is equal to net interest income divided by average interest earning assets.
(4)	In order to make pre-tax income and resultant yields on tax-exempt investments and loans on a basis comparable to those on taxable investments and loans, a tax equivalent adjustment is made to interest income. The tax equivalent adjustment has been computed using a Federal income tax rate of 35% and has the effect of increasing interest income by $567,000 and $535,000 for the three month periods ended June 30, 2007 and 2006, respectively.

Financial Summary

Average Balances, Yields and Costs

(Unaudited)

	Six Months Ended								Six Months Ended
	June 30, 2007								June 30, 2006
						Average								Average
	Average					Yield /			Average					Yield /
(in thousands)	Balance			Interest		Cost			Balance			Interest		Cost
INTEREST EARNING ASSETS:
Interest bearing deposits with banks	$	31,025		$	896		5.78	%	$	22,823		$	566		4.96	%
Federal funds sold		16,446			340		4.13			11,977			280		4.68
Securities		498,618			12,965		5.20			814,604			19,888		4.88
Loans (1)		1,972,241			73,086		7.41			2,000,604			72,728		7.27
Total interest earning assets	$	2,518,330		$	87,287		6.93	%	$	2,850,008		$	93,462		6.56	%
NON-INTEREST EARNING ASSETS:
Cash and due from banks	$	30,987							$	35,588
Allowance for loan losses		(24,724	)							(23,022	)
Premises and equipment, net		12,331								11,669
Other assets		83,316								77,157
Total non-interest earning assets		101,910								101,392
Total assets	$	2,620,240							$	2,951,400
INTEREST BEARING LIABILITIES:
Deposits:
Savings, money markets, and interest bearing demand	$	906,047		$	14,261		3.15	%	$	960,182		$	13,121		2.73	%
Certificates of deposit of $100,000 or more		262,943			6,522		4.96			238,422			4,784		4.01
Other time deposits		664,166			16,223		4.89			570,913			11,963		4.19
Total interest bearing deposits		1,833,156			37,006		4.04			1,769,517			29,868		3.38
Borrowed funds		325,489			7,230		4.44			716,785			18,696		5.22
Subordinated debentures		62,892			2,791		8.88			62,892			2,666		8.48
Total interest bearing liabilities	$	2,221,537		$	47,027		4.23	%	$	2,549,194		$	51,230		4.02	%
NON-INTEREST BEARING LIABILITIES:
Demand deposits	$	188,595							$	210,077
Other liabilities		20,269								13,867
Stockholders' equity		189,839								178,262
Total non-interest bearing liabilities and
stockholders' equity	$	398,703							$	402,206
Total liabilities and stockholders' equity	$	2,620,240							$	2,951,400
Interest rate spread (2)							2.70	%							2.54	%
Net interest income and margin (3)				$	40,260		3.20	%				$	42,232		2.96	%
Net interest income and margin (tax equivalent basis)(4)				$	41,382		3.29	%				$	43,302		3.04	%

(1)	Loan origination fees are considered an adjustment to interest income. For the purpose of calculating loan yields, average loan balances include nonaccrual balances with no related interest income.
(2)	The interest rate spread is the difference between the average yield on interest earning assets and average rate paid on interest bearing liabilities.
(3)	The net interest margin is equal to net interest income divided by average interest earning assets.
(4)	In order to make pre-tax income and resultant yields on tax-exempt investments and loans on a basis comparable to those on taxable investments and loans, a tax equivalent adjustment is made to interest income. The tax equivalent adjustment has been computed using a Federal income tax rate of 35% and has the effect of increasing interest income by $1,122,000 and $1,070,000 for the six month periods ended June 30, 2007 and 2006, respectively.

Interest Income

For the first six months of 2007, total interest income was $87.3 million, a decrease of $6.2 million or 6.6% when compared to $93.5 million for the same period in 2006. A decrease in interest income on securities available for sale was the primary factor for the decrease. Income on securities declined primarily due to a 38.8% decrease in average securities to $498.6 million for the first six months of 2007 compared to $814.6 million for the same period in 2006. Average securities declined primarily due to sales of securities in connection with our balance sheet restructure.

Interest and fees on loans for the first six months of 2007 increased $358,000 to $73.1 million from $72.7 million for the same period in 2006. The higher interest and fees on loans resulted from a higher loan yield, offset by lower average loans. Average loans decreased $28.4 million to $1.97 billion in the first six months of 2007 compared to $2.00 billion for the same period in 2006. The yield on loans increased 14 basis points to 7.41% for the first six months of 2007 from 7.27% for the same period in 2006. The higher loan yield in the first six months of 2007 was due, in part, to the higher prime rate of interest, to which many of our loans are indexed. At June 30, 2007 approximately $549.0 million of our loans consisted of floating rate loans principally tied to the prime rate of interest. For the first six months of 2007, the average prime rate of interest was 8.25% compared to 7.67% for the same period in 2006. At June 30, 2007, approximately $241.0 million of our floating rate commercial loans have interest rate caps and $161.5 million of these loans have reached their caps. These caps would have the effect of restricting the growth in interest income should the prime rate of interest move higher.

Interest on securities decreased $6.9 million to $13.0 million for the first six months of 2007 compared to $19.9 million for the same period in 2006. The primary reason for this decrease was a $316.0 million decline in average securities for the first six months of 2007 compared to the same period in 2006. The yield on our securities portfolio improved 32 basis points to 5.20% for the first six months of 2007 compared to 4.88% for the same period in 2006. The primary cause for the increased yield and the lower interest income was due to the sale of lower yielding securities as part of the balance sheet restructure in the fourth quarter of 2006.

For the second quarter of 2007, total interest income was $43.3 million, a decrease of $4.3 million or 9.0% when compared to $47.7 million for the second quarter of 2006. The decrease is primarily due to a $3.4 million decrease in interest on securities available for sale, and to a lesser extent, $1.4 million less in interest and fees on loans in the second quarter of 2007 compared to the same period in 2006. The decrease in interest on securities resulted from our fourth quarter 2006 balance sheet restructure, which in part reduced average securities $302.0 million to $501.7 million for the second quarter of 2007 compared to $803.7 million for the same period in 2006.

Interest Expense

Interest expense for the first six months of 2007 was $47.0 million, a decrease of $4.2 million or 8.2% from the $51.2 million reported for the same period in 2006. The cost of interest bearing liabilities in the first six months was 4.23%, an increase of 21 basis points compared to 4.02% for the first six months of 2006. The increase in interest expense was strongly influenced by two factors. First, the higher interest rate environment and strong competition for deposits resulted in a higher cost of deposits in the first half of 2007 compared to the same period in 2006. At the same time, we benefited from the balance sheet restructure which reduced the average balance and cost of borrowed funds for the first half of 2007 compared to the same period in 2006.

We continued to execute our retail strategy with the ongoing objective of managing our cost of funds by attracting lower cost core deposits in the first half of 2007. We opened one branch in the first quarter of 2007 and two additional branches in July 2007. These new branches should contribute to attracting deposits to meet our funding needs at lower rates than those associated with wholesale deposit funding sources. The

additional non-interest expense associated with opening a new branch, however, initially makes the overall cost of attracting deposits to new branches higher than the cost of certain alternative funding sources, like FHLB advances. We also believe that increasing our market presence allows us access to a broader pool of lower cost core deposits. In addition, we believe deposits attracted through our branches increase franchise value and have less interest rate and liquidity risk than wholesale funding sources. Our ability to manage our deposit costs in the current interest rate environment is one critical component in maintaining our profitability. We do not anticipate opening any additional branches in 2007, as we prepare for the planned transaction with PNC.

Interest expense on deposits increased $7.1 million or 23.9% to $37.0 million for the first six months of 2007 compared to $29.9 million for the same period in 2006. Average interest bearing deposits were $1.83 billion for the first six months of 2007, an increase of $63.6 million or 3.6% when compared to $1.77 billion for the same period in 2006. The increase in interest expense on deposits resulted primarily from a $6.0 million increase in interest expense on certificates of deposits for the first six months of 2007 compared to the same period in 2006. This increase was due to both higher average balances on certificates of deposits and higher rates paid. Average time deposits, including certificates of deposit (CDs) of $100,000 or more, increased $117.8 million to $927.1 million for the first six months of 2007 compared to $809.3 million for the same period in 2006. In addition to the higher average balance of CDs, the rate paid on CDs increased 77 basis points over the same period. This increase resulted primarily from the higher interest rate environment, which resulted in maturing CDs repricing to current market levels and new CDs having a higher cost than the existing portfolio. Competition for CDs was also particularly strong which also contributed to higher CD costs. While competition remains strong, we believe the increase in CD costs going forward should moderate as the difference between the cost of our CDs currently outstanding reprices to existing market rates.

For the first half of 2007, interest expense on savings, money markets and interest bearing demand deposits increased $1.1 million or 8.7% to $14.3 million, compared to $13.1 million for the same period in 2006. The overall cost of savings, money markets and interest bearing demand deposits was 3.15% for the first half of 2007, compared to 2.73% for the same period in 2006. The shift of balances from comparatively lower cost Simply Better Checking^SM and Simply Better Savings^SM to our higher yielding Simply Better Money Market^SM product was a contributing factor to the increased cost of savings, money markets and interest bearing demand deposits for the first six months of 2007 compared to the same period in 2006. In addition, we continue to attract new depositors to our Simply Better Money Market account, which also contributes to the increase in the overall cost of these deposits.

Interest expense on borrowed funds decreased $11.5 million to $7.2 million for the first six months of 2007 compared to $18.7 million for the same period in 2006. The cost of borrowed funds for the first half of 2007 declined 78 basis points to 4.44% compared to 5.22% for the same period in 2006. The decrease primarily reflects the impact of our balance sheet restructure which resulted in the $391.3 million decline in the average balance of borrowed funds in the first half of 2007 compared to the same period in 2006. In addition, the refinancing of FHLB advances in the fourth quarter of 2006 also contributed to the declining cost of our borrowed funds.

The overall cost of subordinated debentures increased 40 basis points to 8.88% for the first six months of 2007 compared to 8.48% for the same period in 2006. Over the same period, the average balance of subordinated debentures remained unchanged. Of the outstanding subordinated debentures, approximately $21.7 million are fixed rate with an average rate of 9.69%. The remaining $41.2 million are floating rate with an average spread over three month LIBOR of approximately 304 basis points. The increase in the cost of subordinated debentures resulted from the increase in three month LIBOR in the first half of 2007 compared to the same period in 2006. Should three month LIBOR continue to increase, the overall cost of our subordinated debentures will continue to rise.

For the second quarter of 2007, total interest expense decreased $4.2 million or 8.2% to $47.0 million compared to $51.2 million for the same period in 2006. The cost of interest bearing liabilities increased 13 basis points to 4.28% compared to 4.15% for the second quarter of 2006. The decrease in interest expense resulted primarily from the 2006 balance sheet restructure which was the primary factor for the $401.0 million decrease in the average balance of borrowed funds and the 77 basis point drop in the cost of borrowed funds for the second quarter of 2007 compared to the same period in 2006. Partially offsetting this decrease was an increase in the cost of interest bearing deposits of $7.1 million in the second quarter of 2007 compared to the same period in 2006. This increase resulted from a 55 basis point increase in the cost of interest bearing balances, and to a lesser extent, a $54.7 million increase in the average balance of interest bearing deposits for the second quarter of 2007 compared to the same period in 2006.

Provision for Loan Losses

The provision for loan losses for the first six months of 2007 was $2.5 million, a decrease of $1.7 million from the $4.2 million for the same period in 2006. The decrease in the provision for loan losses was primarily due to relatively stable asset quality during the first half of 2007 compared to the increased reserve allocations for certain problem credits required in the first half of 2006. The provision for loan losses in the second quarter of 2007 and 2006 was $1.8 million. See “Asset Quality” and “Allowance for loan losses” in this report for additional detail and information.

Non-interest Income

The largest component of our non-interest income is service charges and related fees on deposit accounts and other banking services. We also earn non-interest income as a result of income on bank owned life insurance (BOLI), investment and insurance fees, and other non-interest income. Net securities gains and losses also impact our level of non-interest income. Total non-interest income for the first six months of 2007 was $3.6 million, an increase of $171,000 when compared to the same period in 2006. The increase was due primarily to higher other non-interest income which includes earnings on certain community reinvestment assets, partially offset by a decline in service charges on deposit accounts. Non-interest income for the second quarter of 2007 was $1.9 million, reflecting an increase of $90,000 when compared to the second quarter of 2006.

Non-interest Expense

Our non-interest expense consists of salaries and employee benefits, occupancy, equipment and other expenses associated with conducting and expanding our business. In the first six months of 2007, non-interest expense totaled $30.4 million, an increase of $2.7 million or 9.6%, compared to $27.7 million for the same period in 2006. Included in 2007 non-interest expense are approximately $1.2 million in legal and other expenses associated with our consideration of strategic alternatives and the planned transaction with PNC. The largest increases in non-interest expense in the first six months of 2007, compared to the same period in 2006, were in occupancy expense, other non-interest expense, and salaries and employee benefits.

Our efficiency ratio, which provides a measure of our operating efficiency, is total non-interest expense as a percentage of the sum of net interest income plus non-interest income. We also measure our efficiency ratio on a tax equivalent basis. Our efficiency ratio for the first half of 2007 was 69.17%, compared to 60.60% for the same period in 2006. On a tax equivalent basis, our efficiency ratio for the first six months of 2007 was 67.45% compared to 59.21% for the same period in 2006. We believe that the tax equivalent 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 presentation of efficiency ratios enhances investors’ understanding of our business and performance, these measures should not be considered an alternative to GAAP. You should refer to note 4 to the Financial Summary table on page 16 for the adjustments used in the calculation of the tax equivalent efficiency ratio. The increase in our efficiency ratio, for the first six months of 2007 compared to the same period in 2006, resulted primarily from non-

interest expenses increasing while net interest income levels declined. Non-interest expenses primarily increased due to our evaluation of strategic alternatives, the continued execution of our retail strategy and meeting regulatory requirements. We believe there will be continued pressure on our efficiency ratio for the remainder of 2007.

The following table presents the components of non-interest expense for the six months ended June 30, 2007 and 2006.

	Six Months Ended
	June 30,
(in thousands)	2007		2006
Salaries and employee benefits	$	15,775	$	15,223
Occupancy expense, net		3,661		2,795
Equipment expense		1,680		1,652
Marketing		1,173		1,175
Attorneys’ fees		955		703
Audit and examination fees		873		688
Outside services and processing fees		703		717
Communication and postage		610		544
Stationery and supplies		535		536
Directors and committee fees		497		574
FDIC insurance premium		338		453
Insurance		298		260
Real estate appraisal fees		242		128
Amortization of subordinated debenture expense		136		136
Deposit intangible amortization		102		102
ORE expense		56		-
Other		2,721		1,998
Total	$	30,355	$	27,684

Salaries and employee benefits is the largest component of non-interest expense. Benefits expense includes the cost of health insurance, benefit plans, incentive compensation and payroll taxes. Salary expense increased $321,000 and benefits expense increased $231,000 for the first half of 2007 when compared to the same period in 2006. The increase in salary expense was net of a credit of $179,000 that resulted from the recapture of certain incentive plan compensation expense. The increase in salaries and benefits expense resulted from the increase in the number of employees and the related increase in benefit costs, and merit raises. Full time equivalent employees totaled 425 at June 30, 2007, compared to 415 at December 31, 2006, and 405 at June 30, 2006. Staffing increases resulted primarily from our continued branch expansion. With the opening of two new branches in July 2007 and the impact of potential new hires, we anticipate total salaries and employee benefits expense will increase for the remainder of 2007.

Occupancy costs consist primarily of rent and related maintenance and operating costs. Net occupancy expense increased $866,000 or 31.0% to $3.7 million for the first six months of 2007 from $2.8 million for the same period in 2006. The increase was principally due to costs associated with our branch expansion, including rent, taxes and associated maintenance costs. Occupancy costs are expected to continue to rise in 2007 as we operate a larger branch network.

Other expense, attorneys’ fees, and audit and examination fees increased 36.2%, 35.9% and 26.9% to $2.7 million, $955,000 and $873,000, respectively, in the first six months of 2007, compared to the same period in 2006. Other expense and attorneys’ fees increased primarily due to our consideration of strategic

alternatives and the planned transaction with PNC. Audit and examination fees also include additional costs incurred in connection with the material weakness in our internal control over financial reporting identified in the first quarter of 2007. As a result of our agreement with the OCC we are required to pay higher bank examination fees and FDIC insurance premiums than would be required if no agreement was in place.

Our FDIC insurance premiums for the first six months of 2007 were $338,000, reflecting a decrease of $115,000 from the $453,000 for the same period in 2006. This reduction resulted from a $319,000 credit we received from the FDIC. We are due to receive an additional credit of $183,000 in the third quarter of 2007. These credits relate to a one-time assessment credit pool established under the Federal Deposit Insurance Reform Act of 2005.

We believe that non-interest expenses will continue to increase for the remainder of 2007 due primarily to our retail strategy, which will be reflected in higher salaries and employee benefits, occupancy expense, as well as preparing for our planned transaction with PNC.

For the three months ended June 30, 2007, total non-interest expense increased $1.3 million or 9.0% to $15.6 million compared to $14.3 million for the same period in 2006. The key factors accounting for this increase included approximately $900,000 in legal and other costs associated with our consideration of strategic alternatives and planned transaction with PNC. In addition to those costs, salaries and employee benefits expense increased $401,000 and occupancy expense increased $507,000, reflecting our ongoing branch expansion. Partially offsetting these increases was a $210,000 decline in our FDIC insurance premium discussed above.

Income Tax Expense

We have identified accounting for income taxes as a critical accounting policy. The provision for income taxes, comprised of Federal and state income taxes, was $2.8 million for the first six months of 2007 compared to $3.6 million for the same period in 2006. The provision for income taxes for the first six months of 2007 and 2006 were at an effective rate of 25.5% and 26.2%, respectively. The decline in tax expense resulted primarily from lower pre-tax income and, to a lesser extent, a lower effective tax rate. The lower effective tax rate resulted primarily from tax strategies to lower state tax expense.

The provision for income taxes was $958,000 for the second quarter of 2007 compared to $1.6 million for the same period in 2006. The decrease in tax expense for the periods was primarily due to lower taxable income and, to a lesser extent a lower effective tax rate in the second quarter of 2007 of 23.4%, compared to 24.6% for the same period in 2006. The lower effective tax rate resulted primarily from tax strategies to lower state tax expense.

Financial Condition

Assets

Total assets at June 30, 2007 were $2.56 billion, a decrease of $58.6 million from $2.62 billion at December 31, 2006. A $72.2 million decrease in total loans was the primary factor in the decline in our assets. We used the cash flows generated from the loan portfolio and other funds to retire $61.0 million in FHLB advances that were called.

Loans

We are a reputable provider of commercial loans, which include commercial real estate and commercial and industrial loans. The loan portfolio represents our largest earning asset class and is our primary source of interest income. Total loans decreased 3.7% to $1.90 billion at June 30, 2007, compared to $1.97 billion at December 31, 2006. The decrease was primarily due to a decline in commercial lines of credit. Two factors significantly influenced our loan portfolio in the first half of 2007. First, we continued to experience strong competition for new and existing commercial loan relationships reflected in aggressive pricing and

terms offered by both bank and non-bank competitors. We have generally not been willing to match pricing that does not earn us an acceptable rate of return or compromise our underwriting standards to generate growth. Second, our loan portfolio was influenced by our relationships with several large real estate developers. We have been successful in providing real estate developers with construction and development financing as well as selected permanent financing. A slowdown in the real estate market has limited the opportunities for growth in our construction portfolio. Increased competition for permanent financing has limited our success in that market. As a result of these trends, we experienced modest loan growth in the first quarter of 2007 and a reduction in the loan portfolio in the second quarter of 2007. To generate new opportunities we have continued our expansion efforts into Middlesex County and have recently launched marketing efforts directed at small business customers. However, larger than expected loan payoffs, increased competition, borrowers’ concerns over the economy, real estate market values, interest rates, and the planned transaction with PNC, among other factors, could limit our growth or result in a smaller loan portfolio in 2007.

The table below sets forth YNB’s loan portfolio composition as of June 30, 2007 and December 31, 2006.

	June 30,		December 31,
(in thousands)	2007		2006
Commercial real estate
Investor occupied	$	552,036	$	574,855
Construction and development		262,456		244,207
Owner occupied		256,080		258,345

Commercial and industrial
Lines of credit		348,438		409,848
Term		148,816		139,791
Demand		644		1,591

Residential
1-4 family		162,431		167,132
Multi-family		36,341		37,514

Consumer
Home equity		92,833		95,902
Installment		29,396		32,446
Other		11,186		11,250
Total loans	$	1,900,657	$	1,972,881

At June 30, 2007 and December 31, 2006 commercial real estate loans and commercial and industrial loans represented 82.5% and 82.6% of total loans, respectively. We endeavor to maintain a diversified real estate portfolio to protect against a potential downturn in any one business sector. We manage risk associated with our commercial loan portfolio through comprehensive underwriting policies and procedures, diversification and loan monitoring efforts. Our underwriting standards include evaluations of the cash flow capabilities of the borrower to repay the loan, requiring independent appraisals, periodic property inspections, and analyses of the quality and experience of the organization or developer managing each property. In addition to real estate collateral, the majority of our commercial loans are secured by business assets and most carry the personal guarantees of the principals.

Commercial real estate loans decreased $6.8 million in the first six months of 2007 to $1.07 billion at June 30, 2007 from $1.08 billion at December 31, 2006. The commercial real estate portfolio includes mortgage

loans on owner occupied and tenanted investment properties (investor occupied), and construction and development loans. We experienced growth in construction and development loans of $18.2 million. Offsetting this growth were declines in investor and owner occupied loans of $22.8 million and $2.3 million, respectively. We continue to see signs of slowing in the real estate market in New Jersey, which could reduce the opportunity for growth and has contributed to the decline in our commercial loan portfolio in the first half of 2007. Investor and owner occupied commercial mortgages are principally secured by professional office buildings, retail stores, shopping centers and industrial developments, generally with maturities of five to ten years. Construction and development loans primarily fund residential and commercial projects, and to a lesser extent, acquisition of land for future development. 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 loans have terms of one to two years, are interest only, and have floating rates indexed to the prime rate of interest.

Commercial and industrial loans consist of lines of credit, term loans and demand loans. Commercial and industrial loans decreased $53.3 million or 9.7% to $497.9 million at June 30, 2007 compared to $551.2 million at year-end 2006. The decline resulted from a $61.4 million decrease in commercial lines of credit, partially offset by $9.0 million in growth of commercial term loans. Commercial and industrial loans typically consist of loans to finance equipment, inventory, receivables, and other working capital needs of small to mid-sized businesses.

Residential real estate loans are comprised of 1-4 family and multi-family loans. Residential mortgages consist of first liens on owner occupied 1-4 family residences, while multi-family loans primarily consist of loans secured by apartment complexes. As a participating seller and servicer of the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC), we generally underwrite residential real estate loans to conform to standards required by these agencies. Residential real estate loans decreased $5.9 million to $198.8 million at June 30, 2007 compared to $204.6 million at year-end 2006. We believe the decline in residential real estate loans is primarily due to the slow down in the real estate market. Generally, 1-4 family loans are made in connection with broader banking relationships. We are not involved in the sub-prime residential lending market, including home equity loans. At June 30, 2007 and December 31, 2006 residential loans represented 10.5% of our total loans.

Consumer loans decreased $6.2 million or 4.4% to $133.4 million at June 30, 2007 compared to $139.6 million at December 31, 2006. Consumer loans include fixed and floating rate home equity loans and lines, indirect auto loans, personal loans and other traditional installment loans. Home equity loans and lines represented 69.6% of total consumer loans at June 30, 2007. We underwrite home equity loans to the same credit standards as single-family home loans. As a result, our delinquency and loss experience on home equity loans has been favorable. Like our commercial lending portfolio, the majority of our consumer loans are also secured by collateral.

Asset Quality

Commercial lending is one of our most critical functions. While the most profitable part of our business is commercial lending, the risk and complexity of that business is also the greatest. Extending credit to our borrowers exposes us to credit risk, which is the risk that the principal balance of a loan and related interest will not be collected due to the inability of the borrower to repay the loan. We seek to manage credit risk by carefully analyzing both the debt service capacity of a borrower and the underlying collateral securing their loans. Through our lending and credit risk functions we continuously review our loan portfolio for credit risk. We manage credit risk in our loan portfolio through written loan policies, which establish underwriting standards and other standards or limits deemed necessary or prudent. These guidelines are determined by our credit approval committee and approved by the Bank’s board of directors.

Nonperforming assets as a percentage of total assets amounted to 1.11% at June 30, 2007, compared to 1.12% at December 31, 2006. Total nonperforming assets decreased $976,000 to $28.5 million at June 30, 2007 compared to $29.5 million at December 31, 2006. The decline in nonperforming assets was primarily due to a decline in loans 90 days or more past due partially offset by an increase in nonaccural loans.

The following table sets forth nonperforming assets in our loan portfolio by type at June 30, 2007, December 31, 2006 and June 30, 2006.

(in thousands)	June 30, 2007		December 31, 2006		June 30, 2006
Nonaccrual loans:
Commercial real estate	$	11,813	$	13,211	$	4,286
Commercial and industrial		13,929		8,609		16,480
Residential		1,983		3,429		2,042
Consumer		149		108		389
Total		27,874		25,357		23,197
Loans 90 days or more past due:
Commercial real estate		-		3,283		-
Commercial and industrial		-		49		-
Residential		222		382		446
Consumer		3		4		-
Total		225		3,718		446
Total nonperforming loans		28,099		29,075		23,643
Other real estate		385		385		502
Total nonperforming assets	$	28,484	$	29,460	$	24,145

Nonperforming loans consist of loans on a nonaccrual basis, loans whose terms have been restructured because of a deterioration in the financial condition of the borrower, and loans which are contractually past due 90 days or more as to interest or principal payments and have not been classified as nonaccrual. There were no restructured loans for the periods presented. Nonperforming assets include nonperforming loans plus other real estate owned. Nonaccrual loans totaled $27.9 million at June 30, 2007, reflecting a $2.5 million increase from $25.4 million at December 31, 2006. The level of nonaccrual loans is impacted by new loans being placed on nonaccrual status and the resolution or chargeoff of existing nonaccrual loans. The increase in nonaccrual loans resulted primarily from a $5.3 million increase in nonaccrual commercial and industrial loans partially offset by declines in residential and commercial real estate loans totaling $2.8 million.

Loans 90 days or more past due declined $3.5 million to $225,000 at June 30, 2007, compared to $3.7 million at year-end 2006. The decline resulted primarily from a decrease in commercial real estate loans 90 days or more past due.

Other real estate totaled $385,000 at June 30, 2007, unchanged from the balance at year-end 2006. In July 2007, we sold the sole property in this account.

At June 30, 2007 we had $58.8 million, compared to $94.0 million at December 31, 2006, in loans that have exhibited certain weaknesses, which we have determined require additional monitoring or oversight. These credits receive frequent monitoring and although these credits may pose higher risks, did not warrant adverse classification at June 30, 2007. Additionally, as part of our analysis of the loan portfolio we have determined there were approximately $34.5 million in potential problem loans at June 30, 2007 and $26.2 million at December 31, 2006. We define potential problem loans as performing loans classified substandard, which because of well-defined weaknesses may in some cases result in a loan being placed on nonaccrual with the possibility of some principal loss if the weaknesses are not corrected. Including certain

performing loans in potential problem loans is not necessarily indicative of expected losses that may occur, but reflects our recognition that these loans carry a higher probability of default. While we make every effort to accurately assess the loan portfolio, we can give no assurance that we have identified all of our potential problem loans.

One of our goals is to improve credit quality. One action that we have taken to improve asset quality is to limit new loans to contractors due to our loss experience with this loan type. Factors beyond our control, however, such as adverse economic and business conditions, could result in higher nonperforming asset levels. Additionally, since the majority of our loans are backed by real estate collateral, if it were necessary to liquidate our real estate collateral during a period of reduced real estate values, earnings could be negatively impacted.

Allowance for Loan Losses

We have identified the allowance for loan losses to be a critical accounting policy. The allowance for loan losses is maintained at a level we believe is adequate to absorb probable loan losses inherent in the loan portfolio. Our internal credit risk review function, which operates independently of the lending function, monitors the loan portfolio to identify risks so that an appropriate allowance can be maintained. Our methodology for evaluating the adequacy of the allowance consists of a number of significant elements, which include specific allowances for impaired loans, an allocated allowance for specific loan pools, and an unallocated allowance to cover inherent loan losses, which have not been otherwise reviewed or measured on an individual basis. The formal evaluation process for determining the adequacy of the allowance for loan losses takes place quarterly.

As part of our formal process, our commercial lending staff reviews, evaluates and rates our commercial loans at origination based on their respective risks. Risk classifications range from one to nine, or from minimal risk to loss. Internal credit risk review staff formally evaluates risk ratings and classifications. Our criticized and classified asset committee, comprised of key executive and senior officers, including the credit risk review officer, is responsible for the review and oversight of higher risk performing loans and all nonperforming loans. We define higher risk performing loans to be loans that are exhibiting certain weaknesses and require a higher level of monitoring because of one or more factors such as borrower performance, business conditions affecting the borrower, nature of collateral, or other factors. On a quarterly basis, the criticized and classified asset committee also vettes changes in risk ratings, approves strategies regarding problem credits and reviews impaired loan analyses. The committee will recommend charge offs based on its analyses to the credit approval committee of the Bank’s board of directors. The credit administration staff confirms reserve allocations for impaired loans each quarter. Reserves associated with these loans are based on a thorough analysis of the most probable source or sources of repayment, which is normally the liquidation of collateral, but may also include discounted cash flows.

As part of this process, we divide our loan portfolio into various loan pools. Loan pools are established based on specific commercial loan categories consisting of groups of borrowers with similar characteristics to better measure the risk in each loan category. The reserve percentage assigned to each risk-rating category within each pool is determined quarterly from historical loan loss rates based on an eight quarter rolling trend using migration analysis. In addition, we use our judgment concerning the anticipated impact on credit quality of economic conditions, real estate values, interest rates and business activity. Allocations for the allowance for loan losses are determined after the review described above. At June 30, 2007, the following risk ratings were used for determining the allowance. Risk ratings of 1 to 5 are considered to be acceptable and correspond to loans rated as minimal, modest, better than average, average and acceptable. Loans with acceptable risk were reserved at a range of 0.35% to 1.50%. Risk ratings of 6 to 9 are considered higher than acceptable risk and correspond to loans rated as special mention, substandard, doubtful or loss. Due to the higher level of risk, these loans were assigned a specific reserve or were reserved at a range of 3.75% to 100%. At June 30, 2007, there were no 9 rated loans. Residential mortgage loans were assigned an individual risk reserve percentage of up to 0.01% due to the strong secured nature of these loans and the low

level of losses experienced historically. Consumer loans were assigned reserve percentages of 0.01% for the lowest risk to 3.19% for the highest risk depending on the extent and type of collateral.

Factors used to evaluate the adequacy of the allowance for loan losses include the amounts and trends of criticized loans and economic data associated primarily with New Jersey’s real estate market. After the conclusion of this evaluation, we present the quarterly review of the loan loss reserve to the Bank’s board of directors for their approval. Results of regulatory examinations may also impact our allowance for loan losses, as review of the allowance for loan losses is typically an integral part of the regulatory examination process.

In connection with management’s assessment of our internal control over financial reporting at December 31, 2006, management identified a material weakness related to the risk rating process and resultant determination of the allowance for loan losses and the provision for loan losses, specifically as to ineffective policies and procedures related to the loan risk rating process by loan officers, as well as ineffective monitoring and review by credit risk review personnel to identify and resolve discrepancies in risk ratings. As a result, we have provided additional credit training for our loan officers, updated and strenghthened our credit policies and procedure manuals, changed personnel within the credit risk review function, enhanced administrative oversight of the credit risk review function and undertaken an expanded review of loan files to confirm appropriate risk ratings. We believe the actions we have taken and are taking, when completed, should correct this material weakness in our internal control over financial reporting.

The following table provides information regarding the allowance for loan losses for the three and six month periods ended June 30, 2007 and 2006.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2007			2006			2007			2006
Allowance balance, beginning of period	$	24,685		$	22,392		$	24,563		$	22,703
Charge offs:
Commercial and industrial		-			(1,120	)		(559	)		(3,684	)
Commercial real estate		(1,776	)		(100	)		(1,777	)		(188	)
Consumer		(97	)		(138	)		(145	)		(197	)
Total charge offs		(1,873	)		(1,358	)		(2,481	)		(4,069	)
Recoveries:
Commercial and industrial		72			98			90			102
Residential		-			-			32			-
Consumer		8			158			38			204
Total recoveries		80			256			160			306
Net charge offs		(1,793	)		(1,102	)		(2,321	)		(3,763	)
Provision charged to operations		1,800			1,800			2,450			4,150
Allowance balance, end of period	$	24,692		$	23,090		$	24,692		$	23,090
Allowance for loan losses to total loans								1.30	%		1.13	%
Nonperforming loans to total loans								1.48			1.16
Net charge offs to average loans								0.48			0.38
Allowance for loan losses to nonperforming loans								87.88	%		97.66	%

At June 30, 2007, the allowance for loan losses totaled $24.7 million, an increase of $129,000 compared to $24.6 million at December 31, 2006. The ratio of the allowance for loan losses to total loans was 1.30% at June 30, 2007 compared to 1.25% at year-end 2006. We also measure the adequacy of the allowance for loan losses by the coverage ratio. The coverage ratio is the allowance for loan losses as a percentage of

nonperforming loans. At June 30, 2007 this ratio was 87.88% compared to 84.48% at December 31, 2006 and 97.66% at June 30, 2006. It is our assessment, based on our judgment and analysis, that the allowance for loan losses was adequate for probable loan losses inherent in the loan portfolio at June 30, 2007.

Loans or portions of loans deemed uncollectible are deducted from the allowance for loan losses, while recoveries of amounts previously charged off, if any, are added to the allowance. Net loan charge offs were $2.3 million for the first six months of 2007, compared to $3.8 million for the same period in 2006. The decrease in net charge offs is primarily reflective of the higher level of charge offs experienced in the first half of 2006. Net charge offs to average loans increased to 0.48% in the first six months of 2007, compared to 0.38% for the same period in 2006. The increase in this ratio was due to the decrease in average loans outstanding as actual net charge offs declined. Annual net loan charge offs to average loans in 2006 was 0.48%.

We recognize that despite our best efforts to manage credit risk, losses will occur. In times of economic slowdown, either within our markets or nationally, the risk inherent in our loan portfolio may increase. Many of our loans are secured by real estate collateral. Any adverse trends in our real estate markets could have a significant negative effect on many of our borrowers and, in turn, on the quality of our loan portfolio and the level of the allowance for loan losses. In addition to economic conditions and other factors, the timing and amount of loan losses will also be dependent on the specific financial condition of our borrowers. While the allowance for loan losses is maintained at a level believed to be adequate for probable loan losses inherent in the loan portfolio, determination of the allowance for loan losses is inherently subjective, as it requires management’s estimates, all of which are susceptible to significant change. Changes in these estimates could impact the provision charged to expense in future periods.

The following table describes the allocation of the allowance for loan losses among various categories of loans and certain other information as of the dates indicated. An unallocated allowance is distributed proportionately among each loan category. This unallocated portion of the allowance for loan losses is important to maintain the overall allowance at a level that is adequate to absorb probable loan losses inherent in the total loan portfolio. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future loan losses may occur. The total allowance is available to absorb losses from any segment of loans.

	As of June 30, 2007								As of December 31, 2006
						Percent of								Percent of
	Reserve		Percent of			loans to			Reserve		Percent of			loans to
(in thousands)	Amount		Allowance			Total loans			Amount		Allowance			Total loans
Commercial real estate	$	9,800		39.7	%		56.3	%	$	12,598		51.2	%		54.6	%
Commercial and industrial		12,832		52.0			26.2			10,168		41.4			27.9
Residential		1,698		6.9			10.5			1,390		5.7			10.4
Consumer		362		1.4			7.0			407		1.7			7.1
Total	$	24,692		100.0	%		100.0	%	$	24,563		100.0	%		100.0	%

Federal funds sold and interest bearing deposits with banks

We use a number of short-term investment vehicles to invest excess funds. Short-term investment vehicles utilized include Federal funds sold and interest bearing deposits with banks. We have maintained adequate levels of overnight liquidity to meet potential loan demand and normal deposit fluctuations. At June 30, 2007, Federal funds sold and interest bearing deposits with banks totaled $30.5 million compared to $35.6 million at December 31, 2006.

Securities

At June 30, 2007 our investment portfolio was comprised of U.S. government securities, agency named mortgage-backed securities, tax-exempt obligations of state and political subdivisions, equity and other securities. There were no securities in the name of any one issuer exceeding 10% of stockholders’ equity, except for securities issued by U.S. government-sponsored agencies, including mortgage-backed securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC).

The investment portfolio is used principally to manage liquidity, interest rate risk and regulatory capital, and to take advantage of market opportunities that provide favorable returns with limited credit risk. The securities portfolio is generally structured to provide consistent cash flows to enhance liquidity and provide funding for loan growth.

At June 30, 2007, the investment portfolio totaled $511.5 million or 20.0% of total assets, compared to $498.7 million or 19.0% of total assets at December 31, 2006. Agency named mortgage-backed securities (MBS) represented 63.4% and 66.9% of our portfolio at June 30, 2007 and at December 31, 2006, respectively.

The following tables present the amortized cost and estimated market value of our securities portfolios at June 30, 2007 and December 31, 2006.

Securities Available for Sale

June 30, 2007

December 31, 2006

Estimated

Estimated

Amortized

Market

Amortized

Market

(in thousands)

Cost

Value

Cost

Value

U.S. Treasury obligations

4,025

3,768

4,027

3,820

Mortgage-backed securities

Issued by FNMA/FHLMC

339,364

323,164

341,892

332,273

Issued by GNMA

7,910

7,793

9,629

9,680

Corporate obligations

54,947

54,499

34,132

34,897

Federal Reserve Bank stock

4,156

4,156

Federal Home Loan Bank stock

14,976

17,815

Total

425,378

408,356

411,651

402,641

Investment Securities

June 30, 2007

December 31, 2006

Estimated

Estimated

Amortized

Market

Amortized

Market

(in thousands)

Cost

Value

Cost

Value

Obligations of state and political subdivisions

101,988

101,537

94,783

96,753

Mortgage-backed securities

Issued by FNMA/FHLMC

1,151

1,124

1,289

1,284

Total

103,139

102,661

96,072

98,037

At June 30, 2007, securities available for sale (AFS) totaled $408.4 million, an increase of $5.8 million from $402.6 million at year-end 2006. The increase was primarily in corporate obligations partially offset by increased market depreciation in the AFS portfolio. The AFS portfolio represented 79.8% of the total investment portfolio at June 30, 2007. Our corporate portfolio primarily consists of fixed and floating rate bank trust preferred securities either in single name issues or pooled deals.

AFS securities are carried at their estimated market value, with any net unrealized gains or losses, net of taxes reported in accumulated other comprehensive income in stockholders’ equity unless a decline in value is deemed to be other-than-temporary, in which case the decline is reported in current period results. The unrealized loss in the AFS portfolio was $17.0 million at June 30, 2007 compared to $9.0 million at year-end 2006. The increase in the unrealized loss position was primarily due to an increase in interest rates, which resulted in a decrease in the market value of our AFS securities.

Securities that we have the intent and ability to hold to maturity are classified as investment securities and are reported at amortized cost or book value. This portfolio is primarily comprised of municipal bonds. Investment securities held to maturity totaled $103.1 million, a $7.1 million increase in the first half of 2007. The increase was primarily due to a $7.2 million increase in municipal bonds. We purchase tax exempt municipal bonds, to reduce our effective tax rate and enhance the tax equivalent yield of our investment portfolio. We typically purchase “Aaa” rated insured general obligation municipal bonds .

Our 2007 investment strategy is based on our overall interest rate risk position. During 2006, the repricing characteristics of our loan portfolio shifted more towards fixed rate. Traditionally, our loan portfolio has had a significant floating rate component. Because of this we have been able to maintain a longer term fixed rate securities portfolio to provide protection against falling interest rates. We have started to selectively purchase floating rate securities to address this shift in the loan portfolio composition.

We evaluate all securities with unrealized losses quarterly to determine whether the loss is other than temporary. We have identified the evaluation of losses other than temporary for securities to be a critical accounting policy. At June 30, 2007, we determined that all unrealized losses were temporary in nature. This conclusion was based on several factors, including the strong credit quality of the securities with unrealized losses. We believe that the unrealized losses in the securities portfolios were caused by changes in interest rates, market credit spreads, and perceived and actual changes in prepayment speeds on MBS.

Deposits

Deposits represent our principal funding source. During 2007, we have continued to expand our geographic footprint, strengthen our brand image, and market new products and services to attract lower cost core deposits. We define core deposits as all nonmaturity retail and business deposits, and time deposits of under $100,000 obtained through our branch network. Nonmaturity deposits include non-interest and interest bearing demand, money market and savings deposits. These deposits are typically lower in cost than other deposits including, public funds, CDs of $100,000 or more, and surrogate’s deposits.

Total deposits decreased $3.5 million to $2.00 billion at June 30, 2007 from the balance at December 31, 2006. In early 2007, to enhance liquidity and meet our funding needs , we selectively priced short term CDs to attract deposits. As a result, CDs became a larger portion of our deposit base. These certificates were obtained from both new customers and existing customers shifting funds out of lower cost nonmaturity deposits to CDs to obtain the higher yield. This trend has resulted in CDs increasing to 45.8% of total deposits at June 30, 2007 compared to 43.6% at December 31, 2006 and 42.2% at June 30, 2006. In addition, our Simply Better Money Market product enjoyed moderate growth in the first half of 2007. Balances were attracted from both new customers as well as existing customers who shifted balances from lower yielding accounts to the higher yielding money market product.

In the first quarter of 2007 we introduced our Capital Builder Money Market Account. This product is part of our effort to attract additional small business customers to YNB. This account has attracted $13.0 million in balances since its introduction.

The following table provides information concerning YNB’s deposit base at June 30, 2007 and December 31, 2006.

(in thousands)	June 30, 2007		December 31, 2006
Non-interest bearing demand deposits	$	196,499	$	197,126
Interest bearing demand deposits		295,100		340,722
Money market deposits		459,248		440,253
Savings deposits		133,452		152,289
Time deposits of $100,000 or more		250,898		248,315
Other time deposits		664,591		624,578
Total	$	1,999,788	$	2,003,283

Interest bearing demand deposits decreased $45.6 million or 13.4% to $295.1 million at June 30, 2007 from $340.7 million at December 31, 2006. The decline in interest bearing demand deposits is primarily due to a $25.5 million decline in public funds, a $12.3 million decrease in surrogate’s deposits (i.e., intermingled minors trust funds) and an $18.2 million decrease in Simply Better Checking balances. Due to the success of our retail strategy in attracting deposits we were able to reduce our reliance on surrogate’s and public fund deposits, which are typically more costly than deposits raised through our branch network. The decline in Simply Better Checking was primarily due to depositors shifting balances from this account to our higher yielding Simply Better Money Market account, and to a lesser extent, CDs.

Money market balances increased $19.0 million or 4.3% to $459.2 million at June 30, 2007, compared to $440.3 million at December 31, 2006. The primary factor for this increase was our popular Simply Better Money Market product. This tiered account pays a competitive rate of interest, and continues to attract new depositors to YNB providing an attractive option for existing customers looking for an increased return on their deposits without using CDs. Simply Better Money Market balances increased $25.0 million to $286.6 million at June 30, 2007 compared to $261.6 million at December 31, 2006.

Savings deposits decreased $18.8 million or 12.4%, to $133.5 million at June 30, 2007, compared to $152.3 million at December 31, 2006. The primary reason for this decrease was the decline in Simply Better Savings balances to $80.4 million at June 30, 2007, compared to $93.7 million at December 31, 2006. We believe this shift of funds out of Simply Better Savings into the Simply Better Money Market, and to a lesser extent, certificates of deposit, will continue, resulting in higher core deposits cost.

We market our CDs through our branch network, through a computer-based service provided by an independent third party, which enables us to place CDs nationally, and through CD brokers on a very selected basis. There were no brokered CDs outstanding at June 30, 2007 or December 31, 2006. Total time deposits, which include CDs of $100,000 or more and other time deposits, increased $42.6 million to $915.5 million at June 30, 2007 from $872.9 million at December 31, 2006. The increase in CDs resulted from additional CDs of $100,000 or less which increased $40.0 million or 6.4% to $664.6 million at June 30, 2007 from $624.6 million at December 31, 2006. CDs of $100,000 or more increased $2.6 million from the balance at December 31, 2006. At June 30, 2007 we had approximately $18.5 million in CDs obtained through a computer-based service, compared to $36.9 million at December 31, 2006. As interest rates have increased, the cost of CDs obtained through this service have become significantly more expensive than those obtained in our markets. It is our plan to retire these CDs as they mature subject to our liquidity needs. We believe that in the current interest rate environment, the popularity of CDs with depositors will continue and that CDs will continue to increase as a percentage of our deposit base. We anticipate that any funds required for loan growth during the balance of 2007 would be generated primarily through certificates of deposits and our Simply Better Money Market product.

Non-interest bearing demand deposits decreased $627,000 to $196.5 million at June 30, 2007, compared to $197.1 million at December 31, 2006. To attract additional non-interest bearing demand deposits, we have increased our focus on attracting new business relationships to YNB through other loan and deposit products. This strategy includes improvements to our small business loan products, the introduction of our Capital Builder Money Market account and increased marketing and business development efforts towards small businesses.

Borrowed Funds

Borrowed funds, excluding subordinated debentures, decreased $61.5 million to $275.8 million at June 30, 2007, compared to $337.3 million at year-end 2006. This reduction resulted principally from FHLB advance calls. Because we reduced our balance of borrowed funds with our balance sheet restructure in the fourth quarter of 2006, our current plans relating to borrowed funds will be based on liquidity needs and interest rate risk objectives. At June 30, 2007 total borrowed funds, excluding subordinated debentures, were 10.8% of total assets, compared to 12.9% at December 31, 2006 and 23.4% at June 30, 2006.

We are a member of the FHLB of New York and use FHLB advances as an alternative source of funds. FHLB advances totaled $263.0 million at June 30, 2007 and represented 77.7% of our total borrowed funds. FHLB advances declined $61.0 million in the first half of 2007, from $324.0 million at December 31, 2006. Our portfolio of FHLB advances consists primarily of callable borrowings. We were able to retire FHLB advances as they were called due in part to the cash flows from payoffs or paydowns on loans. Should we require funds to support loan growth we would consider increasing our FHLB position to fund it. Within approved policy guidelines, we may use FHLB advances as an alternative funding source or to meet desired asset and liability, or liquidity objectives.

Subordinated Debentures (Trust Preferred Securities)

We obtained a portion of the capital needed to support the growth of the Bank and for other purposes through the sale of subordinated debentures of Yardville National Bancorp to subsidiary statutory business trusts of Yardville National Bancorp, which, in turn sold common securities to Yardville National Bancorp and trust preferred securities to third parties. At June 30, 2007 there were $62.9 million in subordinated debentures outstanding, unchanged from December 31, 2006, which supported payment of $1.9 million in common securities and $61.0 million in trust preferred securities. All of the $61.0 million in trust preferred securities qualified as Tier 1 capital at June 30, 2007. The amount of trust preferred securities qualifying as Tier 1 capital is limited to 25% of all Tier 1 capital.

Regulatory Capital

We manage capital in a highly regulated environment which requires a balance between earning the highest return for shareholders while maintaining sufficient capital levels for proper risk management and satisfying regulatory requirements. Our capital management is designed to generate attractive returns on equity to our shareholders and to assure that we are always well capitalized, or otherwise meet capital targets set by regulatory authorities, while having the necessary capital to support our growth.

Our equity capital was $189.0 million at June 30, 2007 reflecting an increase of $2.9 million, or 1.6%, from $186.1 million at December 31, 2006. The increase primarily resulted from net income, offset by dividends and accumulated other comprehensive loss. The increase in the accumulated other comprehensive loss was primarily due to the decline in value of our securities available for sale.

We are subject to risk-based capital standards under Federal banking regulations. These banking regulations relate a company’s regulatory capital to the risk profile of its total assets and off-balance sheet items, and provide the basis for evaluating capital adequacy. Under these standards, assets and certain off-balance sheet items are assigned to broad risk categories, each with applicable weights. Typically, risk-based capital

standards require both the bank and the holding company to have Tier 1 capital of at least 4%, and total capital (including Tier 1 capital) of at least 8%, of total risk-adjusted assets. Our bank and holding company are also subject to leverage ratio requirements. The leverage ratio measures Tier 1 capital to adjusted quarterly average assets. Typically the leverage ratio is required to be at least 4%.

Tier 1 capital includes stockholders’ equity (adjusted for intangibles and the net unrealized gain/loss on securities available for sale) and trust preferred securities. Trust preferred securities are limited to 25% of Tier 1 capital. Balances in trust preferred securities not qualifying as Tier 1 capital are included in total capital. Total capital is comprised of all components of Tier 1 capital plus the allowance for loan losses subject to certain restrictions.

The following table presents the actual capital amounts and ratios of Yardville National Bancorp, the “Holding Company,” and the Bank at June 30, 2007 and December 31, 2006. Our risk-based capital ratios at June 30, 2007 increased from their levels at December 31, 2006. This was primarily due to the increase in our regulatory capital base as well as the decline in our loan portfolio. Our Tier 1 leverage ratio at both the Bank and the Holding Company increased significantly due to the balance sheet restructure which lowered average assets over the comparative periods.

		Amount		Ratios
(amounts in thousands)		June 30, 2007	December 31, 2006	June 30, 2007	December 31, 2006
Risk-based capital:
Tier 1:
	Holding Company	$ 260,009	$ 251,772	11.9%	11.2%
	Bank	232,445	226,408	10.7	10.1
Total:
	Holding Company	$ 284,701	$ 276,336	13.0	12.3
	Bank	257,137	250,972	11.8	11.2
Tier 1 leverage:
	Holding Company	$ 260,009	$ 251,772	9.9%	8.8%
	Bank	232,445	226,408	8.9	8.0

Under capital adequacy guidelines, a well-capitalized financial institution must maintain a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of 6% and a leverage ratio of at least 5%.

Due to our agreement with the OCC, the Bank is no longer considered well-capitalized for certain regulatory purposes. This capital category may not, however, constitute an accurate representation of the Bank’s general financial condition or prospects. In addition, under the agreement, the Bank has to achieve and maintain a total risk-based capital ratio of at least 10.75%, a Tier 1 risk-based capital ratio of at least 9.75% and a leverage ratio of at least 7.50%. We were in compliance with all required capital ratios at June 30, 2007. We believe the combination of controlled asset growth and our financial performance in 2007 should allow us to continue to exceed all applicable minimum capital requirements.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

There have been no material changes in our market risk from December 31, 2006, except as discussed below. For information regarding our market risk, please refer to the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2006.

Asset and liability management involves the evaluation, monitoring, and managing of market risk, interest rate risk, liquidity risk and the appropriate use of capital, while maximizing profitability. Our Asset and Liability Committee (ALCO) provides oversight to the asset and liability process. The committee consists of both executive and senior management, and members of the board of directors. ALCO recommends policy

guidelines regarding exposure to interest rates, liquidity and capital limits for approval by the Bank’s board of directors. Adherence to these guidelines is monitored on a monthly basis, and decisions related to the management of interest rate exposure due to changes in balance sheet composition or market interest rates are made when appropriate and agreed to by ALCO and the board of directors. One of the primary goals of asset and liability management is to prudently maximize net interest income. The risk to net interest income is derived from the difference in the maturity and repricing characteristics between assets and liabilities.

We manage and control interest rate risk by identifying and quantifying interest rate risk exposures through the use of net interest income simulation analysis and economic value at risk models. Both measures may change periodically as the balance sheet composition and underlying assumptions change. We also use a traditional gap analysis that complements the simulation and economic value at risk modeling. The gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates and also does not fully account for embedded options, caps and floors. The gap analysis is prepared based on the maturity and repricing characteristics of interest earning assets and interest bearing liabilities for selected time periods.

At June 30, 2007, the cumulative one-year gap was a negative $497.3 million, or 19.4% of total assets, compared to a negative $368.0 million, or 14.0% of total assets, at December 31, 2006. We have maintained a negative gap to better position us for stable or declining rates, but this position has increased our risk exposure to rising rates.

We believe that the simulation of net interest income in different rate environments provides a more meaningful measure of our interest rate risk position than gap analysis. Our simulation model measures the volatility of net interest income to changes in market interest rates. We dynamically model our interest income and interest expense over specified time periods under different interest rate scenarios and balance sheet structures. We assess the probable effects on the balance sheet not only of changes in interest rates, but also possible strategies for responding to them. We measure sensitivity of net interest income over 12- and 24- month time horizons, based on assumptions established by ALCO and approved by our board of directors. The board established certain policy limits for potential volatility of net interest income as projected by our simulation.

In our base case simulation, the composition of the balance sheet is kept static and interest rates are assumed to be flat or unchanged. Volatility is measured from the base case and is expressed as the percentage change in net interest income, from the base case, over 12- and 24-month periods with a change in interest rates of plus or minus 200 basis points. At June 30, 2007 we modeled a dynamic yield curve by inverting the curve with rising rates and steepening the curve with falling rates during year one. This is followed by constant rates for year two. ALCO has established a policy that net interest income sensitivity is acceptable if net interest income in the base case scenario is within a –7% change in net interest income in the first twelve months and within –14% change over the two-year time frame.

The following table reflects the estimated change in net interest income from the base case scenario for a 12- and 24-month period based on our June 30, 2007 and December 31, 2006 balance sheets:

	Percentage Change in
	Net Interest Income
Change in Market Interest Rates (basis points)	Next 12 months			Next 24 months
As of: June 30, 2007
+200 basis points		-1.7	%		-12.5	%
Flat		-			-
-200 basis points		2.4	%		10.0	%

As of: December 31, 2006
+200 basis points		-0.4	%		-9.7	%
Flat		-			-
-200 basis points		0.2	%		5.8	%

Based on our June 30, 2007 simulation analysis, we believe our interest rate risk position remains fairly balanced over the next 12 months whether we experience rising or falling interest rates. Our risk to rising rates in year two increases from the assumed impact of FHLB advances being called and replaced with higher cost funds as well as increased costs from the replacement of maturing CDs. This, combined with the predominately fixed rate profile of our earning asset base, produces less net interest income in year two. The year two results at June 30, 2007 reflect an increase in risk from our position at year-end 2006. Our simulation analysis indicates that our net interest income would increase in a falling rate environment.

We also measure, through simulation analysis, the impact to net interest income based on growth, in addition to rate ramps, inversions, or rate shifts greater than 2% over 12-and 24-month periods. In our growth scenario we see similar results to net interest income based on our projected balance sheet composition. Due to the assumptions used in preparing our simulation analysis, actual outcomes could differ significantly from the simulation outcomes.

We measure longer-term interest rate risk through the Economic Value of Equity (“EVE”) model. This model involves projecting future cash flows from our current assets and liabilities to their maturity dates, discounting those cash flows at appropriate interest rates, and then aggregating the discounted cash flows. Our EVE is the estimated net present value of these discounted cash flows. The variance in the economic value of equity is measured as a percentage of the present value of equity. The sensitivity of EVE to changes in the level of interest rates is a measure of the sensitivity of long-term earnings to changes in interest rates. We use the sensitivity of EVE to measure the exposure of equity to changes in interest rates over a relatively long time horizon.

The following table lists the percentage change in EVE with a plus or minus 200 basis point rate shock at June 30, 2007 and December 31, 2006.

	Percentage Change in EVE
Change in market interest rates (rate shock)	June 30, 2007			December 31, 2006
+200 basis points		-16.5	%		-13.4	%
-200 basis points		3.7	%		-5.2	%

Based on the underlying assumptions, we were within policy guidelines at June 30, 2007 and December 31, 2006. Our risk profile has changed with our risk to lower rates shifting from a negative position to a positive position. At the same time, our risk to rising rates has increased. This shift resulted primarily from the decline in FHLB advances and the longer term nature of our earning asset base.

Certain shortcomings are inherent in the methodology used in the previously discussed interest rate risk measurements. Modeling changes in simulation and EVE analyses require the making of certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. There are many factors that we evaluate when constructing the assumptions used in short-term and long-term interest rate risk models. One of the most important assumptions involves deposits without fixed maturity dates. These core deposits include non-interest bearing demand, interest bearing demand, savings and money market deposits, and represent a significant portion of our deposit base. We believe these core deposits, as a whole, are less sensitive to changes in interest rates than our other interest bearing liabilities and can effectively fund a portion of our fixed rate earning asset portfolio. The balance of these deposits and their costs may fluctuate due to changes in market interest rates, competition, or by the fact that customers may add to or withdraw these deposits at any time or at no cost. These characteristics and the lack of a fixed maturity date makes modeling these deposits for both simulation and EVE purposes very subjective. A modest change in the maturity term or repricing characteristics can result in very different outcomes. Because each financial institution assigns different repricing and maturity terms to these nonmaturity deposits, comparing risk between institutions without understanding the treatment of nonmaturity deposits has limited value. Another source of uncertainty are the options embedded in many of our financial instruments, which include loans, investments and convertible FHLB advances. To deal with the uncertainties when constructing either short- or long-term interest rate measurements, we have developed a number of assumptions. Depending on the product or behavior in question, each assumption will reflect some combination of market data, research analysis and business judgment. Assumptions are reviewed periodically and changes are made when deemed appropriate by management and approved by ALCO.

Although the models discussed above provide an indication of our interest rate exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income or economic value of equity and may differ from actual results.

We believe that any changes to interest rate levels are likely to occur gradually. We continue to monitor our gap position and rate ramp and rate shock analyses to detect changes to our exposure to fluctuating interest rates. We have the ability to shorten or lengthen maturities on assets, sell securities, enter into derivative financial instruments, or seek funding sources with different repricing characteristics in order to change our asset and liability structure for the purpose of mitigating the effect of interest rate risk changes.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information we are required to disclose in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended, the “Exchange Act”, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information we are required to disclose in our Exchange Act reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of June 30, 2007. Based upon that evaluation the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting as of December 31, 2006 which still existed at June 30, 2007.

Changes to Internal Control Over Financial Reporting

As we reported in our Annual Report on Form 10-K, as amended, based on management’s assessment as of December 31, 2006, we did not maintain effective internal control over financial reporting due to the existence of a material weakness related to the risk rating process and resultant determination of the allowance for loan losses and the provision for loan losses. Accordingly, we made several changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Specifically, management has taken remedial actions with respect to the identified material weakness. We have provided additional credit training for our loan officers, updated and strenghtened our credit policies and procedure manuals, enhanced administrative oversight of the credit risk review function and undertaken an expanded review of loan files to confirm appropriate risk ratings. We believe the actions we have taken and are taking, when completed, should correct this material weakness in our internal control over financial reporting.

Limitations of Effectiveness of Controls

We note that any system of internal controls, however well designed and operated, can provide only reasonable assurance, and not absolute assurance, that the objectives of the internal control system will be met. The design of any control system is based, in part, upon the benefits of the control system relative to its cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management overrides of controls. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II: OTHER INFORMATION

Item 1: Legal Proceedings

Actions Related to 2006 Annual Meeting

On June 6, 2007, the Company entered into a settlement agreement and mutual release with Lawrence B. Seidman and other related parties with respect to two previously reported legal proceedings. The settlement agreement is filed as Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on June 11, 2007.

Pursuant to the terms of the settlement agreement, the parties submitted a consent order to the Superior Court of New Jersey, Chancery Division, Passaic County, in the matter captioned Seidman, et al. v. Yardville National Bancorp, et al. (Docket No. PAS-C-20-07). On June 13, 2007, the Court entered the consent order and vacated a March 21, 2007 order requiring the Company to hold its annual meeting of shareholders on July 12, 2007.

The referenced settlement agreement also provided that the Company pay Seidman $100,053, an amount previously awarded by the Court in the matter captioned Seidman, et al. v. Yardville National Bancorp, et al. (Docket No. PAS-C-14-06), regarding matters related to the Company’s 2006 annual meeting of shareholders. Seidman agreed to withdraw his cross-appeal of certain other orders that were entered in that matter The Company, however, still has certain issues that remain on appeal before the Superior Court of New Jersey, Appellate Division (Docket No. A-004348-06-T5), pending additional proceedings contemplated by the settlement agreement.

Item 1A: Risk Factors

Significant risk factors could negatively impact our financial condition and results of operation. These risk factors are discussed in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2006.

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

Not Applicable.

Item 3: Defaults Upon Senior Securities

Not Applicable.

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

Not Applicable.

Item 5: Other Information

Not Applicable.

Item 6: Exhibits.

The exhibits filed or incorporated by reference as part of this report are listed in the Index to Exhibits, which appears at page E-1.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		YARDVILLE NATIONAL BANCORP (Registrant)
Date: August 9, 2007	By:	Stephen F. Carman Stephen F. Carman Vice President and Treasurer

EXHIBIT INDEX

Exhibit Number	Description
2.1*	Agreement and Plan of Merger dated June 6, 2007, by and between The PNC Financial Services Group, Inc. and Yardville National Bancorp

10.1*	Employment and Retention Agreement dated June 6, 2007, by and among Yardville National Bancorp, PNC Bank, National Association and F. Kevin Tylus

10.2*	Consulting, Non-Competition and Retention Agreement dated June 6, 2007, by and among Yardville National Bancorp, PNC Bank, National Association and Patrick M. Ryan

10.3**	Settlement Agreement and Mutual Release dated June 6, 2007, by and among Yardville National Bancorp, Lawrence B. Seidman and other parties

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Vice President and Treasurer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Vice President and Treasurer

*	Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 6, 2007, filed with the SEC on June 8, 2007

**	Incorporated by reference to the Registrant’s Current Report on Form 8-K dated June 6, 2007, filed with the SEC on June 11, 2007

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Yardville National Bancorp (YANB) Inactive 10-Q2007 Q2 Quarterly report

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