The Inner Circle Keeps Raiders at Bay

Yardville National Bank has a plan for retaining its independenceIn the face of unrelenting consolidation in the banking industry, most small and medium-sized banks live in constant fear of being swallowed by someone bigger. Not so at Yardville National Bank, a midsize community bank based in Hamilton that has 25 branches and more than $3 billion in assets. The publicly held bank has managed to insulate itself from corporate raiders with a capital growth strategy that concentrates ownership among like-minded shareholders.

Patrick M. Ryan, Yardville’s CEO since 1991, says the bank gets feelers from potential buyers all the time, but they face the obstacle that Ryan and his top management have erected: a core group of some 40 shareholders who collectively own about 35% of the bank’s $168.8 million equity base. Another 40% is held by some 50 financial institutions and mutual funds. The rest is with other minority shareholders.

Ryan’s strategy is simple. Over the past 15 years, the 80-year-old bank has had three rounds of private placement of equity and three public offerings. With each offering, the “insider ownership group” has brought in more capital; the number of entities in that insider group has also grown over time.

“As we grew the bank, we relied on our stakeholders and our largest customers to also become very sizable shareholders,” says Ryan. “We have been able to stay independent because of that strong insider ownership base.”

In doing so, Yardville has bucked an industry trend. When Ryan joined Yardville 15 years ago, it was a small bank with $175 million in assets and four branches in Mercer County’s Hamilton township. It was one among 23 banks of varying sizes in that market. Ryan says most of his bank’s competitors were either acquired or merged into bigger banks.

Jack Morris, founder and principal of Edgewood Properties in Piscataway, one of the state’s largest developers of mixed-use properties, is one of Yardville’s top customers and, along with members of his family, is part of the insider group. “We bought stock in every one of Yardville’s offerings,” says Morris of his shareholder group. Today, Morris reckons his group is the banks’ largest private shareholder.

Morris says it is important for his company as a borrower to ensure that Yardville stays independent since it is one of the top five banks his firm works with. “The unique thing about a Yardville Bank is that they operate with a personal touch where you know who you are dealing with,” he says. “You can call up its president, Pat Ryan, and you can get a quick answer. They are also business friendly,” adds Morris. He contrasts this with regional or national banks where an officer “could be at Wachovia one day and at Bank of America the next day.”

Morris acknowledges that it can be more expensive to do business with a bank that lacks the economies of scale of a bigger institution. “There’s an old saying,” he says, “You get what you pay for.” Further, he argues that even while interest rates on loans might be a bit higher, once he factors in the bigger banks’ various fees, “they are not a lot cheaper.”

And Ryan says that while there could be disadvantages in having a small group of stockholders control the bank, “that is balanced by four or five large institutional shareholders who push from the other side to make sure they are satisfied with the performance.” Yardville’s top five institutional shareholders own about 34% of its stock.

Neither is the bank worried about potential conflicts of interest related to having key shareholders who are also borrowers, says Kevin Tylus, Yardville’s chief operating officer. “An insider is put to the same level of review as any other Yardville customer,” he says. No regulatory limits exist on the amount of money a shareholder could borrow from the bank.

Tylus says Yardville’s independence has not hurt its financial performance over the years; in fact, it compares well with its peers. He says that while the deposit base at many national banks has been shrinking lately, Yardville has shown healthy growth.

In the current year’s third quarter, deposits crossed the $2 billion mark, growing 13% over the same quarter in 2004. The bank ranks 21 among banks in the state in its market share of deposits, and has second place after Wachovia—ahead of PNC Bank and Bank of America—in its home territory of Mercer County. Its efficiency ratio, defined as operating expenses as a percentage of net interest and other recurring income, is 53.71%, better than its peer-group average of 56.9%.

On other fronts, Tylus acknowledges Yardville could do better. Its net interest margin is 3%; the industry average is 4%. Return on average assets is 0.75%, compared with the industry average of 1.15%.

“If we were not a growth story, some of those indicators might be troubling,” says Tylus, adding that the bank is seeing “some good performance improvement there.” The Nasdaq-listed bank’s share price has grown from levels below $10 five years ago to around $36.

A top priority at Yardville is branch expansion, spearheaded by CEO Ryan’s son, Patrick L. Ryan, the senior vice president heading strategic planning. The younger Ryan has most recently focused on growing the bank in Middlesex County, and is now readying the first Ocean County branch. Yardville currently operates in Mercer, Hunterdon, Somerset, Burlington, Middlesex counties and Pennsylvania’s Bucks county. Plans are to add two more branches by the end of the year.

That branch expansion will help lower Yardville’s cost of funds. More significantly, it will add new stakeholders who might contribute to the bank’s equity base: Yardville followed that route with earlier expansions into Somerset and Hunterdon counties.

Patrick L. Ryan is currently working on a three-to-five-year growth plan for the bank, but wants to retain his father’s business model of a relationship-based community bank. “We will be a much bigger franchise in terms of assets and the number of markets we serve, but we won’t be entirely different in the way we compete in the marketplace,” he says. The younger Ryan is looking at a “conservative” pace of asset growth of 10% a year for the foreseeable future.

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