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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, 2002
| | 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 20, 2003 was approximately $3,638,350.
There were 124,604 shares of common stock outstanding at March 20, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the definitive Proxy Statement for the 2003 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 - 16
Item 8. Financial Statements and Supplementary Data........................................ 17 - 31
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................... 32
PART III
Item 10. Directors and Executive Officers of Registrant..................................... 32
Item 11. Executive Compensation............................................................. 32
Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 32
Item 13. Certain Relationships and Related Transactions..................................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................... 32 - 34
Signatures.................................................................................. 35
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, 2002, CNBC
had consolidated total assets of $215.1 million, total deposits of $181.9
million and stockholders' equity of $13.3 million. In addition to its principal
subsidiary, City National Bank of New Jersey (the "Bank" or "CNB"), a nationally
chartered commercial bank which commenced operations on June 11, 1973, the
Corporation formed a subsidiary during 2002, City National Bank Capital Trust I,
through which it issued trust preferred securities.
CNB is a national banking association chartered in 1973 under the laws of the
United States of America and has one subsidiary, City National Investments,
Inc., an investment company which holds, maintains and manages investment assets
for CNB. 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 its retail branch network. 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.
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 eight-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, and also opened
a de novo branch in Hempstead, Long Island in 2002.
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
4
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OCC, in connection with its
examination of a national bank, to assess the association's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications by such association. The CRA also requires
all institutions to make public disclosure of their CRA ratings. CNB received an
"Outstanding" 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, 2002, CNBC and its subsidiaries had 90 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 four other branch locations in New Jersey
and three in the state of New York. Three 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, all owned,
and in Paterson, which is leased. The New York branches are located in Roosevelt
and Hempstead, Long Island, both of which are leased and Brooklyn, New York,
which is 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 alleged, 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. CNB has been awarded a $1.7 million judgment, representing
the loss, cost of collection and interest.
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 or from the judgment cannot be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002 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 2002.
At March 20, 2003, the Corporation had 1,950 common stockholders of record.
On April 11, 2002, the Corporation paid a cash dividend of $2.25 per share to
stockholders of record on April 5, 2002. 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
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
5
Item 6. Selected Financial Data
FIVE YEAR SUMMARY
Dollars in thousands, except per share data 2002 2001 2000 1999 1998
=========================================== ==== ==== ==== ==== ====
YEAR-END BALANCE SHEET DATA:
Total assets $215,106 $222,298 $200,442 $172,496 $164,901
Gross loans 109,195 99,190 90,653 82,446 71,440
Reserve for loan losses 2,100 1,700 1,200 1,975 1,415
Investment securities 79,941 71,291 65,930 68,475 63,966
Total deposits 181,894 194,129 176,169 139,837 137,943
Long-term debt 13,179 13,204 12,425 16,225 15,749
Mandatorily redeemable preferred capital securities
of subsidiary trust 3,000 -- -- -- --
Stockholders' equity 13,251 11,434 10,235 9,026 10,123
======== ======== ======== ======== ========
INCOME STATEMENT DATA:
Interest income $ 12,221 $ 12,888 $ 12,477 $ 10,615 $ 9,555
Interest expense 3,994 5,268 6,381 5,276 4,598
-------- -------- -------- -------- --------
Net interest income 8,227 7,620 6,096 5,339 4,957
Provision for loan losses 356 356 872 906 1,016
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 7,871 7,264 5,224 4,433 3,941
Other operating income 2,856 2,588 2,547 1,492 1,297
Other operating expenses 8,089 7,827 6,239 5,330 4,999
-------- -------- -------- -------- --------
Income before income tax expense 2,638 2,025 1,532 595 239
Income tax expense 918 719 452 193 13
-------- -------- -------- -------- --------
Net income $ 1,720 $ 1,306 $ 1,080 $ 402 $ 226
======== ======== ======== ======== ========
PER COMMON SHARE DATA:
Net income per basic share $ 13.35 $ 10.05 $ 8.21 $ 2.48 $ 1.25
Net income per diluted share 12.54 9.33 7.52 2.34 1.22
Book value 97.94 83.01 75.68 66.73 72.54
Dividends 2.25 2.00 1.85 1.80 1.75
Basic average number of common shares
outstanding 123,852 123,241 120,926 118,902 115,189
Diluted average number of common shares
outstanding 132,402 133,766 133,426 131,402 129,039
Number of common shares outstanding at year-end 124,611 125,125 121,406 119,571 118,221
FINANCIAL RATIOS:
Return on average assets .80% .65% .61% .25% .16%
Return on average common equity 14.76 12.69 12.06 3.49 1.51
Stockholders' equity as a percentage of total assets 6.16 5.14 5.11 5.23 6.14
Dividend payout ratio 20.17 19.90 22.53 72.58 140.00
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PERFORMANCE SUMMARY
Net income rose 31.7% to $1,720,000 in 2002 from to $1,306,000 in 2001 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, related to lending. Award income
was $343,000 in 2002, compared to $774,000 in 2001. Additionally, the Bank
recorded award income related to deposits made in other CDFI's of $384,000 in
2002 and $97,000 in 2001, respectively. Related earnings per common share on a
diluted basis increased to $12.54 from $9.33. Without the aforementioned award
income, net income would have totalled $1,246,000 in 2002 and $744,000 in 2001.
Total assets declined to $215.1 million at the end of 2002 from $222.3 million a
year earlier due to a planned reduction in short-term municipal certificates of
deposits.
CASH AND DUE FROM BANKS
Cash and due from banks rose to $6 million at the end of 2002 from $5.5 million
a year earlier. Average cash and due from banks for 2002 declined slightly to
$6.6 million from $6.8 million a year earlier.
FEDERAL FUNDS SOLD
Federal funds sold declined to $6.2 million at the end of 2002 from $33.5
million at December 31, 2001, while the related average balance decreased to $18
million from $19.1 million in 2001. Both decreases occurred due to the
reinvestment into higher earning assets.
INTEREST-BEARING DEPOSITS WITH BANKS
Interest-bearing deposits with banks decreased to $3.5 million at December 31,
2002 from $3.6 million a year earlier, while the related average balance rose to
$3.6 million in 2002 from $185,000 in 2001. This increase occurred 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. $384,000 and $97,000 was recorded as interest income from
interest-bearing deposits with banks in 2002 and 2001 respectively, while the
remaining $1,674,000 has been deferred and will be accreted over two years based
on the remaining maturities of the deposits.
INVESTMENTS
The investment securities available for sale ("AFS") portfolio rose 19.7%, to
$50.4 million at December 31, 2002 from $42.1 million a year earlier, while the
related gross unrealized net gain increased to $526,000 from a loss of $209,000
due to a decline in interest rates.
The overall increase in the portfolio rose due to a decision by the
Asset/Liability Management Committee to increase the maximum average life of
fixed income instruments that may be classified as AFS, allowing more
flexibility in overall investment portfolio management. The major change within
the available for sale portfolio occurred in agency securities, which rose from
$9.6 million at the end of 2001 to $16 million at the end of 2002. Purchases of
floating-rate pooled Small Business Administration guaranteed loans comprised
the largest increase.
The investment securities held to maturity ("HTM") portfolio rose to $29.6
million at December 31, 2002 from $29.2 million a year earlier. The relatively
small change occurred due to the aforementioned investment policy change
allowing for more investment purchases into the AFS portfolio.
At December 31, 2002, the Bank held callable U.S. Government agency notes with a
carrying value of $14 million, of which $12.8 million were included in the HTM
portfolio. These notes are callable at par at various dates from 2003 until
maturity. These callable securities reflect gross unrealized appreciation of
$143,000. 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, 2002 is presented below. Maturities of
mortgaged-backed securities included with U.S. Government agencies are based on
the maturity of the final scheduled payment. Such securities, which comprise
most of the balances shown as maturing beyond five years, generally amortize on
a monthly basis and are subject to prepayment.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Maturing After One Maturing After Five
Maturing Within Year But Within Years But Within
One Year Five Years Ten Years
Dollars in thousands Amount Yield Amount Yield Amount Yield
==================== ===== ===== ====== ===== ===== =====
U.S. Treasury securities and
U.S. Government agencies $5,955 4.17% $3,758 4.00% $ 591 4.01%
Mortgage-backed securities -- -- 732 5.36 2,356 6.00
Obligations of state
political and subdivisions(1) 2,288 2.70 -- -- 1,272 7.56
Other debt securities -- -- 752 5.72 -- --
------ ---- ------ ---- ------ ----
Total amortized cost $8,243 3.76 $5,242 4.44% $4,219 6.19%
====== ==== ====== ==== ====== ====
(1) Includes $250,000 of nontax-exempt securities with a 7.60% yield.
Maturing After
Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield
==================== ====== ===== ====== =====
U.S. Treasury securities and
U.S. Government agencies $ 5,511 2.43% $15,815 3.52%
Mortgage-backed securities 20,210 4.77 23,298 4.91
Obligations of state
political and subdivisions(1) 819 10.65 4,379 5.60
Other debt securities 3,917 4.23 4,669 4.47
------- ---- ------- ----
Total amortized cost $30,457 4.43% $48,161 4.47%
======= ==== ======= ====
INVESTMENT SECURITIES HELD TO MATURITY
Maturing After One Maturing After Five
Maturing Within Year But Within Years But Within
One Year Five Years Ten Years
Dollars in thousands Amount Yield Amount Yield Amount Yield
==================== ====== ===== ====== ===== ====== =====
U.S. Government agencies(1) $ -- --% $ -- --% $ 42 8.61%
Obligations of state and
Political subdivisions -- -- -- -- 2,467 4.62
Mortgage-backed securities 48 5.52 133 6.19 -- --
Other debt securities -- -- -- -- 2,021 8.01
------ ---- ------ ---- ------ ----
Total amortized cost $ 48 5.52% $ 133 6.19% $4,530 6.17%
====== ==== ====== ==== ====== ====
Maturing After
Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield
==================== ====== ===== ====== =====
U.S. Government agencies(1) $13,800 5.93% $13,842 5.94%
Obligations of state and
Political subdivisions 3,470 8.10 5,937 6.65
Mortgage-backed securities 7,578 5.78 7,759 5.79
Other debt securities -- -- 2,021 8.01
------- ---- ------- ----
Total amortized cost $24,848 6.19% $29,559 6.18%
======= ==== ======= ====
7
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, 2002. 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 4.47% at December 31, 2002
from 5.42% at December 31, 2001, while the yield on the HTM portfolio declined
32 basis points to 5.86% at December 31, 2002 from 6.18% at December 31, 2001.
The decrease in both yields occurred because of the overall decline in interest
rates. 71.1% of the total portfolio matures after ten years December 31, 2002
compared to 76.7% one year earlier.
The following table sets forth the carrying value of the Corporation's portfolio
for the three years ended December 31:
2002 2001 2000
-------------------------------------------------------------------
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 $15,815 $15,964 $ 9,590 $ 9,635 $ 6,926 $ 6,764
Obligations of state and political subdivisions 4,379 4,473 2,396 2,435 2,279 2,311
Other securities:
Mortgage-backed securities 23,298 23,823 24,319 24,307 19,913 19,814
Other debt securities 4,669 4,471 4,669 4,426 3,670 3,475
Equity securities:
Marketable securities -- -- 397 359 399 381
Federal Reserve Bank and Federal Home Loan Bank stock 1,695 1,651 948 948 1,107 1,107
------- ------- ------- ------- ------- -------
Total $49,856 $50,382 $42,319 $42,110 $34,294 $33,852
======= ======= ======= ======= ======= =======
2002 2001 2000
-------------------------------------------------------------------
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 $13,842 $14,000 $12,976 $12,724 $18,567 $18,100
Obligations of state and political subdivisions 5,937 6,283 5,837 5,889 4,985 5,120
Other securities:
Mortgage-backed securities 7,759 8,079 8,343 8,385 6,498 6,458
Other debt securities 2,021 2,329 2,025 2,179 2,028 2,008
------- ------- ------- ------- ------- -------
Total $29,559 $30,691 $29,181 $29,177 $32,078 $31,686
======= ======= ======= ======= ======= =======
8
CONSOLIDATED AVERAGE BALANCE SHEET WITH RELATED INTEREST AND RATES
Average Average Average
Tax equivalent basis; dollars in thousands Balance Interest Rate Balance Interest
======================================== ======= ======== ======= ======= ========
ASSETS
Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell $ 17,970 $ 292 1.63% $ 19,089 $ 746
Interest-bearing deposits with banks(1) 3,559 510 14.33 2,446 185
Investment securities:
Taxable (2) 68,704 3,636 5.29 59,790 3,706
Tax-exempt 9,097 659 7.24 7,651 593
--------- -------- ------ --------- --------
Total investment securities 77,801 4,295 5.52 67,441 4,299
--------- -------- ------ --------- --------
Loans(3), (4)
Commercial 16,038 985 6.21 17,869 1,243
Real estate 81,727 6,244 7.64 76,827 6,493
Installment 1,420 137 9.62 1,562 123
--------- -------- ------ --------- --------
Total loans 99,185 7,366 7.42 96,258 7,859
--------- -------- ------ --------- --------
Total interest earning assets 198,515 12,463 6.28 185,234 13,089
--------- -------- ------ --------- --------
Noninterest earning assets:
Cash and due from banks 6,562 6,823
Gross unrealized gain (loss) on investment
securities available for sale 176 (131)
Reserve for possible loan losses (1,872) (1,402)
Other assets 11,097 9,944
--------- -------- ------ --------- --------
Total noninterest earning assets 15,963 15,234
--------- -------- ------ --------- --------
Total assets $ 214,478 $ 200,468
========= ======== ====== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits(5) $ 91,901 1,233 1.34 $ 83,866 1,575
Time deposits 57,513 1,927 3.35 60,936 2,960
--------- -------- ------ --------- --------
Total interest bearing deposits 149,414 3,160 2.12 144,802 4,535
Short-term borrowings 1,047 15 1.47 1,111 39
Long-term debt 13,276 739 5.56 12,361 694
--------- -------- ------ --------- --------
Total interest bearing liabilities 163,737 3,914 2.39 158,274 5,268
--------- -------- ------ --------- --------
Noninterest bearing liabilities:
Demand deposits 33,847 29,498
Other liabilities 3,215 1,882
--------- -------- ------ --------- --------
Total noninterest bearing liabilities 37,062 31,380
--------- -------- ------ --------- --------
Mandatorily redeemable preferred capital
securities of subsidiary trust 1,430 79 5.52 -- --
Stockholders' equity 12,249 10,814
--------- -------- ------ --------- --------
Total liabilities and stockholders' equity $ 214,478 $ 200,468
========= ======== ====== ========= ========
Net interest income (tax equivalent basis) 8,470 3.86 7,821
Tax equivalent basis adjustments(6) (241) (202)
--------- -------- ------ --------- --------
Net interest income $ 8,229 $ 7,619
========= ======== ====== ========= ========
Average rate paid to fund interest earning
assets 2.01
Net interest income as a percentage of
interest earning assets (tax equivalent
basis) 4.27%
========= ======== ====== ========= ========
Average Average Average
Tax equivalent basis; dollars in thousands Rate Balance Interest Rate
- ------------------------------------------ ------- ------- -------- -------
ASSETS
Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell 3.91% $ 10,491 $ 646 6.16%
Interest-bearing deposits with banks(1) 7.56 787 41 5.28
Investment securities:
Taxable (2) 6.20 60,950 3,985 6.54
Tax-exempt 7.75 7,012 542 7.73
----- --------- -------- -----
Total investment securities 6.37 67,962 4,527 6.66
----- --------- -------- -----
Loans(3), (4)
Commercial 6.96 15,494 1,614 10.42
Real estate 8.45 68,406 5,760 8.42
Installment 7.87 809 73 9.02
----- --------- -------- -----
Total loans 8.16 84,709 7,447 8.79
----- --------- -------- -----
Total interest earning assets 7.07 163,949 12,661 7.72
----- --------- -------- -----
Noninterest earning assets:
Cash and due from banks 4,485
Gross unrealized gain (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
===== ========= ======== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits(5) 1.88 $ 53,316 1,276 2.39
Time deposits 4.86 71,648 4,204 5.87
---- --------- -------- -----
Total interest bearing deposits 3.13 124,964 5,480 4.39
Short-term borrowings 3.51 3,481 210 6.03
Long-term debt 5.61 12,007 691 5.76
----- --------- -------- -----
Total interest bearing liabilities 3.33 140,452 6,381 4.54
----- --------- -------- -----
Noninterest bearing liabilities:
Demand deposits 24,411
Other liabilities 1,590
----- --------- -------- -----
Total noninterest bearing liabilities 26,001
----- --------- -------- -----
Mandatorily redeemable preferred capital
securities of subsidiary trust -- -- --
Stockholders' equity 9,282
----- --------- -------- -----
Total liabilities and stockholders' equity $ 175,735 6,381
===== ========= ======== ====
Net interest income (tax equivalent basis) 3.74 6,280 3.18
Tax equivalent basis adjustments(6) (184)
----- --------- -------- -----
Net interest income $ 6,096
===== ========= ======== =====
Average rate paid to fund interest earning
assets 2.84 3.89
===== =====
Net interest income as a percentage of
interest earning assets (tax equivalent
basis) 4.22% 3.83%
===== ========= ======== =====
(1) Includes $385,000 in 2002 and $97,000 in 2001, representing twenty and six
basis point additions to net interest income in 2002 and 2001
respectively, 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 $289,000, $162,000 and $219,000 in 2002, 2001 and
2000 respectively.
(5) Includes noninterest bearing deposits maintained by a state governmental
agency of $361,000 in 2002, and $294,000 in 2001 and 2000.
(6) The tax equivalent adjustment was computed assuming a 34% statutory
federal income tax rate in 2002, 2001 and 2000.
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.
2002 Net Interest Income Increase 2001 Net Interest Income Increase
(Decrease) from 2001 due to: (Decrease) from 2000 due to:
================================= ==================================
In thousands Volume Rate Total Volume Rate Total
- ------------ ------ ---- ----- ------ ---- -----
INTEREST INCOME
Loans:
Commercial $(127) $ (131) $ (258) $ 247 $ (618) $ (371)
Real estate 414 (663) (249) 709 24 733
Installment (11) 25 14 68 (18) 50
----- ------- ------- ------- ------- -------
Total loans 276 (769) (493) 1,024 (612) 412
Taxable investment securities 553 (623) (70) (72) (208) (280)
Tax-exempt investment securities 112 (46) 66 50 1 51
Federal funds sold and securities
purchased under agreements to resell (44) (410) (454) 530 (430) 100
Interest-bearing deposits with banks 84 241 325 126 19 145
----- ------- ------- ------- ------- -------
Total interest income 981 (1,607) (626) 1,658 (1,230) 428
----- ------- ------- ------- ------- -------
INTEREST EXPENSE
Savings deposits (151) 493 342 (574) 275 (299)
Time deposits 166 867 1,033 521 724 1,245
Short-term borrowings 2 22 24 82 89 171
Long-term debt (51) 6 (45) (20) 17 (3)
Mandatorily redeemable preferred capital securities of
subsidiary trust (79) -- (79) -- -- --
----- ------- ------- ------- ------- -------
Total interest expense (113) 1,388 1,275 9 1,105 1,114
----- ------- ------- ------- ------- -------
Net interest income $ 868 $ (219) $ 649 $ 1,667 $ (125) $ 1,542
===== ======= ======= ======= ======= =======
LOANS
Loans rose 10.1% to $109.2 million December 31, 2002 from $99.2 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
originations in the portfolio.
There were no loans held for sale at December 31, 2002 or 2001. Loans sold
totalled $723,000 in 2002 compared to $238,000 in 2001.
At December 31, 2002, loans to churches totalled $14.9 million, representing
13.6% of total loans outstanding, all of which are secured by real estate.
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.
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, 2002 is presented below.
Due from
One Year
Due in One Through Due After
In thousands Year or Less Five Years Five Years Total
- ------------ ------------ ---------- ---------- --------
Commercial $ 8,299 $ 1,277 $ 5,717 $ 15,293
Real estate:
Construction 3,686 1,500 -- 5,186
Mortgage 15,460 38,775 32,986 87,221
Installment 605 701 189 1,495
------- ------- ------- --------
Total $28,050 $42,253 $38,892 $109,195
======= ======= ======= ========
Loans at fixed
interest rates $ 8,401 $12,006 $38,203 $ 58,610
Loans at variable
interest rates 19,649 30,247 689 50,585
------- ------- ------- --------
Total $28,050 $42,253 $38,892 $109,195
======= ======= ======= ========
The following table reflects the composition of the loan portfolio for the five
years ended December 31:
In thousands 2002 2001 2000 1999 1998
- ------------ -------- ------- ------- ------- -------
Commercial $ 15,301 $17,448 $17,353 $17,687 $18,785
Real estate 92,528 80,466 72,482 64,113 52,353
Installment 1,495 1,385 947 823 568
-------- ------- ------- ------- -------
Total loans 109,324 99,299 90,782 82,623 71,706
Less: Unearned income 129 109 129 177 266
-------- ------- ------- ------- -------
Loans $109,195 $99,190 $90,653 $82,446 $71,440
======== ======= ======= ======= =======
10
SUMMARY OF LOAN LOSS EXPERIENCE
Changes in the reserve for loan losses are summarized below.
Dollars in thousands 2002 2001 2000 1999 1998
==================== ====== ====== ======= ======= =======
Balance, January 1 $1,700 $1,200 $ 1,975 $ 1,415 $ 825
------ ------ ------- ------- -------
Charge-offs:
Commercial loans 6 121 1,538 411 480
Real estate loans 34 -- 184 68 83
Installment loans 19 34 15 24 16
------ ------ ------- ------- -------
Total 59 155 1,737 503 579
------ ------ ------- ------- -------
Recoveries:
Commercial loans 93 265 58 137 40
Real estate loans -- -- 21 4 111
Installment loans 10 34 11 16 2
------ ------ ------- ------- -------
Total 103 299 90 157 153
------ ------ ------- ------- -------
Net recoveries (charge-offs) 44 144 (1,647) (346) (426)
Provision for loan
losses charged to operations 356 356 872 906 1,016
------ ------ ------- ------- -------
Balance, December 31 $2,100 $1,700 $ 1,200 $ 1,975 $ 1,415
====== ====== ======= ======= =======
Net charge-offs as a
percentage of average loans - % -% 1.94% .47% .72%
Reserve for loan losses as a
percentage of loans 1.92 1.71 1.32 2.40 1.98
Reserve for loan losses as a
percentage of nonperforming loans 201.92 137.65 171.18 71.40 78.51
====== ====== ======= ======= =======
The allowance 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 allowance is increased by provisions charged
to operations and recoveries of loan charge-offs. The allowance 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 allowance 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 allowance 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 allowance is maintained at a level considered sufficient to absorb
estimated losses in the loan portfolio, and allowances not allocated to specific
loan categories are considered unallocated and evaluated based on management's
assessment of the portfolio's risk profile as well as current business and
economic conditions in the Bank's market area.
The allowance represented 1.92% of total loans at December 31, 2002 compared to
1.71% a year earlier. The increase in the allowance occurred due to
deterioration in current business and economic conditions in the Bank's market
area.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance 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.
2002 2001 2000
====================== ===================== =====================
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 $ 422 14.06% $ 482 17.57% $ 405 19.12%
Real estate 622 84.67 555 81.03 444 79.84
Installment 43 1.27 39 1.40 30 1.04
Unallocated 1,013 -- 624 -- 321 --
------ ------ ------ ------ ------ ------
Total $2,100 100.00% $1,700 100.00% $1,200 100.00%
====== ====== ====== ====== ====== ======
1999 1998
====================== =====================
Percentage Percentage
of Loan of Loan
Category Category
to Gross to Gross
Dollars in thousands Amount Loans Amount Loans
==================== ====== ========== ====== ==========
Commercial $1,492 21.41% $ 990 26.20%
Real estate 386 77.60 408 73.01
Installment 17 .99 15 .79
Unallocated 80 -- 2 --
------ ------ ------ ------
Total $1,975 100.00% $1,415 100.00%
====== ====== ====== ======
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.
11
NONPERFORMING ASSETS
Information pertaining to nonperforming assets at December 31 is summarized
below.
In thousands 2002 2001 2000 1999 1998
============ ====== ====== ====== ====== ======
Nonperforming loans
Commercial $ 296 $ 199 $ 165 $2,093 $1,148
Real estate 697 985 499 668 647
Installment 47 52 37 5 1
------ ------ ------ ------ ------
Total nonperforming loans 1,040 1,236 701 2,766 1,796
Other real estate owned 352 326 621 698 590
------ ------ ------ ------ ------
Total $1,392 $1,562 $1,322 $3,464 $2,386
====== ====== ====== ====== ======
Nonperforming assets declined $170,000 to $1,392,000 at December 31, 2002, from
$1,562,000 a year earlier. The decrease reflects a reduction in nonperforming
real estate loans, primarily commercial. OREO is carried net of a $63,000
reserve at December 31, 2002 and $13,000 at December 31, 2001.
DEPOSITS
Total deposits declined to $181.9 million at December 31, 2002 from $194.1
million a year earlier, while average deposits increased 5.1%, to $183.3 million
in 2002 from $174.3 million in 2001. A branch acquired in 2001 contributed $7.9
million to the increase in average deposits.
Demand account balances rose to $37.8 million at December 31, 2002 compared to
$30 million a year earlier while average demand deposits were also up in 2002,
rising 14.7% to $33.8 million from $29.5 million in 2001. Higher commercial
balances contributed to these increases.
Savings deposits declined to $90.3 million at December 31, 2002 from $109
million a year earlier due primarily to a large commercial account balance at
December 31, 2001 that declined significantly at the end of 2002. Average
savings accounts rose 9.5% in 2002 due to higher municipal account balances.
Time deposits declined slightly to $53.7 million at December 31, 2002 from $55.1
million at the end of 2001, while average time deposits were $57.5 million in
2002, 5.6% less than in 2001. 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, 2002 and
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, 2002, such balances totalled $694,000.
SHORT-TERM BORROWINGS
There were no short-term borrowings at December 31, 2002 or 2001 while average
short-term borrowings declined to $1 million in 2002 from $1.1 in 2001 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.
LONG-TERM DEBT
Long-term debt was relatively unchanged at December 31. 2002 from a year
earlier, while the related average balance was $13.3 million in 2002 compared to
$12.4 million in 2001. The increase was due to the issuance by CNBC in December,
2001 of a 7% $1 million note.
RESULTS OF OPERATIONS - 2002 COMPARED WITH 2001
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 once during 2002 as
the rate declined from 1.75% to 1.25%. After falling from 6.50% in December 2000
to 1.75% a year later, the low interest rate environment continued to have a
major impact on the Bank, reducing income on interest earning assets and
reducing expense on interest-bearing liabilities. A strategic decision to
shorten the average lives of investment portfolio purchases as protection in a
rising rate environment, along with increased early redemptions of agency
callable securities has contributed to an asset-sensitive interest rate
sensitivity profile. Because rates continued to decrease during 2002, earning
assets have repriced faster than interest bearing liabilities.
Additionally, rates paid on transaction accounts declined below one percent,
approaching a competitive floor. These factors have contributed to a compression
in the interest rate margin.
Because of the continued emphasis on reducing high cost time deposits, the
negative impact of the aforementioned factors on the interest rate margin was
mitigated, and rose five basis points in 2002, from 4.22% to 4.27%. CNB's prime
lending rate began the year at 4.75% and ended at 4.25%. The three-month U.S.
Treasury bill rate started 2002 at 1.72%, declining to 1.19% at the end of the
year.
On a fully taxable equivalent ("FTE") basis, net interest income rose 8.3% to
$8.5 million in 2002 from $7.8million in 2001, while the related net interest
margin rose five basis points, from 4.22% to 4.27%. Higher levels of interest
income along with decreased interest expense, contributed to this improvement.
Interest income on a FTE basis decreased $626,000, or 4.8% in 2002. Lower
interest on interest earning assets was the primary
12
reason for this decrease. Because of the decline in rates, the yield on interest
earning assets fell 79 basis points, from 7.07% to 6.28%. Interest earning
assets averaged $13.3 million, or 7.2% higher in 2002, with the loan portfolio
providing $12.9 million of that increase.
Interest income from Federal funds sold decreased by 60.9%, reflecting
reinvestment into higher earning assets. The related yield decreased from 3.91%
to 1.63%.
Interest income from interest-bearing deposits with banks rose from $185,000 in
2001 to $510,000 in 2002 due to the Bank's participation in the CDFI deposit
program discussed earlier. The related yield increased from 7.56% to 14.33%.
Interest income on taxable investment securities declined $70,000 in 2002 due to
the lower interest rate environment. The taxable investment portfolio averaged
$68.7 million in 2002 compared to $59.8 million in 2001 with most of the
increase occurring in shorter-term floating-rate agency securities. Tax-exempt
income was up 11.1% due mostly to higher volume as the tax-exempt portfolio
average increased from $7.7 million in 2001 to $9.1 million in 2002.
Interest income on loans declined $493,000, or 6.3% due to the lower interest
rate environment. The commercial loan portfolio decreased, averaging $16 million
in 2002 compared to $17.9 million in 2001, while the related yield declined 75
basis points, from 6.96% to 6.21% due to reductions in the prime lending rate
during the year. The real estate portfolio, comprised mainly of commercial real
estate loans, increased $4.9 million, or 6.4% in 2002, while the related yield
decreased to 7.64% in 2002 from 8.45% in 2001. Finally, installment loans
averaged 9.1% less in 2002 than in 2001, due primarily to no-rate financing
offered by car dealers.
Interest expense totalled $3.9 million in 2002, a decrease of 25.7% from 2001.
This decline resulted primarily from a decrease in time deposits. The average
rate paid on interest bearing liabilities declined by 91 basis points, from
3.33% to 2.42%.
The largest growth in interest bearing liabilities occurred in savings accounts,
which averaged 9.6% higher in 2002 than during the previous year due to the
branch acquisition along with higher municipal money market account balances.
Interest expense on savings deposits was 21.7% lower in 2002 due to the low
interest rate environment. The average rate paid decreased from 1.88% to 1.34%.
Interest expense on time deposits decreased $1 million due to the continued
planned reduction in municipal time deposits balances, which are costly funding
sources. The average rate paid was 151 basis points lower in 2002, averaging
3.35% compared to 4.86% in 2001. Additionally, early withdrawal penalties
reduced the average rate paid by twelve basis points in 2001 while such
penalties were nominal in 2002. Average volume was down 5.6%, due to the
aforementioned reduction.
Interest expense on short-term borrowings declined primarily to a decrease in
the average rate paid by 204 basis points, from 3.51% in 2001 to 1.47%, because
the rates on these liabilities are tied to the Federal funds rate.
Interest expense on long-term debt rose 17.9% due to the issuance of $3 million
of preferred capital securities ("TRUPS") in July, 2002. As a result, the
average rate paid on long-term debt and the TRUPs declined only five basis
points in 2002, to 5.56% from 5.61%.
Service charges on deposit accounts rose 22% due to the aforementioned new
branches, as well as increases in customer fee schedules.
Other operating income increased $104,000, or 6.3% to $1,755,000 in 2002 from
$1,651,000 in 2001. The primary reasons for the increase were an increase in
loan syndication fees from $192,000 to $305,000 and an increase in income from
an unconsolidated leasing subsidiary from $86,000 in 2001 to $275,000 in 2002.
Offsetting these increases was a reduction in CDFI award income from $774,000 to
$342,000.
Net losses incurred on securities transactions totalled $42,000 in 2002 compared
to an $11,000 gain in 2001. The losses occurred primarily in CNBC's equity
securities portfolio and resulted in a change in portfolio managers during 2002.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for loan losses, totalled $8.1 million in 2002, a 2.3%
increase compared to $7.8 million in 2001. Expenses attributable to the new
branches were the major contributor to the higher expense levels. Additionally,
data processing charges increased 20.4% due to greater volume and higher
servicer fees.
Salary expense rose 13.8% due to normal recurring merit increases, the branch
openings and additional staff. Employee benefits rose 21.7% due primarily to the
higher cost of providing employee health insurance, along with an increase in
supplemental employee retirement plan expense.
Occupancy and equipment expense declined 6.3% due primarily to a reduction in
nonrecurring renovation and maintenance costs incurred on a new branch during
2001, along with a decrease in depreciation expense as fixed assets became fully
depreciated.
Other expenses declined $258,000, or 9% in 2002 due primarily to lower legal and
professional fees along with a decrease in expenses incurred on foreclosed
properties.
Income tax expense as a percentage of pre-tax income was 34.8% in 2002 compared
to 35.5% in 2001, due to higher levels of tax-exempt income.
LIQUIDITY
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
The Bank depends primarily on deposits as a source of funds and also provides
for a portion of its funding needs through short-term borrowings, such as
Federal Funds purchased, securities sold under repurchase agreements and
borrowings under the U.S. Treasury tax and loan note option program. The Bank
also utilizes the Federal Home Loan Bank for longer-term funding purposes.
The major contribution during 2002 from operating activities to the
Corporation's liquidity came from net income, while an increase in other assets,
which includes the investment in unconsolidated subsidiaries and cash surrender
value of bank-owned life insurance.
Net cash used in investing activities was primarily used for purchases of
investment securities available for sale, which totalled $44.2 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 $36.6 million.
The primary source of funds from financing activities resulted from the $3
million TRUPS issuance, while the primary use resulted from a decrease in
deposits.
13
EFFECTS OF INFLATION
Inflation, as measured by the CPI, rose 2.4% in 2002 compared to 1.6% in 2001
and 3.4% in 2000. 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.
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.
INTEREST RATE SENSITIVITY
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 GAP ANALYSIS
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
interest sensitive gap. At any given point in time, the Corporation may be in an
asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities or in a liability-sensitive position, whereby its
interest-sensitive liabilities exceed its interest-sensitive assets, depending
on management's judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which
details the repricing differences for assets and liabilities for given periods.
The primary limitation of this analysis is that it is a static (i.e., as of a
specific point in time) measurement which does not capture risk that varies
nonproportionally with changes in interest rates. Because of this limitation,
the Corporation uses a simulation model as its primary method of measuring
interest rate risk. This model, because of its dynamic nature, forecasts the
effects of different patterns of rate movements on the Corporation's mix of
interest sensitive assets and liabilities.
The following table presents the Corporation's sensitivity to changes in
interest rates, categorized by repricing period. Various assumptions are used to
estimate expected maturities. The actual maturities of these instruments could
vary substantially if future prepayments differ from estimated experience.
December 31, 2002
=========================================================================================
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 $ 6,200 $ -- $ -- $ 6,200 $ -- $ 6,200
Interest-bearing deposits with
banks -- -- -- -- 3,528 3,528
Investment securities:
Available for sale 2,552 2,134 3,557 8,243 42,139 50,382
Held to maturity 48 -- -- 48 29,511 29,559
Loans 21,676 2,428 3,946 28,050 81,145 109,195
--------- -------- --------- --------- -------- --------
30,476 4,562 7,503 42,541 156,323 198,864
--------- -------- --------- --------- -------- --------
Interest bearing liabilities:
Deposits:
Savings 90,394 -- -- 90,394 -- 90,394
Time 12,321 12,941 9,051 34,313 19,379 53,692
Long-term debt -- 150 2,504 2,654 10,525 13,179
Mandatorily convertible preferred
capital securities of subsidiary
trust -- -- -- -- 3,000 3,000
Non-interest bearing liabilities -- -- -- -- 38,599 38,599
--------- -------- --------- --------- -------- --------
102,715 13,091 11,555 127,361 71,503 198,864
--------- -------- --------- --------- -------- --------
Asset (liability) sensitivity gap:
Period gap $ (72,239) $ (8,529) $ (4,052) $ (84,820) $ 84,820 $ --
Cumulative gap (72,239) (80,768) (84,820) -- -- --
========= ========= ========= ========= ======== =========
During 2002, the Bank changed the interest rates paid on its passbook and
statement savings accounts more frequently than in past years due to the low
interest rate environment, and intends to change rates more frequently in the
future as well. Accordingly, such accounts, which were previously classified as
noninterest sensitive, are now considered rate-sensitive.
The Corporation was highly liability-sensitive at the 90-day interval with a
$72.2 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.
14
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 2002 2001 2002 2001
- -------------------- --------- --------- --------- ---------
Total stockholders' equity $ 13,251 $ 11,434 $ 17,722 $ 13,618
Net unrealized (gain) loss
on investment securities
available for sale (320) 136 (339) 121
Net unrealized loss on
equity securities available
for sale (27) -- (2) --
Disallowed intangibles (850) (970) (850) (970)
Qualifiying trust preferred
securities 3,000 -- -- --
--------- --------- --------- ---------
Tier 1 capital 15,054 10,600 16,531 12,769
--------- --------- --------- ---------
Qualifying long-term debt 1,094 2,154 154 227
Reserve for loan
losses 1,582 1,514 1,575 1,504
--------- --------- --------- ---------
Tier 2 capital 2,676 3,668 1,729 1,731
--------- --------- --------- ---------
Total capital $ 17,730 $ 14,268 $ 18,260 $ 14,500
========= ========= ========= =========
Risk-adjusted assets $ 126,044 $ 121,308 $ 125,488 $ 120,529
Total assets 215,106 222,298 214,304 221,309
--------- --------- --------- ---------
Risk-based capital ratios:
Tier 1 capital to risk-
adjusted assets 11.94% 8.74% 13.17% 10.59%
Regulatory minimum 4.00 4.00 4.00 4.00
Total capital to risk-
adjusted assets 14.07 11.76 14.55 12.03
Regulatory minimum 8.00 8.00 8.00 8.00
Leverage ratio 7.00 5.16 7.73 6.26
Total stockholders' equity
to total assets 6.16 5.14 8.27 6.15
========= ========= ========= =========
On July 11, 2002, City National Bancshares Corporation issued $3 million of
preferred capital securities through City National Bank of New Jersey Capital
Trust 1 ("the Trust"), a special-purpose statutory trust created expressly for
the issuance of these securities. Distribution of interest on the securities
will be payable at an annual rate of 5.52%, representing the 3-month LIBOR plus
3.65%, adjustable quarterly beginning October 7, 2002. The quarterly
distributions may, at the option of the Company, be deferred for up to 20
consecutive quarterly periods. The proceeds have been invested in junior
subordinated debentures of CNBC, at terms identical to the preferred capital
securities. Cash distributions on the securities are made to the extent interest
on the debentures is received by the Trust. In the event of certain changes or
amendments to regulatory requirements or federal tax rules, the securities are
redeemable. The securities are generally redeemable in whole or in part on or
after October 7, 2007, at a price equal to 100% of the principal amount plus
accrued interest to the date of redemption. The securities must be redeemed by
October 7, 2032.
RESULTS OF OPERATIONS - 2001 COMPARED WITH 2000
Net income rose to $1,306,000 in 2001 compared to $1,080,000 in 2000 due
primarily to an increase in net interest income. Related earnings per common
share on a diluted basis increased to $9.33 from $7.52.
Total assets rose to $222.3 million at the end of 2001 from $200.4 million a
year earlier due to the acquisition of a branch in Brooklyn, New York. The
deposits acquired were used to replace more costly short-term municipal
certificates of deposit, ultimately reducing deposit costs.
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 this 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 short-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 15.3%, averaging $17.9 million in
2002 compared to $15.5 million in 2001, while the related yield declined 346
basis points, from 10.42% to 6.96% due to reductions in the prime lending rate
during the year. The real estate portfolio, comprised mainly of commercial real
estate loans, increased $5.4 million, or 12.3% in 2001. Finally, installment
loans, although comprising the smallest segment of the loan portfolio, averaged
93.1% 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 121 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 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 source.
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 decline 252 basis points, from 6.03%
in 2000 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 15
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
15
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 costs 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 branches.
Other expenses rose $798,000, or 38.3% in 2001 due primarily to the
aforementioned increased 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.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The calculation of the allowance for loan losses is a critical accounting policy
of the Corporation. Provisions for loan losses will continue to be based upon
our assessment of the overall loan portfolio and the underlying collateral,
trends in non-performing loans, current economic conditions and other relevant
factors in order to maintain the allowance for loan losses at adequate levels to
provide for estimated losses. Although management uses the best information
available, the level of the allowance for loan losses remains an estimate which
is subject to significant judgment and short-term change.
16
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
December 31,
==========================
Dollars in thousands, except per share data 2002 2001
=========================================== ========= =========
ASSETS
Cash and due from banks (Note 2) $ 5,996 $ 5,573
Federal funds sold (Note 3) 6,200 33,500
Interest-bearing deposits with banks 3,528 3,630
Investment securities available for sale (Note 4) 50,382 42,110
Investment securities held to maturity (Market value of $30,691
at December 31, 2002 and $29,177 at December 31, 2001) (Note 5) 29,559 29,181
Loans (Note 6) 109,195 99,190
Less: Allowance for loan losses (Note 7) 2,100 1,700
--------- ---------
Net loans 107,095 97,490
--------- ---------
Premises and equipment (Note 8) 4,167 4,176
Accrued interest receivable 1,256 1,289
Other real estate owned 352 326
Other assets (Notes 14 and 15) 6,571 5,023
--------- ---------
TOTAL ASSETS $ 215,106 $ 222,298
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits: (Notes 3, 4, 5, and 9)
Demand $ 37,808 $ 30,056
Savings 90,394 109,022
Time 53,692 55,051
--------- ---------
Total deposits 181,894 194,129
Accrued expenses and other liabilities 3,782 3,531
Long-term debt (Note 11) 13,179 13,204
--------- ---------
Total liabilities 198,855 210,864
Mandatorily redeemable preferred capital securities of subsidiary trust 3,000 --
Commitments and contingencies (Note 21)
Stockholders' equity (Notes 15, 16 and 24):
Preferred stock, no par value: Authorized 100,000 shares (Note 15);
Series A , issued and outstanding 8 shares in 2002 and 2001 200 200
Series C , issued and outstanding 108 shares in 2002 and 2001 27 27
Series D , issued and outstanding 3,280 shares in 2002 and 2001 820 820
Common stock, par value $10: Authorized 400,000 shares;
125,980 shares issued in 2002 and 125,980 shares issued in 2001,
124,611 shares outstanding in 2002 and 125,125 shares outstanding in 2001 1,260 1,260
Surplus 999 999
Retained earnings 9,660 8,288
Accumulated other comprehensive gain (loss) 320 (136)
Treasury stock, at cost - 1,369 shares and 855 shares in 2002 and 2001, respectively (35) (24)
--------- ---------
Total stockholders' equity 13,251 11,434
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 215,106 $ 222,298
========= =========
See accompanying notes to consolidated financial statements.
17
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
=========================================
Dollars in thousands, except per share data 2002 2001 2000
=========================================== ========= ======== =========
INTEREST INCOME
Interest and fees on loans $ 7,348 $ 7,859 $ 7,447
Interest on Federal funds sold and securities
purchased under agreements to resell 292 746 646
Interest on deposits with banks 510 185 41
Interest and dividends on investment securities:
Taxable 3,636 3,705 3,985
Tax-exempt 435 392 358
--------- -------- ---------
Total interest income 12,221 12,887 12,477
--------- -------- ---------
INTEREST EXPENSE
Interest on deposits (Note 9) 3,160 4,535 5,480
Interest on short-term borrowings 16 39 210
Interest on long-term debt 818 694 691
--------- -------- ---------
Total interest expense 3,994 5,268 6,381
--------- -------- ---------
Net interest income 8,227 7,619 6,096
Provision for loan losses (Note 7) 356 356 872
--------- -------- ---------
Net interest income after provision
for loan losses 7,871 7,263 5,224
--------- -------- ---------
OTHER OPERATING INCOME
Service charges on deposit accounts 1,143 937 701
Other income (Note 13) 1,755 1,651 1,847
Net (losses) gains on sales of investment securities (Notes 4 and 5) (42) 1 (1)
--------- -------- ---------
Total other operating income 2,856 2,589 2,547
--------- -------- ---------
OTHER OPERATING EXPENSES
Salaries and other employee benefits (Note 15) 4,421 3,831 3,199
Occupancy expense (Note 8) 603 635 490
Equipment expense (Note 8) 444 482 469
Other expenses (Note 10) 2,621 2,879 2,081
--------- -------- ---------
Total other operating expenses 8,089 7,827 6,239
--------- -------- ---------
Income before income tax expense 2,638 2,025 1,532
Income tax expense (Note 14) 918 719 452
--------- -------- ---------
NET INCOME $ 1,720 $ 1,306 $ 1,080
========= ======== =========
NET INCOME PER COMMON SHARE (NOTE 18)
Basic $ 13.35 $ 10.05 $ 8.21
Diluted 12.54 9.33 7.52
========= ======== =========
Basic average common shares outstanding 123,852 123,241 120,926
Diluted average common shares outstanding 132,402 133,766 133,426
========= ======== =========
See accompanying notes to consolidated financial statements.
18
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, 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
Comprehensive income:
Net income -- -- -- 1,720
Unrealized holding gains on securities
arising during the period (net of tax of $179) -- -- -- --
Total comprehensive income
Proceeds from issuance of common stock -- -- -- --
Purchase of treasury stock -- -- -- --
Dividends paid on common stock -- -- -- (281)
Dividends paid on preferred stock -- -- -- (67)
--------- --------- --------- ----------
BALANCE, DECEMBER 31, 2002 $ 1,260 $ 999 $ 1,047 $ 9,660
========= ========= ========= ==========
Accumulated
Other
Comprehensive Treasury
Dollars in thousands (Loss) Income Stock Total
==================== ============= ========== ===========
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
Comprehensive income:
Net income -- -- 1,720
Unrealized holding gains on securities
arising during the period (net of tax of $179) 456 -- 456
-----------
Total comprehensive income 2,176
Proceeds from issuance of common stock -- -- --
Purchase of treasury stock -- (11) (11)
Dividends paid on common stock -- -- (281)
Dividends paid on preferred stock -- -- (67)
----------- --------- -----------
BALANCE, DECEMBER 31, 2002 $ 320 $ (35) $ 13,251
=========== ========= ===========
See accompanying notes to consolidated financial statements.
19
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
==================================
IN THOUSANDS 2002 2001 2000
- ------------ ======== ======== ========
OPERATING ACTIVITIES
Net income $ 1,720 $ 1,306 $ 1,080
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 401 433 460
Provision for loan losses 356 356 872
Premium amortization on investment securities 63 60 9
Net losses (gains) on sales and early redemption of investment securities 42 (1) 1
Loans originated for sale (724) (90) (553)
Proceeds from sales of loans held for sale 724 238 810
Decrease (increase) in accrued interest receivable 33 121 (115)
Deferred income tax expense 183 850 206
Increase in other assets (2,010) (2,295) (405)
Increase (decrease) in accrued expenses and other liabilities 251 1,964 (47)
-------- -------- --------
Net cash provided by operating activities 1,039 2,942 2,318
-------- -------- --------
INVESTING ACTIVITIES
Increase in loans (10,211) (8,393) (10,024)
Decrease (increase) in interest-bearing deposits with banks 102 (3,477) 2,133
Proceeds from maturities of investment securities available for sale,
including principal payments and early redemptions 36,595 9,405 8,194
Proceeds from maturities of investment securities held to maturity,
including principal payments and early redemptions 13,694 22,220 4,947
Purchases of investment securities available for sale (44,241) (17,268) (5,896)
Purchases of investment securities held to maturity (14,068) (19,546) (4,023)
Purchases of premises and equipment (392) (1,138) (222)
Decrease in other real estate owned, net 224 295 247
-------- -------- --------
Net cash used in investing activities (18,297) (17,902) (4,644)
-------- -------- --------
FINANCING ACTIVITIES
Purchase of deposits -- 16,369 8,339
(Decrease) increase in deposits (12,235) 1,591 27,993
Decrease in short-term borrowings -- (46) (5,954)
(Decrease) increase in long-term debt (25) 779 (3,800)
Proceeds from issuance of common stock -- 71 37
Issuance of mandatorily redeemable preferred capital securities of subsidiary trust 3,000 -- --
Purchases of treasury stock (11) (5) (2)
Dividends paid on preferred stock (67) (67) (87)
Dividends paid on common stock (281) (243) (225)
-------- -------- --------
Net cash (used in) provided by financing activities (9,619) 18,449 26,301
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (26,877) 3,489 23,975
Cash and cash equivalents at beginning of year 39,073 35,584 11,609
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,196 $ 39,073 $ 35,584
======== ======== ========
CASH PAID DURING THE YEAR:
Interest $ 4,281 $ 5,115 $ 6,440
Income taxes 2,072 735 323
SUPPLEMENTAL SCHEDULE FOR NONCASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans 250 -- 170
Conversion of common stock into long-term debt -- 71 --
Transfer from investment securities held to maturity to investment securities
available for sale, at amortized cost -- 246 --
See accompanying notes to consolidated financial statements.
20
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.
ALLOWANCE 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 allowance for loan losses is maintained at a level determined adequate to
provide for losses inherent in the portfolio. The allowance is increased by
provisions charged to operations and recoveries of loans previously charged off
and reduced by loan charge-offs. The allowance 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 allowance for loan losses is adequate. While
management uses available information to determine the adequacy of the
allowance, 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 allowance for loan losses.
Such agencies may require the Bank to increase the allowance 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 allowance for
loan losses. Operating results, including any future writedowns of OREO, rental
income and operating expenses, are included in "Other expenses."
An allowance 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.
21
CORE DEPOSIT PREMIUMS
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
On July 20, 2001, the Financial Accounting Standards Board ("FASB") 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."
The Corporation adopted 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 adopted Statement 142
effective January 1, 2002. It did not have a significant impact on the
Corporation's consolidated financial statements.
In April, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishments of Debt" and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." Under SFAS No. 4, as amended by SFAS No. 64,
gains and losses from the extinguishment of debt were required to be classified
as an extraordinary item, if material. Under SFAS No. 145, gains or losses from
the extinguishment of debt are to be classified as a component of operating
income, rather than an extraordinary item. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002, with early adoption of the provisions
related to the rescission of SFAS No. 4 encouraged. Upon adoption, companies
must reclassify prior period amounts previously classified as an extraordinary
item. Management does not anticipate that the initial adoption of SFAS 145 will
have a significant impact on the Corporation's consolidated financial
statements.
In October, 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions- an amendment to FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets." The provisions of Statement No. 147 that relate to the
application of the purchase method of accounting apply to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises.
Statement No. 147 clarifies that a branch acquisition that meets the definition
of a business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The provisions of Statement No. 147
were effective October 1, 2002. This Statement did not have any impact on the
consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The additional disclosure requirements of SFAS No.
148 are effective for fiscal years ended after December 15, 2002. The
Corporation believes that the adoption of this standard will have no material
impact on its financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements in order to conform with the 2002 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 $2,130,000 in
2002 and $2,038,000 in 2001.
Note 3 Federal funds sold and securities purchased under agreements to resell
Federal funds sold averaged $18 million during 2002 and $19.1 million in 2001,
while the maximum balance outstanding at any month-end during 2002, 2001 and
2000 was $37 million, $53.8 million and $26.7 million, respectively. There were
no securities purchased under repurchase agreements in either 2002 or 2001.
There were no such transactions outstanding at any month-end during 2002, 2001
or 2000.
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:
22
Gross Gross
Amortized Unrealized Unrealized Market
2002 In thousands Cost Gains Losses Value
================= ========= ========== ========== ======
U.S. Treasury securities
and obligations of U.S.
government agencies $15,815 $181 $ 32 $15,964
Obligations of state and
political subdivisions 4,379 94 -- 4,473
Other securities:
Mortgage-backed
securities 23,298 561 36 23,823
Other debt securities 4,669 34 232 4,471
Equity securities:
Marketable securities 869 -- 44 825
Federal Reserve Bank
and Federal Home
Loan Bank stock 826 -- -- 826
------- ---- ---- -------
Total $49,856 $870 $344 $50,382
======= ==== ==== =======
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
======= ==== ==== =======
The amortized cost and the market values of investments in debt securities
available for sale presented below as of December 31, 2002 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:
U.S. Treasury securities $5,955 $6,036
Obligations of state and political subdivisions 2,288 2,289
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies 3,758 3,807
Mortgage-backed securities 732 750
Other debt securities 752 787
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 591 609
Mortgage-backed securities 2,356 2,489
Obligations of state and political subdivisions 1,272 1,319
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 5,511 5,512
Mortgage-backed securities 20,210 20,584
Obligations of state and political subdivisions 819 864
Other debt securities 3,917 3,685
------- -------
Total debt securities 48,161 48,731
Equity securities 1,695 1,651
------- -------
Total $49,856 $50,382
======= =======
Sales of investment securities available for sale resulted in gross gains of
$5,000, $15,000 and $24,000 and gross losses of $55,000, $18,000 and $10,000 in
2002, 2001 and 2000 respectively.
Interest and dividends on investment securities available for sale was as
follows:
In thousands 2002 2001 2000
============ ====== ====== ======
Taxable $2,187 $2,058 $2,257
Tax-exempt 124 112 101
------ ------ ------
Total $2,311 $2,170 $2,358
====== ====== ======
Investment securities available for sale with a carrying value of $22,358,000
were pledged to secure public funds at December 31, 2002.
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
2002 In thousands Value Gains Losses Value
================= ======= ========== ========== =======
U.S. Treasury securities
and obligations of U.S.
government agencies $13,842 $ 158 $ -- $14,000
Obligations of state and
political subdivisions 5,937 346 -- 6,283
Other securities:
Mortgaged-backed
securities 7,759 320 -- 8,079
Other debt securities 2,021 308 -- 2,329
------- ------ ----- -------
Total $29,559 $1,132 $ -- $30,691
======= ====== ===== =======
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:
Mortgage-backed
securities 8,343 103 61 8,385
Other debt securities 2,025 154 -- 2,179
======= ====== ===== =======
Total $29,181 $366 $370 $29,177
======= ====== ==== =======
The book value and the market value of investment securities held to maturity
presented below as of December 31, 2002 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 $ 48 $ 48
Due after one year but within five years:
Mortgage-backed securities 133 135
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 42 45
Obligations of state and political subdivisions 2,467 2,612
Other debt securities 2,021 2,329
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 13,800 13,955
Obligations of state and political subdivisions 3,470 3,671
Mortgage-backed securities 7,578 7,896
------- -------
Total $29,559 $30,691
======= =======
During 2002, $5.5 million of Agency callable securities were redeemed by the
issuers prior to maturity, resulting in gross gains of $8,000.
Interest and dividends on investment securities held to maturity was as follows:
23
In thousands 2002 2001 2000
============= ======= ==== =====
Taxable $1,449 $1,647 $1,728
Tax-exempt 311 280 257
------ ------ ------
Total $1,760 $1,927 $1,985
====== ====== ======
Investment securities held to maturity with a carrying value of $11,349,000 were
pledged to secure public funds at December 31, 2002.
NOTE 6 LOANS
Loans, net of unearned discount and net deferred origination fees and costs at
December 31 were as follows:
In thousands 2002 2001
============= ==== ====
Commercial $ 15,510 $17,448
Real estate 92,323 80,466
Installment 1,492 1,385
-------- -------
Total loans 109,325 99,299
Unearned income (130) (109)
-------- -------
Loans $109,195 $99,190
======== =======
Loans guaranteed by the Small Business Administration totalling $899,000 were
pledged as collateral for borrowings under a note issued to the U.S. Treasury
Department at December 31, 2002.
Nonperforming loans include loans which are contractually past due 90 days or
more for which interest income is still being accrued and nonaccrual loans.
At December 31, nonperforming loans were as follows:
In thousands 2002 2001
- ------------ ------ ------
Nonaccrual loans $ 765 $ 983
Loans with interest or principal 90
days or more past due and still accruing 275 252
------ ------
Total nonperforming loans $1,040 $1,235
====== ======
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 2002 2001 2000
============ ==== ==== ====
Interest income foregone $(39) $(38) $(18)
Interest income received 95 62 54
---- ---- ----
$ 56 $ 24 $ 36
==== ==== ====
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, 2002, 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, 2002, or at December 31, 2001.
NOTE 7 ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
In thousands 2002 2001 2000
============ ==== ==== ====
Balance, January 1 $1,700 $1,200 $1,975
Provision for loan
losses 356 356 872
Recoveries of loans previously
charged off 103 299 90
------ ------ ------
2,159 1,855 2,937
Less: Charge-offs 59 155 1,737
------ ------ ------
Balance, December 31 $2,100 $1,700 $1,200
====== ====== ======
NOTE 8 PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
In thousands 2002 2001
=========== ==== ====
Land $ 476 $ 476
Premises 1,892 1,892
Furniture and equipment 3,011 2,657
Leasehold improvements 2,602 2,564
Total cost 7,981 7,589
Less: Accumulated depreciation and amortization 3,814 3,413
-------- --------
Total premises and equipment $ 4,167 $ 4,176
======== ========
Depreciation and amortization expense charged to operations amounted to
$401,000, $434,000, and $460,000 in 2002, 2001, and 2000, respectively.
NOTE 9 DEPOSITS
Deposits at December 31 are presented below.
In thousands 2002 2001
============ ======== ========
Noninterest bearing:
Demand $ 37,808 $ 30,056
Savings 694 294
-------- --------
Total noninterest bearing deposits 38,502 30,350
-------- --------
Interest bearing:
Savings 89,700 108,728
Time 53,692 55,051
-------- --------
Total interest bearing deposits 143,392 163,779
-------- --------
Total deposits $181,894 $194,129
======== ========
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 2002 2001
============ ======= ======
Three months or less $ 5,704 $ 10,925
Over three months but within six months 6,002 4,004
Over six months but within twelve months 4,333 2,788
Over twelve months 6,524 6,172
-------- --------
Total deposits $ 22,563 $ 23,889
======== ========
Interest expense on certificates of deposits of $100,000 or more was $759,000,
$2,468,000 and $2,720,000 in 2002, 2001 and 2000, 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
==================== ======= ======= ======== ======== =======
2002
Federal funds purchased and securities
sold under repurchase
agreements $ -- --% $ -- --% $ --
Demand note issued
to the U.S. Treasury -- -- 1,047 1.47% 2,183
------ ----- ------ ---- ------
Total $ -- --% $1,047 1.47% $2,183
====== ===== ====== ==== ======
24
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
====== ===== ====== ==== ======
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 $6,690,000, along with loans guaranteed by the Small
Business Administration totalling $899,000. There is no balance outstanding
under the note at December 31, 2002.
NOTE 11 LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
In thousands 2002 2001
============ ======= =======
FHLB convertible advances due from
April 6, 2008 through October 14, 2010 $ 9,700 $ 9,700
5.25% capital note, due December 28, 2005 1,125 1,350
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 154 154
7.00% note, due January 1, 2014 1,000 1,000
8.00% capital note, due May 6, 2017 200 --
------- -------
Total $13,179 $13,204
======= =======
Interest is payable quarterly on most of the FHLB advances. $2.2 million of the
advances are convertible at the option of the issuer in October, 2003. The
advances bear interest rates ranging from 1.74% 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 the capital note due December 28, 2005, on
June 29 and December 29, with semiannual principal payments 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.
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.
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.
Interest is payable semiannually through May 6, 2017, at which time the entire
principal balance is due. The note is renewable at the option of the Corporation
for an additional fifteen years at the prevailing rate of interest.
Scheduled repayments on long-term debt are as follows:
In thousands Amount
- ------------ -------
2003 $ 2,654
2004 375
2005 450
2006 125
2007 125
Thereafter 9,450
-------
Total $13,179
=======
NOTE 12 MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF SUBSIDIARY TRUST
In July 2002, City National Bancshares Corporation sold $3 million of trust
preferred securities through a statutory business trust, City National Bank of
New Jersey Capital Trust I (the "Trust"). The securities pay interest quarterly
on January 7, April 7, July 7 and October 7, based on the current three-month
LIBOR rate, plus 3.65%. The rate in effect at December 31, 2002 was 5.43%.
City National Bancshares Corporation owns all of the common securities of this
Trust. The Trust has no independent assets or operations, and exists for the
sole purpose of issuing trust preferred securities and investing the proceeds
thereof in an equivalent amount of junior subordinate debentures issued by City
National Bancshares Corporation. The junior subordinate debentures, which are
the sole assets of the Trust, are unsecured obligations of City National
Bancshares Corporation, and are subordinate and junior in right of payment to
all present and future senior and subordinate indebtedness and certain other
financial obligations of City National Bancshares Corporation.
The trust preferred securities qualify as Tier I Capital under regulatory
guidelines. The principal amount of subordinate debentures held by the trust
equals the aggregate liquidation amount of its trust preferred securities and
its common securities. The subordinate debentures bear interest at the same
rate, and will mature on the same date, as the corresponding trust preferred
securities. All of the trust preferred securities may be prepaid at par at the
option of the trust, in whole or in part, on or after July 18, 2007. The trust
preferred securities effectively mature on April 22, 2032.
NOTE 13 OTHER OPERATING INCOME AND EXPENSES
The following table presents the major items of other operating income and
expenses:
25
In thousands 2002 2001 2000
============ ==== ==== ====
OTHER OPERATING INCOME
Award income $343 $774 $879
Agency fees on commercial loans 305 192 525
OTHER OPERATING EXPENSES
Marketing expense 370 408 370
Data processing 260 215 177
Professional fees 246 373 293
Stationery and supplies expense 159 161 112
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. During 2002 and 2001, $385,000 and $97,000 respectively, was recorded as
interest income on deposits with banks as a yield enhancement. The remaining
$673,000 has been deferred and will be credited as interest income over the
remaining lives of the deposits through 2004.
NOTE 14 INCOME TAXES
The components of income tax expense are as follows:
In thousands 2002 2001 2000
============ ======= ======= =====
CURRENT EXPENSE
Federal $ 862 $ 1,324 $215
State 239 245 31
------- ------- ----
Total current income tax expense 1,101 1,569 246
------- ------- ----
DEFERRED (BENEFIT) EXPENSE
Federal (158) (728) 178
State (25) (122) 28
------- ------- ----
Total deferred income tax (benefit) expense (183) (850) 206
------- ------- ----
Total income tax expense $ 918 $ 719 $452
======= ======= ====
Not included in the above table is deferred income tax expense (benefit) of
$206,000, ($73,000) and ($169,000) for 2002, 2001 and 2000, respectively, which
represents the deferred income tax expense (benefit) on the net unrealized gains
(losses) of securities available for sale.
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 2002 2001 2000
============ ==== ==== =====
Federal income tax at statutory rate $ 824 $ 689 $ 521
Increase (decrease) in income tax
expense resulting from:
State income tax expense, net of
federal benefit 141 81 39
Tax-exempt income (159) (119) (122)
Life insurance (28) (27) (23)
Change in valuation allowance 17 (17) (5)
Other, net 123 112 42
----- ----- -----
Total income tax expense $ 918 $ 719 $ 452
===== ===== =====
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 2002 2001
============ ======= ======
DEFERRED TAX ASSETS
Unrealized (gains) losses on investment
securities available for sale $ (206) $ 73
Investment securities 25 8
Allowance for possible loan losses 337 362
Premises and equipment 75 75
Deposit intangible 48 26
Allowance for other real estate owned 25 39
Deferred compensation 301 215
Other real estate owned 149 115
Accrued expenses 109 132
Deferred income 382 423
Other assets 155 11
Other -- 3
------- ------
Total deferred tax asset 1,400 1,482
Less: Valuation allowance 18 1
------- ------
Deferred tax asset 1,382 1,481
------- ------
DEFERRED TAX LIABILITIES
Other assets -- --
------- ------
Deferred tax liability -- --
------- ------
Net deferred tax asset $ 1,382 $1,481
======= ======
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 15 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 50%
of the first 6% of participant salaries subject to a vesting schedule.
Contribution expense amounted to $64,000 in 2002, $60,000 in 2001 and $55,000 in
2000.
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 2002, 2001 and 2000 amounted to $219,000, $270,000, and $217,000,
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 $130,000 in 2002, $74,000 in 2001 and
$41,000 in 2000. The Bank also has a director retirement plan ("DRIP"). DRIP
expense was $59,000 in 2002, $11,000 in 2001 and $33,000 in 2000.
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
$2.6 million and $2.2 million at December 31, 2002 and 2001, 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 $119,000 in 2002,
$117,000 in 2001 and $106,000 in 2000, while the related life insurance expense
was $39,000 in 2002, $38,000 in 2001 and $38,000 in 2000.
26
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 2002 and 2001 and $2,000 in 2000, which would have decreased
the reported basic and diluted earnings per share by $.02 in 2000.
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 16 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 2002 2001
------ ---- ----- --------- ---------- ----------
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 17 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, $3,042,000 was available for the payment of dividends to
the parent corporation at December 31, 2002, subject to the restrictive
covenants under long-term debt agreements included in Note 11.
NOTE 18 NET INCOME PER COMMON SHARE
The following table presents the computation of net income per common share.
In thousands, except per share data 2002 2001 2000
- ----------------------------------- --------- --------- ---------
Net income $ 1,720 $ 1,306 $ 1,080
Dividends paid on preferred stock (67) (67) (87)
--------- --------- ---------
Net income applicable to basic
common shares 1,653 1,239 993
Interest expense on convertible
subordinated debentures, net of
income taxes 8 9 10
Net income applicable to diluted
--------- --------- ---------
common shares $ 1,661 $ 1,248 $ 1,003
========= ========= =========
NUMBER OF AVERAGE COMMON SHARES
Basic 123,852 123,241 120,926
--------- --------- ---------
Diluted:
Average common shares outstanding 123,852 123,241 120,926
Average common shares converted from
convertible subordinate debentures 8,550 10,525 12,500
--------- --------- ---------
132,402 133,766 133,426
========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 13.35 $ 10.05 $ 8.21
Diluted 12.54 9.33 7.52
NOTE 19 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 2002 and 2001. 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
$775,000 and $608,000 at December 31, 2002 and 2001, respectively. The highest
amount of such indebtedness during 2002 was $782,000 and in 2001 amounted to
$761,000. During 2002, new loans totalled $388,000 and paydowns totalled
$22,000. All related party loans are performing as of December 31, 2002.
NOTE 20 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, 2002 and 2001.
27
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 there 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, 2002 and 2001. 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, 2002 and 2001.
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
2002 2001
Carrying Fair Carrying Fair
In thousands Value Value Value Value
============ ======== ======== ======== ========
FINANCIAL ASSETS
Cash and other short-term
investments $ 12,196 $ 12,196 $ 39,073 $ 39,073
Interest-bearing deposits
with banks 3,528 4,264 3,630 4,518
Investment securities AFS 50,382 50,382 42,110 42,110
Investment securities HTM 29,559 30,691 29,181 29,177
Loans 107,095 134,126 97,490 100,403
FINANCIAL LIABILITIES
Deposits $181,894 $184,013 $194,129 $196,329
Short-term borrowings -- -- -- --
Long-term debt 13,179 15,453 13,204 13,658
NOTE 21 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 alleged, 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. CNB has been awarded a $1.7 million judgment, representing
the loss, cost of collection and interest. 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 or from
the judgment cannot be determined.
NOTE 22 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, 2002 and 2001 the Bank had mortgage commitments of $12,750,000
and $15,560,000, unused corporate lines of credit of $34,143,000 and
$36,443,000, and $583,000 and $1,527,000 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 23 PARENT COMPANY INFORMATION
Condensed financial statements of the parent company only are presented below.
CONDENSED BALANCE SHEET
In thousands 2002 2001
============ ======= =======
ASSETS
Cash and cash equivalents $ 144 $ 120
Investment securities held to maturity 151 126
Investment securities available for sale 580 763
Investment in subsidiary 17,817 13,618
Due from subsidiary 1,154 227
Other assets 90 109
------- -------
Total assets $19,936 $14,963
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 113 $ 25
Loans from subsidiaries 3,093 --
Long-term debt 3,479 3,504
------- -------
Total liabilities 6,685 3,529
Stockholders' equity 13,251 11,434
------- -------
Total liabilities and stockholders' equity $19,936 $14,963
======= =======
28
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
---------------------------------
In thousands 2002 2001 2000
- ------------ ------- ------- -------
INCOME
Interest income $ 60 $ 52 $ 51
Dividends from subsidiaries 300 690 306
Interest from subsidiaries 56 19 20
------- ------- -------
Total income 416 761 377
------- ------- -------
EXPENSES
Interest expense 299 148 122
Other operating expenses 5 4 5
Net (losses) gains on sales of
investment securities (43) (3) 16
Income tax benefit (79) (29) (15)
------- ------- -------
Total expenses 268 126 96
------- ------- -------
Income before equity in undistributed
income of subsidiaries 148 635 281
Equity in undistributed income
of subsidiaries 1,572 671 799
------- ------- -------
Net income $ 1,720 $ 1,306 $ 1,080
======= ======= =======
CONDENSED STATEMENT OF CASH FLOWS
In thousands 2002 2001 2000
============ ======== ======= =======
OPERATING ACTIVITIES
Net income $ 1,720 $ 1,306 $ 1,080
Adjustments to reconcile net income
to cash used in operating activities:
(Discount accretion) premium
amortization on investment securities (11) 2 (1)
Net losses (gains) on sales of investment
securities available for sale 43 3 (16)
Equity in undistributed income of
subsidiary (1,572) (671) (799)
Iincrease in other assets (19) (65) (8)
Increase in other liabilities 88 2 1
-------- ------- -------
Net cash provided by operating activities 249 577 257
-------- ------- -------
INVESTING ACTIVITIES
Proceeds from sales and maturities of
investment securities available for sale
Including principal payments 125 92 97
Proceeds from maturities of investment
securities held to maturity including
principal payments 21,396 103 --
Purchases of investment securities
available for sale (21,211) (97) (99)
Purchases of investment securities
held to maturity (150) (128) --
Increase in investment in subsidiary (2,093) (1,000) (500)
Increase in loans to subsidiaries (1,000) -- --
-------- ------- -------
Net cash used in investing
Activities (2,933) (1,030) (502)
FINANCING ACTIVITIES
(Decrease) Increase in long-term debt (25) 779 500
Increase in loans from subsidiaries 3,093 -- --
Proceeds from issuance of common stock -- 71 37
Purchase of treasury stock (11) (5) (2)
Dividends paid (348) (310) (312)
-------- ------- -------
Net cash provided by financing
activities 2,709 535 223
-------- ------- -------
Increase (decrease) in cash and
cash equivalents 25 82 (22)
Cash and cash equivalents at
beginning of year 120 38 60
-------- ------- -------
Cash and cash equivalents at
end of year $ 145 $ 120 $ 38
======== ======= =======
NOTE 24 REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 2002, 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, 2002 both City National Bancshares
and City National Bank meet all capital adequacy requirements to which it is
subject. Further, the most recent FDIC notification categorized City National
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 City National Bank's capital
classification.
The following is a summary of City National Bank's actual capital amounts and
ratios as of December 31, 2002 and 2001, compared to the FDIC minimum capital
adequacy requirements and the FDIC requirements for classification as a
well-capitalized Bank:
In thousands FDIC Requirements
- ------------------------ -------------------------------------------------------------------
MINIMUM CAPITAL FOR
MINIMUM CAPITAL CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL-CAPITALIZED
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
December 31, 2002
Leverage (Tier 1)
capital $16,531 7.73% $ 8,559 4.00% $10,699 5.00%
Risk-based capital:
Tier 1 16,531 13.17 5,020 4.00 7,530 6.00
Total 18,260 14.55 10,039 8.00 12,549 10.00
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
29
NOTE 25 SUMMARY OF QUARTERLY FINANCIAL INFORMATION
(unaudited) 2002
----------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
======================= ======= ======= ======= =======
Interest income $ 3,043 $ 3,076 $ 3,055 $ 3,047
Interest expense 1,023 1,005 1,009 957
------- ------- ------- -------
Net interest income 2,020 2,071 2,046 2,090
Provision for
loan losses 80 75 83 118
Net (losses) gains on sales
of investment securities (11) (31) (3) 3
Other operating income 643 748 591 916
Other operating expenses 1,855 1,933 1,925 2,376
------- ------- ------- -------
Income before income
tax expense 717 780 626 515
Income tax expense 235 288 215 180
------- ------- ------- -------
Net income $ 482 $ 492 $ 411 $ 335
======= ======= ======= =======
Net income per share- basic $ 3.72 $ 3.93 $ 3.15 $ 2.55
======= ======= ======= =======
Net income per share- diluted $ 3.50 $ 3.68 $ 2.96 $ 2.40
======= ======= ======= =======
(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
======= ======= ======= =======
30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
City National Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of City National
Bancshares Corporation and subsidiary (the Corporation) as of December 31, 2002
and 2001, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of City National
Bancshares Corporation and subsidiary as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
February 14, 2003
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants during 2002.
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 23, 2003.
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).
32
(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, (incorporated by reference to
Exhibit 10(e) to the Corporation's Annual report on Form 10-K
for the year ended December 31, 2001)
(10)(f) Loan Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund
(incorporated by reference to Exhibit 10(f) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001)
(10)(g) Pledge Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund
(incorporated by reference to Exhibit (g) to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
2001)
(10)(h) 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(h) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998).
(10)(i) Promissory Note dated May 6, 2002 payable to United Negro
College Fund, Inc., in the principal amount of $200,000
(incorporated by reference to Exhibit 10(I) to the
Corporation's Quarterly Report on Form 10-Q for quarter ended
March 31, 2002).
(10)(j) Guarantee Agreement dated July 11, 2002 from the Corporation
in favor of Wilmington Trust Company, as trustee for holders
of securities issued by City National Bank of New Jersey
Capital Trust 1 (incorporated by reference to Exhibit 10(j) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
(10(k) Amended and Restated Declaration of Trust of City national
Bank of New Jersey Capital Trust I, dated July 11, 2002
(incorporated by reference to Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
(11) Statement regarding computation of per share earnings. The
required information is included on page 27.
(12) Ratios have been computed using the average daily balances of
the respective asset, liability and stockholders' equity
accounts.
(13) Annual Report to security holders for the fiscal year ended
December 31, 2002.
33
(21) Subsidiaries of the registrant. The required information is
included on page 3.
(99) Certifications of Periodic Report.
(c) No reports on Form 8-K were filed during the quarter ended
December 31, 2002.
34
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 20, 2003 Date: March 20, 2003
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 20, 2003
- -------------------------
Douglas E. Anderson
/s/ Barbara Bell Coleman Director March 20, 2003
- -------------------------
Barbara Bell Coleman
/s/ Leon Ewing Director March 20, 2003
- -------------------------
Leon Ewing
/s/ Eugene Giscombe Director, March 20, 2003
- ------------------------- Chairperson of the Board
Eugene Giscombe
/s/ Norman Jeffries Director March 20, 2003
- -------------------------
Norman Jeffries
/s/ Louis E. Prezeau Director, March 20, 2003
- ------------------------- President and Chief
Louis E. Prezeau Executive Officer
/s/ Lemar C. Whigham Director March 20, 2003
- -------------------------
Lemar C. Whigham
35