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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11535
CITY NATIONAL BANCSHARES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2434751
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
900 BROAD STREET, 07102
NEWARK, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 624-0865
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
Common stock, par value $10 per share
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant (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
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 28, 2001 was approximately $1,522,525.
There were 121,406 shares of common stock outstanding at March 28, 2001.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the definitive Proxy Statement for the 2001 Annual Meeting
of shareholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A are incorporated herein by reference in Part III.
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CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents
Page
PART I
Item 1. Business.....................................................................................................3
Item 2. Properties...................................................................................................5
Item 3. Legal Proceedings............................................................................................5
Item 4. Submission of Matters to a Vote of Security Holders..........................................................5
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters....................................5
Item 6. Selected Financial Data......................................................................................6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................................7 - 13
Item 8. Financial Statements and Supplementary Data............................................................14 - 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................................................................28
PART III
Item 10. Directors and Executive Officers of Registrant..............................................................28
Item 11. Executive Compensation......................................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................................28
Item 13. Certain Relationships and Related Transactions..............................................................28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................28
Signatures...........................................................................................................30
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
City National Bancshares Corporation (the "Corporation" or "CNBC") is a New
Jersey corporation incorporated on January 10, 1983. At December 31, 2000, CNBC
had consolidated total assets of $200.4 million, total deposits of $176.2
million and stockholders' equity of $10.2 million. Its only subsidiary is City
National Bank of New Jersey (the "Bank" or "CNB"), a nationally chartered
commercial bank which commenced operations on June 11, 1973. CNB has one
subsidiary, City National Investments, Inc., an investment company which holds,
maintains and manages investment assets for CNB.
In May 2000, the Bank became the second interstate minority owned bank in the
United States with the acquisition of a branch location in Roosevelt, Long
Island from a savings bank.
CNB is a national banking association chartered in 1973 under the laws of the
United States of America. CNB is minority owned and operated and therefore
eligible to participate in certain federal government programs. CNB is a member
of the Federal Reserve Bank, the Federal Home Loan Bank and the Federal Deposit
Insurance Corporation. CNB provides a wide range of retail and commercial
banking services through three offices located in northern New Jersey. Deposit
services include savings and checking accounts, certificates of deposit and
money market and retirement accounts. The Bank also provides many forms of small
to medium size business financing, including revolving credit, credit lines,
term loans and all forms of consumer financing, including auto, home equity and
mortgage loans and maintains banking relationships with several major domestic
corporations.
In June, 2000 the United States Department of the Treasury certified City
National Bank as a Community Development Financial Institution, or CDFI. This
certification means that the Department of Treasury has formally recognized CNB
for "having a primary purpose of promoting community development." CNB is one of
only 33 banks in the country to receive this certification and the only bank in
New Jersey to qualify for this distinction. Certification as a CDFI will bring
certain financial benefits by proving financial incentives for expanding in
lending and other community development efforts in the urban areas where the
Bank's offices are located.
CNB specializes in providing credit and deposit services to businesses and
individuals located within urban areas in New York and New Jersey, particularly
in the Newark area.
The Bank does not have a trust department.
COMPETITION
The market for banking and bank related services is highly competitive. The Bank
competes with other providers of financial services such as other bank holding
companies, commercial banks, savings and loan associations, credit unions, money
market and mutual funds, mortgage companies, and a growing list of other local,
regional and national institutions which offer financial services. Mergers
between financial institutions within New Jersey and in neighboring states have
added competitive pressures. Competition is expected to intensify as a
consequence of interstate banking laws now in effect or that may be in effect in
the future. CNB competes by offering quality products and convenient services at
competitive prices. CNB regularly reviews its products and locations and
considers various branch acquisition prospects.
Management believes that as New Jersey's only African-American owned and
controlled Bank, it has a unique ability to provide commercial banking services
to that segment of the minority community.
SUPERVISION AND REGULATION
The banking industry is highly regulated. The following discussion summarizes
some of the material provisions of the banking laws and regulations affecting
City National Bancshares Corporation and City National Bank of New Jersey.
BANK HOLDING COMPANY REGULATIONS
CNBC is a bank holding company within the meaning of the Bank Holding Company
Act (the "Act") of 1956, and as such, is supervised by the Board of Governors of
the Federal Reserve System (the "FRB").
The Act prohibits CNBC, with certain exceptions, from acquiring ownership or
control of more than five percent of the voting shares of any company which is
not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to subsidiary banks. The
Act also requires prior approval by the FRB of the acquisition by CNBC of more
than five percent of the voting stock of any additional bank. The Act also
restricts the types of businesses, activities, and operations in which a bank
holding company may engage.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking and Branching Act") enabled bank holding companies to
acquire banks in states other than its home state, regardless of applicable
state law. The Interstate Banking and Branching Act also authorized banks to
merge across state lines, thereby creating interstate branches. Under such
legislation, each state had the opportunity to "opt out" of this provision.
Furthermore, a state may "opt-in" with respect to de novo branching, thereby
permitting a bank to open new branches in a state in which the bank does not
already have a branch. Without de novo branching, an out-of-state commercial
bank can enter the state only by acquiring an existing bank or branch. The vast
majority of states have allowed interstate banking by merger but not authorized
de novo branching.
New Jersey enacted legislation to authorize interstate banking and branching and
the entry into New Jersey of foreign country banks. New Jersey did not authorize
de novo branching into the state. However, under federal law, federal savings
banks which meet certain conditions may branch de novo into a state, regardless
of state law.
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will allow bank
holding companies meeting management, capital and Community Reinvestment Act
standards to engage in a substantially broader range of nonbanking activities
than currently is permissible, including insurance underwriting and making
merchant banking investments in commercial and financial companies. If a bank
holding company elects to become a financial holding company, it may file a
certification, effective in 30 days, and thereafter may engage in certain
financial activities without further approvals. It also allows insurers and
other financial services companies to acquire banks, removes various
restrictions that currently apply to bank holding company ownership of
securities firms and mutual fund advisory companies and establishes the overall
regulatory structure
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applicable to bank holding companies that also engage in insurance and
securities operations.
The Modernization Act also modifies other current financial laws, including laws
related to financial privacy and community reinvestment.
REGULATION OF BANK SUBSIDIARY
CNB is subject to the supervision of, and to regular examination by the Office
of the Comptroller of the Currency of the United States (the "OCC").
Various laws and the regulations thereunder applicable to CNB impose
restrictions and requirement in many areas, including capital requirements, the
maintenance of reserves, establishment of new offices, the making of loans and
investments, consumer protection and other matters. There are various legal
limitations on the extent to which a bank subsidiary may finance or otherwise
supply funds to its holding company or its non-bank subsidiaries. Under federal
law, no bank subsidiary may, subject to certain limited exceptions, make loans
or extensions of credit to, or investments in the securities of, its parent or
nonbank subsidiaries of its parent (other than direct subsidiaries of such bank)
or, subject to broader exceptions, take their securities as collateral for loans
to any borrower. Each bank subsidiary is also subject to collateral security
requirements for any loans or extension of credit permitted by such exceptions.
CNBC is a legal entity separate and distinct from its subsidiary bank. CNBC's
revenues (on a parent company only basis) result from dividends paid to CNBC by
its subsidiary. Payment of dividends to CNBC by CNB, without prior regulatory
approval, is subject to regulatory limitations. Under the National Bank Act,
dividends may be declared only if, after payment thereof, capital would be
unimpaired and remaining surplus would equal 100% of capital. Moreover, a
national bank may declare, in any one year, dividends only in an amount
aggregating not more than the sum of its net profits for such year and its
retained net profits for the preceding two years. In addition, the bank
regulatory agencies have the authority to prohibit a bank subsidiary from paying
dividends or otherwise supplying funds to a bank holding company if the
supervising agency determines that such payment would constitute an unsafe or
unsound banking practice.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), a depository institution insured by the FDIC can be held liable for
any loss incurred by, or reasonably expected to be incurred by, the FDIC in
connection with the default of a commonly controlled FDIC-insured depository
institution or any assistance provided by the FDIC to a commonly controlled
FDIC-insured depository institution in danger of default, or deferred by the
FDIC. Further, under FIRREA, the failure to meet capital guidelines could
subject a banking institution to a variety of enforcement remedies available to
federal regulatory authorities, including the termination of deposit insurance
by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each federal banking agency to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of non-traditional activities. In
addition, each federal banking agency has promulgated regulations, specifying
the levels at which a financial institution would be considered "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized", or "critically undercapitalized", and to take certain
mandatory and discretionary supervisory actions based on the capital level of
the institution.
The OCC's regulations implementing these provisions of FDICIA provide that an
institution will be classified as "well capitalized" if it has a total
risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital ratio
of at least 6%, has a Tier 1 leverage ratio of at least 5%, and meets certain
other requirements. An institution will be classified as "adequately
capitalized" if it has a total risk-based capital ratio of at least 8%, has a
Tier 1 risk-based capital ratio of at least 4%, and has Tier 1 leverage ratio of
at least 4%. An institution will be classified as "undercapitalized" if it has a
total risk-based capital ratio of less than 6%, has a Tier 1 risk-based capital
ratio of less than 3%, or has a Tier 1 leverage ratio of less than 3%. An
institution will be classified as "significantly undercapitalized" if it has a
total risk-based capital ratio of less than 6%, or a Tier I risk-based capital
ratio of less than 3%, or a Tier I leverage ratio of less than 3%. An
institution will be classified as "critically undercapitalized" if it has a
tangible equity to total assets ratio that is equal to or less than 2%. An
insured depository institution may be deemed to be in a lower capitalization
category if it receives an unsatisfactory examination.
Insured institutions are generally prohibited from paying dividends or
management fees if after making such payments, the institution would be
"undercapitalized". An "undercapitalized" institution also is required to
develop and submit to the appropriate federal banking agency a capital
restoration plan, and each company controlling such institution must guarantee
the institution's compliance with such plan.
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), as implemented by OCC regulations,
a national bank has a continuing and affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OCC, in connection with its examination of a
national bank, to assess the association's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such association. The CRA also requires all institutions to make
public disclosure of their CRA ratings. CNB received a "Satisfactory" CRA rating
in its most recent examination.
GOVERNMENT POLICIES
The earnings of the Corporation are affected not only by economic conditions,
but also by the monetary and fiscal policies of the United States and its
agencies, especially the Federal Reserve Board. The actions of the Federal
Reserve Board influence the overall levels of bank loans, investments and
deposits and also affect the interest rates charged on loans or paid on
deposits. The monetary policies of the Federal Reserve Board have had a
significant affect on the operating results of commercial banks in the past and
are expected to do so in the future. The nature and impact of future changes in
monetary and fiscal policies on the earnings of the Corporation cannot be
determined.
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EMPLOYEES
On December 31, 2000, CNBC and its subsidiary had 65 full-time equivalent
employees. Management considers relations with employees to be satisfactory.
ITEM 2. PROPERTIES
The corporate headquarters and main office as well as the operations and data
processing center of CNBC and CNB are located in Newark, New Jersey in a
building owned by CNB. The Bank has three other branch locations in New Jersey
and one in the state of New York. Two of the locations are in leased space while
the others are owned by the Bank.
ITEM 3. LEGAL PROCEEDINGS
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders and certain affiliates of such entity
for fraud and other damages. CNB alleges, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. The defendants have responded alleging CNB records regarding
these transactions are in error and that CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified.
Discovery has been completed and the case is expected to go to trial before the
end of 2001. The likelihood of CNB's success in this litigation and its ability
to recover any amount for which it obtains judgment is uncertain. CNB has filed
appropriate proofs of loss under various insurance policies, including CNB's
fidelity bond. It is also too early to determine the amount CNB will ultimately
recover, if any, under these insurance policies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2000 there were no matters submitted to
stockholders for a vote.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Corporation's common stock, when publicly traded, is traded
over-the-counter. The common stock is not listed on any exchange and is not
quoted on the National Association of Securities Dealers' Automated Quotation
System. The last customer trade effected by a market maker was unsolicited and
occurred on November 2, 1990. No price quotations are currently published for
the common stock, nor is any market maker executing trades. No price quotations
were published during 2000.
At February 21, 2001, the Corporation had 1,938 common stockholders of record.
On September 27, 2000, the Corporation paid a cash dividend of $1.85 per share
to stockholders of record on September 7, 2000. Whether cash dividends on the
common stock will be paid in the future depends upon various factors, including
the earnings and financial condition of the Bank and the Corporation at the
time. Additionally, federal and state laws and regulations contain restrictions
on the ability of the Bank and the Corporation to pay dividends.
FORM 10-K
THE ANNUAL REPORT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K
IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO CITY NATIONAL BANCSHARES
CORPORATION, EDWARD R. WRIGHT, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER, 900 BROAD STREET, NEWARK, NEW JERSEY, 07102.
TRANSFER AGENT
First City Transfer Company
P.O. Box 170
Iselin, New Jersey 08830
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
Dollars in thousands, except per share data 2000 1999 1998 1997 1996
====================================================================================================================
YEAR-END BALANCE SHEET DATA:
Total assets $200,442 $172,496 $164,901 $138,868 $134,951
Gross loans 90,653 82,446 71,440 56,947 57,128
Reserve for loan losses 1,200 1,975 1,415 825 750
Investment securities 65,930 68,475 63,966 62,360 60,863
Total deposits 176,169 139,837 137,943 119,717 115,854
Long-term debt 12,425 16,225 15,749 3,749 1,749
Stockholders' equity 10,235 9,026 10,123 10,032 8,287
====================================================================================================================
INCOME STATEMENT DATA:
Interest income $ 12,477 $ 10,615 $ 9,555 $ 9,571 $ 9,034
Interest expense 6,381 5,276 4,598 4,330 3,802
- --------------------------------------------------------------------------------------------------------------------
Net interest income 6,096 5,339 4,957 5,241 5,232
Provision for loan losses 872 906 1,016 159 91
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 5,224 4,433 3,941 5,082 5,141
Other operating income 2,547 1,492 1,297 1,199 1,147
Other operating expenses 6,239 5,330 4,999 4,630 4,839
====================================================================================================================
Income before income tax expense 1,532 595 239 1,651 1,449
Income tax expense 452 193 13 582 504
====================================================================================================================
Net income $ 1,080 $ 402 $ 226 $ 1,069 $ 945
====================================================================================================================
PER COMMON SHARE DATA:
Net income per basic share $ 8.21 $ 2.48 $ 1.25 $ 8.98 $ 8.31
Net income per diluted share 7.52 2.34 1.22 8.11 7.51
Book value 75.68 66.73 72.54 74.34 66.23
Dividends 1.85 1.80 1.75 1.50 1.35
Basic average number of common shares
outstanding 120,926 118,902 115,189 114,141 113,498
Diluted average number of common shares
outstanding 133,426 131,402 129,039 127,991 127,348
Number of common shares outstanding at year-end 121,406 119,571 118,221 114,141 114,141
FINANCIAL RATIOS:
Return on average assets .61% .25% .16% .78% .71%
Return on average common equity 12.06 3.49 1.51 13.05 13.19
Stockholders' equity as a percentage of total assets 5.11 5.23 6.14 7.22 6.14
Dividend payout ratio 22.53 72.58 140.00 16.70 16.25
====================================================================================================================
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PERFORMANCE SUMMARY
Net income rose to $1,080,000 in 2000 compared to $402,000 in 1999 due primarily
to the receipt in December, 2000 of an $879,000 award from the U.S. Treasury's
Community Development Financial Institution Fund. The award was based on the
Bank's lending efforts in qualifying lower income communities. Related earnings
per common share on a diluted basis increased to $8.21 from $2.48. Without the
award, net income would have totalled $552,000.
Total assets rose to $200.4 million at the end of 2000 from $172.5 million a
year earlier due to the inclusion of a nonrecurring $26 million commercial
deposit. Aside from the temporary increase in Federal Funds sold due to the
aforementioned deposit, most of the asset growth occurred in loans, which grew
10%, and contributed to a 14.2% increase in net interest income.
INVESTMENTS
The investment securities available for sale ("AFS") portfolio declined 4.5%, to
$33.9 million at December 31, 2000 from $35.5 million a year earlier, while the
related gross unrealized net loss decreased to $442,000 from $1.1 million due to
a reduction in interest rates.
The major change within the available for sale portfolio occurred in the
mortgaged-backed portfolio, which decreased $5.2 million or 20.8% from the end
of 1999 to year-end 2000. Partially offsetting this decline was a $3.6 million
increase in U.S. Government securities, comprised primarily of variable-rate
Small Business Administration guaranteed loan pooled certificates.
The investment securities held to maturity ("HTM") portfolio declined to $32.1
million at December 31, 2000 compared to $33 million a year earlier. Most of the
decrease occurred in the U.S. Government agency portfolio, which included
$275,000 of structured notes at December 31, 1999, all of which matured in 2000.
At December 31, 2000, the Bank held callable U.S. Government agency notes with a
carrying value of $20.1 million, of which $18.5 million were included in the HTM
portfolio. These notes are callable at par at various dates from 2001 through
March, 2002. These callable securities reflect gross unrealized depreciation of
$649,000, or more than 75% of the depreciation in the entire investment
portfolio. Favorable spreads provide compensation for the interest rate risk
inherent in this investment due to the call feature. Management believes that
holding the callable securities will not have a significant impact upon the
financial condition of the Corporation.
Reinvestment of proceeds from early redemptions of callable notes in a lower
interest rate environment could have a significant impact on the operations of
the Corporation. Measurement of this impact, along with other aspects of the
Corporation's interest rate risk, is performed quarterly.
Information pertaining to the average weighted yields of investments in debt
securities at December 31, 2000 is presented below. Maturities of
mortgaged-backed securities included with U.S. Government agencies are based on
the maturity of the final scheduled payment. Such securities, which comprise
most of the balances shown as maturing beyond five years, generally amortize on
a monthly basis and are subject to prepayment.
INVESTMENT SECURITIES AVAILABLE FOR SALE Maturing After One Maturing After Five
Maturing Within Year But Within Years But Within Maturing After
One Year Five Years Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
==================================================================================================================================
U.S. Treasury securities
and U.S. Government agencies $2,003 6.52% $1,601 6.06% $ -- --% $ 3,160 7.66% $ 6,764 6.94%
Mortgage-backed securities -- -- 3,078 6.79 701 6.65 16,035 6.50 19,814 6.55
Obligations of state
political and
subdivisions(1) -- -- -- -- -- -- 2,311 7.97 2,311 7.97
Other debt securities -- -- -- -- 742 7.16 2,733 8.03 3,475 7.85
- ----------------------------------------------------------------------------------------------------------------------------------
Total amortized cost 2,003 6.52% $4,679 6.54% $1,443 6.92% $24,239 6.96% $32,364 6.87%
==================================================================================================================================
(1) Includes $250,000 of nontax-exempt securities with a 7.60% yield.
INVESTMENT SECURITIES HELD TO MATURITY Maturing After One Maturing After Five
Maturing Within Year But Within Years But Within Maturing After
One Year Five Years Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
==================================================================================================================================
U.S. Government agencies(1) $ -- -- % $ -- -- % $ 6,168 6.72% $12,399 6.67% $18,567 6.69%
Obligations of state and
political subdivisions 1,557 6.79 401 7.69 - -- 3,027 9.98 4,985 8.80
Mortgage-backed securities 162 5.04 957 6.17 - -- 5,379 6.24 6,498 6.20
Other debt securities -- -- -- -- 2,028 7.95 -- -- 2,028 7.97
- ----------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $1,719 6.62% $1,358 6.62% $ 8,196 7.03% $20,805 7.04% $32,078 7.00%
==================================================================================================================================
(1) Includes $18.5 million of U.S. Government agency securities callable in
2001, all of which mature after five years.
Average yields are computed by dividing the annual interest, net of premium
amortization and including discount accretion, by the amortized cost of each
type of security outstanding at December 31, 2000. Average yields on tax-exempt
obligations of state and political subdivisions have been computed on a fully
taxable equivalent basis, using the statutory Federal income tax rate of 34%.
The average yield on the AFS portfolio increased to 6.78% at December 31, 2000
from 6.20% at December 31, 1999, while the yield on the HTM portfolio rose 41
basis points to 7.00% at December 31, 2000 from 6.59% at December 31, 1999.
70.1% of the total portfolio matures after ten years, compared to 72.7% in 1999.
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CONSOLIDATED AVERAGE BALANCE SHEET WITH RELATED INTEREST AND RATES
2000 1999
Average Average Average Average
Tax equivalent basis; dollars in thousands Balance Interest Rate Balance Interest Rate
===================================================================================================================================
ASSETS
Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell $ 10,491 $ 646 6.16% $ 7,981 $ 396 4.97%
Interest-bearing deposits with banks 787 41 5.28 1,771 76 4.27
Investment securities:
Taxable (1) 60,950 3,985 6.54 62,048 3,770 6.08
Tax-exempt 7,012 542 7.73 4,526 326 7.19
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Total investment securities 67,962 4,527 6.66 66,574 4,096 6.15
- -----------------------------------------------------------------------------------------------------------------------------------
Loans (2,3):
Commercial 29,408 2,532 8.61 25,138 1,889 7.51
Real estate 53,912 4,788 8.88 47,650 4,175 8.76
Installment 1,389 127 9.12 902 94 10.40
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 84,709 7,447 8.79 73,690 6,158 8.36
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 163,949 12,661 7.72 150,016 10,726 7.15
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 4,485 4,451
Gross unrealized loss on investment
securities available for sale (1,102) (483)
Reserve for possible loan losses (1,179) (1,336)
Other assets 9,582 7,117
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest earning assets 11,786 9,749
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $175,735 12,661 $159,765
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits (4) $ 52,430 1,276 2.43 $ 40,597 791 1.95
Time deposits (5) 71,648 4,204 5.87 68,950 3,453 5.01
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 124,078 5,480 4.42 109,547 4,244 3.87
Short-term borrowings 3,481 210 6.03 2,789 133 4.76
Long-term debt 12,007 691 5.76 15,989 899 5.62
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 139,566 6,381 4.57 128,325 5,276 4.11
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 25,297 20,844
Other liabilities 1,590 839
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest bearing liabilities 26,887 21,683
- -----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 9,282 9,757
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $175,735 6,381 $159,765
===================================================================================================================================
Net interest income (tax equivalent basis) 6,280 3.15 5,450 3.04
Tax equivalent basis adjustments (6) (184) (111)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 6,096 $ 5,339
===================================================================================================================================
Average rate paid to fund interest earning assets 3.89 3.52
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income as a percentage of
interest earning assets (tax equivalent basis) 3.83% 3.63%
===================================================================================================================================
1 Includes investment securities available for sale and held to maturity at
amortized cost
2 Includes nonperforming loans
3 Includes loan fees of $219,000 and $149,000 in 2000 and 1999, respectively
4 Includes noninterest bearing deposits maintained by a state governmental
agency of $294,000 in 2000 and $369,000 in 1999
5 Includes noninterest bearing deposits maintained by corporations and U.S.
governmental agencies of $- in 2000 and $1,582,000 in 1999
6 The tax equivalent adjustment was computed assuming a 34% statutory federal
income tax rate in 2000 and 1999
8
9
The table below set forth, on a fully taxable basis, an analysis of the increase
(decrease) in net interest income resulting from the specific components of
income and expenses due to changes in volume and rate. Because of the numerous
simultaneous balance and rate changes, it is not possible to precisely allocate
such changes between balances and rates. Therefore, for purposes of this table,
changes which are not due solely to balance and rate changes are allocated to
rate.
2000 Net Interest Income Increase 1999 Net Interest Income Increase
(Decrease) from 1999 due to (Decrease) from 1998 due to
- -------------------------------------------=====================================================================================
In thousands Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans:
Commercial $ 321 $ 322 $ 643 $ 313 $(126) $ 187
Real estate 549 64 613 981 (308) 673
Installment 51 (18) 33 13 3 16
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 921 368 1,289 1,307 (431) 876
Taxable investment securities (67) 282 215 407 (27) 380
Tax-exempt investment securities 179 37 216 (16) -- (16)
Federal funds sold and securities
purchased under agreements to resell 125 125 250 (225) (32) (257)
Interest-bearing deposits with banks (42) 7 (35) 86 (14) 72
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,116 819 1,935 1,559 (504) 1,055
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings deposits (231) (254) (485) (126) 63 (63)
Time deposits (135) (616) (751) (347) (59) (406)
Short-term borrowings (33) (44) (77) 14 12 26
Long-term debt 224 (16) 208 (241) 6 (235)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense (175) (930) (1,105) (700) 22 (678)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 941 $(111) $ 830 $ 859 $(482) $ 377
================================================================================================================================
LOANS
Loans rose 10.0% to $90.6 million at December 31, 2000 from $82.4 million a year
earlier. The increase resulted from a 57.4% increase in the commercial loan
portfolio.
Loans held for sale decreased to $148,000 at December 31, 2000 from a year
earlier. Loans sold totalled $810,000 in 2000 compared to $571,000 in 1999,
while gains on loan sales declined to $15,000 in 2000 from $21,000 in 1999.
At December 31, 2000, loans to churches totalled $13.3 million, representing
14.7% of total loans outstanding, of which $10.9 million are included with
commercial loans, while $2.4 million are included with real estate loans.
Management does not believe that this loan concentration exposes the Corporation
to any unusual degree of risk.
The Bank generally secures its loans by obtaining primarily first liens on real
estate, both residential and commercial, and does virtually no asset-based
financing. Without additional side collateral, the Bank generally requires
maximum loan-to-value ratios of 70% for loan transactions secured by commercial
real estate.
The Bank's primary market area consists of northern New Jersey, particularly
within the Newark area. Although Newark is undergoing a major renovation, the
city continues to experience a high rate of unemployment.
While management believes that its loan portfolio is well secured and able to
withstand a downturn in economic conditions, its effects will be carefully
considered in making credit decisions in 2001.
MATURITIES AND INTEREST SENSITIVITIES OF LOANS
Information pertaining to contractual maturities without regard to normal
amortization and the sensitivity to changes in interest rates of loans at
December 31, 2000 is presented below.
One Year
Due in One Through Due After
In thousands Year or Less Five Years Five Years Total
================================================================================
Commercial $ 6,854 $ 7,848 $13,141 $27,843
Real estate:
Construction 2,210 177 -- 2,387
Mortgage 9,123 16,722 33,122 58,967
Installment 417 491 548 1,456
- --------------------------------------------------------------------------------
Total $18,604 $25,238 $46,811 $90,653
Loans at fixed
Interest rates $12,108 $16,659 $19,003 $47,770
Loans at variable
Interest rates 6,496 8,579 27,808 42,883
- --------------------------------------------------------------------------------
Total $18,604 $25,238 $46,811 $90,653
================================================================================
SUMMARY OF LOAN LOSS EXPERIENCE
Changes in the reserve for loan losses are summarized below.
Dollars in thousands 2000 1999
=============================================================
Balance, January 1 $ 1,975 $1,415
- -------------------------------------------------------------
Charge-offs:
Commercial loans 1,538 411
Real estate loans 184 68
Installment loans 15 24
- -------------------------------------------------------------
Total 1,737 503
- -------------------------------------------------------------
Recoveries:
Commercial loans 58 137
Real estate loans 21 4
Installment loans 11 16
- -------------------------------------------------------------
Total 90 157
- -------------------------------------------------------------
Net charge-offs (1,647) (346)
Provision for loan
losses charged to operations 872 906
- -------------------------------------------------------------
Balance, December 31 $1,200 $1,975
=============================================================
Net charge-offs as a
percentage of average loans 1.94% .47%
Reserve for loan losses as a
percentage of loans 1.32 2.40
Reserve for loan losses as a
percentage of nonperforming loans 171.18 71.40
=============================================================
The reserve for loan losses is maintained at a level determined by management to
be adequate to provide for inherent losses in the loan portfolio. The reserve is
increased by provisions charged to operations and recoveries of loan
charge-offs. The
9
10
reserve is based on management's evaluation of the loan portfolio and several
other factors, including past loan loss experience, general business and
economic conditions, concentration of credit and the possibility that there may
be inherent losses in the portfolio which cannot currently be identified.
A standardized method is used to assess the adequacy of the reserve and to
identify the risks inherent in the loan portfolio. This process includes the
ongoing assessment of individual borrowers' financial condition and payment
records and gives consideration to areas of exposure such as conditions within
the borrowers' industry, the value of underlying collateral, and the composition
of the performing and non-performing loan portfolios.
Specific allocations are identified by loan category and allocated according to
prior charge-off history as well as future performance projections. All loans
are graded and incorporated in the process of assessing the adequacy of the
reserve. The reserve is maintained at a level considered sufficient to absorb
estimated losses in the loan portfolio, and reserves not allocated to specific
loan categories are considered unallocated and evaluated based on management's
assessment of the portfolio's risk profile.
The reserve represented 1.32% of total loans at December 31, 2000 compared to
2.40% a year earlier. The decrease in the reserve resulted from the charge-off
of $1.3 million of loans to a single borrower that had been considered impaired
at December 31, 1999.
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
The reserve for loan losses has been allocated based on management's estimates
of the risk elements within the loan categories set forth below at December 31:
2000 1999
========================================================================
Percentage Percentage
of Loan of Loan
Category Category
to Gross to Gross
Dollars in thousands Amount Loans Amount Loans
========================================================================
Commercial $ 405 30.67% $1,492 21.41%
Real estate 444 67.73 386 77.60
Installment 30 1.60 17 .99
Unallocated 321 - 80 -
- ------------------------------------------------------------------------
Total $1,200 100.00% $1,975 100.00%
========================================================================
Reserve allocations are subject to change based on the levels of classified
loans in each segment of the portfolio. The minimum levels of reserves by
internal loan classification are .25% for pass loans, 1% for special mention
loans, 5% for substandard loans, 50% for doubtful loans, and 100% for loss
loans. These minimum reserve levels have been consistently applied for all
reported periods. The unallocated reserve is based upon management's evaluation
of the underlying inherent risk in the loan portfolio.
NONPERFORMING ASSETS
Information pertaining to nonperforming assets at December 31 is summarized
below:
In thousands 2000 1999
=============================================================
Nonperforming loans
Commercial $ 165 $2,093
Real estate 499 668
Installment 37 5
- -------------------------------------------------------------
Total nonperforming loans 701 2,766
Other real estate owned 621 698
- -------------------------------------------------------------
Total $1,322 $3,464
=============================================================
OREO is carried net of a $13,000 reserve at December 31, 2000 and 1999. The
decrease in nonperforming loans reflects the aforementioned impaired loan
charge-off.
DEPOSITS
Total deposits rose to $176.2 million at December 31, 2000 from $139.8 million a
year earlier, while average deposits increased 14.6%, to $149.4 million in 2000
from $130.4 million in 1999. Year-end 2000 included a $26 million nonrecurring
deposit which was withdrawn shortly after year-end.
Demand account balances rose to $54.8 million at December 31, 2000 compared to
$20.6 million a year earlier due primarily to the aforementioned nonrecurring
deposit. Average demand deposits were also up in 2000, rising 21.4% to $25.3
million from $20.8 million in 1999. Higher commercial balances contributed to
this increase.
Saving deposits rose to $53.5 million at December 31, 2000 from $34.7 million a
year earlier due to higher municipal account balances. Average savings accounts
rose 29.1% in 2000 due to higher municipal Super NOW account balances. Regular
savings and money-market account growth was flat.
Time deposits declined 19.7% to $67.9 million at December 31, 2000 from $84.5
million at the end of 1999, while average time deposits were $71.6 million in
2000, 3.9% more than in 1999. The nominal increase in average time deposits
occurred due to a similar increase in municipal time deposit balances, while a
decline of such deposits contributed to the reduction at December 31, 2000 from
a year earlier.
The Bank's deposit levels may change significantly on a daily basis because
deposit accounts maintained by municipalities represent a significant part of
the Bank's deposits and are more volatile than commercial or retail deposits.
These municipal and U.S. Government accounts represent a substantial part of the
Bank's business, tend to have high balance relationships and comprised most of
the Bank's accounts with balances of $100,000 or more at December 31, 2000.
While the collateral maintenance requirements associated with the Bank's
municipal and U.S. Government account relationships might limit the ability to
readily dispose of investment securities used as such collateral, management
does not foresee any need for such disposal, and in the event of the withdrawal
of any of these deposits, these securities are readily marketable.
Certain corporations and governmental agencies maintain noninterest-bearing
savings accounts with the Bank as compensation for services performed. At
December 31, 2000, such balances totalled $294,000.
10
11
SHORT-TERM BORROWINGS
Short-term borrowings decreased to $46,000 at December 31, 2000 compared to $6
million a year earlier due to a lower U.S. Treasury tax and loan note option
account balance. These balances are subject to daily redemption and can
fluctuate significantly. Average short-term borrowings rose to $3.5 million in
2000 from $2.8 in 1999 because of higher U.S. Treasury tax and loan note option
account balances.
LONG-TERM DEBT
Long-term debt decreased in 2000 due to the early redemption of $4.3 million of
FHLB callable advances. In December, 2000 CNBC issued a capital note for
$500,000, which qualifies for "Tier1" regulatory capital.
RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999
Net interest income is the principal source of the Corporation's earnings and
represents the amounts by which the interest and fees earned on loans and other
interest earning assets exceeds the interest paid on the funding sources used to
finance those assets. An analysis of the components of net interest income is
facilitated when the income from tax-exempt investment securities is adjusted to
a taxable equivalent basis, placing tax-exempt assets on a comparable basis with
taxable interest earning assets.
Federal monetary policy and the resultant changes in interest rates have a
significant effect on the operations of the Corporation. Generally, if rates
rise, interest on earning assets goes up, along with interest paid on interest
bearing liabilities, while a decrease in rates leads to lower rates earned on
earning assets and paid on interest bearing liabilities.
Three key rates affect the yields on earning assets as well as the rates paid
interest bearing liabilities: (1) the Federal funds target rate, (2) the
three-month U.S. treasury bill rate and (3) the prime rate.
The Federal funds rate started 2000 at 5.50%, rising three times, to 6.50% on
March 21, 2000 and remaining there all year. The three-month U.S. Treasury bill
rate started 2000 at 5.31%, rising to 6.20% at the end of the third quarter
before declining to 5.89% at the end of the year. Finally, CNB's prime rate
began the year at 9.50%, remaining unchanged through the year. Accordingly,
short-term rates were considerably higher during 2000 than in 1999, while
longer-term rates were slightly higher.
On a fully taxable equivalent ("FTE") basis, net interest income rose 15.2%, to
$6.3 million in 2000 from $5.5 million in 1999, while the related net interest
margin rose 20 basis points, from 3.63% to 3.83%. Higher levels of interest
income were partially offset by increased interest expense, resulting from both
an increase in interest bearing liabilities and a higher cost of funds.
Interest income on a FTE basis rose $1.9 million or 18% in 2000. Both a higher
volume of interest earning assets along with higher interest rate environment
contributed to this increase. As a result, the yield on interest earning assets
rose 57 basis points from 7.15% to 7.72%. Interest earning assets averaged $13.9
million or 9.3% higher in 2000, with the loan portfolio providing $11 million of
that increase.
Interest income from shorter-term earning assets increased by 45.6%, reflecting
the investment of higher short-term deposit balances. The increase in short-term
rates provided $132,000 of the $215,000 total increase in income.
Interest income on taxable investment securities rose $215,000 or 5.7% in 2000
due to the higher interest rate environment. Tax-exempt income was up 66.3% due
mostly to higher volume as the tax-exempt portfolio average increased from $4.5
million in 1999 to $7 million in 2000.
Interest income on loans rose $1.3 million, or 20.9% due primarily to higher
volume in all categories, which accounted for $921,000, or 71.4% of the total
increase. The commercial loan portfolio averaged $29.4 million in 2000 compared
to $25.1 million in 1999, while the yield on the portfolio rose 110 basis points
from 7.51% to 8.61%. The real estate portfolio also increased, averaging $53.9
million in 2000 compared to $47.7 million in 1999, while the related yields were
8.88% compared to 8.76%. Finally, installment loans, although comprising the
smallest segment of the loan portfolio, averaged 54% more in 2000 than in 1999,
contributing a small but growing percentage of loan portfolio income. This
latter increase resulted from the effects of the Bank's efforts in expanding its
credit card portfolio, which is being done on a selective basis.
Interest expense totalled $6.4 million in 2000, an increase of 20.9% from 1999.
This increase resulted primarily from a higher cost of interest bearing
liabilities. Higher rates accounted for 84.2 % of the total increase in interest
expense. The average rate paid on interest bearing liabilities rose by 46 basis
points, from 4.11% to 4.57%.
The largest growth in interest bearing liabilities occurred in savings accounts,
which averaged $11.8 million higher in 2000 than during the previous year due to
increased commercial deposit activity. Interest expense on savings deposits was
61.3% higher in 2000, with the increase divided almost equally between volume
and rate increases. The average rate paid rose from 1.95% to 2.43%.
Interest expense on time deposits rose $751,000, comprising the largest
component of the increase in total interest expense, and resulted primarily from
higher rates paid on those deposits. The average rate paid was 86 basis points
higher in 2000, averaging 5.87% compared to 5.01% in 1999. Average volume was up
3.9%, as the Bank reduced its municipal deposit growth during the second quarter
of 2000.
Interest expense on short-term borrowing was up $77,000 due to both volume and
rate increases. The average rate paid rose 127 basis points, from 4.76% in 1999
to 6.03% because the rates on these liabilities are tied to the Federal funds
rate.
Interest expense on long-term debt declined $208,000 in 2000 due to lower levels
of FHLB advances, while the average rate paid rose by 14 basis points.
Service charges on deposit accounts rose 6.2% due primarily to the acquisition
of the aforementioned branch office in May, 2000.
Other operating income rose 70.7% to $2,547,000 in 2000 from $1,492,000 in 1999.
The primary reasons for the increase were the $879,000 CDFI Fund award and
higher loan syndication fees, which rose 87.2% to $575,000 from $307,000.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for loan losses, totalled $6.2 million in 2000, a 17.1%
increase compared to $5.3 million in 1999. Expenses of operating the acquired
branch accounted for $293,000 of the $909,000, with an increase in OREO expense
contributing $189,000 more.
Salary expense rose 13.4 % due to normal recurring merit increases, the branch
acquisition and a higher incentive bonus
11
12
paid in 2000. Employee benefits rose 14.3% due primarily to the higher cost of
providing employee health insurance.
Occupancy and equipment expense rose 16% due to the expenses of operating the
aforementioned new branch, along with increased costs associated with the
acquisition of a building at another branch location in August, 1999, which was
previously being leased from an agency of the U. S. Government at no cost. Also
contributing to the increase was lower rental income from Bank-owned properties.
Other expenses rose $398,000, or 23.7% in 2000 due primarily to the
aforementioned increase in OREO expense along with costs associated with
operating the new branch.
Income tax expense as a percentage of pre-tax income was 29.5% in 2000 compared
to 32.4% in 1999. The decrease resulted due primarily to higher levels of
tax-exempt income.
LIQUIDITY
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
The Bank depends primarily on deposits as a source of funds and also provides
for a portion of its funding needs through short-term borrowings, such as
Federal Funds purchased, securities sold under repurchase agreements and
borrowings under the U.S. Treasury tax and loan note option program. The Bank
also utilizes the Federal Home Loan Bank for longer-term funding purposes.
The major contribution during 2000 from operating activities to the
Corporation's liquidity came from net income, while loans originated for sale,
amounting to $553,000, represented the primary use of cash.
Net cash used in investing activities was primarily used for loan originations,
which totalled $10 million, while sources of cash provided by investing
activities were derived primarily from proceeds from maturities, principal
payments and early redemptions of investment securities available for sale,
amounting to $8.2 million.
The primary source of funds from financing activities resulted from an increase
in deposits of $28 million while the primary use was for a $6 million decrease
in short-term borrowings. The deposit increase resulted from a $26 million
nonrecurring deposit received at the end of 2000 which was withdrawn in January.
EFFECTS OF INFLATION
Inflation, as measured by the CPI, rose to 3.4% in 2000 compared to 2.7% in 1999
and 1.0% in 1998.
The asset and liability structure of the Corporation and subsidiary bank differ
from that of an industrial company since its assets and liabilities fluctuate
over time based upon monetary policies and changes in interest rates. The growth
in earning assets, regardless of the effects of inflation, will increase net
income if the Corporation is able to maintain a consistent interest spread
between earning assets and supporting liabilities. In an inflationary period,
the purchasing power of these net monetary assets necessarily decreases.
However, changes in interest rates may have a more significant impact on the
Corporation's performance than inflation. While interest rates are affected by
inflation, they do not necessarily move in the same direction, or in the same
magnitude as the prices of other goods and services.
The impact of inflation on the future operations of the Corporation should not
be viewed without consideration of other financial and economic indicators, as
well as historical financial statements and the preceding discussion regarding
the Corporation's liquidity and asset and liability management.
INTEREST RATE SENSITIVITY
The management of interest rate risk is also important to the profitability of
the Corporation. Interest rate risk arises when an earning asset matures or when
its interest rate changes in a time period different from that of a supporting
interest bearing liability, or when an interest bearing liability matures or
when its interest rate changes in a time period different from that of an
earning asset that it supports. While the Corporation does not match specific
assets and liabilities, total earning assets and interest bearing liabilities
are grouped to determine the overall interest rate risk within a number of
specific time frames.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to
monitor and oversee the activities of interest rate sensitivity management and
the protection of net interest income from fluctuations in interest rates.
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
interest sensitive gap. At any given point in time, the Corporation may be in an
asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities or in a liability-sensitive position, whereby its
interest-sensitive liabilities exceed its interest-sensitive assets, depending
on management's judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which
details the repricing differences for assets and liabilities for given periods.
The primary limitation of this analysis is that it is a static (i.e., as of a
specific point in time) measurement which does not capture risk that varies
nonproportionally with changes in interest rates. Because of this limitation,
the Corporation uses a simulation model as its primary method of measuring
interest rate risk. This model, because of its dynamic nature, forecasts the
effects of different patterns of rate movements on the Corporation's mix of
interest sensitive assets and liabilities.
The following table presents the Corporation's sensitivity to changes in
interest rates, categorized by repricing period. Various assumptions are used to
estimate expected maturities. The actual maturities of these instruments could
vary substantially if future prepayments differ from estimated experience.
12
13
INTEREST SENSITIVITY GAP ANALYSIS
December 31, 2000
======================================================================================================================
Non-Interest
Sensitive and
Total Maturing In
90 Days 91 to 180 181 to 365 Within More Than
Dollars in thousands or Less Days Days One Year One Year Total
======================================================================================================================
Interest earning assets:
Federal funds sold and securities
purchased under agreements
to resell $ 26,700 $ -- $ -- $ 26,700 $ -- $ 26,700
Investment securities:
Available for sale 6,191 3,164 3,508 12,863 20,989 33,852
Held to maturity 2,158 200 1,505 3,863 28,215 32,078
Loans 17,542 6,426 12,851 36,819 53,834 90,653
- ----------------------------------------------------------------------------------------------------------------------
52,591 9,790 17,864 80,245 103,038 183,283
- ----------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Deposits:
Savings 32,377 -- -- 32,377 21,144 53,521
Time 39,314 8,862 5,410 53,586 14,273 67,859
Short-term borrowings 46 -- -- 46 -- 46
Long-term debt 1,000 150 150 1,300 11,125 12,425
Non-interest bearing liabilities -- -- -- -- 49,432 49,432
- ----------------------------------------------------------------------------------------------------------------------
72,737 9,012 5,560 87,309 95,974 183,283
- ----------------------------------------------------------------------------------------------------------------------
Asset (liability) sensitivity gap:
Period gap $(20,146 $ 778 $ 12,304 $ (7,064) $ 7,064 $ --
Cumulative gap (20,146) (19,368) (7,064) -- -- --
======================================================================================================================
The Corporation was highly liability-sensitive at the 90-day interval with a $20
million negative gap due to the Bank's short-term municipal time deposit
relationship. Because most of these deposits are considered a stable funding
source, the deposit proceeds are invested in investment securities, which are
used to collateralize these deposits, creating a rate sensitivity gap mismatch.
Partially offsetting this mismatch are expected maturities and repricings within
the loan portfolio. At the one-year interval, the sensitivity gap was almost
neutral, amounting to a negative $7.1 million, due largely to repricings and
maturities within the loan portfolio.
CAPITAL
The following table presents the consolidated and bank-only capital components
and related ratios as calculated under regulatory accounting practice at
December 31:
Consolidated Bank Only
- ------------------------------------------------------------------------------------------------
December 31, December 31,
Dollars in thousands 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------
Total stockholders' equity $ 10,235 $ 9,026 $ 11,787 $ 10,083
Net unrealized (gain) loss
on investment securities
available for sale 273 679 259 664
Disallowed intangibles (261) (37) (261) (36)
Tier 1 capital 10,247 9,668 11,785 10,711
Qualifying long-term debt 1,225 2,225 249 249
Reserve for loan
losses 1,200 1,231 1,200 1,222
Tier 2 capital 2,425 3,456 1,449 1,471
Total capital $ 12,672 $ 13,124 $ 13,234 $ 12,182
Risk-adjusted assets $ 109,391 $ 97,736 $ 108,674 $ 97,038
Total assets 200,442 172,496 199,543 171,625
Risk-based capital ratios:
Tier 1 capital to risk-
adjusted assets 9.37% 9.89% 10.84% 11.04%
Regulatory minimum 4.00 4.00 4.00 4.00
Total capital to risk-
adjusted assets 11.58 13.43 12.18 12.55
Regulatory minimum 8.00 8.00 8.00 8.00
Leverage ratio 5.67 5.68 6.56 6.32
Total stockholders' equity
To total assets 5.11 5.23 5.91 5.87
=================================================================================================
13
14
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
=======================
Dollars in thousands, except per share data 2000 1999
===================================================================================================================
ASSETS
Cash and due from banks (Note 2) $ 8,884 $ 6,209
Federal funds sold (Note 3) 26,700 5,400
Interest-bearing deposits with banks 153 2,286
Investment securities available for sale (Note 4) 33,852 35,458
Investment securities held to maturity (Market value of $31,686
at December 31, 2000 and $31,051 at December 31, 1999) (Note 5) 32,078 33,017
Loans held for sale 148 405
Loans (Note 6) 90,653 82,446
Less: Reserve for loan losses (Note 7) 1,200 1,975
- -------------------------------------------------------------------------------------------------------------------
Net loans 89,453 80,471
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment (Note 8) 3,471 3,709
Accrued interest receivable 1,410 1,295
Other real estate owned 621 698
Other assets (Notes 13 and 14) 3,672 3,548
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 200,442 $ 172,496
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits: (Notes 3, 4, 5, and 9)
Demand $ 54,789 $ 20,625
Savings 53,521 34,719
Time 67,859 84,493
- -------------------------------------------------------------------------------------------------------------------
Total deposits 176,169 139,837
Short-term borrowings (Notes 6 and 10) 46 6,000
Accrued expenses and other liabilities 1,567 1,408
Long-term debt (Note 11) 12,425 16,225
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 190,207 163,470
Commitments and contingencies (Note 20)
Stockholders' equity (Notes 15, 16 and 23):
Preferred stock, no par value: Authorized 100,000 shares (Note 15);
Series A , issued and outstanding 8 shares in 2000 and 1999 200 200
Series C , issued and outstanding 108 shares in 2000 and 1999 27 27
Series D , issued and outstanding 3,280 shares in 2000 and 1999 820 820
Common stock, par value $10: Authorized 400,000 shares;
122,030 shares issued in 2000 and 120,130 shares issued in 1999,
121,406 shares outstanding in 2000 and 119,571 shares outstanding in 1999 1,220 1,201
Surplus 968 950
Retained earnings 7,292 6,524
Accumulated other comprehensive loss (273) (679)
Treasury stock, at cost - 624 shares and 559 shares in 2000 and 1999, respectively (19) (17)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,235 9,026
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 200,442 $ 172,496
==================================================================================================================
See accompanying notes to consolidated financial statements.
14
15
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
----------------------------------
Dollars in thousands, except per share data 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 7,447 $ 6,158 $ 5,282
Interest on Federal funds sold and securities
purchased under agreements to resell 646 396 653
Interest on deposits with banks 41 76 4
Interest and dividends on investment securities:
Taxable 3,985 3,770 3,390
Tax-exempt 358 215 226
- ---------------------------------------------------------------------------------------------------------
Total interest income $ 12,477 $ 10,615 $ 9,555
- ---------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits (Note 9) 5,480 4,244 3,775
Interest on short-term borrowings 210 133 159
Interest on long-term debt 691 899 664
- ---------------------------------------------------------------------------------------------------------
Total interest expense 6,381 5,276 4,598
- ---------------------------------------------------------------------------------------------------------
Net interest income 6,096 5,339 4,957
Provision for loan losses (Note 7) 872 906 1,016
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 5,224 4,433 3,941
- ---------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Service charges on deposit accounts 701 660 668
Other income (Note 12) 1,847 815 642
Net (losses) gains on sales of investment securities (Notes 4 and 5) (1) 17 (13)
- ---------------------------------------------------------------------------------------------------------
Total other operating income 2,547 1,492 1,297
- ---------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries and other employee benefits (Note 14) 3,199 2,820 2,644
Occupancy expense (Note 8) 490 394 356
Equipment expense (Note 8) 469 433 386
Other expenses (Note 12) 2,081 1,683 1,613
- ---------------------------------------------------------------------------------------------------------
Total other operating expenses 6,239 5,330 4,999
- ---------------------------------------------------------------------------------------------------------
Income before income tax expense 1,532 595 239
Income tax expense (Note 13) 452 193 13
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 1,080 $ 402 $ 226
=========================================================================================================
NET INCOME PER COMMON SHARE (NOTE 17)
Basic $ 8.21 $ 2.48 $ 1.25
Diluted 7.52 2.34 1.22
=========================================================================================================
Basic average common shares outstanding 120,926 118,902 115,189
Diluted average common shares outstanding 133,426 131,402 129,039
=========================================================================================================
See accompanying notes to consolidated financial statements.
15
16
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Accumulated
Other
Common Preferred Retained Comprehensive Treasury
Dollars in thousands Stock Surplus Stock Earnings (Loss) Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 1,150 $ 901 $ 1,547 $ 6,497 $ (38) $ (25) $ 10,032
Comprehensive income:
Net income - - - 226 - - 226
Unrealized holding gains on securities
arising during the period (net of tax of $21) - - - - 63 - 63
--------
Total comprehensive income 289
Proceeds from issuance of common stock 38 37 - - - 8 83
Dividends paid on common stock - - - (199) - - (199)
Dividends paid on preferred stock - - - (82) - - (82)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,188 938 1,547 6,442 25 (17) 10,123
Comprehensive income:
Net income - - - 402 - - 402
Unrealized holding losses on securities
arising during the period (net of tax of $(465)) - - - - (704) - (704)
--------
Total comprehensive income (loss) (302)
Redemption of preferred stock - - (500) - - - (500)
Proceeds from issuance of common stock 13 12 - - - - 25
Dividends paid on common stock - - - (213) - - (213)
Dividends paid on preferred stock - - - (107) - - (107)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 1,201 950 1,047 6,524 (679) (17) 9,026
Comprehensive income:
Net income - - - 1,080 - - 1,080
Unrealized holding gains on securities
arising during the period (net of tax of $281) - - - - 406 - 406
--------
Total comprehensive income 1,486
Proceeds from issuance of common stock 19 18 - - - - 37
Purchase of treasury stock - - - - - (2) (2)
Dividends paid on common stock - - - (225) - - (225)
Dividends paid on preferred stock - - - (87) - - (87)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 1,220 $ 968 $ 1,047 $ 7,292 $ (273) $ (19) $ 10,235
====================================================================================================================================
See accompanying notes to consolidated financial statements.
16
17
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
IN THOUSANDS 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,080 $ 402 $ 226
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 460 420 376
Provision for loan losses 872 906 1,016
Premium amortization on investment securities 9 69 73
Net losses (gains) on sales and early redemption of investment securities 1 (17) 13
Gains on sales of loans held for sale (15) (21) (64)
Loans originated for sale (553) (1,640) (2,307)
Proceeds from sales of loans held for sale 825 592 1,152
(Increase) decrease in accrued interest receivable (115) (185) 2
Deferred income tax expense (benefit) 206 (514) (409)
Increase in other assets (405) (1,050) (343)
(Decrease) increase in accrued expenses and other liabilities (47) 340 327
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,318 (698) 62
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in loans (10,024) (8,419) (15,304)
Decrease (increase) in interest-bearing deposits with banks 2,133 (2,261) 15
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and early redemptions 8,194 16,791 18,882
Proceeds from maturities of investment securities held to maturity,
including sales, principal payments and early redemptions 4,947 8,729 18,255
Purchases of investment securities available for sale (5,896) (21,185) (18,472)
Purchases of investment securities held to maturity (4,023) (10,046) (20,252)
Purchases of premises and equipment (222) (821) (492)
Decrease (increase) in other real estate owned, net 247 (5) 180
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,644) (17,217) (17,188)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchase of deposits 8,339 -- --
Increase in deposits 27,993 1,894 18,226
(Decrease) increase in short-term borrowings (5,954) 5,982 (4,195)
(Decrease) increase in long-term debt (3,800) 476 12,000
Proceeds from issuance of common stock 37 25 83
Purchase of treasury stock (2) -- --
Redemptions of preferred stock -- (500) --
Dividends paid on preferred stock (87) (107) (82)
Dividends paid on common stock (225) (213) (199)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,301 7,557 25,833
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 23,975 (10,358) 8,707
Cash and cash equivalents at beginning of year 11,609 21,967 13,260
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 35,584 $ 11,609 $ 21,967
===================================================================================================================
CASH PAID DURING THE YEAR:
Interest $ 6,440 $ 5,428 $ 4,173
Income taxes 323 520 539
SUPPLEMENTAL SCHEDULE FOR NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans 170 103 385
Transfer of loans held for sale to loans -- 2,292 --
Conversion of preferred stock into long-term debt -- 500 --
See accompanying notes to consolidated financial statements.
17
18
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of City National Bancshares Corporation
(the "Corporation" or "CNBC") and its subsidiary City National Bank of New
Jersey (the "Bank" or "CNB") conform with accounting principles generally
accepted in the United States of America and to general practice within the
banking industry. In preparing the financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities as of the date of the
balance sheet and revenues and expenses for the related periods. Actual results
could differ significantly from those estimates. The following is a summary of
the more significant policies and practices.
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of CNBC and its wholly-owned
subsidiary, CNB. All significant intercompany accounts and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the presentation of the Statement of Cash Flows, Cash and cash
equivalents includes Cash and due from banks and Federal funds sold.
FEDERAL HOME LOAN BANK OF NEW YORK
The Bank, as a member of Federal Home Loan Bank of New York "FHLB", is required
to hold shares of capital stock of the FHLB based on a specified formula. The
FHLB stock is carried at cost and is included in investment securities available
for sale.
INVESTMENT SECURITIES HELD TO MATURITY AND INVESTMENT SECURITIES AVAILABLE FOR
SALE
Investment securities are designated as held to maturity or available for sale
at the time of acquisition. Securities that the Corporation has the intent and
ability at the time of purchase to hold until maturity are designated as held to
maturity. Investment securities held to maturity are stated at cost and adjusted
for amortization of premiums and accretion of discount to the earlier of
maturity or call date using the level yield method.
Securities to be held for indefinite periods of time but not intended to be held
until maturity or on a long-term basis are classified as investment securities
available for sale. Securities held for indefinite periods of time include
securities that the Corporation intends to use as part of its interest rate
sensitivity management strategy and that may be sold in response to changes in
interest rates, resultant risk and other factors. Investment securities
available for sale are reported at fair market value, with unrealized gains and
losses, net of deferred tax reported as a component of accumulated other
comprehensive income, which is included in stockholders' equity. Gains and
losses realized from the sales of securities available for sale are determined
using the specific identification method.
The Corporation holds in its investment portfolios mortgage-backed securities.
Such securities are subject to changes in the prepayment rates of the underlying
mortgages, which may affect both the yield and maturity of the securities.
LOANS HELD FOR SALE
Loans held for sale include residential mortgage loans originated with the
intent to sell. Loans held for sale are carried at the lower of aggregate cost
or fair value. During 1999, the Bank transferred $2.3 million in loans held for
sale into the loan portfolio at the lower of cost or fair market value.
LOANS
Loans are stated at the principal amounts outstanding, net of unearned discount
and deferred loan fees. Interest income is accrued as earned, based upon the
principal amounts outstanding. Loan origination fees and certain direct loan
origination costs, as well as unearned discount, are deferred and recognized
over the life of the loan revised for loan prepayments, as an adjustment to the
loan's yield. Recognition of interest on the accrual method is generally
discontinued when a loan contractually becomes 90 days or more past due or a
reasonable doubt exists as to the collectibility of the loan, unless such loans
are well-secured and in the process of collection. At the time a loan is placed
on a nonaccrual status, previously accrued and uncollected interest is generally
reversed against interest income in the current period. Interest on such loans,
if appropriate, is recognized as income when payments are received. A loan is
returned to an accrual status when it is current as to principal and interest
and its future collectibility is expected.
The Corporation has defined the population of impaired loans to be all
nonaccrual loans of $100,000 or more considered by management to be inadequately
secured and subject to risk of loss. Impaired loans of $100,000 or more are
individually assessed to determine that the loan's carrying value does not
exceed the fair value of the underlying collateral or the present value of the
loan's expected future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment such as residential mortgage and
installment loans, are specifically excluded from the impaired loan portfolio.
RESERVE FOR LOAN LOSSES
A substantial portion of the Bank's loans are secured by real estate in New
Jersey particularly within the Newark area. Accordingly, as with most financial
institutions in the market area, the ultimate collectibility of a substantial
portion of the Bank's loan portfolio is susceptible to changes in market
conditions.
The reserve for loan losses is maintained at a level determined adequate to
provide for losses inherent in the portfolio. The reserve is increased by
provisions charged to operations and recoveries of loans previously charged off
and reduced by loan charge-offs. The reserve is based on management's evaluation
of the loan portfolio considering current economic conditions, the volume and
nature of the loan portfolio, historical loan loss experience and individual
credit and collateral situations.
Management believes that the reserve for loan losses is adequate. While
management uses available information to determine the adequacy of the reserve,
future additions may be necessary based on changes in economic conditions or
subsequent events unforeseen at the time of evaluation.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's reserve for loan losses.
Such agencies may require the Bank to increase the reserve based on their
judgment of information available to them at the time of their examination.
BANK PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation based
upon estimated useful lives of three to 39 years, computed using the
straight-line method. Expenditures for maintenance and repairs are charged to
operations as incurred, while major replacements and improvements are
capitalized. The net asset values of assets retired or disposed of are removed
from the asset accounts and any related gains or losses are included in
operations.
18
19
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") acquired through foreclosure or deed in lieu of
foreclosure is carried at the lower of cost or fair value less estimated cost to
sell, net of a valuation allowance. When a property is acquired, the excess of
the loan balance over the estimated fair value is charged to the reserve for
loan losses. Operating results, including any future writedowns of OREO, rental
income and operating expenses, are included in "Other expenses".
A reserve for OREO has been established through charges to "Other expenses" to
maintain properties at the lower of cost or fair value less estimated cost to
sell.
CORE DEPOSIT PREMIUMS
The premium paid for the acquisition of deposits in connection with the purchase
of a branch office is amortized on an accelerated basis over the ten-year
estimated useful life of the assumed deposit base.
INCOME TAXES
Federal income taxes are based on currently reported income and expense after
the elimination of income which is exempt from Federal income tax.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Such temporary
differences include depreciation and the provision for possible loan losses.
NET INCOME PER COMMON SHARE
Basic income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. On a diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of the convertible subordinate
debentures.
COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. The required disclosures are included in the Statement of
Changes in Stockholders' Equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement, as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 supersedes the disclosure requirements in SFAS No. 80, 105, and 119.
This statement was to be effective for periods after June 15, 1999. SFAS 137
extended the adoption date of SFAS 133 to fiscal years beginning after June 15,
2000. The Corporation adopted the provisions of SFAS 133 on January 1, 2001, at
which time, investment securities with a carrying value of $246,000 and a
related market value of $266,000 were transferred from the held to maturity
portfolio to the available for sale portfolio.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements in order to conform with the 2000 presentation.
NOTE 2 CASH AND DUE FROM BANKS
The Bank is required to maintain a reserve balance with the Federal Reserve Bank
based primarily on deposit levels. These reserve balances averaged $953,000 in
2000 and $826,000 in 1999.
NOTE 3 FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Federal funds sold averaged $10.5 million during 2000 and $8 million in 1999,
while the maximum balance outstanding at any month-end during 2000, 1999 and
1998 was $26.7 million, $15.4 million and $30.5 million, respectively. There
were no securities purchased under repurchase agreements in either 2000 or 1999.
There were no such transactions outstanding at any month-end during 2000, 1999
or 1998.
At December 31, 2000, Federal funds sold and demand deposits included a $26
million nonrecurring deposit which was withdrawn in January, 2001.
NOTE 4 INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and market values at December 31 of investment securities
available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
2000 In thousands Cost Gains Losses Value
===========================================================================
U.S. Treasury securities
and obligations of U.S.
government agencies $ 6,926 $ 43 $205 $ 6,764
Obligations of state and
political subdivisions
Other securities: 2,279 32 -- 2,311
Mortgage-backed
securities 19,913 112 211 19,814
Other debt securities 3,670 -- 195 3,475
Equity securities 1,506 -- 18 1,488
- ---------------------------------------------------------------------------
Total $34,294 $187 $629 $33,852
===========================================================================
Gross Gross
Amortized Unrealized Unrealized Market
1999 In thousands Cost Gains Losses Value
============================================================================
U.S. Treasury securities
and obligations of U.S.
government agencies $ 3,193 $25 $ 13 $ 3,205
Obligations of state and
political subdivisions 2,280 -- 69 2,211
Other securities:
Mortgage-backed
securities 25,910 10 910 25,010
Other debt securities 3,670 -- 163 3,507
Equity securities 1,534 -- 9 1,525
- ----------------------------------------------------------------------------
Total $36,587 $35 $1,164 $35,458
============================================================================
The amortized cost and the market values of investments in debt securities
available for sale presented below as of December 31, 2000 are distributed by
contractual maturity, without regard to normal amortization including
mortgage-backed securities, which will have shorter estimated lives as a result
of prepayments of the underlying mortgages.
19
20
Amortized Market
In thousands Cost Value
=======================================================================
Due within one year:
U.S. Treasury securities and obligations
of U.S. government agencies $ 1,997 $ 2,003
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies 1,596 1,601
Mortgage-backed securities 3,077 3,078
Due after five years but within ten years:
Mortgage-backed securities 703 701
Other debt securities 756 742
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 3,333 3,160
Mortgage-backed securities 16,133 16,035
Obligations of state and political
subdivisions 2,279 2,311
Other debt securities 2,914 2,733
- -----------------------------------------------------------------------
Total debt securities 32,788 32,364
Equity securities 1,506 1,488
- -----------------------------------------------------------------------
Total $34,294 $33,852
=======================================================================
Sales of investment securities available for sale totalled $80,000 in 2000, $4.9
million in 1999 and $3.9 million in 1998, resulting in gross gains of $24,000,
$133,000 and $44,000 and gross losses of $10,000, $116,000 and $57,000
respectively.
Interest and dividends on investment securities available for sale was as
follows:
In thousands 2000 1999 1998
=============================================================
Taxable $2,257 $1,977 $1,760
Tax-exempt 101 104 116
- -------------------------------------------------------------
Total $2,358 $2,081 $1,876
=============================================================
Investment securities available for sale with a carrying value of $24,391,000
were pledged to secure public funds at December 31, 2000.
NOTE 5 INVESTMENT SECURITIES HELD TO MATURITY
The book and market values as of December 31 of investment securities held to
maturity were as follows:
Gross Gross
Book Unrealized Unrealized Market
2000 In thousands Value Gains Losses Value
================================================================================
U.S. Treasury securities
and obligations of U.S.
government agencies $18,567 $ 1 $468 $18,100
Obligations of state and
political subdivisions 4,985 135 -- 5,120
Other securities:
Mortgage-backed 6,498 56 96 6,458
Other debt securities 2,028 7 27 2,008
- --------------------------------------------------------------------------------
Total $32,078 $199 $591 $31,686
================================================================================
Gross Gross
Book Unrealized Unrealized Market
1999 In thousands Value Gains Losses Value
================================================================================
U.S. Treasury securities
and obligations of U.S.
government agencies $23,204 $-- $1,660 $21,544
Obligations of state and
political subdivisions 3,360 -- 33 3,327
Other securities:
Mortgage-backed 3,922 -- 75 3,847
Other debt securities 2,531 -- 198 2,333
- --------------------------------------------------------------------------------
Total $33,017 $-- $1,966 $31,051
================================================================================
The book value and the market value of investment securities held to maturity
presented below as of December 31, 2000 are distributed by contractual maturity
without regard to normal amortization, including mortgage-backed securities,
which will have shorter estimated lives as a result of prepayments of the
underlying mortgages.
Book Market
In thousands Value Value
==========================================================================
Due within one year:
Mortgage-backed securities $ 162 $ 162
Obligations of state and political
subdivisions 1,557 1,561
Due after one year but within five years:
Mortgage-backed securities 957 954
Obligations of state and political
subdivisions 401 403
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 6,168 6,039
Other debt securities 2,028 2,008
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 12,399 12,061
Mortgage-backed securities 5,379 5,342
Obligations of state and political
subdivisions 3,027 3,156
- --------------------------------------------------------------------------
Total $32,078 $31,686
==========================================================================
During 2000, $500,000 of securities held to maturity were sold resulting in a
loss of $15,000. The securities were sold as a result of a downgrade in the
credit rating of the issuer. There were no sales of securities held to maturity
in 1999.
Interest and dividends on investment securities held to maturity was as follows:
In thousands 2000 1999 1998
============================================================
Taxable $1,728 $1,793 $1,630
Tax-exempt 257 111 110
- ------------------------------------------------------------
Total $1,985 $1,904 $1,740
============================================================
Investment securities held to maturity with a carrying value of $19,895,000 were
pledged to secure public funds at December 31, 2000.
NOTE 6 LOANS
Loans, net of unearned discount and net deferred origination fees and costs at
December 31, were as follows:
In thousands 2000 1999
=============================================================
Commercial $27,843 $17,687
Real estate 61,483 64,113
Installment 1,456 823
Total loans 90,782 82,623
Less: Unearned income 129 177
- -------------------------------------------------------------
Loans $90,653 $82,446
=============================================================
Loans guaranteed by the Small Business Administration totalling $1,424,000 were
pledged as collateral for borrowings under a note issued to the U.S. Treasury
Department at December 31, 2000.
Nonperforming loans include loans which are contractually past due 90 days or
more for which interest income is still being accrued and nonaccrual loans.
At December 31, nonperforming loans were as follows:
In thousands 2000 1999
=============================================================
Nonaccrual loans $457 $2,539
Loans with interest or principal 90
days or more past due and still
accruing 244 227
- -------------------------------------------------------------
Total nonperforming loans $701 $2,766
=============================================================
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 2000 1999 1998
===============================================================
Interest income foregone $(18) $(183) $(81)
Interest income received 54 108 104
- ---------------------------------------------------------------
$ 36 $ (75) $ 23
===============================================================
20
21
Nonaccrual loans at December 31, 1999 included two loans to one commercial
borrower totaling $1.3 million that were charged off during the first quarter of
2000.
Nonperforming assets are generally well secured by residential and small
commercial real estate. It is the Bank's intent to dispose of all other real
estate owned ("OREO") properties at the earliest possible date at or near
current market value.
At December 31, 2000, there were no commitments to lend additional funds to
borrowers for loans that were on nonaccrual or contractually past due in excess
of 90 days and still accruing interest, or to borrowers whose loans have been
restructured. A majority of the Bank's loan portfolio is concentrated in first
mortgage loans to borrowers in northern New Jersey, particularly within the
Newark area. Its borrowers' abilities to repay their obligations are dependent
upon various factors including the borrowers' income, net worth, cash flows
generated by the underlying collateral, the value of the underlying collateral
and priority of the Bank's lien on the related property. Such factors are
dependent upon various economic conditions and individual circumstances beyond
the Bank's control. Accordingly, the Bank may be subject to risk of credit
losses.
There were no impaired loans at December 31, 2000, while impaired loans totalled
$1.3 million at December 31, 1999. There were no reserves allocated to these
loans as of December 31, 2000, while at December 31, 1999, the related reserves
amounted to $400,000. Impaired loans averaged $185,000 in 2000 and $425,000 in
1999.
NOTE 7 RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses are summarized as follows:
In thousands 2000 1999 1998
=============================================================
Balance, January 1 $1,975 $1,415 $ 825
Provision for loan
losses 872 906 1,016
Recoveries of loans previously
charged off 90 157 153
- -------------------------------------------------------------
2,937 2,478 1,994
Less: Charge-offs 1,737 503 579
- -------------------------------------------------------------
Balance, December 31 $1,200 $1,975 $1,415
=============================================================
NOTE 8 PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
In thousands 2000 1999
==============================================================
Land $ 421 $ 421
Premises 1,397 1,397
Furniture and equipment 2,375 2,219
Building improvements 2,259 2,191
- --------------------------------------------------------------
Total cost 6,452 6,228
Less: Accumulated depreciation and
amortization 2,981 2,519
- --------------------------------------------------------------
Total premises and equipment $3,471 $3,709
==============================================================
Depreciation and amortization expense charged to operations amounted to
$460,000, $420,000, and $376,000 in 2000, 1999, and 1998, respectively.
NOTE 9 DEPOSITS
Deposits at December 31 are presented below.
In thousands 2000 1999
=============================================================
Noninterest bearing:
Demand $ 54,789 $ 20,625
Savings 294 369
- -------------------------------------------------------------
Total noninterest bearing deposits 55,083 20,994
- -------------------------------------------------------------
Interest bearing:
Savings 53,227 34,350
Time 67,859 84,493
- -------------------------------------------------------------
Total interest bearing deposits 121,086 118,843
- -------------------------------------------------------------
Total deposits $176,169 $139,837
=============================================================
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 2000 1999
==============================================================
Three months or less $33,376 $44,223
Over three months but within six months 3,430 11,859
Over six months but within twelve months 1,468 1,556
Over twelve months 2,413 779
- --------------------------------------------------------------
Total deposits $40,687 $58,417
==============================================================
Interest expense on certificates of deposits of $100,000 or more was $2,720,000,
$2,323,000 and $1,974,000 in 2000, 1999 and 1998, respectively.
NOTE 10 SHORT-TERM BORROWINGS
Information regarding short-term borrowings at December 31, is presented below.
Average
Interest Average Maximum
Rate on Average Interest Balance
Decem- Decem- Balance Rate at any
ber 31 ber 31 During During Month-
Dollars in thousands Balance Balance the Year the Year End
============================================================================================================
2000
Federal funds purchased and securities
sold under repurchase agreements $ -- -- % $ 412 6.20% $2,000
Demand note issued to the U.S. 46 3.50 3,069 6.00 5,773
Treasury
- ------------------------------------------------------------------------------------------------------------
Total $ 46 3.50% $3,481 6.03 $7,773
============================================================================================================
1999
Federal funds purchased and securities
sold under repurchase Agreements $ -- -- % $ 77 4.83% $ --
Demand note issued to the U.S. 6,000 4.47 2,712 4.76 6,000
Treasury
- ------------------------------------------------------------------------------------------------------------
Total $6,000 4.47% $2,789 4.76% $6,000
============================================================================================================
The demand note, which has no stated maturity, issued by the Bank to the U.S.
Treasury Department is payable with interest at 25 basis points less than the
weekly average of the daily effective Federal Funds rate and is collateralized
by various investment securities held at the Federal Reserve Bank of New York
with a book value of $7,429,000, along with loans guaranteed by the Small
Business Administration totalling $1,424,000.
NOTE 11 LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
In thousands 2000 1999
================================================================================
FHLB convertible advances due from
August 28, 2000 through April 7, 2008 $ 9,700 $14,000
5.25% capital note, due December 28, 2005 1,500 1,500
5.00% capital note, due July 1, 2008 500 500
6.00% capital note, due December 28, 2010 500 --
8.00% mandatory convertible debentures,
due July 1, 2003 225 225
- --------------------------------------------------------------------------------
Total $12,425 $16,225
================================================================================
Interest is payable quarterly on most of the FHLB advances. $12 million of the
advances are callable at various dates from
21
22
January 1, 2001 to April 7, 2003. The advances bear interest rates ranging from
5.00% to 5.93% and are secured by residential mortgages and certain obligations
of U.S. Government agencies under a blanket collateral agreement.
Interest is payable semiannually on January 15 and July 15 on the convertible
debentures. The debentures convert into CNBC common stock upon maturity and are
convertible by the holder at any time on or before the maturity, unless
previously redeemed by the Corporation into CNBC common stock at a conversion
price of $18.00 per share, subject to adjustment upon the occurrence of certain
events, including, among other things, the issuance of common stock as a per
share price of less than $18.00 or the issuance of rights or options to purchase
shares of common stock at a price of less than $18.00 per share.
The debentures are subordinate to all other indebtedness of the Corporation
except for indebtedness which by its terms is equal and not senior in right of
payment to the debentures. The debentures become immediately payable upon the
bankruptcy, insolvency or receivership of the Corporation. In the event of
default as to principal or interest, the Corporation is required upon the
request of the holder, to pay the unpaid principal balance along with any
accrued interest by issuing an amount of common stock at the conversion price in
exchange for the indebtedness, subject to the holder owning not more than 9.9%
of the total number of common shares outstanding when added to the shares
already held by the holder. The unpaid balance of principal, if any, after
conversion upon maturity, or an interest payment default is then payable in cash
upon maturity of the debenture and prior to maturity would continue to accrue
interest at an annual rate of 8% payable semiannually.
Interest is payable semiannually on the capital note due December 28, 2005, on
June 29 and December 29, with principal payments commencing semiannually in
June, 2001. Interest payments on the note due July 1, 2008 are payable
semiannually, on January 1 and July 1, while principal payments of $100,000 are
payable annually, commencing July 1, 2004.
The note agreement includes restrictive covenants including the creation of
liens on Bank assets, the sale of such assets and certain limitations on
investments and dividend payments and requires the maintenance of certain
capital levels and earning performance, asset quality and reserve for possible
loan loss ratios.
NOTE 12 OTHER OPERATING INCOME AND EXPENSES
The following table presents the major items of other operating income and
expenses:
In thousands 2000 1999 1998
================================================================================
OTHER OPERATING INCOME
Award income $879 $-- $--
Agency fees on commercial loans 525 307 255
OTHER OPERATING EXPENSES
Professional fees 293 319 282
Other real estate owned expense 253 64 39
Data processing 159 145 144
Stationery and supplies expense 112 82 100
================================================================================
On September 25, 2000, the U.S. Department of the Treasury Community Development
Financial Institutions Fund issued an award to CNB totalling $1,170,000 for loan
commitments made during 2000 to borrowers in qualifying lower income
communities. The Bank received $879,000 in December 2000 based on such funding.
The remaining payment of the award is contingent upon funding the aforementioned
loan commitments.
NOTE 13 INCOME TAXES
The components of income tax expense are as follows:
In thousands 2000 1999 1998
================================================================================
CURRENT EXPENSE
Federal $215 $ 624 $ 399
State 31 83 23
Total current income tax expense 246 707 422
DEFERRED
Federal 178 (441) (364)
State 28 (73) (45)
Total deferred income tax expense (benefit) 206 (514) (409)
- --------------------------------------------------------------------------------
Total income tax expense $452 $ 193 $ 13
================================================================================
A reconciliation between income tax expense and the total expected federal
income tax computed by multiplying pre-tax accounting income by the statutory
federal income tax rate is as follows:
In thousands 2000 1999 1998
==================================================================================
Federal income tax at statutory rate $ 521 $ 202 $ 81
Increase (decrease) in income tax
expense resulting from:
State income tax (benefit) expense, net of
federal (expense) benefit 39 7 (15)
Tax-exempt income (122) (63) (66)
Life insurance (23) (18) (13)
Change in valuation allowance (5) -- 23
Other, net 42 65 3
- ----------------------------------------------------------------------------------
Total income tax expense $ 452 $ 193 $ 13
==================================================================================
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 2000 1999
=============================================================
DEFERRED TAX ASSETS
Unrealized losses on investment securities
available for sale $ 169 $ 450
Reserve for possible loan losses 155 525
Premises and equipment 42 7
Reserve for other real estate owned 5 5
Deferred compensation 171 131
Other real estate owned 76 -
State net operating loss 18 -
Accrued expenses 104 -
Other 23 129
- -------------------------------------------------------------
Total deferred tax asset 763 1,247
Less: Valuation allowance 18 23
- -------------------------------------------------------------
Deferred tax asset 745 1,224
- -------------------------------------------------------------
DEFERRED TAX LIABILITIES
Investment securities held to maturity 3 3
Other 18 10
- -------------------------------------------------------------
Deferred tax liability 21 13
- -------------------------------------------------------------
Net deferred tax asset $ 724 $ 1,211
=============================================================
The net deferred asset represents the anticipated federal and state tax asset to
be realized or liability to be incurred in future years upon the utilization of
the underlying tax attributes comprising this balance. Management believes,
based upon estimates of future taxable earnings, that more likely than not there
will be sufficient taxable income in future years to realize the deferred tax
assets, net of deferred valuation allowance, although there can be no assurance
about the level of future earnings.
The Bank has a state net operating tax loss carryforward of approximately
$300,000 which expires in 2007.
22
23
NOTE 14 BENEFIT PLANS
Savings plan
The Bank maintains an employee savings plan under section 401(k) of the Internal
Revenue Code covering all employees with at least six months of service.
Participants are allowed to make contributions to the plan by salary reduction,
up to 15% of total compensation. The Bank provides matching contributions of 25%
of the first 4% of participant salaries along with a 1% discretionary
contribution, subject to a vesting schedule. Contribution expense amounted to
$55,000 in 2000 and $52,000 in 1999 and 1998.
Bonus plan
The Bank awards profit sharing bonuses to its officers and employees based on
the achievement of certain performance objectives. Bonuses charged to operating
expense in 2000, 1999 and 1998 amounted to $217,000, $100,000, and $68,000,
respectively.
Nonqualified benefit plans
During 1997, the Bank established a supplemental executive retirement plan
("SERP"), which provides a post employment supplemental retirement benefit to
certain key executive officers. SERP expense was $41,000 in 2000 and 1999 and
$39,000 in 1998. The Bank also has a director retirement plan ("DRIP"). DRIP
expense was $33,000 in 2000, $28,000 in 1999 and $17,000 in 1998.
Benefits under both plans will be funded through a bank-owned life insurance
policy, the cash surrender value of which is included in "Other assets" and
totalled $2.0 million and $1.7 million at December 31, 2000 and 1999,
respectively. In addition, expenses for both plans along with the expense
related to carrying the policy itself are offset by increases in the cash
surrender value of the policy. Such increases are included in "Other income" and
totalled $106,000 in 2000, $94,000 in 1999 and $85,000 in 1998, while the
related life insurance expense was $38,000 in 2000, $36,000 in 1999 and $40,000
in 1998.
Stock options
No stock options were issued during 2000 or 1999. During 1997, the Corporation
issued 5,700 stock options at an exercise price equal to the fair market value
of the stock on the date of the grant. Under Accounting Principles Board Opinion
No. 25, compensation cost for the stock options is not recognized because the
exercise price of the stock options equaled the market price of the underlying
stock on the date of the grant. Had compensation expense been recorded for stock
options granted as determined under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 123, net income would have been
reduced by $2,000 in 2000, 1999 and 1998, which would have decreased the
reported basic and diluted earnings per share by $.02 in each of these years.
The fair value of the option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 8.75%, expected volatility of 15%, risk-free interest rate of 6% and
estimated option life of three years. The fair value of the options was $1.08
per share. The options vest equally over three years.
NOTE 15 PREFERRED STOCK
The Corporation is authorized to issue noncumulative perpetual preferred stock
in one or more series, with no par value. Shares of preferred stock have
preference over the Corporation's common stock with respect to the payment of
dividends. Different series of preferred stock may have different stated or
liquidation values as well as different rates. Dividends are paid annually.
Set forth below is a summary of the Corporation's preferred stock issued and
outstanding.
December 31,
Date Dividend Stated Number -------------------
Issued Rate Value of Shares 2000 1999
==============================================================================
Series A 12/96 6.00% $25,000 8 $ 200,000 $ 200,000
Series C 2/96 8.00 250 108 27,000 27,000
Series D 6/97 6.50 250 3,280 820,000 820,000
- -------------------------------------------------------------------------------
$1,047,000 $1,047,000
==============================================================================
NOTE 16 RESTRICTIONS ON SUBSIDIARY BANK DIVIDENDS
Subject to applicable law, the Board of Directors of the Bank and of the
Corporation may provide for the payment of dividends when it is determined that
dividend payments are appropriate, taking into account factors including net
income, capital requirements, financial condition, alternative investment
options, tax implications, prevailing economic conditions, industry practices,
and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory
limitation on the amount of dividends it may pay to its parent corporation,
CNBC. Prior approval of the Office of the Comptroller of the Currency ("OCC") is
required if the total dividends declared by the Bank in any calendar year
exceeds net profit, as defined, for that year combined with the retained net
profits from the preceding two calendar years.
Under this limitation, $874,000 was available for the payment of dividends to
the parent corporation at December 31, 2000, subject to the restrictive
covenants under long-term debt agreements included in Note 11.
NOTE 17 NET INCOME PER COMMON SHARE
The following table presents the computation of net income per common share.
In thousands, except per share data 2000 1999 1998
=========================================================================================
Net income $ 1,080 $ 402 $ 226
Dividends paid on preferred stock (87) (107) (82)
=========================================================================================
Net income applicable to basic
common shares 993 295 144
Interest expense on convertible
subordinated debentures, net of
income taxes 10 12 13
Net income applicable to diluted
common shares $ 1,003 $ 307 $ 157
=========================================================================================
NUMBER OF AVERAGE COMMON SHARES
Basic 120,926 118,902 115,189
Diluted:
Average common shares outstanding 120,926 118,902 115,189
Average common shares converted from
convertible subordinate debentures 12,500 12,500 13,850
- -----------------------------------------------------------------------------------------
133,426 131,402 129,039
=========================================================================================
NET INCOME PER COMMON SHARE
Basic $ 8.21 $ 2.48 $ 1.25
Diluted 7.52 2.34 1.22
The stock options outstanding are not included as common stock equivalents in
the diluted net income per share calculation because they are antidilutive.
NOTE 18 RELATED PARTY TRANSACTIONS
Certain directors of the Corporation and its subsidiary, including organizations
in which they are officers or have significant ownership, were customers of, and
had other transactions with the Bank in the ordinary course of business during
2000 and 1999. Such transactions were on substantially the same terms, including
interest rates and collateral with respect to loans, as those prevailing at the
time
23
24
of comparable transactions with others. Further, such transactions did not
involve more than the normal risk of collectibility and did not include any
unfavorable features.
Total loans to the aforementioned individuals and organizations amounted to
$602,000 and $653,000 at December 31, 2000 and 1999, respectively. The highest
amount of such indebtedness during 2000 was $653,000 and in 1999 amounted to
$660,000. During 2000, no new loans were made and paydowns totalled $51,000.
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair value estimates are made at a specific
point in time based on the type of financial instrument and relevant market
information.
Because no quoted market price exists for a significant portion of the
Corporation's financial instruments, the fair values of such financial
instruments are derived based on the amount and timing of future cash flows,
estimated discount rates, as well as management's best judgment with respect to
current economic conditions. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values
of those financial instruments and should not be interpreted as an estimate of
the fair market value of the Corporation taken as a whole. The disclosures do
not address the value of recognized and unrecognized nonfinancial assets and
liabilities or the value of future anticipated business. In addition, tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates.
The following methods and assumptions were used to estimate the fair values of
significant financial instruments at December 31, 2000 and 1999.
CASH AND SHORT-TERM INVESTMENTS
These financial instruments have relatively short maturities or no defined
maturities but are payable on demand, with little or no credit risk. For these
instruments, the carrying amounts represent a reasonable estimate of fair value.
INVESTMENT SECURITIES
Investment securities are reported at their fair values based on quoted market
prices.
LOANS
Fair values were estimated for performing loans by discounting the future cash
flows using market discount rates that reflect the credit and interest-rate risk
inherent in the loans. Fair value for significant nonperforming loans was based
on recent external appraisals of collateral securing such loans. If such
appraisals were not available, estimated cash flows were discounted employing a
rate incorporating the risk associated with such cash flows.
DEPOSIT LIABILITIES
The fair values of demand deposits, savings deposits and money market accounts
were the amounts payable on demand at December 31, 2000 and 1999. The fair value
of time deposits was based on the discounted value of contractual cash flows.
The discount rate was estimated utilizing the rates currently offered for
deposits of similar remaining maturities.
SHORT-TERM BORROWINGS
For such short-term borrowings, the carrying amount was considered to be a
reasonable estimate of fair value.
LONG-TERM DEBT
The fair value of long-term debt was estimated based on rates currently
available to the Corporation for debt with similar terms and remaining
maturities.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
The estimated fair value of financial instruments with off-balance sheet risk is
not significant at December 31, 2000 and 1999.
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
2000 1999
Carrying Fair Carrying Fair
In thousands Value Value Value Value
=====================================================================================
FINANCIAL ASSETS
Cash and other short-term
investments $ 35,584 $ 35,584 $ 11,609 $ 11,609
Interest-bearing deposits
with banks 153 153 2,286 2,211
Investment securities AFS 33,852 33,852 35,458 35,458
Investment securities HTM 32,078 31,686 33,017 31,051
Loans 89,453 88,083 80,471 78,564
Loans held for sale 148 148 405 405
FINANCIAL LIABILITIES
Deposits $176,169 $176,695 $139,837 $138,576
Short-term borrowings 46 46 6,000 6,000
Long-term debt 12,425 12,760 16,225 15,003
================================================================================
NOTE 20 COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements will not be materially affected by the outcome of any pending legal
proceedings.
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders and certain affiliates of such entity
for fraud and other damages. CNB alleges, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. The defendants have responded alleging CNB records regarding
these transactions are in error and that CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified.
Discovery has been completed and the case is expected to go to trial before the
end of 2001. The likelihood of CNB's success in this litigation and its ability
to recover any amount for which it obtains judgment is uncertain. CNB has filed
appropriate proofs of loss under various insurance policies, including CNB's
fidelity bond. It is also too early to determine the amount CNB will ultimately
recover, if any, under these insurance policies.
NOTE 21 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments
24
25
include lines of credit, commitments to extend standby letters of credit, and
could involve, to varying degrees, elements of credit risk in excess of the
amounts recognized in the consolidated financial statements.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis, and the amount of collateral or other
security obtained is based on management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
primarily issued to support borrowing arrangements and extend for up to one
year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Accordingly,
collateral is generally required to support the commitment.
At December 31, 2000 and 1999 the Bank had mortgage commitments of $12,957,000
and $9,671,000, unused corporate lines of credit of $35,588,000 and $34,725,000,
and $1,203,000 and $1,033,000 of other loan commitments, respectively.
The aforementioned commitments and credit lines are made at both fixed and
floating rates of interest based on the Bank's prime lending rate.
NOTE 22 PARENT COMPANY INFORMATION
Condensed financial statements of the parent company only are presented below.
CONDENSED BALANCE SHEET
December 31,
In thousands 2000 1999
=======================================================================
ASSETS
Cash and cash equivalents $ 38 $ 60
Investment securities held to 100 100
maturity
Investment securities available for 765 745
sale
Investment in subsidiary 11,787 10,083
Due from subsidiary 249 249
Other assets 44 36
- -----------------------------------------------------------------------
Total assets $12,983 $11,273
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 23 $ 22
Long-term debt 2,725 2,225
- -----------------------------------------------------------------------
Total liabilities 2,748 2,247
Stockholders' equity 10,235 9,026
- -----------------------------------------------------------------------
Total liabilities and stockholders' equity $12,983 $11,273
=======================================================================
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
In thousands 2000 1999 1998
===============================================================================
INCOME
Interest income $ 51 $ 53 $ 52
Dividends from subsidiary 306 260 340
Interest from subsidiary 20 20 20
- --------------------------------------------------------------------------------
Total income 377 333 412
- --------------------------------------------------------------------------------
EXPENSES
Interest expense 122 110 99
Other operating expenses 5 4 4
Net gains (losses) on sales of
investment securities 16 29 (27)
Income tax benefit (15) (4) (19)
- --------------------------------------------------------------------------------
Total expenses 96 81 111
- --------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiary 281 252 301
Equity in undistributed income (loss)
of subsidiary 799 150 (75)
- --------------------------------------------------------------------------------
Net income $ 1,080 $ 402 $ 226
===============================================================================
25
26
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
In thousands 2000 1999 1998
=====================================================================================
OPERATING ACTIVITIES
Net income $ 1,080 $ 402 $ 226
Adjustments to reconcile net income
to cash used in operating activities:
(Discount accretion) premium
amortization on investment securities (1) (5) 2
Net (gains) losses on sales of
investment securities available for sale (16) (29) 27
Equity in undistributed (income) loss
of subsidiary (799) (150) 75
(Increase) decrease in other assets (8) (16) --
Increase (decrease) in other liabilities 1 (5) 18
- -------------------------------------------------------------------------------------
Net cash provided by operating activities 257 197 348
- -------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale 97 205 416
Proceeds from maturities of investment
securities held to maturity including
principal payments -- 221 111
Purchases of investment securities
available for sale (101) (179) (433)
Purchases of investment securities
held to maturity -- (74) (256)
Increase in investment in subsidiary (500) -- --
- -------------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (504) 173 (162)
- -------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long-term debt 500 476 --
Proceeds from issuance of common stock 37 25 83
Redemption of preferred stock -- (500) --
Dividends paid (312) (320) (281)
- -------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 225 (319) (198)
- -------------------------------------------------------------------------------------
(Decrease) increase in cash and
cash equivalents (22) 51 (12)
Cash and cash equivalents at
beginning of year 60 9 21
- -------------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 38 $ 60 $ 9
=====================================================================================
NOTE 23 REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 2000, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total average assets
of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-adjusted
assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized bank. Such actions could have a direct material
effect on such bank's financial statements. The regulations establish a
framework for the classification of banks into five categories:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Generally, a bank is
considered well-capitalized if it has a leverage capital ratio of at least 5.0%,
a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FDIC about capital components, risk
adjustments and other factors.
Management believes that, as of December 31, 2000, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent FDIC
notification categorized the Bank as a well-capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 2000 and 1999, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
Bank:
In thousands FDIC REQUIREMENTS
======================================================================================================
MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL-CAPITALIZED
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
======================================================================================================
December 31, 2000
Leverage (Tier 1)
capital $11,785 6.56% $7,187 4.00% $ 8,984 5.00%
Risk-based capital:
Tier 1 11,785 10.84 4,347 4.00 6,520 6.00
Total 13,234 12.18 8,693 8.00 10,867 10.00
December 31, 1999
Leverage (Tier 1)
capital $10,711 6.32% $6,774 4.00% $ 8,468 5.00%
Risk-based capital:
Tier 1 10,711 11.04 3,882 4.00 5,822 6.00
Total 12,182 12.55 7,763 8.00 9,705 10.00
======================================================================================================
Note 24 Summary of quarterly financial information
(unaudited) 2000
- ------------------------------------------------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
====================================================================================
Interest income $ 3,008 $3,104 $3,087 $ 3,278
Interest expense 1,630 1,590 1,546 1,615
Net interest income 1,378 1,514 1,541 1,663
Provision for
loan losses 304 45 130 393
- ------------------------------------------------------------------------------------
Net (losses) gains on sales
of investment securities (13) 8 8 (4)
Other operating income 379 361 317 1,441
Other operating expenses 1,397 1,464 1,434 1,894
Income before income
tax expense (benefit) 43 374 302 813
Income tax (benefit) expense (27) 118 66 295
- ------------------------------------------------------------------------------------
Net income $ 70 $ 256 $ 236 $ 518
====================================================================================
Net (loss) income per share-
Basic $ (.14) $ 2.11 $ 1.94 $ 4.30
====================================================================================
Net (loss) loss per share-
diluted $ (.14) $ 1.92 $ 1.78 $ 3.96
====================================================================================
1999
- -----------------------------------------------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
===================================================================================
Interest income $2,540 $2,585 $ 2,641 $ 2,849
Interest expense 1,166 1,209 1,383 1,518
- -----------------------------------------------------------------------------------
Net interest income 1,374 1,376 1,258 1,331
Provision for
loan losses 43 141 301 421
Net gains on sales
of investment securities 15 -- 1 1
Other operating income 398 355 347 375
Other operating expenses 1,279 1,273 1,310 1,468
- -----------------------------------------------------------------------------------
Income (loss) before income
tax expense (benefit) 465 317 (5) (182)
Income tax expense (benefit) 159 110 (42) (34)
- -----------------------------------------------------------------------------------
Net income (loss) $ 306 $ 207 $ 37 $ (148)
===================================================================================
Net income (loss) per share-
basic $ 1.68 $ 1.75 $ .31 $ (1.57)
===================================================================================
Net income (loss) per share-
diluted $ 1.53 $ 1.59 $ .30 $ (1.08)
===================================================================================
26
27
KPMG
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
City National Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of City National
Bancshares Corporation and subsidiary (the Corporation) as of December 31. 2000
and 1999, and the related consolidated statements of income, chances in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits with auditing principles generally accepted in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of City National
Bancshares Corporation and subsidiary as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
February 2, 2001
27
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE There were no changes in or disagreements with accounts
during 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 17, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following exhibits are incorporated herein by reference or are annexed to
this Annual Report:
(a) The required financial statements and the related independent auditor's
report are included in Item 8.
(b) The required exhibits are included as follows:
(3)(a) The Corporation's Restated Articles of Incorporation
(incorporated herein by reference to Exhibit (3)(d) of the
Corporation's Current Report on Form 8-K dated July 28, 1992).
(3)(b) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual Preferred
Stock, Series A (incorporated herein by reference to Exhibit
(3)(b) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995).
(3)(c) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual Preferred
Stock, Series B (incorporated herein by reference to Exhibit
(3)(c) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995).
(3)(d) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual Preferred
Stock, Series C (incorporated herein by reference to Exhibit
(3(i) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1996).
(3)(e) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual Preferred
Stock, Series D (incorporated herein by reference to Exhibit
filed with the Corporation's current report on Form 10-K dated
July 10, 1997).
(3)(f) The amended By-Laws of the Corporation (incorporated herein by
reference to Exhibit (3)(c) of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1991).
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(4)(a) The Debenture Agreements between the Corporation and its
Noteholders (incorporated herein by reference to Exhibit (4)(a)
of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993).
(4)(b) Note Agreement dated December 28, 1995 by and between the
Corporation and the Prudential Foundation (incorporated herein by
reference to Exhibit (4)(b) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995).
(10)(a) The Employees' Profit Sharing Plan of City National Bank of New
Jersey (incorporated herein by reference to Exhibit (10) of the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the bank and
Louis E. Prezeau dated May 24, 1997 (incorporated herein by
reference to Exhibit 10 to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997).
(10)(c) Lease and option Agreement dated May 6, 1995 by and between the
RTC and City National Bank of New Jersey (incorporated herein by
reference to Exhibit (10)(d) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1995).
(10)(d) Asset Purchase and Sale Agreement between the Bank and Carver
Federal Savings Bank dated as of February 27, 2001.
(11) Statement regarding computation of per share earnings. The
required information is included on page 24.
(12) Ratios have been computed using the average daily balances of the
respective asset, liability and stockholders' equity accounts.
(13) Annual Report to security holders for the fiscal year ended
December 31, 2000.
(21) Subsidiaries of the registrant. The required information is
included on page 1.
(24) Power of Attorney is located on the signature page.
(27) Financial Data Schedule.
(c) No reports on Form 8-K were filed during the quarter ended December 31,
2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, City National Bancshares Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized:
CITY NATIONAL BANCSHARES CORPORATION
By: /s/ Louis E. Prezeau By: /s/ Edward R. Wright
--------------------------------- --------------------------------
Louis E. Prezeau Edward R. Wright
President and Chief Chief Financial Officer
Executive Officer and Principal Accounting Officer
Date: March 29, 2001 Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. The undersigned hereby constitute
and appoint Louis E. Prezeau his true and lawful attorney in fact and agent,
with full power of substitution and resubstitution, to sign any and all
amendments to this report and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorney in fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he or she might or could in person, hereby ratifying and confirming all that
said attorney in fact and agent, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
- --------- ----- ----
/s/ Douglas E. Anderson Director March 29, 2001
- ----------------------------------------
Douglas E. Anderson
/s/ Barbara Bell Director March 29, 2001
- ----------------------------------------
Barbara Bell
/s/ Leon Ewing Director March 29, 2001
- ----------------------------------------
Leon Ewing
/s/ Eugene Giscombe Director, March 29, 2001
- ---------------------------------------- Chairperson of the Board
Eugene Giscombe
/s/ Norman Jeffries Director March 29, 2001
- ----------------------------------------
Norman Jeffries
/s/ Louis E. Prezeau Director, March 29, 2001
- ---------------------------------------- President and Chief
Louis E. Prezeau Executive Officer
/s/ Lemar C. Whigham Director March 29, 2001
- ----------------------------------------
Lemar C. Whigham
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