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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, 2001
| | 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 18, 2002 was approximately $1,610,200.
There were 125,055 shares of common stock outstanding at March 23, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the definitive Proxy Statement for the 2002 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.
1
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 - 15
Item 8. Financial Statements and Supplementary Data......................................................... 16 - 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................................ 30
PART III
Item 10. Directors and Executive Officers of Registrant...................................................... 30
Item 11. Executive Compensation.............................................................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 30
Item 13. Certain Relationships and Related Transactions...................................................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................... 30 - 31
Signatures................................................................................................... 32
2
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, 2001, CNBC
had consolidated total assets of $222.3 million, total deposits of $194.1
million and stockholders' equity of $11.4 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.
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 November, 2001 the United States Department of the Treasury designated both
City National Bancshares Corporation and City National Bank as community
development enterprises ("CDE's"). This designation means that the Department of
Treasury has formally recognized CBNC and CNB for "having a primary purpose of
promoting community development" and will facilitate attracting capital by
allowing both entities to benefit from the federal government's New Market Tax
Program.
As a result of the terrorist attack on the World Trade Center in New York City
on September 11, 2001, economic conditions have deteriorated within the Bank's
market area. The impact on the Bank is more fully discussed under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Bank has been, and intends to continue to be, a community-oriented financial
institution providing financial services and loans for housing and commercial
businesses within its market area. The Bank oversees its seven branch office
network from its headquarters located in downtown Newark, New Jersey. The Bank
operates three branches (including the Headquarters) in Newark, and one each in
Hackensack and Paterson, New Jersey. As a result of the acquisitions of two
branches from Carver Federal Savings Bank ("Carver"), the Bank also operates a
branch in Brooklyn, New York and one in Roosevelt, Long Island.
The Bank gathers deposits primarily from the communities and neighborhoods in
close proximity to its branches. Although the Bank lends throughout the New York
City metropolitan area, the substantial majority of its real estate loans are
secured by properties located in central New Jersey. The Bank's customer base,
like that of the urban neighborhoods which it serves, is racially and ethnically
diverse and is comprised of mostly low to moderate income households. The Bank
has sought to set itself apart from its many competitors by tailoring its
products and services to meet the needs of its customers, by emphasizing
customer service and convenience and by being actively involved in community
affairs in the neighborhoods and communities which it serves. The Bank believes
that its commitment to customer and community service has permitted it to build
strong customer identification and loyalty, which is essential to the Bank's
ability to compete effectively. The Bank offers various investment products,
including mutual funds.
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
3
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 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
4
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.
EMPLOYEES
On December 31, 2001, CNBC and its subsidiary had 83 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 two in the state of New York. Two of the locations are in leased space while
the others are owned by the Bank.
The New Jersey branch offices are located in Newark and Hackensack, both owned,
and in Paterson, which is leased. The New York branches are located in
Roosevelt, Long Island and Brooklyn, New York, and both are owned.
In addition to its branch network, the Bank currently maintains three ATM's at
remote sites.
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 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. The amount that CNB will ultimately recover, if any, under
these insurance policies cannot be determined. The trial has been completed and
the Bank is awaiting a decision by the Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001 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 2001.
At March 23, 2002, the Corporation had 1,950 common stockholders of record.
On April 11, 2001, the Corporation paid a cash dividend of $2.00 per share to
stockholders of record on April 4, 2001. 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
5
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
Dollars in thousands, except per share data 2001 2000 1999 1998 1997
===============================================================================================================
YEAR-END BALANCE SHEET DATA:
Total assets $222,298 $200,442 $172,496 $164,901 $138,868
Gross loans 99,190 90,653 82,446 71,440 56,947
Reserve for loan losses 1,700 1,200 1,975 1,415 825
Investment securities 71,291 65,930 68,475 63,966 62,360
Total deposits 194,129 176,169 139,837 137,943 119,717
Long-term debt 13,204 12,425 16,225 15,749 3,749
Stockholders' equity 11,434 10,235 9,026 10,123 10,032
===============================================================================================================
INCOME STATEMENT DATA:
Interest income $ 12,888 $ 12,477 $ 10,615 $ 9,555 $ 9,571
Interest expense 5,268 6,381 5,276 4,598 4,330
- ---------------------------------------------------------------------------------------------------------------
Net interest income 7,620 6,096 5,339 4,957 5,241
Provision for loan losses 356 872 906 1,016 159
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 7,264 5,224 4,433 3,941 5,082
Other operating income 2,588 2,547 1,492 1,297 1,199
Other operating expenses 7,827 6,239 5,330 4,999 4,630
- ---------------------------------------------------------------------------------------------------------------
Income before income tax expense 2,025 1,532 595 239 1,651
Income tax expense 719 452 193 13 582
- ---------------------------------------------------------------------------------------------------------------
Net income $ 1,306 $ 1,080 $ 402 $ 226 $ 1,069
===============================================================================================================
PER COMMON SHARE DATA:
Net income per basic share $ 10.05 $ 8.21 $ 2.48 $ 1.25 $ 8.98
Net income per diluted share 9.33 7.52 2.34 1.22 8.11
Book value 83.01 75.68 66.73 72.54 74.34
Dividends 2.00 1.85 1.80 1.75 1.50
Basic average number of common shares
outstanding 123,241 120,926 118,902 115,189 114,141
Diluted average number of common shares
outstanding 133,766 133,426 131,402 129,039 127,991
Number of common shares outstanding at year-end 125,125 121,406 119,571 118,221 114,141
FINANCIAL RATIOS:
Return on average assets .65% .61% .25% .16% .78%
Return on average common equity 12.69 12.06 3.49 1.51 13.05
Stockholders' equity as a percentage of total assets 5.14 5.11 5.23 6.14 7.22
Dividend payout ratio 19.90 22.53 72.58 140.00 16.70
===============================================================================================================
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PERFORMANCE SUMMARY
Net income rose 20.9% to $1,306,000 in 2001 from to $1,080,000 in 2000 due
primarily to an increase in net interest income. Included in both years'
earnings were awards received from the U.S. Treasury's Community Development
Financial Institution ("CDFI") Fund. The awards were based on the Bank's lending
efforts in qualifying lower income communities, as well as the Bank's deposits
in other CDFI's. Award income was $774,000 in 2001, compared to $879,000 in
2000. Related earnings per common share on a diluted basis increased to $9.33
from $7.52. Without the awards, net income would have totalled $744,000 in 2001
and $460,000 in 2000.
Total assets rose to $222.3 million at the end of 2001 from $200.4 million a
year earlier due to the acquisition in June, 2001, of a branch in Brooklyn, New
York from Carver Federal Savings Bank. The deposits acquired were used to
replace more costly short-term municipal certificates of deposit, ultimately
reducing deposit costs.
CASH AND DUE FROM BANKS
Cash and due from banks declined to $5.5 million at the end of 2001 from $8.9
million a year earlier due to the receipt at the end of 2000 of a large deposit.
Average cash and due from banks for 2001 rose to $6.8 million from $4.5 million
a year earlier due to the branch acquisitions.
FEDERAL FUNDS SOLD
Federal funds sold rose to $33.5 million at the end of 2001 from $26.7 million
at December 31, 2000, while the related average balance increased 81.9% to $19.1
million from $10.5 million in 2000. Both increases occurred due to the
additional liquidity from the acquired branch deposit proceeds, pending
longer-term investment.
INTEREST-BEARING DEPOSITS WITH BANKS
Interest-bearing deposits with banks increased to $3.6 million at December 31,
2001 from $153,000 a year earlier due to the Bank's participation in the CDFI
deposit program. Under this program, the Bank became eligible for an award based
on deposits made in other CDFI's, and received $1.1 million in December, 2001,
which is considered a yield enhancement on the CDFI deposits. $97,000 was
recorded as interest income from interest-bearing deposits with banks, while the
remaining $1,058,000 has been deferred and will be accreted over three years
based on the remaining maturities of the deposits.
INVESTMENTS
The investment securities available for sale ("AFS") portfolio rose 24.4%, to
$42.1 million at December 31, 2001 from $33.9 million a year earlier, while the
related gross unrealized net loss decreased to $209,000 from $442,000 due to a
decline in interest rates.
The major change within the available for sale portfolio occurred in the
mortgage-backed portfolio, which rose $4.5 million from the end of 2000 to
year-end 2001, as well as a $2.9 million increase in U.S. Government securities.
The investment securities held to maturity ("HTM") portfolio declined to $29.2
million at December 31, 2001 compared to $32.1 million a year earlier. All the
decreases occurred in the U.S. Government agency portfolio, due primarily to
early redemption of callable securities issued by U. S. Government agencies.
At December 31, 2001, the Bank held callable U.S. Government agency notes with a
carrying value of $13 million, of which $12.4 million were included in the HTM
portfolio. These notes are callable at par at various dates from 2002 through
February, 2004. These callable securities reflect gross unrealized depreciation
of $461,000. 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, 2001 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 Maturing After One Maturing After Five
AVAILABLE FOR SALE 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 $ -- --% $5,122 4.67% $1,639 4.49% $ 2,829 5.11% $ 9,590 4.77%
Mortgage-backed securities 424 5.84 2,760 6.21 453 6.18 20,682 5.86 24,319 5.91
Obligations of state
political and subdivisions(1) -- -- -- -- 897 7.56 1,499 8.62 2,396 7.82
Other debt securities -- -- 754 7.05 -- -- 3,915 6.06 4,669 4.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $424 5.84% $8,636 5.37% $2,989 5.67% $28,925 5.96% $40,974 5.42%
====================================================================================================================================
(1) Includes $250,000 of nontax-exempt securities with a 7.60% yield.
INVESTMENT SECURITIES Maturing After One Maturing After Five
HELD TO MATURITY 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) $ -- --% $ -- --% $ 60 8.53% $12,916 6.30% $12,976 6.31%
Obligations of state and
political subdivisions 400 7.09 -- -- 1,265 7.11 4,172 7.86 5,837 7.67
Mortgage-backed securities 234 5.60 300 6.29 -- -- 7,809 5.81 8,343 5.90
Other debt securities -- -- -- -- 2,025 8.01 -- -- 2,025 8.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $634 6.54% $ 300 6.29% $3,350 7.68% $24,897 6.41% $29,181 6.04%
====================================================================================================================================
(1) Includes $12.4 million of U.S. Government agency securities callable in
2001, all of which mature after five years.
The following table sets forth the carrying value of the Corporation's portfolio
for the three years ended December 31.
7
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE Amortized Market Amortized Market Amortized Market
In thousands Cost Value Cost Value Cost Value
====================================================================================================================================
U.S. Treasury securities and obligations
of U.S. government agencies $ 9,590 $ 9,635 $ 6,926 $ 6,764 $ 3,193 $ 3,205
Obligations of state and political subdivisions 2,396 2,435 2,279 2,311 2,280 2,211
Other securities:
Mortgage-backed securities 24,319 24,307 19,913 19,814 25,910 25,010
Other debt securities 4,669 4,426 3,670 3,475 3,670 3,507
Equity securities:
Marketable securities 397 359 399 381 -- --
Federal Reserve Bank and Federal Home Loan Bank stock 948 945 1,107 1,107 1,105 1,105
- ------------------------------------------------------------------------------------------------------------------------------------
Total $42,319 $42,110 $34,294 $33,852 $36,587 $35,458
====================================================================================================================================
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES HELD TO MATURITY Amortized Market Amortized Market Amortized Market
In thousands Cost Value Cost Value Cost Value
====================================================================================================================================
U.S. Treasury securities and obligations
of U.S. government agencies $12,976 $12,724 $18,567 $18,100 $23,204 $21,544
Obligations of state and political subdivisions 5,837 5,889 4,985 5,120 3,360 3,327
Other securities:
Mortgage-backed securities 8,343 8,385 6,498 6,458 3,922 3,847
Other debt securities 2,025 2,179 2,028 2,008 2,531 2,333
- ------------------------------------------------------------------------------------------------------------------------------------
Total $29,181 $29,177 $32,078 $31,686 $33,017 $31,051
====================================================================================================================================
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, 2001. 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 decreased to 5.42% at December 31, 2001
from 6.78% at December 31, 2000, while the yield on the HTM portfolio declined
96 basis points to 6.04% at December 31, 2001 from 7.00% at December 31, 2000.
76.7% of the total portfolio matures after ten years, compared to 70.1% in 2000.
8
CONSOLIDATED AVERAGE BALANCE SHEET WITH RELATED INTEREST AND RATES
2001
========================================================================================
Average Average
Tax equivalent basis; dollars in thousands Balance Interest Rate
========================================================================================
ASSETS
Interest earning assets:
Federal funds sold and securities purchased
Under agreements to resell $ 19,089 $ 746 3.91%
Interest-bearing deposits with banks (1) 2,446 185 7.56
Investment securities:
Taxable (2) 59,790 3,706 6.20
Tax-exempt 7,651 593 7.75
-------- ------- -----
Total investment securities 67,441 4,299 6.37
-------- ------- -----
Loans (3, 4)
Commercial 29,700 2,152 7.25
Real estate 64,790 5,532 8.54
Installment 1,768 175 9.90
-------- ------- -----
Total loans 96,258 7,859 8.16
-------- ------- -----
Total interest earning assets 185,234 13,089 7.07
-------- ------- -----
Noninterest earning assets:
Cash and due from banks 6,823
Gross unrealized loss on investment
Securities available for sale (131)
Reserve for possible loan losses (1,402)
Other assets 9,944
--------
Total noninterest earning assets 15,234
--------
Total assets $200,468
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits (5) $ 83,866 1,575 1.88
Time deposits 60,936 2,960 4.86
-------- ------- -----
Total interest bearing deposits 144,802 4,535 3.13
Short-term borrowings 1,111 39 3.51
Long-term debt 12,361 694 5.61
- ----------------------------------------------------------------------------------------
Total interest bearing liabilities 158,274 5,268 3.33
- ----------------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 29,498
Other liabilities 1,882
- ----------------------------------------------------------------------------------------
Total noninterest bearing liabilities 31,380
- ----------------------------------------------------------------------------------------
Stockholders' equity 10,814
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $200,468
- ----------------------------------------------------------------------------------------
Net interest income (tax equivalent basis) 7,821 3.74
Tax equivalent basis adjustments (5) (202)
- ----------------------------------------------------------------------------------------
Net interest income $ 7,619
- ----------------------------------------------------------------------------------------
Average rate paid to fund interest earning
assets 2.84
- ----------------------------------------------------------------------------------------
Net interest income as a percentage of
interest earning assets (tax equivalent
basis) 4.22%
========================================================================================
2000
========================================================================================
Average Average
Tax equivalent basis; dollars in thousands Balance Interest Rate
========================================================================================
ASSETS
Interest earning assets:
Federal funds sold and securities purchased
Under agreements to resell $ 10,491 $ 646 6.16%
Interest-bearing deposits with banks (1) 787 41 5.28
Investment securities:
Taxable (2) 60,950 3,985 6.54
Tax-exempt 7,012 542 7.73
- ----------------------------------------------------------------------------------------
Total investment securities 67,962 4,527 6.66
- ----------------------------------------------------------------------------------------
Loans (3, 4)
Commercial 29,408 2,532 8.61
Real estate 53,912 4,788 8.88
Installment 1,389 127 9.12
- ----------------------------------------------------------------------------------------
Total loans 84,709 7,447 8.79
- ----------------------------------------------------------------------------------------
Total interest earning assets 163,949 12,661 7.72
- ----------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 4,485
Gross unrealized loss on investment
Securities available for sale (1,102)
Reserve for possible loan losses (1,179)
Other assets 9,582
- ----------------------------------------------------------------------------------------
Total noninterest earning assets 11,786
- ----------------------------------------------------------------------------------------
Total assets $175,735 12,661
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits (5) $ 53,316 1,276 2.39
Time deposits 71,648 4,204 5.87
- ----------------------------------------------------------------------------------------
Total interest bearing deposits 124,964 5,480 4.39
Short-term borrowings 3,481 210 6.03
Long-term debt 12,007 691 5.76
- ----------------------------------------------------------------------------------------
Total interest bearing liabilities 140,452 6,381 4.54
- ----------------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 24,411
Other liabilities 1,590
- ----------------------------------------------------------------------------------------
Total noninterest bearing liabilities 26,001
- ----------------------------------------------------------------------------------------
Stockholders' equity 9,282
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $175,735 6,381
- ----------------------------------------------------------------------------------------
Net interest income (tax equivalent basis) 6,280 3.18
Tax equivalent basis adjustments (5) (184)
- ----------------------------------------------------------------------------------------
Net interest income $ 6,096
- ----------------------------------------------------------------------------------------
Average rate paid to fund interest earning
assets 3.89
- ----------------------------------------------------------------------------------------
Net interest income as a percentage of
interest earning assets (tax equivalent
basis) 3.83%
========================================================================================
1999
========================================================================================
Average Average
Tax equivalent basis; dollars in thousands Balance Interest Rate
========================================================================================
ASSETS
Interest earning assets:
Federal funds sold and securities purchased
Under agreements to resell $ 7,981 $ 396 4.97%
Interest-bearing deposits with banks (1) 1,771 76 4.27
Investment securities:
Taxable (2) 62,048 3,770 6.08
Tax-exempt 4,526 326 7.19
- ----------------------------------------------------------------------------------------
Total investment securities 66,574 4,096 6.15
- ----------------------------------------------------------------------------------------
Loans (3, 4)
Commercial 25,138 1,889 7.51
Real estate 47,650 4,175 8.75
Installment 902 94 10.40
- ----------------------------------------------------------------------------------------
Total loans 73,690 6,158 8.36
- ----------------------------------------------------------------------------------------
Total interest earning assets 150,016 10,726 7.15
- ----------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 4,451
Gross unrealized loss on investment
Securities available for sale (483)
Reserve for possible loan losses (1,336)
Other assets 7,117
- ----------------------------------------------------------------------------------------
Total noninterest earning assets 9,749
- ----------------------------------------------------------------------------------------
Total assets $159,765
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits (5) $ 40,597 791 1.95
Time deposits 68,950 3,453 5.01
- ----------------------------------------------------------------------------------------
Total interest bearing deposits 109,547 4,244 3.87
Short-term borrowings 2,789 133 4.76
Long-term debt 15,989 899 5.62
- ----------------------------------------------------------------------------------------
Total interest bearing liabilities 128,325 5,276 4.11
- ----------------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 20,844
Other liabilities 839
- ----------------------------------------------------------------------------------------
Total noninterest bearing liabilities 21,683
- ----------------------------------------------------------------------------------------
Stockholders' equity 9,757
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $159,765
- ----------------------------------------------------------------------------------------
Net interest income (tax equivalent basis) 5,450 3.04
Tax equivalent basis adjustments (5) (111)
- ----------------------------------------------------------------------------------------
Net interest income $ 5,339
- ----------------------------------------------------------------------------------------
Average rate paid to fund interest earning
assets 3.52
- ----------------------------------------------------------------------------------------
Net interest income as a percentage of
interest earning assets (tax equivalent
basis) 3.63%
========================================================================================
(1) Includes $97,000 in 2001, representing a six basis point addition to net
interest income, attributable to income received under the U.S. Treasury
Department's Bank Enterprise Award certificate of deposit program.
(2) Includes investment securities available for sale and held to maturity at
amortized cost.
(3) Includes nonperforming loans.
(4) Includes loan fees of $162,000, $219,000 and $149,000 in 2001, 2000 and
1999 respectively.
(5) Includes noninterest bearing deposits maintained by a state governmental
agency of $294,000 in 2001, and 2000 and $369,000 in 1999.
(6) The tax equivalent adjustment was computed assuming a 34% statutory
federal income tax rate in 2001, 2000 and 1999.
9
The table below set forth, on a fully tax-equivalent 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.
2001 Net Interest Income Increase 2000 Net Interest Income Increase
(Decrease) from 2000 due to (Decrease) from 1999 due to
==================================================================================================================================
In thousands Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans:
Commercial $ 21 $ (401) $ (380) $ 321 $ 322 $ 643
Real estate 929 (185) 744 549 64 613
Installment 37 11 48 51 (18) 33
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 987 (575) 412 921 368 1,289
Taxable investment securities (72) (208) (280) (67) 282 215
Tax-exempt investment securities 50 1 51 179 37 216
Federal funds sold and securities
purchased under agreements to resell 530 (430) 100 125 125 250
Interest-bearing deposits with banks 126 19 145 (42) 7 (35)
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,621 (1,193) 428 1,116 819 1,935
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings deposits (574) 275 (299) (231) (254) (485)
Time deposits 521 724 1,245 (135) (616) (751)
Short-term borrowings 82 89 171 (33) (44) (77)
Long-term debt (20) 17 (3) 224 (16) 208
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 9 1,105 1,114 (175) (930) (1,105)
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $1,630 $ (88) $1,542 $ 941 $(111) $ 830
==================================================================================================================================
LOANS
Loans rose 9.4% to $99.2 December 31, 2001 from $90.6 million a year earlier.
The commercial loan portfolio declined due to several credits that were
refinanced with competitors as well as the nonrenewal of certain major borrowing
credit lines due to a decline in creditworthiness.
The real estate portfolio rose due to management's decision to seek greater
collateral protection, along with the decision to retain its mortgage loan
organizations in the portfolio.
There were no loans held for sale at December 31, 2001 compared to $148,000 a
year earlier. Loans sold totalled $238,000 in 2001 compared to $810,000 in 2000.
At December 31, 2001, loans to churches totalled $13.8 million, representing
13.9% of total loans outstanding, of which $5 million is included with
commercial loans, while $8.8 million is 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 terrorist attack on the World Trade Center on September 11, 2001 has
adversely affected the economy in which the Bank's lending area is located.
Unemployment has risen, although the Bank does not have a significant consumer
loan portfolio. Additionally, management does not believe that the rest of the
portfolio has been significantly impacted by the attack.
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, 2001 is presented below.
Due from
One Year
Due in One Through Due After
In thousands Year or Less Five Years Five Years Total
- ---------------------------------------------------------------------------------
Commercial $11,039 $ 2,425 $ 3,492 $16,956
Real estate:
Construction 4,905 1,500 -- 6,405
Mortgage 4,784 20,990 48,134 73,908
Installment 757 1,093 71 1,921
- ---------------------------------------------------------------------------------
Total $21,485 $26,008 $51,697 $99,190
=================================================================================
Loans at fixed
interest rates $11,010 $20,651 $25,062 $56,723
Loans at variable
interest rates 10,475 5,357 26,635 42,467
- ---------------------------------------------------------------------------------
Total $21,485 $26,008 $51,697 $99,190
=================================================================================
The following table reflects the composition of the loan portfolio for the five
years ended December 31, 2001:
In thousands 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Commercial $17,448 $17,353 $17,687 $18,785 $14,456
Real estate 80,466 72,482 64,113 52,353 42,518
Installment 1,385 947 823 568 555
- -----------------------------------------------------------------------------------------------------
Total loans 99,299 90,782 82,623 71,706 57,529
Less: Unearned income 109 129 177 266 312
- -----------------------------------------------------------------------------------------------------
Loans $99,190 $90,653 $82,446 $71,440 $56,947
=====================================================================================================
10
SUMMARY OF LOAN LOSS EXPERIENCE
Changes in the reserve for loan losses are summarized below.
Dollars in thousands 2001 2000 1999 1998 1997
====================================================================================================================
Balance, January 1 $ 1,200 $ 1,975 $1,415 $ 825 $ 750
- --------------------------------------------------------------------------------------------------------------------
Charge-offs:
Commercial loans 121 1,538 411 480 31
Real estate loans -- 184 68 83 108
Installment loans 34 15 24 16 19
- --------------------------------------------------------------------------------------------------------------------
Total 155 1,737 503 579 158
- --------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial loans 265 58 137 40 57
Real estate loans -- 21 4 111 5
Installment loans 34 11 16 2 12
- --------------------------------------------------------------------------------------------------------------------
Total 299 90 157 153 74
- --------------------------------------------------------------------------------------------------------------------
Net recoveries (charge-offs) 144 (1,647) (346) (426) (85)
Provision for loan
losses charged to operations 356 872 906 1,016 158
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31 $ 1,700 $ 1,200 $1,975 $1,415 $ 825
====================================================================================================================
Net charge-offs as a
percentage of average loans --% 1.94% .47% .72% .15%
Reserve for loan losses as a
percentage of loans 1.71 1.32 2.40 1.98 1.45
Reserve for loan losses as a
percentage of nonperforming loans 137.65 171.18 71.40 78.51 59.10
====================================================================================================================
The reserve for loan losses is a critical accounting policy and 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 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. Although management uses the
best information available, the level of the reserve for loan losses remains an
estimate which is subject to significant judgment and short-term change.
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 1.71% of total loans at December 31, 2001 compared to
1.32% a year earlier. The increase in the reserve occurred due to higher levels
of nonperforming loans.
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.
2001 2000 1999
================================================================================================
Percentage Percentage Percentage
of Loan of Loan of Loan
Category Category Category
to Gross to Gross to Gross
Dollars in thousands Amount Loans Amount Loans Amount Loans
================================================================================================
Commercial $ 482 17.57% $ 405 19.12% $1,492 21.41%
Real estate 555 81.03 444 79.84 386 77.60
Installment 39 1.40 30 1.04 17 .99
Unallocated 624 -- 321 -- 80 --
- ------------------------------------------------------------------------------------------------
Total $1,700 100.00% $1,200 100.00% $1,975 100.00%
================================================================================================
1998 1997
=======================================================================
Percentage Percentage
of Loan of Loan
Category Category
to Gross to Gross
Dollars in thousands Amount Loans Amount Loans
=======================================================================
Commercial $ 990 26.20% $ 348 26.51%
Real estate 480 73.01 382 73.91
Installment 15 .79 12 .42
Unallocated 2 -- 83 --
- -----------------------------------------------------------------------
Total $1,415 100.00% $ 825 100.00%
=======================================================================
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 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------
Nonperforming loans
Commercial $ 199 $ 165 $2,093 $1,148 $ 614
Real estate 985 499 668 647 781
Installment 52 37 5 1 1
- -------------------------------------------------------------------------------------
Total nonperforming loans 1,236 701 2,766 1,796 1,396
Other real estate owned 326 621 698 590 415
- -------------------------------------------------------------------------------------
Total $1,562 $1,322 $3,464 $2,386 $1,811
=====================================================================================
Nonperforming assets rose $240,000 to $1,562,000 at December 31, 2001, from
$1,322,000 a year earlier. The increase reflects a
11
97.4% increase in nonperforming real estate loans, primarily commercial. OREO is
carried net of a $13,000 reserve at December 31, 2001 and 2000.
Management does not believe that the increase in nonperforming assets was caused
by the deterioration in the local economy due to the impact of the terrorist
attack on the World Trade Center.
DEPOSITS
Total deposits rose to $194.1 million at December 31, 2001 from $176.2 million a
year earlier, while average deposits increased 16.7%, to $174.3 million in 2001
from $149.4 million in 2000. The branch acquired in 2001 contributed $15 million
to the year-end increase and $8.6 million to the increase in average deposits.
Demand account balances rose to $30 million at December 31, 2001 compared to
$23.3 million a year earlier while average demand deposits were also up in 2001,
rising 20.8% to $29.5 million from $24.4 million in 2000. Higher commercial
balances contributed to these increases.
Savings deposits rose to $109 million at December 31, 2001 from $85 million a
year earlier due to primarily to the branch acquisition. Average savings
accounts rose 57.3% in 2001 for the same reasons.
Time deposits declined 18.9% to $55.1 million at December 31, 2001 from $67.9
million at the end of 2000, while average time deposits were $60.9 million in
2001, 15% less than in 2000. The decreases in time deposits occurred due to
planned reductions in municipal time deposit balances.
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, 2001.
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, 2001, such balances totalled $294,000.
SHORT-TERM BORROWINGS
There were no short-term borrowings at December 31, 2001 compared to $46,000 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 declined to $2.4 million in 2001
from $3.5 in 2000 for the same reason.
LONG-TERM DEBT
Long-term debt increased in 2001 to $13.2 million due to the issuance by CNBC in
December, 2000 of a 7% $1 million note, the proceeds of which were downstreamed
to CNB as "Tier 1" capital.
RESULTS OF OPERATIONS - 2001 COMPARED WITH 2000
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 Reserve Bank cut the target Federal funds rate eleven times during
2001 as the rate declined from 6.50% to 1.75%. the rate cuts had a major impact
on the Bank, reducing income on interest earning assets and reducing expense on
interest-bearing liabilities. The net result was compression in interest rate
margin, although it rose 40 basis points from 3.83% in 2000 to 4.23% due
primarily to the decrease in the average rate paid on time deposits. CNB's prime
lending rate began the year at 9.00% and ended at 4.75%. 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.
On a fully taxable equivalent ("FTE") basis, net interest income rose 24.6% to
$7.8 million in 2001 from $6.3 million in 2000, while the related net interest
margin rose 40 basis points, from 3.83% to 4.23%. Higher levels of interest
income along with decreased interest expense, contributed to this improvement.
Interest income on a FTE basis rose $429,000, or 3.4% in 2001. A higher volume
of interest earning assets along with a shift in asset allocation to higher
earning assets contributed to this increase. Because of the decline in rates,
however, the yield on interest earning assets fell 65 basis points from 7.72% to
7.07%. Interest earning assets averaged $21.3 million, or 13% higher in 2001,
with the loan portfolio providing $11.5 million of that increase.
Interest income from shorter-term earning assets increased by 35.5%, reflecting
an increase in Federal funds sold, which rose due to the additional liquidity
obtained from acquiring the branch.
Interest income on taxable investment securities declined $280,000, or 7% in
2001 due primarily to the lower interest rate environment. Tax-exempt income was
up 9.4% due mostly to higher volume as the tax-exempt portfolio average
increased from $7 million in 2000 to $7.7 million in 2001.
Interest income on loans rose $412,000, or 5.5% due to higher volume in all
categories. The commercial loan portfolio rose slightly, averaging $29.7 million
in 2001 compared to $29.4 million in 2000, while the related yield declined 132
basis points, from 8.61% to 7.25%. The real estate portfolio, comprised mainly
of commercial real estate loans, increased $10.9 million, or 20.2% in 2001,
contributing to a $744,000 increase in commercial loan interest income, while
the related yield decreased to 8.54% in 2001 from 8.88% in 2000. Finally,
installment loans, although comprising the smallest segment of the loan
portfolio, averaged 27.3% more in 2001 than in 2000, 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 $5.3 million in 2001, a decrease of 17.4% from 2000.
This decline resulted primarily from a decrease in time deposits. The average
rate paid on interest bearing liabilities declined by 78 basis points, from
4.54% to 3.33%.
The largest growth in interest bearing liabilities occurred in savings accounts,
which averaged $30.6 million higher in 2001 than during the previous year due to
the branch acquisitions. Interest expense
12
on savings deposits was 23.4% higher in 2001 for the same reason. The average
rate paid decreased from 2.39% to 1.88%.
Interest expense on time deposits decreased $1.2 million due to the planned
reduction in municipal time deposits balances, which are costly funding sources.
The average rate paid was 101 basis points lower in 2001, averaging 4.86%
compared to 5.87% in 2000. Additionally, early withdrawal penalties reduced the
average rate paid by twelve basis points in 2001 compared to four basis points
in 2000. Average volume was down 15%, due to the aforementioned reduction.
Interest expense on short-term borrowings was down $171,000 due to both volume
and rate decreases. The average rate paid declined 256 basis points, from 6.03%
in 2000 to 3.51%, because the rates on these liabilities are tied to the Federal
funds rate.
Interest expense on long-term debt remained relatively unchanged, while the
average balance was 2.9% higher. The average interest rate paid decreased 14
basis points to 5.61%, from 5.76%.
Service charges on deposit accounts rose 33.7% due primarily to the
aforementioned branch acquisition.
Other operating income declined $196,000, or 10.6% to $1,651,000 in 2001 from
$1,847,000 in 2000. The primary reason for the decrease was a decline in loan
syndication fees from $525,000 to $192,000 due to the nonrenewal of certain
major corporate credit lines and a decline in CDFI Fund award income for loan
originations from $879,000 to $774,000. Offsetting these decreases were higher
fees from ATM's and increased earnings from an unconsolidated subsidiary.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for loan losses, totalled $7.8 million in 2001, a 25.5%
increase compared to $6.2 million in 2000. Expenses attributable to the acquired
branches were a major contributor, along with a one-time $120,000 contribution
to an unaffiliated community development corporation. Additionally, legal fees
were 40% higher due to ongoing litigation and data processing charges increased
22% due to greater volume and higher servicer fees.
Salary expense rose 20% due to normal recurring merit increases, the branch
acquisitions and a higher incentive bonus in 2001. Employee benefits rose 18.7%
due primarily to the higher cost of providing employee health insurance.
Occupancy and equipment expense rose 29.6% due to the expenses of operating the
aforementioned new branch.
Other expenses rose $798,000, or 38.3% in 2001 due primarily to the
aforementioned increases in legal and contribution expense along with costs
associated with operating the new branches.
Income tax expense as a percentage of pre-tax income was 35.5% in 2001 compared
to 29.5% in 2000.
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 2001 from operating activities to the
Corporation's liquidity came from net income, while an increase in other assets,
which includes the premium paid for the branch acquisition, represented the
primary use of cash.
Net cash used in investing activities was primarily used for purchases of
investment securities held to maturity, which totalled $19.6 million, while
sources of cash provided by investing activities were derived primarily from
proceeds from maturities, principal payments and early redemptions of investment
securities held to maturity, amounting to $22.2 million.
The primary source of funds from financing activities resulted from the $16.4
million deposits acquired with the branch purchase, while the primary use was
for dividends paid.
EFFECTS OF INFLATION
Inflation, as measured by the CPI, rose to 1.6% in 2001 compared to 3.4% in 2000
and 2.7% in 1999.
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
13
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.
INTEREST SENSITIVITY GAP ANALYSIS
December 31, 2001
==========================================================================================================================
Non-Interest
Sensitive and
Total Maturing In
90 Days 91 to 180 181 to 365 Within More Than
In thousands Or Less Days Days One Year One Year Total
==========================================================================================================================
Interest earning assets:
Federal funds sold and securities
purchased under agreements
to resell $ 33,500 $ -- $ -- $ 33,500 $ -- $ 33,500
Interest-bearing deposits with
Banks 100 -- -- 100 3,530 3,630
Investment securities:
Available for sale 7,967 1,807 766 10,540 31,570 42,110
Held to maturity 1,626 200 -- 1,826 27,355 29,181
Loans 10,967 8,189 2,329 21,485 77,705 99,190
- --------------------------------------------------------------------------------------------------------------------------
54,160 10,196 3,095 67,451 140,160 207,611
- --------------------------------------------------------------------------------------------------------------------------
Interest bearing liabilities:
Deposits:
Savings 77,871 -- -- 77,871 31,151 109,022
Time 18,658 10,304 7,272 36,234 18,817 55,051
Long-term debt -- 112 113 225 12,979 13,204
Non-interest bearing liabilities -- -- -- -- 30,334 30,334
- --------------------------------------------------------------------------------------------------------------------------
96,529 10,416 7,385 114,330 93,281 207,611
- --------------------------------------------------------------------------------------------------------------------------
Asset (liability) sensitivity gap:
Period gap $(42,369) $ (220) $ (4,290) $(46,879) $ 46,879 $ --
Cumulative gap (42,369) (42,589) (46,879) -- -- --
==========================================================================================================================
The Corporation was highly liability-sensitive at the 90-day interval with a
$42.4 million negative gap due to the Bank's Money Market and Super NOW account
deposit relationships. Much of these deposits comprise municipal account
relationships and require collateralization with eligible investment securities,
many of which are not rate sensitive, creating a rate sensitivity gap mismatch.
Because individual interest earnings assets and interest bearing liabilities
respond differently to changes in prime, more refined results are obtained when
the simulation model is used. These results indicate a reduction in net interest
income when rates decrease and increase in net interest income when rates rise.
CAPITAL
The following table presents the consolidated and bank-only capital components
and related ratios as calculated under regulatory
accounting practice.
Consolidated Bank Only
- --------------------------------------------------------------------------------
December 31, December 31,
Dollars in thousands 2001 2000 2001 2000
- --------------------------------------------------------------------------------
Total stockholders' equity $ 11,434 $ 10,235 $ 13,618 $ 11,787
Net unrealized (gain) loss
on investment securities
available for sale 136 273 121 259
Disallowed intangibles (970) (261) (970) (261)
- --------------------------------------------------------------------------------
Tier 1 capital 10,600 10,247 12,769 11,785
- --------------------------------------------------------------------------------
Qualifying long-term debt 2,154 1,225 227 249
Reserve for loan
losses 1,514 1,200 1,504 1,200
- --------------------------------------------------------------------------------
Tier 2 capital 3,668 2,425 1,731 1,449
- --------------------------------------------------------------------------------
Total capital $ 14,268 $ 12,672 $ 14,500 $ 13,234
================================================================================
Risk-adjusted assets $121,308 $109,391 $120,529 $108,674
Total assets 222,298 200,442 221,309 199,543
- --------------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 capital to risk-
adjusted assets 8.74% 9.37% 10.59% 10.84%
Regulatory minimum 4.00 4.00 4.00 4.00
Total capital to risk-
adjusted assets 11.76 11.58 12.03 12.18
Regulatory minimum 8.00 8.00 8.00 8.00
Leverage ratio 5.16 5.67 6.26 6.56
Total stockholders' equity
to total assets 5.14 5.11 6.15 5.00
================================================================================
14
RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999
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 $7.52 from $2.34. Without the
award, net income would have totalled $460,000.
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.
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.
Interest expense on short-term borrowings 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 Federal Home Loan Bank 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 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.
15
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
====================
Dollars in thousands, except per share data 2001 2000
================================================================================================================
ASSETS
Cash and due from banks (Note 2) $ 5,573 $ 8,884
Federal funds sold (Note 3) 33,500 26,700
Interest-bearing deposits with banks 3,630 153
Investment securities available for sale (Note 4) 42,110 33,852
Investment securities held to maturity (Market value of $29,177
at December 31, 2001 and $31,686 at December 31, 2000) (Note 5) 29,181 32,078
Loans held for sale -- 148
Loans (Note 6) 99,190 90,653
Less: Reserve for loan losses (Note 7) 1,700 1,200
- ----------------------------------------------------------------------------------------------------------------
Net loans 97,490 89,453
- ----------------------------------------------------------------------------------------------------------------
Premises and equipment (Note 8) 4,176 3,471
Accrued interest receivable 1,289 1,410
Other real estate owned 326 621
Other assets (Notes 13 and 14) 5,023 3,672
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $222,298 $200,442
================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits: (Notes 3, 4, 5, and 9)
Demand $ 30,056 $ 23,341
Savings 109,022 84,969
Time 55,051 67,859
- ----------------------------------------------------------------------------------------------------------------
Total deposits 194,129 176,169
Short-term borrowings (Notes 6 and 10) -- 46
Accrued expenses and other liabilities 3,531 1,567
Long-term debt (Note 11) 13,204 12,425
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 210,864 190,207
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 2001 and 2000 200 200
Series C , issued and outstanding 108 shares in 2001 and 2000 27 27
Series D , issued and outstanding 3,280 shares in 2001 and 2000 820 820
Common stock, par value $10: Authorized 400,000 shares;
125,980 shares issued in 2001 and 122,030 shares issued in 2000,
125,125 shares outstanding in 2001 and 121,406 shares outstanding in 2000 1,260 1,220
Surplus 999 968
Retained earnings 8,288 7,292
Accumulated other comprehensive loss (136) (273)
Treasury stock, at cost - 855 shares and 624 shares in 2001 and 2000, respectively (24) (19)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,434 10,235
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $222,298 $200,442
================================================================================================================
See accompanying notes to consolidated financial statements.
16
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
===============================
Dollars in thousands, except per share data 2001 2000 1999
======================================================================================================
INTEREST INCOME
Interest and fees on loans $ 7,859 $ 7,447 $ 6,158
Interest on Federal funds sold and securities
purchased under agreements to resell 746 646 396
Interest on deposits with banks 185 41 76
Interest and dividends on investment securities:
Taxable 3,705 3,985 3,770
Tax-exempt 392 358 215
- ------------------------------------------------------------------------------------------------------
Total interest income 12,887 12,477 10,615
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits (Note 9) 4,535 5,480 4,244
Interest on short-term borrowings 39 210 133
Interest on long-term debt 694 691 899
- ------------------------------------------------------------------------------------------------------
Total interest expense 5,268 6,381 5,276
- ------------------------------------------------------------------------------------------------------
Net interest income 7,619 6,096 5,339
Provision for loan losses (Note 7) 356 872 906
- ------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 7,263 5,224 4,433
- ------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Service charges on deposit accounts 937 701 660
Other income (Note 12) 1,651 1,847 815
Net gains (losses) on sales of investment securities (Notes 4 and 5) 1 (1) 17
- ------------------------------------------------------------------------------------------------------
Total other operating income 2,589 2,547 1,492
- ------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries and other employee benefits (Note 14) 3,831 3,199 2,820
Occupancy expense (Note 8) 635 490 394
Equipment expense (Note 8) 482 469 433
Other expenses (Note 12) 2,879 2,081 1,683
- ------------------------------------------------------------------------------------------------------
Total other operating expenses 7,827 6,239 5,330
- ------------------------------------------------------------------------------------------------------
Income before income tax expense 2,025 1,532 595
Income tax expense (Note 13) 719 452 193
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 1,306 $ 1,080 $ 402
======================================================================================================
NET INCOME PER COMMON SHARE (NOTE 17)
Basic $ 10.05 $ 8.21 $ 2.48
Diluted 9.33 7.52 2.34
======================================================================================================
Basic average common shares outstanding 123,241 120,926 118,902
Diluted average common shares outstanding 133,766 133,426 131,402
======================================================================================================
See accompanying notes to consolidated financial statements.
17
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Common Preferred Retained
Dollars in thousands Stock Surplus Stock Earnings
=======================================================================================================
BALANCE, DECEMBER 31, 1998 $1,188 $938 $1,547 $6,442
Comprehensive income:
Net income -- -- -- 402
Unrealized holding losses on securities
arising during the period (net of tax of $(465)) -- -- -- --
Total comprehensive income (loss)
Redemption of preferred stock -- -- (500) --
Proceeds from issuance of common stock 13 12 -- --
Dividends paid on common stock -- -- -- (213)
Dividends paid on preferred stock -- -- -- (107)
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 1,201 950 1,047 6,524
Comprehensive income:
Net income -- -- -- 1,080
Unrealized holding gains on securities
arising during the period (net of tax of $281) -- -- -- --
Total comprehensive income
Proceeds from issuance of common stock 19 18 -- --
Purchase of treasury stock -- -- -- --
Dividends paid on common stock -- -- -- (225)
Dividends paid on preferred stock -- -- -- (87)
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 1,220 968 1,047 7,292
Comprehensive income:
Net income -- -- -- 1,306
Cumulative effect of change in accounting
principle (net of tax of $ 7) -- -- -- --
Unrealized holding gains on securities
arising during the period (net of tax of $46) -- -- -- --
Total comprehensive income
Proceeds from issuance of common stock 40 31 -- --
Purchase of treasury stock -- -- -- --
Dividends paid on common stock -- -- -- (243)
Dividends paid on preferred stock -- -- -- (67)
- -------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $1,260 $999 $1,047 $8,288
=======================================================================================================
Accumulated
Other
Comprehensive Treasury
Dollars in thousands (Loss) Income Stock Total
===================================================================================================
BALANCE, DECEMBER 31, 1998 $ 25 $(17) $10,123
Comprehensive income:
Net income -- -- 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)
Proceeds from issuance of common stock -- -- 25
Dividends paid on common stock -- -- (213)
Dividends paid on preferred stock -- -- (107)
- ---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (679) (17) 9,026
Comprehensive income:
Net income -- -- 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 -- -- 37
Purchase of treasury stock -- (2) (2)
Dividends paid on common stock -- -- (225)
Dividends paid on preferred stock -- -- (87)
- ---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 (273) (19) 10,235
Comprehensive income:
Net income -- -- 1,306
Cumulative effect of change in accounting
principle (net of tax of $ 7) 20 -- 20
Unrealized holding gains on securities
arising during the period (net of tax of $46) 117 -- 117
-------
Total comprehensive income 1,443
Proceeds from issuance of common stock -- -- 71
Purchase of treasury stock -- (5) (5)
Dividends paid on common stock -- -- (243)
Dividends paid on preferred stock -- -- (67)
- ---------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $(136) $(24) $11,434
===================================================================================================
See accompanying notes to consolidated financial statements.
18
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
================================
IN THOUSANDS 2001 2000 1999
================================================================================================================
OPERATING ACTIVITIES
Net income $ 1,306 $ 1,080 $ 402
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 433 460 420
Provision for loan losses 356 872 906
Premium amortization on investment securities 60 9 69
Net losses (gains) on sales and early redemption of investment securities 1 1 (17)
Gains on sales of loans held for sale (3) (15) (21)
Loans originated for sale (90) (553) (1,640)
Proceeds from sales of loans held for sale 241 825 592
Decrease (increase) in accrued interest receivable 121 (115) (185)
Deferred income tax expense (benefit) 850 206 (514)
Increase in other assets (2,297) (405) (1,050)
Increase (decrease) in accrued expenses and other liabilities 1,964 (47) 340
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,942 2,318 (698)
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in loans (8,393) (10,024) (8,419)
(Increase) decrease in interest-bearing deposits with banks (3,477) 2,133 (2,261)
Proceeds from maturities of investment securities available for sale,
including principal payments and early redemptions 8,258 8,100 11,921
Proceeds from sales of investment securities available for sale 1,147 94 4,870
Proceeds from maturities of investment securities held to maturity,
including principal payments and early redemptions 22,220 4,462 8,729
Proceeds from sales of investment securities held to maturity -- 485 --
Purchases of investment securities available for sale (17,268) (5,896) (21,185)
Purchases of investment securities held to maturity (19,546) (4,023) (10,046)
Purchases of premises and equipment (1,138) (222) (821)
Decrease (increase) in other real estate owned, net 295 247 (5)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,902) (4,644) (17,217)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchase of deposits 16,369 8,339 --
Increase in deposits 1,591 27,993 1,894
(Decrease) increase in short-term borrowings (46) (5,954) 5,982
Increase (decrease) in long-term debt 779 (3,800) 476
Proceeds from issuance of common stock 71 37 25
Purchase of treasury stock (5) (2) --
Redemptions of preferred stock -- -- (500)
Dividends paid on preferred stock (67) (87) (107)
Dividends paid on common stock (243) (225) (213)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,449 26,301 7,557
- ----------------------------------------------------------------------------------------------------------------
Net decrease (increase) in cash and cash equivalents 3,489 23,975 (10,358)
Cash and cash equivalents at beginning of year 35,584 11,609 21,967
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 39,073 $ 35,584 $ 11,609
================================================================================================================
CASH PAID DURING THE YEAR:
Interest $ 5,115 $ 6,440 $ 5,428
Income taxes 735 323 520
SUPPLEMENTAL SCHEDULE FOR NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans -- 170 103
Transfer of loans held for sale to loans -- -- 2,292
Conversion of preferred stock into long-term debt 71 -- 500
Transfer from investment securities held to maturity to investment securities
available for sale, at amortized cost 246 -- --
See accompanying notes to consolidated financial statements.
19
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.
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.
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
20
The premium paid for the acquisition of deposits in connection with the purchase
of a branch office is amortized on a straight-line basis over a nine-year
period.
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. As a result of the reclassification, the
Corporation recorded other comprehensive income, net of tax of $14,000, as a
cumulative effect of an accounting change.
On July 20, 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations," and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies the criteria acquired intangible assets must
meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Statement 142 requires that after June 30, 2001, goodwill and any intangible
asset determined to have an indefinite useful life will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement 142.
The Corporation is required to adopt the provisions of Statement of 141
immediately. The initial adoption of Statement 141 had no impact on the
Corporation's consolidated financial statements. The Corporation is required to
adopt Statement 142 effective January 1, 2002. At December 31, 2001, the
Corporation has $970,000 in core deposit premium with a definite useful life,
which results in $120,000 in annual amortization that will continue through 2010
after adoption of Statement 142.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2000 and 1999 consolidated
financial statements in order to conform with the 2001 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 $2,038,000 in
2001 and $953,000 in 2000.
NOTE 3 FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Federal funds sold averaged $19.1 million during 2001 and $10.5 million in 2000,
while the maximum balance outstanding at any month-end during 2001, 2000 and
1999 was $ 58.3 million, $26.7 million and $15.4 million, respectively. There
were no securities purchased under repurchase agreements in either 2001 or 2000.
There were no such transactions outstanding at any month-end during 2001, 2000
or 1999.
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
2001 In thousands Cost Gains Losses Value
=======================================================================================
U.S. Treasury securities
and obligations of U.S.
government agencies $ 9,590 $183 $138 $ 9,635
Obligations of state and
political subdivisions 2,396 39 -- 2,435
Other securities:
Mortgage-backed
securities 24,319 184 196 24,307
Other debt securities 4,669 25 268 4,426
Equity securities:
Marketable securities 397 -- 38 359
Federal Reserve Bank
and Federal Home
Loan Bank stock 948 -- -- 948
- ---------------------------------------------------------------------------------------
Total $42,319 $431 $640 $42,110
=======================================================================================
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 2,279 32 -- 2,311
Other securities:
Mortgage-backed
securities 19,913 112 211 19,814
Other debt securities 3,670 -- 195 3,475
Equity securities:
Marketable securities 399 -- 18 381
Federal Reserve Bank
and Federal Home
Loan Bank stock 1,107 -- -- 1,107
21
- ---------------------------------------------------------------------------------------
Total $34,294 $187 $629 $33,852
=======================================================================================
The amortized cost and the market values of investments in debt securities
available for sale presented below as of December 31, 2001 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.
Amortized Market
In thousands Cost Value
================================================================================
Due within one year:
Mortgage-backed securities $ 424 $ 425
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies 5,122 5,257
Mortgage-backed securities 2,760 2,780
Other debt securities 754 778
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 1,639 1,642
Mortgage-backed securities 453 462
Obligations of state and political subdivisions 897 913
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 2,829 2,736
Mortgage-backed securities 20,682 20,640
Obligations of state and political subdivisions 1,499 1,522
Other debt securities 3,915 3,648
- --------------------------------------------------------------------------------
Total debt securities 40,974 40,803
Equity securities 1,345 1,307
- --------------------------------------------------------------------------------
Total $42,319 $42,110
================================================================================
Sales of investment securities available for sale totalled $1.1 million in 2001,
$80,000 in 2000 and $4.9 million in 1999, resulting in gross gains $15,000,
$24,000 and $133,000 and gross losses of $18,000, $10,000 and $116,000
respectively.
Interest and dividends on investment securities available for sale was as
follows:
In thousands 2001 2000 1999
================================================================================
Taxable $2,058 $2,257 $1,977
Tax-exempt 112 101 104
- --------------------------------------------------------------------------------
Total $2,170 $2,358 $2,081
================================================================================
Investment securities available for sale with a carrying value of $25,249,000
were pledged to secure public funds at December 31, 2001.
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
2001 In thousands Value Gains Losses Value
===================================================================================
U.S. Treasury securities
and obligations of U.S.
government agencies $12,976 $ 10 $262 $12,724
Obligations of state and
political subdivisions 5,837 99 47 5,889
Other securities:
Mortgaged-backed 8,343 103 61 8,385
Other debt securities 2,025 154 -- 2,179
- -----------------------------------------------------------------------------------
Total $29,181 $366 $370 $29,177
===================================================================================
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
===================================================================================
The book value and the market value of investment securities held to maturity
presented below as of December 31, 2001 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 $ 234 $ 239
Obligations of state and political
subdivisions 400 406
Due after one year but within five years:
Mortgage-backed securities 300 304
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 60 64
Obligations of state and political subdivisions 1,265 1,260
Other debt securities 2,025 2,179
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 12,916 12,656
Obligations of state and political subdivisions 4,172 4,223
Mortgage-backed securities 7,809 7,846
- ---------------------------------------------------------------------------------
Total $29,181 $29,177
=================================================================================
During 2001, $18.8 million of Agency callable securities were redeemed by the
issuer prior to maturity, resulting in a gross gain of $4,000. 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.
Interest and dividends on investment securities held to maturity was as follows:
In thousands 2001 2000 1999
================================================================================
Taxable $1,647 $1,728 $1,793
Tax-exempt 280 257 111
- --------------------------------------------------------------------------------
Total $1,927 $1,985 $1,904
================================================================================
Investment securities held to maturity with a carrying value of $25,065,000 were
pledged to secure public funds at December 31, 2001.
NOTE 6 LOANS
Loans, net of unearned discount and net deferred origination fees and costs at
December 31, were as follows:
In thousands 2001 2000
- --------------------------------------------------------------------------------
Commercial $17,448 $17,353
Real estate 80,466 72,482
Installment 1,385 947
- --------------------------------------------------------------------------------
Total loans 99,299 90,782
Less: Unearned income 109 129
- --------------------------------------------------------------------------------
Loans $99,190 $90,653
================================================================================
Loans guaranteed by the Small Business Administration totalling $1,791,000 were
pledged as collateral for borrowings under a note issued to the U.S. Treasury
Department at December 31, 2001.
Nonperforming loans include loans which are contractually past due 90 days or
more for which interest income is still being accrued and nonaccrual loans.
22
At December 31, nonperforming loans were as follows:
In thousands 2001 2000
================================================================================
Nonaccrual loans $ 983 $457
Loans with interest or principal 90
days or more past due and still accruing 252 244
- --------------------------------------------------------------------------------
Total nonperforming loans $1,235 $701
================================================================================
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 2001 2000 1999
================================================================================
Interest income foregone $(38) $(18) $(183)
Interest income received 62 54 108
- --------------------------------------------------------------------------------
$ 24 $ 36 $ (75)
================================================================================
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, 2001, 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, 2001, or at December 31, 2000.
NOTE 7 RESERVE FOR LOAN LOSSES
Transactions in the reserve for loan losses are summarized as follows:
In thousands 2001 2000 1999
================================================================================
Balance, January 1 $1,200 $1,975 $1,415
Provision for loan
losses 356 872 906
Recoveries of loans previously
charged off 299 90 157
- --------------------------------------------------------------------------------
1,855 2,937 2,478
Less: Charge-offs 155 1,737 503
- --------------------------------------------------------------------------------
Balance, December 31 $1,700 $1,200 $1,975
================================================================================
NOTE 8 PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
In thousands 2001 2000
================================================================================
Land $ 476 $ 421
Premises 1,892 1,397
Furniture and equipment 2,657 2,375
Building improvements 2,564 2,259
- --------------------------------------------------------------------------------
Total cost 7,589 6,452
Less: Accumulated depreciation and amortization 3,413 2,981
- --------------------------------------------------------------------------------
Total premises and equipment $4,176 $3,471
================================================================================
Depreciation and amortization expense charged to operations amounted to
$434,000, $460,000, and $420,000 in 2001, 2000, and 1999, respectively.
NOTE 9 DEPOSITS
Deposits at December 31 are presented below.
In thousands 2001 2000
================================================================================
Noninterest bearing:
Demand $ 30,056 $ 54,789
Savings 294 294
- --------------------------------------------------------------------------------
Total noninterest bearing deposits 30,350 55,083
- --------------------------------------------------------------------------------
Interest bearing:
Savings 108,728 53,227
Time 55,051 67,859
- --------------------------------------------------------------------------------
Total interest bearing deposits 163,779 121,086
- --------------------------------------------------------------------------------
Total deposits $194,129 $176,169
================================================================================
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 2001 2000
================================================================================
Three months or less $10,925 $33,376
Over three months but within six months 4,004 3,430
Over six months but within twelve months 2,788 1,468
Over twelve months 6,172 2,413
- --------------------------------------------------------------------------------
Total deposits $23,889 $40,687
================================================================================
Interest expense on certificates of deposits of $100,000 or more was $2,468,000,
$2,720,000 and $2,323,000 in 2001, 2000 and 1999, 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
===================================================================================================================
2001
Federal funds purchased and securities
sold under repurchase
agreements $-- --% $ 37 2.30% $ --
Demand note issued
to the U.S. Treasury -- -- 1,074 3.47 3,733
- -------------------------------------------------------------------------------------------------------------------
Total $-- --% $1,111 3.47% $3,733
===================================================================================================================
2000
Federal funds purchased and securities
sold under repurchase
agreements $-- --% $ 412 6.20% $2,000
Demand note issued
to the U.S. Treasury 46 3.50 3,069 6.00 5,773
- -------------------------------------------------------------------------------------------------------------------
Total $46 3.50% $3,481 6.03% $7,773
===================================================================================================================
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. There is no balance outstanding
under the note at December 31, 2001.
NOTE 11 LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
In thousands 2001 2000
================================================================================
FHLB convertible advances due from
February 24, 2002 through October 14, 2010 $ 9,700 $ 9,700
5.25% capital note, due December 28, 2005 1,350 1,500
5.00% capital note, due July 1, 2008 500 500
6.00% capital note, due December 28, 2010 500 500
8.00% mandatory convertible debentures,
due July 1, 2003 154 225
7.00% note, due January 1, 2014 1,000 --
- --------------------------------------------------------------------------------
Total $13,204 $12,425
================================================================================
23
Interest is payable quarterly on most of the FHLB advances. $12 million of the
advances are callable at various dates from April 7, 2003 to October 4, 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 and continuing through December, 2005.
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.
Interest is payable semiannually on the capital note due July 1, 2008 with
principal payments commencing in July, 2004 and continuing annually until July,
2008.
Interest is payable quarterly on the capital note due December 28, 2010, with
principal payments commencing annually in December, 2006 and continuing until
December, 2010.
The 7% note payable on January 1, 2014 is payable in quarterly installments of
$31,250 commencing January 1, 2006, with interest only payable quarterly from
April 1, 2002 to January 1, 2006. The debt is secured by 5,090 shares of the
authorized but unissued shares of CNB common stock.
Scheduled repayments on long-term debt are as follows:
In thousands Amount
================================================================================
2002 $ 325
2003 4,054
2004 575
2005 650
2006 325
Thereafter 7,275
================================================================================
Total $13,204
================================================================================
NOTE 12 OTHER OPERATING INCOME AND EXPENSES
The following table presents the major items of other operating income and
expenses:
In thousands 2001 2000 1999
================================================================================
OTHER OPERATING INCOME
Award income $774 $879 $ --
Agency fees on commercial loans 192 525 307
OTHER OPERATING EXPENSES
Professional fees 373 293 319
Other real estate owned expense 250 253 64
Data processing 193 159 145
Contributions 171 59 60
Stationery and supplies expense 161 112 82
================================================================================
During 2000, the U.S. Department of the Treasury Community Development Financial
Institutions Fund ("CDFI") 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.
During 2001, the Bank received $1.9 million from the CDFI fund, of which
$209,000 was applicable to the loan commitments made in 2000, and recorded as
award income. Additionally, $473,000 was applicable to loans committed and
funded during 2001 and $92,000 was applicable to a new branch location opened in
a low-income neighborhood. Finally, $1.1 million applied to a deposit program in
which the Bank participated. Under this program, long-term certificates of
deposits were purchased from banks located in low-income areas at below-market
rates. $97,000 of the $1.1 million was recorded as interest income as a yield
enhancement, while the remaining $1 million was deferred and will be credited as
interest income over the remaining lives of the deposits over three years.
NOTE 13 INCOME TAXES
The components of income tax expense are as follows:
In thousands 2001 2000 1999
================================================================================
CURRENT EXPENSE
Federal $1,324 $215 $ 624
State 245 31 83
- --------------------------------------------------------------------------------
Total current income tax expense 1,569 246 707
- --------------------------------------------------------------------------------
DEFERRED (BENEFIT) EXPENSE
Federal (728) 178 (441)
State (122) 28 (73)
- --------------------------------------------------------------------------------
Total deferred income tax (benefit) expense (850) 206 (514)
- --------------------------------------------------------------------------------
Total income tax expense $ 719 $452 $ 193
================================================================================
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 2001 2000 1999
================================================================================
Federal income tax at statutory rate $ 689 $ 521 $202
Increase (decrease) in income tax
expense resulting from:
State income tax expense, net of
federal benefit 81 39 7
Tax-exempt income (119) (122) (63)
Life insurance (27) (23) (18)
Change in valuation allowance (17) (5) --
Other, net 112 42 65
- --------------------------------------------------------------------------------
Total income tax expense $ 719 $ 452 $193
================================================================================
24
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 2001 2000
================================================================================
DEFERRED TAX ASSETS
Unrealized losses on investment securities
available for sale $ 76 $169
Investment securities 8 7
Reserve for possible loan losses 362 155
Premises and equipment 75 42
Deposit intangible 26 13
Reserve for other real estate owned 39 5
Deferred compensation 215 171
Other real estate owned 115 76
State net operating loss -- 18
Accrued expenses 132 104
Deferred income 423 --
Other assets 11 --
Other -- 3
- --------------------------------------------------------------------------------
Total deferred tax asset 1,482 763
Less: Valuation allowance 1 18
- --------------------------------------------------------------------------------
Deferred tax asset 1,481 745
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Other assets -- 21
- --------------------------------------------------------------------------------
Deferred tax liability -- 21
- --------------------------------------------------------------------------------
Net deferred tax asset $1,481 $724
================================================================================
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.
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
$60,000 in 2001, $55,000 in 2000 and $52,000 in 1999.
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 2001, 2000 and 1999 amounted to $270,000, $217,000, and $100,000,
respectively.
Nonqualified benefit plans
The Bank maintains a supplemental executive retirement plan ("SERP"), which
provides a post-employment supplemental retirement benefit to certain key
executive officers. SERP expense was $74,000 in 2001, and $41,000 in 2000 and in
1999. The Bank also has a director retirement plan ("DRIP"). DRIP expense was
$11,000 in 2001, $33,000 in 2000 and $28,000 in 1999.
Benefits under both plans are funded through a bank-owned life insurance policy,
the cash surrender value of which is included in "Other assets" and totalled
$2.2 million and $2 million at December 31, 2001 and 2000, 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 $117,000 in 2001,
$106,000 in 2000 and $94,000 in 1999, while the related life insurance expense
was $38,000 in 2001 and 2000 and $36,000 in 1999.
Stock options
No stock options have been issued since 1997. 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 $ - in 2001 and $2,000 in 2000 and 1999, which would have decreased
the reported basic and diluted earnings per share by $.02 in 2000 and 1999.
The fair value of the option grants were estimated on the date of the grants
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 2001 2000
=========================================================================================================
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, $2,465,000 was available for the payment of dividends to
the parent corporation at December 31, 2001, subject to the restrictive
covenants under long-term debt agreements included in Note 11.
25
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 2001 2000 1999
==================================================================================
Net income $ 1,306 $ 1,080 $ 402
Dividends paid on preferred stock (67) (87) (107)
- ----------------------------------------------------------------------------------
Net income applicable to basic
common shares 1,239 993 295
Interest expense on convertible
subordinated debentures, net of
income taxes 9 10 12
- ----------------------------------------------------------------------------------
Net income applicable to diluted
common shares $ 1,248 $ 1,003 $ 307
==================================================================================
NUMBER OF AVERAGE COMMON SHARES
Basic 123,241 120,926 118,902
- ----------------------------------------------------------------------------------
Diluted:
Average common shares outstanding 123,241 120,926 118,902
Average common shares converted from
convertible subordinate debentures 10,525 12,500 12,500
- ----------------------------------------------------------------------------------
133,766 133,426 131,402
==================================================================================
NET INCOME PER COMMON SHARE
Basic $ 10.05 $ 8.21 $ 2.48
Diluted 9.33 7.52 2.34
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, 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 2001 and 2000. Such transactions
were on substantially the same terms, including interest rates and collateral
with respect to loans, as those prevailing at the time 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
$608,000 and $602,000 at December 31, 2001 and 2000, respectively. The highest
amount of such indebtedness during 2001 was $761,000 and in 2000 amounted to
$653,000. During 2001, new loans totalled $159,000 and paydowns totalled
$153,000.
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, 2001 and 2000.
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, 2001 and 2000. 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, 2001 and 2000.
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
2001 2000
Carrying Fair Carrying Fair
In thousands Value Value Value Value
================================================================================
FINANCIAL ASSETS
Cash and other short-term
investments $ 39,073 $ 39,073 $ 35,584 $ 35,584
Interest-bearing deposits
with banks 3,630 4,518 153 153
Investment securities AFS 42,110 42,110 33,852 33,852
Investment securities HTM 29,181 29,177 32,078 31,686
Loans 97,490 100,403 89,453 88,083
Loans held for sale -- -- 148 148
FINANCIAL LIABILITIES
Deposits 194,129 $196,329 $176,169 $176,695
Short-term borrowings -- -- 46 46
Long-term debt 13,204 13,658 12,425 12,760
================================================================================
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
26
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. This amount
was charged-off prior to 2000. 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. The amount that CNB will ultimately
recover, if any, under these insurance policies cannot be determined. The trial
has been completed and the Bank is awaiting a decision by the Court.
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 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, 2001 and 2000 the Bank had mortgage commitments of $15,560,000
and $12,957,000, unused corporate lines of credit of $36,443,000 and
$35,588,000, and $1,527,000 and $1,203,000 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 2001 2000
================================================================================
ASSETS
Cash and cash equivalents $ 120 $ 38
Investment securities held to maturity 126 100
Investment securities available for sale 763 765
Investment in subsidiary 13,618 11,787
Due from subsidiary 227 249
Other assets 109 44
- --------------------------------------------------------------------------------
Total assets $14,963 $12,983
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 25 $ 23
Long-term debt 3,504 2,725
- --------------------------------------------------------------------------------
Total liabilities 3,529 2,748
Stockholders' equity 11,434 10,235
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $14,963 $12,983
================================================================================
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
In thousands 2001 2000 1999
- --------------------------------------------------------------------------------
INCOME
Interest income $ 52 $ 51 $ 53
Dividends from subsidiary 690 306 260
Interest from subsidiary 19 20 20
- --------------------------------------------------------------------------------
Total income 761 377 333
- --------------------------------------------------------------------------------
EXPENSES
Interest expense 148 122 110
Other operating expenses 4 5 4
Net (losses) gains on sales of
investment securities (3) 16 29
Income tax benefit (29) (15) (4)
- --------------------------------------------------------------------------------
Total expenses 126 96 81
- --------------------------------------------------------------------------------
income of subsidiary 635 281 252
Equity in undistributed income
of subsidiary 671 799 150
- --------------------------------------------------------------------------------
Net income $1,306 $1,080 $402
================================================================================
27
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
In thousands 2001 2000 1999
=================================================================================
OPERATING ACTIVITIES
Net income $ 1,306 $1,080 $ 402
Adjustments to reconcile net income
to cash used in operating activities:
Premium amortization (discount
accretion) on investment securities 2 (1) (5)
Net losses (gains) on sales of investment
securities available for sale 3 (16) (29)
Equity in undistributed income of
subsidiary (671) (799) (150)
(Increase) decrease in other assets (65) (8) (16)
Increase (decrease) in other liabilities 2 1 (5)
- ---------------------------------------------------------------------------------
Net cash provided by operating activities 577 257 197
- ---------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale 92 97 205
Proceeds from maturities of investment
securities held to maturity including
principal payments 103 -- 221
Purchases of investment securities
available for sale (97) (99) (179)
Purchases of investment securities
held to maturity (128) -- (74)
Increase in investment in subsidiary (1,000) (500) --
- ---------------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (1,030) (502) 173
- ---------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long-term debt 779 500 476
Proceeds from issuance of common stock 71 37 25
Purchase of treasury stock (5) (2) --
Redemption of preferred stock -- -- (500)
Dividends paid (310) (312) (320)
- ---------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 535 225 (319)
- ---------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents 82 (22) 51
Cash and cash equivalents at
beginning of year 38 60 9
- ---------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 120 $ 38 $ 60
=================================================================================
NOTE 23 REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 2001, 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, 2001 and 2000, 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
MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL-CAPITALIZED
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------
December 31, 2001
Leverage (Tier 1)
capital $12,769 6.26% $8,195 4.00% $10,244 5.00%
Risk-based capital:
Tier 1 12,769 10.63 4,821 4.00 7,232 6.00
Total 14,500 12.07 9,642 8.00 12,053 10.00
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
- ----------------------------------------------------------------------------------------------
NOTE 24 SUMMARY OF QUARTERLY FINANCIAL INFORMATION
(unaudited) 2001
- --------------------------------------------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
================================================================================
Interest income $3,247 $3,290 $3,234 $3,116
Interest expense 1,424 1,406 1,291 1,147
- --------------------------------------------------------------------------------
Net interest income 1,823 1,884 1,943 1,969
Provision for
loan losses 60 75 66 155
Net gains (losses) on sales
of investment securities 5 (2) 5 (7)
Other operating income 380 435 419 1,354
Other operating expenses 1,587 1,777 1,903 2,560
- --------------------------------------------------------------------------------
Income before income
tax expense 561 465 398 601
Income tax expense 183 207 139 190
- --------------------------------------------------------------------------------
Net income $ 378 $ 258 $ 259 $ 411
================================================================================
Net income per share-basic $ 2.56 $ 2.13 $ 2.06 $ 3.30
================================================================================
Net income per share-diluted $ 2.35 $ 1.95 $ 1.94 $ 3.09
================================================================================
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) income per share-
diluted $ (.14) $ 1.92 $ 1.78 $ 3.96
================================================================================
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants during 2001.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required is incorporated herein 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 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 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 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).
(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).
29
(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) Amended and Restated Asset Purchase and Sale Agreement between
the Bank and Carver Federal Savings Bank dated as of February
27, 2001 (incorporated by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2000).
(10)(e) Secured Promissory Note of the Corporation dated December 28,
2001 payable to National Community Investment Fund in the
principal amount of $1,000,000.
(10)(f) Loan Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund.
(10)(g) Pledge Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund.
(10)(p) Asset Purchase and Sale Agreement between the Bank and Carver
Federal Savings Bank dated as of January 26, 1998.
(Incorporated by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998).
(11) Statement regarding computation of per share earnings. The
required information is included on page 25.
(21) Subsidiaries of the registrant. The required information is
included on page 3.
(24) Power of Attorney is located on the signature page.
(c) No reports on Form 8-K were filed during the quarter ended
December 31, 2001.
30
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 28, 2002 Date: March 28, 2002
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 28, 2002
- --------------------------------
Douglas E. Anderson
/s/ Barbara Bell Director March 28, 2002
- --------------------------------
Barbara Bell
/s/ Leon Ewing Director March 28, 2002
- --------------------------------
Leon Ewing
/s/ Eugene Giscombe Director, March 28, 2002
- -------------------------------- Chairperson of the Board
Eugene Giscombe
/s/ Norman Jeffries Director March 28, 2002
- --------------------------------
Norman Jeffries
/s/ Louis E. Prezeau Director, March 28, 2002
- -------------------------------- President and Chief
Louis E. Prezeau Executive Officer
/s/ Lemar C. Whigham Director March 28, 2002
- --------------------------------
Lemar C. Whigham
31
CLOSING CHECKLIST
NCIF LOAN TO CITY NATIONAL BANCSHARES CORPORATION ("CNBC")
1. Loan Agreement
2. Secured Promissory Note
3. Pledge Agreement
4. Resolutions of the Board of Directors of CNBC, certified by the Secretary,
approving the loan and the pledge of City National Bank of New Jersey (the
"Bank") common shares, and authorizing the officers of CNBC to take
appropriate action.
5. Current "good standing" certificate for CNBC from the New Jersey Secretary
of State
6. Current "good standing" certificate for the Bank from the Comptroller of
the Currency.
7. UCC-1 financing statement(s).
8. Certificate(s) representing _____ of the issued and outstanding shares of
common stock of the Bank, accompanied by stock power(s) endorsed in blank.
9. Other documents reasonably requested by NCIF.