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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, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11535
CITY NATIONAL BANCSHARES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2434751
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
900 BROAD STREET, 07102
NEWARK, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 624-0865
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
Common stock, par value $10 per share
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 18, 2004 was approximately $4,370,410.
There were 131,299 shares of common stock outstanding at March 18, 2004
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the definitive Proxy Statement for the 2004 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.
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.................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 8 - 17
Item 7a. Quantitative and Qualitative Disclosure about Market Risk................. 17
Item 8. Financial Statements and Supplementary Data................................ 18 - 31
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................... 33
Item 9a. Controls and Procedures................................................... 33
PART III
Item 10. Directors and Executive Officers of Registrant............................. 33
Item 11. Executive Compensation..................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 33
Item 13. Certain Relationships and Related Transactions............................. 33
PART IV
Item 14. Principal Accountant Fees and Services .................................... 33
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 33 - 35
Signatures.......................................................................... 36
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, 2003, CNBC
had consolidated total assets of $236.4 million, total deposits of $198.4
million and stockholders' equity of $14.3 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, checking, certificates of deposit, 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 nine-branch office
network from its headquarters located in downtown Newark, New Jersey. The Bank
operates three branches (including the headquarters) in Newark, and one each in
Hackensack and Paterson, New Jersey. As a result of the acquisitions of two
branches from Carver Federal Savings Bank ("Carver"), the Bank also operates a
branch in Brooklyn, New York and one in Roosevelt, Long Island. The Bank opened
de novo branches in Hempstead, Long Island in 2002 and Manhattan, New York in
2003.
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 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. Sales of annuities and mutual funds
are offered to customers under a networking agreement with the Independent
Community Bankers of America.
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 low and moderate income segments 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.
GOVERNMENTAL POLICIES AND LEGISLATION
The policies of regulatory authorities, including the Federal Reserve Bank and
the Federal Deposit Insurance Corporation, have had a significant effect on the
operating results of commercial banks in the past and are expected to do so in
the future. An important function of the Federal Reserve Bank is to regulate
national monetary policy by such means as open market dealings in securities,
the establishment of the discount rate on member bank borrowings, and changes in
reserve requirements on member bank deposits.
The efforts of national monetary policy have a significant impact on the
business of the Bank, which is measured and managed through its interest rate
risk policies.
The Federal Open Market Committee lowered the target Federal funds rate from
1.25% to 1.00% in 2003. The three-month U.S. Treasury bill rate started 2003 at
1.19%, declining to .92% at the end of the year. As a result of the continued
low interest rate environment, the Bank lowered its prime lending rate once
during 2003, from 4.25% to 4.00%, after reducing it from 4.75% to 4.25% in 2003.
Rates earned on the Corporation's interest-earning assets and rates paid on
interest-bearing liabilities declined in 2003 compared to 2002.
3
BANK HOLDING COMPANY REGULATIONS
CNBC is a bank holding company within the meaning of the Bank Holding Company
Act (the "Act") of 1956, and as such, is supervised by the Board of Governors of
the Federal Reserve System (the "FRB").
The Act prohibits CNBC, with certain exceptions, from acquiring ownership or
control of more than five percent of the voting shares of any company which is
not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to subsidiary banks. The
Act also requires prior approval by the FRB of the acquisition by CNBC of more
than five percent of the voting stock of any additional bank. The Act also
restricts the types of businesses, activities, and operations in which a bank
holding company may engage.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking and Branching Act") enabled bank holding companies to
acquire banks in states other than its home state, regardless of applicable
state law. The Interstate Banking and Branching Act also authorized banks to
merge across state lines, thereby creating interstate branches. Under such
legislation, each state had the opportunity to "opt out" of this provision.
Furthermore, a state may "opt-in" with respect to de novo branching, thereby
permitting a bank to open new branches in a state in which the bank does not
already have a branch. Without de novo branching, an out-of-state commercial
bank can enter the state only by acquiring an existing bank or branch. The vast
majority of states have allowed interstate banking by merger but not authorized
de novo branching.
New Jersey enacted legislation to authorize interstate banking and branching and
the entry into New Jersey of foreign country banks. New Jersey did not authorize
de novo branching into the state. However, under federal law, federal savings
banks which meet certain conditions may branch de novo into a state, regardless
of state law.
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will allow bank
holding companies meeting management, capital and Community Reinvestment Act
standards to engage in a substantially broader range of nonbanking activities
than currently is permissible, including insurance underwriting and making
merchant banking investments in commercial and financial companies. If a bank
holding company elects to become a financial holding company, it may file a
certification, effective in 30 days, and thereafter may engage in certain
financial activities without further approvals. It also allows insurers and
other financial services companies to acquire banks, removes various
restrictions that currently apply to bank holding company ownership of
securities firms and mutual fund advisory companies and establishes the overall
regulatory structure 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
4
8%, has a Tier 1 risk-based capital ratio of at least 4%, and has Tier 1
leverage ratio of at least 4%. An institution will be classified as
"undercapitalized" if it has a total risk-based capital ratio of less than 6%,
has a Tier 1 risk-based capital ratio of less than 3%, or has a Tier 1 leverage
ratio of less than 3%. An institution will be classified as "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, or
a Tier I risk-based capital ratio of less than 3%, or a Tier I leverage ratio of
less than 3%. An institution will be classified as "critically undercapitalized"
if it has a tangible equity to total assets ratio that is equal to or less than
2%. An insured depository institution may be deemed to be in a lower
capitalization category if it receives an unsatisfactory examination.
Insured institutions are generally prohibited from paying dividends or
management fees if after making such payments, the institution would be
"undercapitalized". An "undercapitalized" institution also is required to
develop and submit to the appropriate federal banking agency a capital
restoration plan, and each company controlling such institution must guarantee
the institution's compliance with such plan.
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act ("CRA"), as implemented by OCC regulations,
a national bank has a continuing and affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OCC, in connection with its examination of a
national bank, to assess the association's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such association. The CRA also requires all institutions to make
public disclosure of their CRA ratings. CNB received 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, 2003, CNBC and its subsidiaries had 97 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 four in the state of New York. Four 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 in Harlem and Brooklyn,
New York, which is owned. The Harlem branch is leased, while the Brooklyn branch
is owned.
In addition to its branch network, the Bank currently maintains five 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. It is
unlikely that CNB will receive any of the judgment, and the amount that CNB will
ultimately recover, if any, under the insurance policy cannot be determined.
During 2003, the Bank incurred a credit card fraud loss of $295,000. The Bank
has filed a claim with its fidelity bond carrier to recover this loss and is
contemplating legal action. The amount that CNB will ultimately recover, if any,
under the insurance policy or from such legal action cannot be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2003 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 February 25, 2004, the Corporation had 1,493 common stockholders of record.
On April 7, 2003, the Corporation paid a cash dividend of $2.50 per share to
stockholders of record on April 10, 2003. 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.
5
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
6
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
Dollars in thousands, except per share data 2003 2002 2001 2000 1999
- ------------------------------------------- -------- -------- -------- -------- --------
YEAR-END BALANCE SHEET DATA
Total assets $236,385 $215,199 $222,298 $200,442 $172,496
Gross loans 131,771 109,195 99,190 90,653 82,446
Allowance for loan losses 2,200 2,100 1,700 1,200 1,975
Investment securities 77,193 79,941 71,291 65,930 68,475
Total deposits 198,371 181,894 194,129 176,169 139,837
Long-term debt 19,318 16,272 13,204 12,425 16,225
Stockholders' equity 14,311 13,251 11,434 10,235 9,026
======== ======== ======== ======== ========
INCOME STATEMENT DATA
Interest income $ 12,084 $ 12,221 $ 12,887 $ 12,477 $ 10,615
Interest expense 3,266 3,994 5,268 6,381 5,276
-------- -------- -------- -------- --------
Net interest income 8,818 8,227 7,619 6,096 5,339
Provision for loan losses 129 356 356 872 906
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 8,689 7,871 7,263 5,224 4,433
Other operating income 2,605 2,856 2,589 2,547 1,492
Other operating expenses 8,847 8,089 7,827 6,239 5,330
-------- -------- -------- -------- --------
Income before income tax expense 2,447 2,638 2,025 1,532 595
Income tax expense 726 918 719 452 193
-------- -------- -------- -------- --------
Net income $ 1,721 $ 1,720 $ 1,306 $ 1,080 $ 402
======== ======== ======== ======== ========
PER COMMON SHARE DATA
Net income per basic share $ 12.94 $ 13.35 $ 10.05 $ 8.21 $ 2.48
Net income per diluted share 12.55 12.54 9.33 7.52 2.34
Book value 100.89 97.94 83.01 75.68 66.73
Dividends 2.50 2.25 2.00 1.85 1.80
Basic average number of common shares
outstanding 127,854 123,852 123,241 120,926 118,902
Diluted average number of common shares
outstanding 132,129 132,402 133,766 133,426 131,402
Number of common shares outstanding at year-end 131,469 124,611 125,125 121,406 119,571
FINANCIAL RATIOS
Return on average assets .75% .80% .65% .61% .25%
Return on average common equity 13.21 14.76 12.69 12.06 3.49
Stockholders' equity as a percentage of total assets 6.05 6.16 5.14 5.11 5.23
Dividend payout ratio 19.32 16.85 19.90 22.53 72.58
======== ======== ======== ======== ========
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this analysis is to provide information relevant to understanding
and assessing the Corporation's results of operations for each of the past three
years and financial condition for each of the past two years.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not historical facts and include expressions about management's
expectations about new and existing programs and products, relationships,
opportunities, and market conditions. Such forward-looking statements involve
certain risks and uncertainties. These include, but are not limited to,
unanticipated changes in the direction of interest rates, effective income tax
rates, loan prepayment assumptions, deposit growth, the direction of the economy
in New Jersey and New York, continued levels of loan quality, continued
relationships with major customers as well as the effects of general economic
conditions and legal and regulatory issues and changes in tax regulations.
Actual results may differ materially from such forward-looking statements. The
Corporation assumes no obligation for updating any such forward-looking
statement at any time.
EXECUTIVE SUMMARY
The primary source of the Corporation's income comes from net interest income,
which represents the excess of interest earned on earning assets over the
interest paid on interest-bearing liabilities. This income is subject to
interest rate risk resulting from changes in interest rates. The most
significant component of the Corporation's interest earning assets is the loan
portfolio. In addition to the aforementioned interest rate risk, the portfolio
is subject to credit risk.
Net income rose to $1,721,000 in 2003 from to $1,720,000 in 2002 due primarily
to an increase in net interest income offset by higher operating expenses.
Included in both years' earnings were awards received from the U.S. Treasury's
Community Development Financial Institution ("CDFI") Fund. The awards were based
in part on the Bank's lending efforts in qualifying lower income communities.
Award income was $94,000 in 2003 compared to $343,000 in 2002. Additionally, the
Bank recorded award income related to deposits made in other CDFI's of $386,000
in 2003 and $384,000 in 2002, respectively. Finally, additional award income of
$3,000 was also recorded, representing an award received for opening a branch
office in a low-income area. In total, $483,000 of award income was recorded in
2003, while $727,000 was recorded in 2002. Excluding these awards, net income
would have totaled $1,409,000 and $1,247,000 in 2003 and 2002, respectively.
These awards are dependent on the availability of funds in the CDFI Fund as well
as the Bank meeting various qualifying standards. Accordingly, there is no
assurance that the Bank will continue to receive these awards in the future.
Total assets increased 9.8% to $236.4 million at the end of 2003 from $215.2
million a year earlier, while average assets rose 7.2% in 2003, due primarily to
deposit growth.
CASH AND DUE FROM BANKS
Cash and due from banks rose to $7.4 million at the end of 2003 from $6 million
a year earlier. Average cash and due from banks for 2003 totalled $6.6 million,
unchanged from a year earlier.
FEDERAL FUNDS SOLD
Federal funds sold declined to $4.5 million at the end of 2003 from $6.2 million
at December 31, 2002, while the related average balance decreased 35% to $11.7
million from $18 million in 2002. Both decreases occurred due to the
reinvestment into higher earning assets, primarily into the loan portfolio. The
Corporation has been steadily reducing its Federal funds sold balances in recent
years in an attempt to better utilize funds considered excess liquidity.
Management expects to continue this trend.
INTEREST-BEARING DEPOSITS WITH BANKS
Interest-bearing deposits with banks increased to $3.7 million at December 31,
2003 from $3.5 million a year earlier, while the related average balances was
$3.6 million for both years. The deposits represent 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. $386,000 and $384,000 were
recorded as interest income from interest-bearing deposits with banks in 2003
and 2002, and are considered a yield enhancement on the CDFI deposits.
INVESTMENTS
The investment securities available for sale ("AFS") portfolio declined to $47.3
million at December 31, 2003 from $50.4 million a year earlier, while the
related gross unrealized net loss amounted to $48,000 compared to a gain of
$526,000 due to the effects of an increase in interest rates.
Mortgage-backed securities ("MBS"), comprised 61.7% of the AFS portfolio at the
end of 2003 compared to 47.3% a year earlier, as the Corporation sought to
mitigate its interest rate risk by reducing its purchases of bullet investments.
The investment securities held to maturity ("HTM") portfolio totaled to $29.9
million at December 31, 2003, relatively unchanged from $29.6 million a year
earlier.
At December 31, 2003, the Bank held callable U.S. Government agency notes with a
carrying value of $11.5 million, of which $11.3 million were included in the HTM
portfolio. These notes are callable at par at various dates from 2004 until
maturity. These callable securities reflect gross unrealized depreciation of
$101,000. 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.
The most significant change in the AFS portfolio was an increase in the weighted
average life, which at December 31, 2003 was 9.16 years compared to 5.95 years
at the end of 2002. The greatest impact on this increase came from the MBS
portfolio, in which the average life more than doubled in 2003. Average duration
in the portfolio rose correspondingly, from 3.42 to 5.77, also due to the MBS
portfolio.
All the mortgage-backed securities held by the Corporation are issued or backed
by federal agencies. The mortgage-backed securities portfolio is a source of
significant liquidity to the Corporation through the monthly cash flow of
principal and interest. Mortgage-backed securities, like all securities, are
sensitive to changes in the interest rate environment, increasing and decreasing
in value as interest rates fall and rise. As interest rates fall, the increase
in prepayments can reduce the yield on the mortgage-backed securities portfolio,
and reinvestment of the proceeds will be at lower yields. Conversely, rising
interest rates will reduce cash flows from prepayments and extend anticipated
duration of these assets. The Corporation monitors the changes in interest
rates, cash flows and duration. During 2003, substantial prepayments were
received and reinvested at lower yields. This negatively impacted the yield on
the investment portfolio. Continued low interest rates during 2004 will likely
have similar results.
8
The MBS portfolio was also affected by the rising long-term interest rate
environment during the last quarter of 2003, which decreased prepayment speeds,
thus lengthening average lives.
The weighted average life of the HTM portfolio also rose, to 7.65 years at
December 31, 2003 compared to 5.57 years at the end of 2002, while average
duration also rose to 5.33 from 3.96. The MBS portfolio was the primary
contributor to these increases as well.
Information pertaining to the average weighted yields of investments in debt
securities at December 31, 2003 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 Maturing After
Maturing Within One Year But Five Years But Maturing After
One Year Within Five Years Within Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
==================== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
U.S. Treasury securities and
U.S. Government agencies $ 4,166 2.22% $ 500 3.00% $ -- --% $ 5,539 5.33% $10,205 3.53%
Mortgage-backed securities 65 6.22 183 5.49 1,077 5.98 27,890 4.61 29,215 4.67
Obligations of state
political and subdivisions 612 1.67 -- -- 697 7.59 570 8.70 1,879 6.00
Other debt securities 750 7.05 -- -- -- -- 3,418 3.41 4,168 2.89
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total amortized cost $ 5,593 2.88% $ 683 3.80% $ 1,774 6.61% $37,417 4.67% $45,467 4.36%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
INVESTMENT SECURITIES HELD TO MATURITY Maturing After Maturing After
Maturing Within One Year But Five Years But Maturing After
One Year Within Five Years Within Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
==================== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
U.S. Government agencies(1) $ -- --% $ 28 8.72% $ -- --% $11,339 5.84% $11,367 5.85%
Obligations of state and
political subdivisions -- -- -- -- 2,470 7.57 3,909 7.60 6,379 7.59
Mortgage-backed securities 45 5.83 -- -- -- -- 10,088 5.44 10,133 5.44
Other debt securities -- -- -- -- 2,018 8.01 -- -- 2,018 8.01
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total amortized cost $ 45 5.83% $ 28 8.72% $ 4,488 7.77% $25,336 5.86% $29,897 6.23%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
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, 2003. 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 4.36% at December 31, 2003
from 4.47% at December 31, 2002, while the yield on the HTM portfolio rose five
basis points to 6.23% at December 31, 2003 from 6.18% at December 31, 2002.
The following table sets forth the carrying value of the Corporation's portfolio
for the three years ended December 31:
2003 2002 2001
--------------------- --------------------- ---------------------
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 $ 10,205 $ 10,114 $ 15,815 $ 15,964 $ 9,590 $ 9,635
Obligations of state and political subdivisions 1,879 2,006 4,379 4,473 2,396 2,435
Other securities:
Mortgage-backed securities 29,215 29,173 23,298 23,823 24,319 24,307
Other debt securities 4,168 4,123 4,669 4,471 4,669 4,426
Equity securities:
Marketable securities 897 900 869 825 397 359
Federal Reserve Bank and Federal Home Loan Bank stock 980 980 826 826 948 948
--------- --------- --------- --------- --------- ---------
Total $ 47,344 $ 47,296 $ 49,856 $ 50,382 $ 42,319 $ 42,110
========= ========= ========= ========= ========= =========
2003 2002 2001
--------------------- --------------------- ---------------------
INVESTMENT SECURITIES HELD TO MATURITY Amortized Market Amortized Market Amortized Market
In thousands Cost Value Cost Value Cost Value
============ ==== ===== ==== ===== ==== =====
U.S. Treasury securities and obligations
Of U.S. government agencies $ 11,367 $ 11,279 $ 13,842 $ 14,000 $ 12,976 $ 12,724
Obligations of state and political subdivisions 6,379 6,786 5,937 6,283 5,837 5,889
Other securities:
Mortgage-backed securities 10,133 10,293 7,759 8,079 8,343 8,385
Other debt securities 2,018 2,374 2,021 2,329 2,025 2,179
--------- --------- --------- --------- --------- ---------
Total $ 29,897 $ 30,732 $ 29,559 $ 30,691 $ 29,181 $ 29,177
========= ========= ========= ========= ========= =========
9
CONSOLIDATED AVERAGE BALANCE SHEET WITH RELATED INTEREST AND RATES
2003 2002 2001
============================ ============================ ============================
Tax equivalent basis; dollars Average Average Average Average Average Average
in thousands Balance Interest Rate Balance Interest Rate Balance Interest Rate
============ ======= ======== ==== ======= ======== ==== ======= ======== ====
ASSETS
Interest earning assets:
Federal funds sold and securities
purchased under agreements to
resell $ 11,679 $ 128 1.10% $ 17,970 $ 292 1.62% $ 19,089 $ 746 3.91%
Interest-bearing deposits
with banks(1) 3,609 510 14.13 3,559 510 14.33 2,446 185 7.56
Investment securities:
Taxable(2) 71,990 3,267 4.54 68,704 3,636 5.29 59,790 3,705 6.20
Tax-exempt 8,920 628 7.04 9,097 676 7.43 7,651 594 7.76
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total investment securities 80,910 3,895 4.81 77,801 4,312 5.54 67,441 4,299 6.37
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans(3, 4)
Commercial(7) 16,623 992 5.97 16,038 985 6.14 17,869 1,243 6.96
Real estate 98,240 6,653 6.77 81,727 6,244 7.64 76,827 6,493 8.45
Installment 1,483 120 8.09 1,420 137 9.65 1,562 123 7.87
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans 116,346 7,765 6.67 99,185 7,348 7.41 96,258 7,859 8.16
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest earning assets 212,544 12,298 5.79 198,515 12,462 6.28 185,234 13,089 7.07
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest earning assets:
Cash and due from banks 6,610 6,562 6,823
Gross unrealized gain (loss) on
investment securities available
for sale 230 176 (131)
Allowance for loan losses (2,191) (1,872) (1,402)
Other assets 12,639 11,097 9,944
-------- -------- --------
Total noninterest earning assets 17,288 15,963 15,234
-------- -------- --------
Total assets $229,832 $214,478 $200,468
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Savings deposits(5) $107,467 $ 819 .76% $ 91,901 $ 1,233 1.34% $ 83,866 $ 1,575 1.88%
Time deposits 54,249 1,524 2.81 57,513 1,927 3.35 60,936 2,960 4.86
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest bearing deposits 161,716 2,343 1.45 149,414 3,160 2.11 144,802 4,535 3.13
Short-term borrowings 1,041 10 .96 1,047 16 1.53 1,111 39 3.51
Long-term debt 17,557 913 5.20 14,706 818 5.56 12,361 694 5.61
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest bearing
liabilities 180,314 3,266 1.81 163,737 3,994 2.44 158,274 5,268 3.33
-------- -------- -------- -------- -------- -------- -------- -------- --------
Noninterest bearing liabilities:
Demand deposits 32,722 33,847 29,498
Other liabilities 3,228 3,215 1,882
-------- -------- --------
Total noninterest bearing
liabilities 35,950 37,062 31,380
-------- -------- --------
Stockholders' equity 13,568 12,249 10,814
-------- -------- --------
Total liabilities and stockholders'
equity $229,832 $214,478 $200,468
======== ======== ========
Net interest income (tax equivalent
basis) 9,032 3.98 8,470 3.84 7,821 3.74
Tax equivalent basis adjustments(6) (214) (241) (202)
-------- -------- --------
Net interest income $ 8,818 $ 8,227 $ 7,619
======== ======== ========
Average rate paid to fund interest
earning assets 1.54 2.01 2.84
-------- -------- --------
Net interest income as a percentage
of interest earning assets (tax
equivalent basis) 4.25% 4.27% 4.22%
======== ======== ========
(1) Includes $386,000 in 2003, $384,000 in 2002 and $97,000 in 2001,
representing thirty-three, twenty and six basis point additions to net
interest income in 2003, 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 $416,000, $279,000 and $162,000 in 2003, 2002 and 2001
respectively.
(5) Includes noninterest bearing deposits maintained by a state governmental
agency of $694,000 in 2003, and $294,000 in 2002 and 2001.
(6) The tax equivalent adjustment was computed assuming a 34% statutory
federal income tax rate in 2003, 2002 and 2001.
(7) Includes $94,000 in 2003 attributable to income received under the U.S.
Treasury Department's Bank Enterprise Award loan program representing
eight basis points.
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.
10
2003 Net Interest Income Increase 2002 Net Interest Income Increase
(Decrease) from 2002 due to: (Decrease) from 2001 due to:
============================ ============================
In thousands Volume Rate Total Volume Rate Total
- ------------ ------ ---- ----- ------ ---- -----
INTEREST INCOME
Loans:
Commercial $ 36 $ (29) $ 7 $ (127) $ (131) $ (258)
Real estate 1,262 (853) 409 414 (663) (249)
Installment 6 (23) (17) (11) 25 14
-------- -------- -------- -------- -------- --------
Total loans 1,304 (905) 399 276 (769) (493)
Taxable investment securities 174 (543) (369) 553 (623) (70)
Tax-exempt investment securities (13) (18) (31) 112 (46) 66
Federal funds sold and securities
Purchased under agreements to resell (103) (61) (164) (44) (410) (454)
Interest-bearing deposits with banks 7 (7) -- 84 241 325
-------- -------- -------- -------- -------- --------
Total interest income 1,369 (1,534) (165) 981 (1,607) (626)
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE
Savings deposits (235) 649 414 (151) 493 342
Time deposits 109 294 403 166 867 1,033
Short-term borrowings 1 4 5 2 22 24
Long-term debt (158) 63 (95) (130) 6 (124)
-------- -------- -------- -------- -------- --------
Total interest expense (283) 1,010 727 (113) 1,388 1,275
-------- -------- -------- -------- -------- --------
Net interest income $ 1,086 $ (524) $ 562 $ 868 $ (219) $ 649
======== ======== ======== ======== ======== ========
LOANS
Loans rose 20.7% to $131.8 million December 31, 2003 from $109.2 million a year
earlier. Most of the loan increase occurred in the commercial real estate
portfolio.
Loans held for sale amounted to $552,000 at December 31, 2003, while there were
no loans held for sale at December 31, 2002. Loan originations and sales cash
rose in 2003 compared to 2002 due to increased refinancings from the favorable
interest rate environment.
Residential mortgage loans, including home equity loans, represent an
insignificant part of the Bank's lending business. Such loans that have
long-term fixed rates are generally sold into the secondary market, although
some loans maybe retained in the portfolio to balance the Bank's loan mix and
provide collateral for Federal Home Loan Bank borrowings. Consumer loans,
including automobile loans, also comprise a relatively small part of the loan
portfolio.
At December 31, 2003, loans to churches totalled $29.3 million, representing
13.6% of total loans outstanding, all of which are secured by real estate,
compared to $14.9 million and 22.2% at December 31, 2002. Management does not
believe that this loan concentration exposes the Corporation to any unusual
degree of risk. Most of the Bank's lending efforts are in northern New Jersey,
Manhattan and Nassau County.
The Bank generally secures its loans by obtaining primarily first liens on real
estate, both residential and commercial, and does virtually no asset-based
financing. Without additional side collateral, the Bank generally requires
maximum loan-to-value ratios of 70% for loan transactions secured by commercial
real estate. The Bank expects to maintain the aforementioned types of lending.
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, 2003 is presented below.
Due from
One Year
Due in One Through Due After
In thousands Year or Less Five Years Five Years Total
- ------------ ------------ ---------- ---------- -----
Commercial $ 9,427 $ 936 $ 9,541 $ 19,904
Real estate:
Construction 17,388 1,765 -- 19,153
Mortgage 7,321 13,759 70,599 91,679
Installment 532 439 64 1,035
-------- -------- -------- --------
Total $ 34,668 $ 16,899 $ 80,204 $131,771
======== ======== ======== ========
Loans at fixed
interest rates $ 9,847 $ 9,944 $ 28,974 $ 48,765
Loans at variable
interest rates 24,821 6,955 51,230 83,006
-------- -------- -------- --------
Total $ 34,668 $ 16,899 $ 80,204 $131,771
======== ======== ======== ========
The following table reflects the composition of the loan portfolio for the five
years ended December 31:
In thousands 2003 2002 2001 2000 1999
- ------------ -------- -------- -------- -------- --------
Commercial $ 20,052 $ 15,510 $ 17,448 $ 17,353 $ 17,687
Real estate 110,802 92,323 80,466 72,482 64,113
Installment 1,035 1,492 1,385 947 823
-------- -------- -------- -------- --------
Total loans 131,889 109,325 99,299 90,782 82,623
Less: Unearned income 118 130 109 129 177
-------- -------- -------- -------- --------
Loans $131,771 $109,195 $ 99,190 $ 90,653 $ 82,446
======== ======== ======== ======== ========
11
SUMMARY OF LOAN LOSS EXPERIENCE
Changes in the allowance for loan losses are summarized below.
Dollars in thousands 2003 2002 2001 2000 1999
==================== ======== ======== ======== ======== ========
Balance, January 1 $ 2,100 $ 1,700 $ 1,200 $ 1,975 $ 1,415
-------- -------- -------- -------- --------
Charge-offs:
Commercial loans 164 6 121 1,538 411
Real estate loans -- 34 -- 184 68
Installment loans 43 19 34 15 24
-------- -------- -------- -------- --------
Total 207 59 155 1,737 503
-------- -------- -------- -------- --------
Recoveries:
Commercial loans 89 93 265 58 137
Real estate loans 73 -- -- 21 4
Installment loans 16 10 34 11 16
-------- -------- -------- -------- --------
Total 178 103 299 90 157
-------- -------- -------- -------- --------
Net (charge-offs) recoveries (29) 44 144 (1,647) (346)
Provision for loan
losses charged to operations 129 356 356 872 906
-------- -------- -------- -------- --------
Balance, December 31 $ 2,200 $ 2,100 $ 1,700 $ 1,200 $ 1,975
======== ======== ======== ======== ========
Net charge-offs as a
percentage of average loans .02% --% --% 1.94% .47%
Allowance for loan losses as a
percentage of loans 1.67 1.92 1.71 1.32 2.40
Allowance for loan losses as a
percentage of nonperforming loans 177.99 201.92 137.65 171.18 71.40
======== ======== ======== ======== ========
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 1.67% of total loans at December 31, 2003 compared to
1.92% a year earlier. The nominal increase in the allowance compared to the
increase in the loan portfolio reflects the continued low net charge-off level
in the portfolio, as well as an improvement 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.
2003 2002 2001 2000 1999
=================== =================== =================== =================== ==================
Percentage Percentage Percentage Percentage Percentage
of Loan of Loan of Loan of Loan of Loan
Category Category Category Category Category
to Gross to Gross to Gross to Gross to Gross
Dollars in thousands Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
==================== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Commercial $ 686 15.22% $ 422 14.20% $ 482 17.57% $ 405 19.12% $1,492 21.41%
Real estate 798 84.00 622 84.43 555 81.03 444 79.84 386 77.60
Installment 75 .78 43 1.37 39 1.40 30 1.04 17 .99
Unallocated 641 -- 1,013 -- 624 -- 321 -- 80 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,200 100.00% $2,100 100.00% $1,700 100.00% $1,200 100.00% $1,975 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Allowance 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 allocation is based upon management's
evaluation of the underlying inherent risk in the loan portfolio that has not
been measured on an individual basis. Such evaluation includes economic and
business conditions within the Bank's market area, portfolio concentrations,
credit quality and delinquency trends. An additional factor is the demographics
in the Bank's market area. Because CNB serves primarily low to moderate income
communities, in general, the inherent credit risk profile of the loans it makes
has a greater degree of risk than if a more economically diverse demographic
area were served.
12
NONPERFORMING ASSETS
Information pertaining to nonperforming assets at December 31 is summarized
below.
In thousands 2003 2002 2001 2000 1999
============ ====== ====== ====== ====== ======
Nonperforming loans
Commercial $ 314 $ 296 $ 199 $ 165 $2,093
Real estate 894 697 985 499 668
Installment 28 47 52 37 5
------ ------ ------ ------ ------
Total nonperforming loans 1,236 1,040 1,236 701 2,766
Other real estate owned 290 352 326 621 698
------ ------ ------ ------ ------
Total $1,526 $1,392 $1,562 $1,322 $3,464
====== ====== ====== ====== ======
Nonperforming assets rose $134,000 to $1,526,000 at December 31, 2003, from
$1,392,000 a year earlier. The increase reflects an increase in nonperforming
commercial real estate loans. OREO is carried net of a $63,000 reserve at
December 31, 2003 and at December 31, 2002.
DEPOSITS
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, 2003 and
2002.
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. The Bank
expects to continue seeking municipal account relationships.
Total deposits rose to $198.4 million at December 31, 2003 from $181.9 million a
year earlier, while average deposits increased 5.1%, to $194.4 million in 2003
from $183.3 million in 2002. Higher money market account balances were the
primary factor in both increases.
Demand account balances decreased to $34.5 million at December 31, 2003 compared
to $37.8 million a year earlier while average demand deposits decreased slightly
in 2003 to $32.7 million from $33.8 million in 2002. Lower municipal account
balances contributed to these decreases.
Savings deposits rose to $106 million at December 31, 2003 from $90.4 million a
year earlier due primarily to higher money market account balances. Average
savings accounts rose 16.9% in 2003 for the same reason.
Time deposits rose to $57.9 million at December 31, 2003 from $53.7 million at
the end of 2002, while average time deposits were $54.2 million in 2003, 5.7%
less than in 2002.
Certain corporations and governmental agencies maintain noninterest-bearing
savings accounts with the Bank as compensation for services performed. At
December 31, 2003, such balances totalled $694,000.
SHORT-TERM BORROWINGS
There were no short-term borrowings at December 31, 2002 compared to $890,000 at
December 31, 2003, while average short-term borrowings of $1 million in 2003 was
unchanged from 2002. Most of these balances are comprised of U.S. Treasury, tax
and loan note option account balances which are subject to daily redemption and
can fluctuate significantly.
LONG-TERM DEBT
Long-term debt rose to $19.3 million at December 31, 2003 from $16.3 million a
year earlier, while the related average balance was $17.6 million in 2003
compared to $14.7 million in 2002. The increases were due to higher levels of
Federal Home Loan Bank advances, along with the trust preferred securities
issued in July, 2002 being outstanding for a full year.
RESULTS OF OPERATIONS - 2003 COMPARED WITH 2002
Net income rose to $1,721,000 in 2003 from to $1,720,000 in 2002 due primarily
to an increase in net interest income offset by higher operating expenses.
Included in both years' earnings were awards received from the U.S. Treasury's
Community Development Financial Institution ("CDFI") Fund. The awards were based
in part on the Bank's lending efforts in qualifying lower income communities.
Award income was $94,000 in 2003 compared to $343,000 in 2002. Additionally, the
Bank recorded award income related to deposits made in other CDFI's of $386,000
in 2003 and $384,000 in 2002, respectively. Finally, additional award income of
$3,000 was also recorded, representing an award received for opening a branch
office in a low-income area. In total, $483,000 of award income was recorded in
2003, while $727,000 was recorded in 2002. Excluding these awards, net income
would have totaled $1,409,000 and $1,247,000 in 2003 and 2002, respectively.
These awards are dependent on the availability of funds in the CDFI Fund as well
as the Bank meeting various qualifying standards. Accordingly, there is no
assumption that the Bank will continue to receive these awards in the future.
On a fully taxable equivalent ("FTE") basis, net interest income rose 6.6% to $9
million in 2003 from $8.5 million in 2002, while the related net interest margin
declined two basis points, from 4.27% to 4.25%. Higher levels of interest
earning assets was the primary reason for the increased net interest income,
while compression from the low interest rate environment contributed to the
lower margin.
Interest income on a FTE basis decreased $164,000, or 1.3% in 2003. Lower
interest rates on interest earning assets was the reason for this decrease.
Because of the decline in rates, the yield on interest earning assets fell 49
basis points, from 6.28% to 5.79%. Interest earning assets averaged $14 million,
or 7.1% higher in 2003, with the loan portfolio providing the increase.
Interest income from Federal funds sold decreased by 56.2%, reflecting
reinvestment into higher earning assets. The related yield decreased from 1.62%
to 1.10%.
Interest income on taxable investment securities declined $369,000 in 2003 due
to the lower interest rate environment. The taxable investment portfolio
averaged $72 million in 2003 compared to $68.7 million in 2002 with most of the
increase occurring in fixed-rate mortgage-backed agency securities. Tax-exempt
income was down slightly due to early redemptions and the low rates on
replacement securities, precluding reinvestment into similar securities.
Interest income on loans rose $417,000, or 5.7% due to higher loan volumes. The
commercial loan portfolio rose slightly, along with the related interest income,
while the related yield declined 17 basis points, from 6.14% to 5.97%, due to a
reduction in the prime lending rate. The real estate portfolio, comprised mainly
of commercial real estate loans, increased $16.5 million, or 20.2% in 2003,
while the related yield decreased to 6.77% in 2003 from 7.64% in 2002. Finally,
installment loans averaged slightly more in
13
2003 than in 2002, while the related yield declined 156 basis points.
Interest expense totalled $3.3 million in 2003, a decrease of 18.2% from 2002.
This decline resulted primarily from a decrease in deposits. The average rate
paid on deposits declined by 66 basis points, from 2.11% to 1.45%.
The largest growth in interest bearing liabilities occurred in savings accounts,
which averaged 16.9% higher in 2003 than during the previous year due to higher
municipal money market account balances. Interest expense on savings deposits
was 33.6% lower in 2003 due to the low interest rate environment. The average
rate paid decreased from 1.34% to .76%.
Interest expense on time deposits decreased $403,000 due to the reduction in
rates. The average rate paid was 54 basis points lower in 2003, averaging 2.81%
compared to 3.35% in 2002. Average volume was down 5.7%.
Average short-term borrowings, along with related Interest expense declined
slightly while the average rate paid decreased by 57 basis points, from 1.53% in
2002 to .96, because the rates on these liabilities are tied to the Federal
funds rate.
Interest expense on long-term debt rose due to an increase in Federal Home Loan
Bank advances while the related interest rate decreased 36 basis points due to
lower rates on variable-rate debt.
Service charges on deposit accounts was relatively unchanged from 2003 due to
sales promotions and competitive business.
Other operating income decreased $359,000, or 20.5% to $1,396,000 in 2003 from
$1,755,000 in 2002. The primary reasons for the decrease was a reduction in CDFI
award income from $341,000 to $3,000.
Net gains incurred on securities transactions totalled $12,000 in 2003 compared
to $42,000 in losses in 2002. The gains occurred primarily in CNBC's
fixed-income securities portfolio.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for loan losses, totalled $8.8 million in 2003, a 9.4%
increase compared to $8.1 million in 2002. Expenses attributable to the new
branches along with a credit card loss of $295,000 were the major contributors
to the higher expense levels.
Salary expense rose 8.1% due to normal recurring merit increases, the branch
openings and additional staff. Employee benefits expense rose 15.1% 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 rose 9.9% due primarily to the increased costs
from the new branches.
Other expenses increased $231,000, or 8.8% in 2003 due primarily to the
aforementioned credit card loss.
Income tax expense as a percentage of pre-tax income was 29.7% in 2003 compared
to 34.8% in 2002, due to higher levels of tax-exempt income on Bank-owned life
insurance.
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.
A significant part of the Bank's deposit growth is from municipal deposits.
These relationships arise due to the Bank's urban market, leading to municipal
support. The Bank expects to continue emphasizing these relationships.
The major contribution during 2003 from operating activities to the
Corporation's liquidity came from net income.
Net cash used in investing activities was primarily used for purchases of
investment securities available for sale, which totalled $37.6 million, while
sources of cash provided by investing activities were derived primarily from
proceeds from maturities, principal payments and early redemptions of investment
securities available for sale, amounting to $39.8 million.
The primary source of funds from financing activities resulted from an increase
in deposits.
CONTRACTUAL OBLIGATIONS
The Corporation has various financial obligations, including contractual
obligations that may require future cash payments. These obligations are
included in Notes 4,5,9,10 and 11 of the Notes to Consolidated Financial
Statements.
The Corporation also will have future obligations under supplemental executive
and directors' retirement plans described in Note 4 of the Notes to Consolidated
Financial Statements.
COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE SHEET ARRANGEMENTS
The following table shows the amounts and expected maturities of significant
commitments as of December 31, 2003. Further information on these commitments is
included in Note 20 of the Notes to Consolidated Financial Statements.
One to
One Year Three Three to
In thousands or Less Years Five Years Total
============ ======= ===== ========== =====
Commitments to
extend credit:
Commercial loans
and lines of credit $ 30,559 $ -- $ -- $ 30,559
Commercial
mortgages 15,275 1,061 -- 16,336
Credit cards -- -- 647 647
Residential
mortgages 100 -- -- 100
Financial
standby letters
of credit 40 -- -- 40
Operating lease
obligations 149 127 92 368
-------- -------- -------- --------
Commitments to extend credit do not necessarily represent future cash
requirements, as these commitments may expire without being drawn on based upon
CNB's historical experience.
EFFECTS OF INFLATION
Inflation, as measured by the CPI, rose 2.3% in 2003 compared to 1.6% in 2002
and 2.8% in 2001.
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
14
performance than inflation. While interest rates are affected by inflation, they
do not necessarily move in the same direction, or in the same magnitude as the
prices of other goods and services.
The impact of inflation on the future operations of the Corporation should not
be viewed without consideration of other financial and economic indicators, as
well as historical financial statements and the preceding discussion regarding
the Corporation's liquidity and asset and liability management.
INTEREST RATE SENSITIVITY
The management of interest rate risk is also important to the profitability of
the Corporation. Interest rate risk arises when an earning asset matures or when
its interest rate changes in a time period different from that of a supporting
interest bearing liability, or when an interest bearing liability matures or
when its interest rate changes in a time period different from that of an
earning asset that it supports. While the Corporation does not match specific
assets and liabilities, total earning assets and interest bearing liabilities
are grouped to determine the overall interest rate risk within a number of
specific time frames.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to
monitor and oversee the activities of interest rate sensitivity management and
the protection of net interest income from fluctuations in interest rates.
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
interest sensitive gap. At any given point in time, the Corporation may be in an
asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities or in a liability-sensitive position, whereby its
interest-sensitive liabilities exceed its interest-sensitive assets, depending
on management's judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which
details the repricing differences for assets and liabilities for given periods.
The primary limitation of this analysis is that it is a static (i.e., as of a
specific point in time) measurement which does not capture risk that varies
nonproportionally with changes in interest rates. Because of this limitation,
the Corporation uses a simulation model as its primary method of measuring
interest rate risk. This model, because of its dynamic nature, forecasts the
effects of different patterns of rate movements on the Corporation's mix of
interest sensitive assets and liabilities.
The following table presents the Corporation's sensitivity to changes in
interest rates, categorized by repricing period. Various assumptions are used to
estimate expected maturities. The actual maturities of these instruments could
vary substantially if future prepayments differ from estimated experience.
INTEREST SENSITIVITY GAP ANALYSIS
December 31, 2003
===================================================================================
Non-Interest
Sensitive and
Total Maturing In
90 Days 91 through 181 through Within More Than
In thousands Or Less 180 Days 365 Days One Year One Year Total
============ ======= ======== ======== ======== ======== =====
Interest earning assets:
Federal funds sold and securities
purchased under agreements
to resell $ 4,500 $ -- $ -- $ 4,500 $ -- $ 4,500
Interest-bearing deposits with
banks 1,116 2,500 -- 3,616 100 3,716
Investment securities:
Available for sale 1,499 4,052 3 5,554 41,742 47,296
Held to maturity 45 -- -- 45 29,852 29,897
Loans 15,954 6,015 10,785 32,754 99,017 131,771
--------- --------- --------- --------- --------- ---------
23,114 12,567 10,788 46,469 170,711 217,180
--------- --------- --------- --------- --------- ---------
Interest bearing liabilities:
Deposits:
Savings 105,977 -- -- 105,977 -- 105,977
Time 15,642 10,039 12,639 38,320 19,603 57,923
Short-term borrowings 890 -- -- 890 -- 890
Long-term debt 187 188 -- 375 18,943 19,318
Non-interest bearing liabilities -- -- -- -- 33,072 33,072
--------- --------- --------- --------- --------- ---------
122,690 10,227 12,639 145,562 71,618 217,180
--------- --------- --------- --------- --------- ---------
Asset (liability) sensitivity
gap:
Period gap $ (99,582) $ 2,340 $ (1,851) $ (99,093) $ 99,093 $ --
Cumulative gap (99,582) (97,242) (99,093) -- -- --
========= ========= ========= ========= ========= =========
The Corporation was highly liability-sensitive at the 90-day interval with a
$99.6 million negative gap due to the inclusion of all categories of savings
accounts as rate-sensitive. Certain categories of savings accounts are less
rate-sensitive than others. 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 100 and 200
basis points of $357,000 and $884,000, respectively and an increase in net
interest income when rates rise by 100 and 200 basis points of $117,000 and
$175,000, respectively.
CAPITAL
The following table presents the consolidated and bank-only capital components
and related ratios as calculated under regulatory accounting practice.
15
Consolidated Bank Only
------------------------- -------------------------
December 31, December 31,
Dollars in thousands 2003 2002 2003 2002
- -------------------- --------- --------- --------- ---------
Total stockholders' equity $ 14,311 $ 13,251 $ 18,829 $ 17,722
Net unrealized loss (gain)
on investment securities
available for sale 32 (320) 35 (339)
Net unrealized loss on
equity securities available
for sale -- (27) (8) (2)
Disallowed intangibles (730) (850) (730) (850)
Qualifying trust preferred
securities 3,000 3,000 -- --
--------- --------- --------- ---------
Tier 1 capital $ 16,613 15,054 18,126 16,531
--------- --------- --------- ---------
Qualifying long-term debt 780 1,094 -- 154
Allowance for loan
losses 1,837 1,582 1,831 1,575
Other 2 -- -- --
--------- --------- --------- ---------
Tier 2 capital 2,619 2,676 1,831 1,729
--------- --------- --------- ---------
Total capital $ 19,232 $ 17,730 $ 19,957 $ 18,260
========= ========= ========= =========
Risk-adjusted assets $ 146,589 $ 126,044 $ 146,150 $ 125,488
Average total assets 234,485 215,106 233,907 214,304
--------- --------- --------- ---------
Risk-based capital ratios:
Tier 1 capital to risk-
adjusted assets 11.36% 11.94% 12.40% 13.17%
Regulatory minimum 4.00 4.00 4.00 4.00
Total capital to risk-
adjusted assets 13.12 14.07 13.66 14.55
Regulatory minimum 8.00 8.00 8.00 8.00
Leverage ratio 7.08 7.00 7.75 7.73
Total stockholders' equity
to total assets 6.05 6.16 7.98 8.27
========= ========= ========= =========
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 Trust, 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.
The subsidiary trust is not included with the consolidated financial statements
of the Corporation because of the deconsolidation required by Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities".
RESULTS OF OPERATIONS - 2002 COMPARED WITH 2001
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.
On a fully taxable equivalent ("FTE") basis, net interest income rose 8.3% to
$8.5 million in 2002 from $7.8 million 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 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 1.62%.
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 $511,000, or 6.5% 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 82
basis points, from 6.96% to 6.14% 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 89 basis points, from
3.33% to 2.44%.
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 198 basis points, from 3.51% in 2001 to 1.53%, because
the rates on these liabilities are tied to the Federal funds rate.
16
Interest expense on long-term debt rose 17.9% due to the issuance of $3 million
of subordinated debentures in July, 2002. As a result, the average rate paid on
long-term debt 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.
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 including the risk factors inherent in the Bank's low and moderate
income market area, in order to maintain the allowance for loan losses at
adequate levels to provide for estimated losses.
Management believes that the primary risks inherent in the loan portfolio are
possible increases in interest rates, a deterioration in the economy, and a
decline in real estate market values in the Bank's market area. Any one or a
combination of these events may adversely affect the Bank's loan portfolio,
resulting in increased delinquencies, loan losses and future high levels of
provisions. Accordingly, the Bank has provided for loan losses at the current
level to address the current risks in our loan portfolio. Management considers
it important to maintain the ratio of the allowance for loan losses to total
loans at an acceptable level given current economic conditions, interest rates
and the composition of the portfolio.
Although management believes that the allowance for loan losses has been
maintained at adequate levels, additions may be necessary if future economic and
other conditions differ substantially from the current operating environment.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate that is subject to significant
judgment and short-term change.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information regarding this Item appears under Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" - Interest Rate
Sensitivity.
17
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET December 31,
-------------------------
Dollars in thousands, except per share data 2003 2002
--------- ---------
ASSETS
Cash and due from banks (Note 2) $ 7,364 $ 5,996
Federal funds sold (Note 3) 4,500 6,200
Interest-bearing deposits with banks 3,716 3,528
Investment securities available for sale (Note 4) 47,296 50,382
Investment securities held to maturity (Market value of $30,732
at December 31, 2003 and $30,691 at December 31, 2002) (Note 5) 29,897 29,559
Loans held for sale 552 --
Loans (Note 6) 131,771 109,195
Less: Allowance for loan losses (Note 7) 2,200 2,100
--------- ---------
Net loans 129,571 107,095
--------- ---------
Premises and equipment (Note 8) 4,008 4,167
Accrued interest receivable 1,165 1,256
Other real estate owned 290 352
Bank-owned life insurance (Note 14) 3,731 2,584
Other assets (Note 13) 4,295 4,080
--------- ---------
TOTAL ASSETS $ 236,385 $ 215,199
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits: (Notes 4, 5, and 9)
Demand $ 34,471 $ 37,808
Savings 105,977 90,394
Time 57,923 53,692
--------- ---------
Total deposits 198,371 181,894
Accrued expenses and other liabilities 3,495 3,782
Short-term borrowings (Note 10) 890 --
Long-term debt (Note 11) 19,318 16,272
--------- ---------
Total liabilities 222,074 201,948
Commitments and contingencies (Note 20)
Stockholders' equity (Notes 15, 16 and 23):
Preferred stock, no par value: Authorized 100,000 shares (Note 15);
Series A, issued and outstanding 8 shares in 2003 and 2002 200 200
Series C, issued and outstanding 108 shares in 2003 and 2002 27 27
Series D, issued and outstanding 3,280 shares in 2003 and 2002 820 820
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2003 and 125,980 shares issued in 2002,
131,469 shares outstanding in 2003 and 124,611 shares outstanding in 2002 1,345 1,260
Surplus 1,068 999
Retained earnings 11,003 9,660
Accumulated other comprehensive gain (loss) (32) 320
Treasury stock, at cost - 3,061 shares and 1,369 shares in 2003 and 2002, respectively (120) (35)
--------- ---------
Total stockholders' equity 14,311 13,251
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 236,385 $ 215,199
========= =========
See accompanying notes to consolidated financial statements.
18
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
----------------------------------------
Dollars in thousands, except per share data 2003 2002 2001
--------- --------- ---------
INTEREST INCOME
Interest and fees on loans $ 7,765 $ 7,348 $ 7,859
Interest on Federal funds sold and securities
purchased under agreements to resell 128 292 746
Interest on deposits with banks 510 510 185
Interest and dividends on investment securities:
Taxable 3,267 3,636 3,705
Tax-exempt 414 435 392
--------- --------- ---------
Total interest income 12,084 12,221 12,887
--------- --------- ---------
INTEREST EXPENSE
Interest on deposits (Note 9) 2,343 3,160 4,535
Interest on short-term borrowings 10 16 39
Interest on long-term debt 913 818 694
--------- --------- ---------
Total interest expense 3,266 3,994 5,268
--------- --------- ---------
Net interest income 8,818 8,227 7,619
Provision for loan losses (Note 7) 129 356 356
--------- --------- ---------
Net interest income after provision for loan losses 8,689 7,871 7,263
--------- --------- ---------
OTHER OPERATING INCOME
Service charges on deposit accounts 1,197 1,143 937
Other income (Note 12) 1,396 1,755 1,651
Net gains (losses) on sales of investment securities (Note 4) 12 (42) 1
--------- --------- ---------
Total other operating income 2,605 2,856 2,589
--------- --------- ---------
OTHER OPERATING EXPENSES
Salaries and other employee benefits (Note 15) 4,844 4,421 3,831
Occupancy expense (Note 8) 717 603 635
Equipment expense (Note 8) 434 444 482
Other expenses (Note 12) 2,852 2,621 2,879
--------- --------- ---------
Total other operating expenses 8,847 8,089 7,827
--------- --------- ---------
Income before income tax expense 2,447 2,638 2,025
Income tax expense (Note 13) 726 918 719
--------- --------- ---------
NET INCOME $ 1,721 $ 1,720 $ 1,306
========= ========= =========
NET INCOME PER COMMON SHARE (NOTE 17)
Basic $ 12.94 $ 13.35 $ 10.05
Diluted 12.55 12.54 9.33
========= ========= =========
Basic average common shares outstanding 127,854 123,852 123,241
Diluted average common shares outstanding 132,129 132,402 133,766
========= ========= =========
See accompanying notes to consolidated financial statements.
19
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
Accumulated
Other
Common Preferred Retained Comprehensive Treasury
Dollars in thousands Stock Surplus Stock Earnings (Loss) Income Stock Total
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 $ 1,220 $ 968 $ 1,047 $ 7,292 $ (273) $ (19) $ 10,235
Comprehensive income:
Net income -- -- -- 1,306 -- -- 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 40 31 -- -- -- -- 71
Purchase of treasury stock -- -- -- -- -- (5) (5)
Dividends paid on common stock -- -- -- (243) -- -- (243)
Dividends paid on preferred stock -- -- -- (67) -- -- (67)
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 1,260 999 1,047 8,288 (136) (24) 11,434
Comprehensive income:
Net income -- -- -- 1,720 -- -- 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) -- -- (281)
Dividends paid on preferred stock -- -- -- (67) -- -- (67)
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 1,260 999 1,047 9,660 320 (35) 13,251
Comprehensive income:
Net income -- -- -- 1,721 -- -- 1,721
Unrealized holding losses on securities
arising during the period
(net of tax of $(222)) -- -- -- -- (352) -- (352)
--------
Total comprehensive income 1,369
Proceeds from issuance of common stock 85 69 -- -- -- -- 154
Purchase of treasury stock -- -- -- -- -- (85) (85)
Dividends paid on common stock -- -- -- (311) -- -- (311)
Dividends paid on preferred stock -- -- -- (67) -- -- (67)
-------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2003 $ 1,345 $ 1,068 $ 1,047 $ 11,003 $ (32) $ (120) $ 14,311
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
20
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31,
----------------------------------
IN THOUSANDS 2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 1,721 $ 1,720 $ 1,306
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 422 401 433
Provision for loan losses 129 356 356
Premium amortization on investment securities 217 63 60
Net (gains) losses on sales and early redemption of investment securities (12) 42 (1)
Net gains on sales of loans held for sale (20) (8) --
Loans originated for sale (2,966) (724) (90)
Proceeds from sales of loans held for sale 2,434 734 238
Decrease in accrued interest receivable 91 33 121
Deferred income tax benefit (42) (183) (850)
(Increase) in bank-owned life insurance (1,147) (385) (230)
Decrease (increase) in other assets 1,049 (1,354) (365)
(Decrease) increase in accrued expenses and other liabilities (287) 251 1,964
-------- -------- --------
Net cash provided by operating activities 1,589 946 2,942
-------- -------- --------
INVESTING ACTIVITIES
Purchase of bank-owned life insurance (1,000) -- --
Increase in loans (22,605) (10,211) (8,393)
(Increase) decrease in interest-bearing deposits with banks (188) 102 (3,477)
Proceeds from maturities of investment securities available for sale,
including principal payments and early redemptions 39,829 36,595 9,405
Proceeds from maturities of investment securities held to maturity,
including principal payments and early redemptions 20,166 13,694 22,220
Purchases of investment securities available for sale (37,545) (44,241) (17,268)
Purchases of investment securities held to maturity (20,481) (14,068) (19,546)
Purchases of premises and equipment (263) (392) (1,138)
Decrease in other real estate owned, net 62 224 295
-------- -------- --------
Net cash used in investing activities (22,025) (18,297) (17,902)
-------- -------- --------
FINANCING ACTIVITIES
Purchase of deposits -- -- 16,369
Increase (decrease) in deposits 16,477 (12,235) 1,591
Increase (decrease) in short-term borrowings 890 -- (46)
Increase in long-term debt 3,200 3,068 779
Proceeds from issuance of common stock -- -- 71
Purchases of treasury stock (85) (11) (5)
Dividends paid on preferred stock (67) (67) (67)
Dividends paid on common stock (311) (281) (243)
-------- -------- --------
Net cash provided by (used in) by financing activities 20,104 (9,526) 18,449
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (332) (26,877) 3,489
Cash and cash equivalents at beginning of year 12,196 39,073 35,584
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,864 $ 12,196 $ 39,073
======== ======== ========
CASH PAID DURING THE YEAR
Interest $ 3,333 $ 4,281 $ 5,115
Income taxes 472 2,072 735
SUPPLEMENTAL SCHEDULE FOR NONCASH INVESTING ACTIVITIES
Real estate acquired in settlement of loans -- 250 --
Conversion of long-term debt into common stock 154 -- 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.
21
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. 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.
22
CORE DEPOSIT PREMIUMS
The premium paid for the acquisition of deposits in connection with the
purchases of branch offices is amortized on a straight-line basis over a
nine-year period.
INCOME TAXES
Federal income taxes are based on currently reported income and expense after
the elimination of income which is exempt from Federal income tax.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Such temporary
differences include depreciation and the provision for possible loan losses.
NET INCOME PER COMMON SHARE
Basic income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. On a diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of the convertible subordinate
debentures.
COMPREHENSIVE INCOME
SFAS No. 130 "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. The required disclosures are included in the Statement of
Changes in Stockholders' Equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirement of
Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45
addresses disclosures to be made by a guarantor in its financial statements
about its obligations under guarantees. The interpretation also requires the
recognition, at estimated fair value, of a liability by the guarantor at the
inception of certain guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 were effective for financial statements of
interim or annual periods ending after December 15, 2002. The recognition and
measurement provisions are applicable prospectively to guarantees issued or
modified after December 31, 2002. The adoption of this interpretation did not
have a material impact on the Corporation's consolidated financial statements.
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities
("FIN")" was issued in January 2003 and was reissued as FASB Interpretation No.
46 (revised December 2003) ("FIN 46R"). For public entities, FIN 46 and FIN 46R
are applicable to all special-purpose entities ("SPEs") in which the entity
holds a variable interest no later than the end of the first reporting period
ending after December 15, 2003. FIN 46 and FIN 46R may be applied prospectively
with a cumulative-effect adjustment as of the date on which it is first applied
or by restating previously issued financial statements for one or more years
with a cumulative-effect adjustment as of the beginning of the first year
restated. FIN 46 and FIN 46R provide guidance on the identification of entities
controlled through means other than voting rights. FIN 46 and FIN 46R specifies
how a business enterprise should evaluate its interest in a variable interest
entity to determine whether to consolidate that entity. A variable interest
entity must be consolidated by its primary beneficiary if the entity does not
effectively disperse risks among the parties involved.
The Corporation adopted FIN 46R as of December 31, 2003 and elected to
retroactively restate all periods presented. FIN 46R required the Corporation to
deconsolidate its investment in the subsidiary trust formed in connection with
the issuance of trust preferred securities in July, 2002. In July 2003, the
Board of Governors of the Federal Reserve System instructed bank holding
companies to continue to include the trust preferred securities in their Tier 1
capital for regulatory capital purposes until notice is given to the contrary.
There can be no assurance that the Federal Reserve will continue to allow
institutions to include trust preferred securities in Tier 1 capital for
regulatory capital purposes. As of December 31, 2003, assuming the Corporation
was not allowed to include the $3.0 million in trust preferred securities issued
by the subsidiary trust in Tier 1 capital, the Corporation would remain "well
capitalized."
The deconsolidation of the subsidiary trusts results in the Corporation
reporting on its balance sheet the subordinated debentures that have been issued
from City National Bancshares to the subsidiary trust. The adoption of FIN 46
did not have a significant effect on the Corporation's consolidated financial
statements.
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," was issued on April 30, 2003.
The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. This Statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of this
Statement did not have a significant effect on the Corporation's consolidated
financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 and 2001 consolidated
financial statements in order to conform with the 2003 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 $1,860,000 in
2003 and $2,130,000 in 2002.
NOTE 3 FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Federal funds sold averaged $11.7 million during 2003 and $18 million in 2002,
while the maximum balance outstanding at any month-end during 2003, 2002 and
2001 was $28.4 million, $37 million and $53.8 million, respectively. There were
no securities purchased under repurchase agreements in either 2003 or 2002.
There were no such transactions outstanding at any month-end during 2003, 2002
or 2001.
NOTE 4 INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and market values at December 31 of investment securities
available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
2003 In thousands Cost Gains Losses Value
--------- ---------- ---------- ------
U.S. Treasury securities
and obligations of U.S.
government agencies $10,205 $ 42 $ 133 $10,114
Obligations of state and
political subdivisions 1,879 127 -- 2,006
Other securities:
Mortgage-backed
securities 29,215 296 338 29,173
Other debt securities 4,168 59 104 4,123
Equity securities:
Marketable securities 897 17 14 900
Federal Reserve Bank
and Federal Home
Loan Bank stock 980 -- -- 980
------- ------- ------- -------
Total $47,344 $ 541 $ 589 $47,296
======= ======= ======= =======
23
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
======= ======= ======= =======
The amortized cost and the market values of investments in debt securities
available for sale as of December 31, 2003 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 and obligations
of U.S. government agencies $ 4,166 $ 4,124
Mortgage-backed securities 65 66
Obligations of state and political subdivisions 612 611
Other debt securities 750 753
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies 500 487
Mortgage-backed securities 183 187
Due after five years but within ten years:
Mortgage-backed securities 1,077 1,138
Obligations of state and political subdivisions 697 765
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 5,539 5,438
Mortgage-backed securities 27,890 27,847
Obligations of state and political subdivisions 570 630
Other debt securities 3,418 3,370
------- -------
Total debt securities 45,467 45,416
Equity securities 1,877 1,880
------- -------
Total $47,344 $47,296
======= =======
Sales of investment securities available for sale resulted in gross gains of
$24,000, $5,000 and $15,000 and gross losses of $21,000, $55,000 and $18,000 in
2003, 2002 and 2001 respectively.
Interest and dividends on investment securities available for sale was as
follows:
In thousands 2003 2002 2001
------ ------ ------
Taxable $1,936 $2,187 $2,058
Tax-exempt 92 124 112
------ ------ ------
Total $2,028 $2,311 $2,170
====== ====== ======
Investment securities available for sale with a carrying value of $35,372,000
were pledged to secure U.S. government and municipal deposits at December 31,
2003.
Investment securities available for sale which have had continuous unrealized
losses are set forth below:
Less than 12 Months 12 Months or More Total
------------------------ ----------------------- -----------------------
Gross Gross Gross
Market Unrealized Market Unrealized Market Unrealized
2003 In thousands Value Losses Value Losses Value Losses
------- ------- ------- ------- ------- -------
U.S. Treasury securities and obligations
of U.S. government agencies $ 4,197 $ 121 $ 2,288 $ 12 $ 6,485 $ 133
Other securities:
Mortgaged-backed securities 14,125 338 -- -- 14,125 338
Other debt securities -- -- 1,796 104 1,796 104
Equity securities -- -- 900 14 900 14
------- ------- ------- ------- ------- -------
Total $18,322 $ 459 $ 4,984 $ 130 $23,306 $ 589
======= ======= ======= ======= ======= =======
The gross unrealized losses set forth above are attributable primarily to
investments purchased during 2003, prior to the fourth quarter, when interest
rates increased. Accordingly, these securities were purchased in a lower
interest rate environment. The U.S. Treasury securities and obligations of U.S.
government agencies that have been in a loss position for at least a year
represent primarily floating-rate pools of SBA guaranteed loans, the market
value of which has been negatively impacted by the low interest rate
environment. The other debt securities represent two floating-rate corporate
trust preferred securities similarly effected, as well as by their long
maturities, both of which exceed twenty years.
The Corporation has the intent and ability to hold these securities for the time
necessary to recover the amortized cost.
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
2003 In thousands Value Gains Losses Value
------- ---------- ---------- -------
U.S. Treasury securities
and obligations of U.S.
government agencies $11,367 $ 44 $ 132 $11,279
Obligations of state and
political subdivisions 6,379 417 10 6,786
Other securities:
Mortgage-backed
securities 10,133 211 51 10,293
Other debt securities 2,018 356 -- 2,374
------- ------- ------- -------
Total $29,897 $ 1,028 $ 193 $30,732
======= ======= ======= =======
24
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:
Mortgage-backed
securities 7,759 320 -- 8,079
Other debt securities 2,021 308 -- 2,329
------- ------- --------- -------
Total $29,559 $ 1,132 $ -- $30,691
======= ======= ========= =======
During 2003, $15.6 million of Agency callable securities were redeemed by the
issuers prior to maturity, resulting in gross gains of $9,000, while in 2002
$5.5 million of such securities were redeemed, resulting in gross gains of
$8,000 and $18.9 million were redeemed in 2001 resulting in gross gains of
$4,000.
The book value and the market value of investment securities held to maturity as
of December 31, 2003 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 $ 45 $ 45
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies 28 29
Due after five years but within ten years:
Obligations of state and political subdivisions 2,470 2,667
Other debt securities 2,018 2,374
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 11,339 11,250
Obligations of state and political subdivisions 3,909 4,119
Mortgage-backed securities 10,088 10,248
------- -------
Total $29,897 $30,732
======= =======
Interest and dividends on investment securities held to maturity was as follows:
In thousands 2003 2002 2001
------ ------ ------
Taxable $1,331 $1,449 $1,647
Tax-exempt 322 311 280
------ ------ ------
Total $1,653 $1,760 $1,927
====== ====== ======
Investment securities held to maturity with a carrying value of $16,349,000 were
pledged to U.S. government and municipal deposit funds at December 31, 2003.
Investment securities held to maturity which have had continuous unrealized
losses are set forth below:
Less than 12 Months 12 Months or More Total
-------------------- ------------------ --------------------
Gross Gross Gross
Market Unrealized Market Unrealized Market Unrealized
2003 In thousands Value Losses Value Losses Value Losses
------ ------- ------ ------- ------ ------
U.S. Treasury securities and obligations
of U.S. government agencies $3,867 $ 132 $ -- $ -- $3,867 $ 132
Obligations of state and political subdivisions 186 10 -- -- 186 10
Other securities:
Mortgaged-backed securities 3,316 51 -- -- 3,316 51
Other debt securities -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total $7,369 $ 193 $ -- $ -- $7,369 $ 193
====== ====== ====== ====== ====== ======
The gross unrealized losses set forth above are attributable primarily to
investments purchased during 2003, prior to the fourth quarter, when interest
rates increased. Accordingly, these securities were purchased in a lower
interest rate environment.
The Corporation has the intent and ability to hold these securities for the time
necessary to recover the amortized cost.
NOTE 6 LOANS
Loans, net of unearned discount and net deferred origination fees and costs at
December 31 were as follows:
In thousands 2003 2002
-------- --------
Commercial $ 20,052 $ 15,510
Real estate 110,802 92,323
Installment 1,035 1,492
-------- --------
Total loans 131,889 109,325
Less: Unearned income 118 130
-------- --------
Loans $131,771 $109,195
======== ========
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 2003 2002
------ ------
Nonaccrual loans $1,006 $ 765
Loans with interest or principal 90
days or more past due and still accruing 230 275
------ ------
Total nonperforming loans $1,236 $1,040
====== ======
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 2003 2002 2001
---- ---- ----
Interest income foregone $(54) $(39) $(38)
Interest income received 45 95 62
---- ---- ----
$ (9) $ 56 $ 24
==== ==== ====
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, 2003, 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, 2003, or at December 31, 2002.
NOTE 7 ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
25
In thousands 2003 2002 2001
------ ------ ------
Balance, January 1 $2,100 $1,700 $1,200
Provision for loan losses 129 356 356
Recoveries of loans previously
charged off 178 103 299
------ ------ ------
2,407 2,159 1,855
Less: Charge-offs 207 59 155
------ ------ ------
Balance, December 31 $2,200 $2,100 $1,700
====== ====== ======
NOTE 8 PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
In thousands 2003 2002
------ ------
Land $ 476 $ 476
Premises 1,892 1,892
Furniture and equipment 3,240 3,011
Leasehold improvements 2,631 2,602
------ ------
Total cost 8,239 7,981
Less: Accumulated depreciation and amortization 4,231 3,814
------ ------
Total premises and equipment $4,008 $4,167
====== ======
Depreciation and amortization expense charged to operations amounted to
$422,000, $401,000, and $434,000 in 2003, 2002, and 2001, respectively.
NOTE 9 DEPOSITS
Deposits at December 31 are presented below.
In thousands 2003 2002
-------- --------
Noninterest bearing:
Demand $ 34,471 $ 37,808
Savings 694 694
-------- --------
Total noninterest bearing deposits 35,165 38,502
-------- --------
Interest bearing:
Savings 105,283 89,700
Time 57,923 53,692
-------- --------
Total interest bearing deposits 163,206 143,392
-------- --------
Total deposits $198,371 $181,894
======== ========
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 2003 2002
------- -------
Three months or less $ 9,476 $ 5,704
Over three months but within six months 3,306 6,002
Over six months but within twelve months 8,353 4,333
Over twelve months 4,239 6,524
------- -------
Total deposits $25,374 $22,563
======= =======
Interest expense on certificates of deposits of $100,000 or more was $438,000,
$759,000 and $2,468,000 in 2003, 2002 and 2001, 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
------- ------- -------- -------- -------
2003
Federal funds purchased and securities
sold under repurchase agreements $ 890 .30% $ 353 1.06% $ 4,060
Demand note issued to the U.S. Treasury -- -- 688 .87% 4,303
------- ------- ------- ------- -------
Total $ 890 .30% $ 1,041 .96% $ 8,363
======= ======= ======= ======= =======
2002
Federal funds purchased and securities
sold under repurchase agreements $ -- --% $ -- 1.06% $ --
Demand note issued to the U.S. Treasury -- -- 1,047 1.47% 2,183
------- ------- ------- ------- -------
Total $ -- --% $ 1,047 1.47% $ 2,183
======= ======= ======= ======= =======
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 was no balance outstanding
under the note at December 31, 2003.
NOTE 11 LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
In thousands 2003 2002
------- -------
FHLB convertible advances due from
April 7, 2008 through October 4, 2010 $13,200 $ 9,700
5.25% capital note, due December 28, 2005 825 1,125
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
7.00% note, due January 1, 2014 1,000 1,000
8.00% capital note, due May 6, 2017 200 200
Subordinated debt 3,093 3,093
------- -------
Total $19,318 $16,272
======= =======
Interest is payable quarterly on most of the FHLB advances. The advances bear
fixed interest rates ranging from 1.95% to 6.15% 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.
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:
26
In thousands Amount
- ------------ ------
2004 $ 375
2005 450
2006 125
2007 1,625
2008 8,125
Thereafter 8,618
=======
Total $19,318
=======
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, 2003 was 4.77%.
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.
Information with respect to the accounting treatment of trust preferred
securities is set forth in Note 1.
NOTE 12 OTHER OPERATING INCOME AND EXPENSES
The following table presents the major items of other operating income and
expenses:
In thousands 2003 2002 2001
- ------------ ---- ---- ----
OTHER OPERATING INCOME
Agency fees on commercial loans $326 $305 $192
Undistributed income from
unconsolidated subsidiary 300 276 87
Income from foreign ATM's 235 229 193
Earnings on cash surrender value of
life insurance 187 119 117
Award income 3 343 774
OTHER OPERATING EXPENSES
Data processing 292 260 215
Credit card loss 295 -- --
Professional fees 259 246 373
Marketing expense 270 370 408
Stationery and supplies expense 140 159 161
During 2001, the Bank received $1.9 million from the U.S. Department of the
Treasury Community Development Financial Institutions Fund ("CDFI"), 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. No award
was received in 2002.
In November 2003, the Bank received an award of $513,000 from the CDFI fund, of
which $450,000 was attributable to the Bank's lending efforts and $18,000 was
attributable to purchasing long-term deposits from banks in low-income areas. An
additional $45,000 was received for opening a branch in a low-income community.
The loan and deposit awards are being recorded as interest income, representing
yield enhancement on the lives of the loans and deposits through 2006.
During 2003, 2002 and 2001, $386,000, $385,000 and $97,000 respectively, was
recorded as interest income on deposits with banks as a yield enhancement. An
additional $94,000 was recorded as interest income on loans as a yield
enhancement during 2003.
NOTE 13 INCOME TAXES
The components of income tax expense are as follows:
In thousands 2003 2002 2001
- -------------------------------- ------- ------- -------
CURRENT EXPENSE
Federal $ 574 $ 862 $ 1,324
State 194 239 245
------- ------- -------
Total current income tax expense 768 1,101 1,569
------- ------- -------
DEFERRED (BENEFIT) EXPENSE
Federal (36) (158) (728)
State (6) (25) (122)
------- ------- -------
Total deferred income tax (benefit)
expense (42) (183) (850)
------- ------- -------
Total income tax expense $ 726 $ 918 $ 719
======= ======= =======
Not included in the above table is deferred income tax expense (benefit) of
$(222,000), $179,000 and $(46,000) for 2003, 2002 and 2001, 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 2003 2002 2001
- --------------- ----- ----- -----
Federal income tax at statutory rate $ 832 $ 897 $ 689
Increase (decrease) in income tax
expense resulting from:
State income tax expense, net of
federal benefit 124 141 81
Tax-exempt income (171) (159) (119)
Life insurance (59) (28) (27)
Change in valuation allowance -- 17 (17)
Other, net -- 50 112
----- ----- -----
Total income tax expense $ 726 $ 918 $ 719
===== ===== =====
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
27
In thousands 2003 2002
- ------------------------------- ------- -------
DEFERRED TAX ASSETS
Unrealized losses (gains) on
investment securities available for sale $ 16 $ (206)
Investment securities 19 25
Allowance for possible loan losses 377 337
Premises and equipment 94 75
Deposit intangible 69 48
Deferred compensation 391 301
Other real estate owned 174 174
Accrued expenses 86 109
Deferred income 343 382
Other assets 99 155
Other (4) --
------- -------
Total deferred tax asset 1,664 1,400
Less: Valuation allowance 18 18
------- -------
Deferred tax asset 1,646 1,382
------- -------
DEFERRED TAX LIABILITIES -- --
------- -------
Net deferred tax asset $ 1,646 $ 1,382
======= =======
The net deferred asset represents the anticipated federal and state tax assets
to be realized in future years upon the utilization of the underlying tax
attributes comprising this balance. Management believes, based upon estimates of
future taxable earnings, that more likely than not there will be sufficient
taxable income in future years to realize the deferred tax assets, net of
deferred valuation allowance, although there can be no assurance about the level
of future earnings.
NOTE 14 BENEFIT PLANS
Savings plan
The Bank maintains an employee savings plan under section 401(k) of the Internal
Revenue Code covering all employees with at least six months of service.
Participants are allowed to make contributions to the plan by salary reduction,
up to 15% of total compensation. The Bank provides matching contributions of 50%
of the first 6% of participant salaries subject to a vesting schedule.
Contribution expense amounted to $66,000 in 2003, $64,000 in 2002 and $60,000 in
2001.
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 2003, 2002 and 2001 amounted to $170,000, $219,000, and $270,000,
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 $147,000 in 2003, $130,000 in 2002 and
$74,000 in 2001. The Bank also has a director retirement plan ("DRIP"). DRIP
expense was $52,000 in 2003, $59,000 in 2002 and $11,000 in 2001.
Benefits under both plans are funded through bank-owned life insurance policies.
During 2003, the Bank purchased $1 million in bank-owned life insurance to help
offset the cost of executive benefits. 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 $187,000 in 2003, $119,000 in 2002 and $117,000
in 2001, while the related life insurance expense was $40,000 in 2003, $39,000
in 2002 and $38,000 in 2001.
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. The options vested equally over three years.
There were no stock options outstanding at December 31, 2003 and 2002.
NOTE 15 PREFERRED STOCK
The Corporation is authorized to issue noncumulative perpetual preferred stock
in one or more series, with no par value. Shares of preferred stock have
preference over the Corporation's common stock with respect to the payment of
dividends. Different series of preferred stock may have different stated or
liquidation values as well as different rates. Dividends are paid annually.
Set forth below is a summary of the Corporation's preferred stock issued and
outstanding.
December 31,
--------------------------
Date Dividend Stated Number
Issued Rate Value of Shares 2003 2002
------ -------- ---------- --------- ---------- ----------
Series A 12/96 6.00% $ 25,000 8 $ 200,000 $ 200,000
Series C 2/96 8.00 250 108 27,000 27,000
Series D 6/97 6.50 250 3,280 820,000 820,000
---------- ----------
$1,047,000 $1,047,000
========== ==========
NOTE 16 RESTRICTIONS ON SUBSIDIARY BANK DIVIDENDS
Subject to applicable law, the Board of Directors of the Bank and of the
Corporation may provide for the payment of dividends when it is determined that
dividend payments are appropriate, taking into account factors including net
income, capital requirements, financial condition, alternative investment
options, tax implications, prevailing economic conditions, industry practices,
and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory
limitation on the amount of dividends it may pay to its parent corporation,
CNBC. Prior approval of the Office of the Comptroller of the Currency ("OCC") is
required if the total dividends declared by the Bank in any calendar year
exceeds net profit, as defined, for that year combined with the retained net
profits from the preceding two calendar years.
Under this limitation, $3,583,000 was available for the payment of dividends to
the parent corporation at December 31, 2003, subject to the restrictive
covenants under long-term debt agreements included in Note 11.
NOTE 17 NET INCOME PER COMMON SHARE
The following table presents the computation of net income per common share.
In thousands, except per share data 2003 2002 2001
- ------------------------------------ --------- --------- ---------
Net income $ 1,721 $ 1,720 $ 1,306
Dividends paid on preferred stock (67) (67) (67)
--------- --------- ---------
Net income applicable to basic
common shares 1,654 1,653 1,239
Interest expense on convertible
subordinated debentures, net of
income taxes 4 8 9
--------- --------- ---------
Net income applicable to diluted
common shares $ 1,658 $ 1,661 $ 1,248
========= ========= =========
NUMBER OF AVERAGE COMMON SHARES
Basic 127,854 123,852 123,241
--------- --------- ---------
Diluted:
Average common shares outstanding 127,854 123,852 123,241
Average common shares converted from
convertible subordinate debentures 4,275 8,550 10,525
--------- --------- ---------
132,129 132,402 133,766
========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 12.94 $ 13.35 $ 10.05
Diluted 12.55 12.54 9.33
NOTE 18 RELATED PARTY TRANSACTIONS
Certain directors, including organizations in which they are officers or have
significant ownership, were customers of, and had other
28
transactions with the Bank in the ordinary course of business during 2003 and
2002. 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
$686,000 and $775,000 at December 31, 2003 and 2002, respectively. The highest
amount of such indebtedness during 2003 was $975,000 and in 2002 amounted to
$782,000. During 2003, new loans totalled $276,000 and paydowns totalled
$365,000. All related party loans were performing as of December 31, 2003.
NOTE 19 FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair value estimates are made at a specific
point in time based on the type of financial instrument and relevant market
information.
Because no quoted market price exists for a significant portion of the
Corporation's financial instruments, the fair values of such financial
instruments are derived based on the amount and timing of future cash flows,
estimated discount rates, as well as management's best judgment with respect to
current economic conditions. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values
of those financial instruments and should not be interpreted as an estimate of
the fair market value of the Corporation taken as a whole. The disclosures do
not address the value of recognized and unrecognized nonfinancial assets and
liabilities or the value of future anticipated business. In addition, tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates.
The following methods and assumptions were used to estimate the fair values of
significant financial instruments at December 31, 2003 and 2002.
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, 2003 and 2002. 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, 2003 and 2002.
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
2003 2002
Carrying Fair Carrying Fair
In thousands Value Value Value Value
-------- -------- -------- --------
FINANCIAL ASSETS
Cash and other short-term
Investments $ 11,864 $ 11,864 $ 12,196 $ 12,196
Interest-bearing deposits
with banks 3,716 3,716 3,528 3,528
Investment securities AFS 47,296 47,296 50,382 50,382
Investment securities HTM 29,897 30,732 29,559 30,691
Loans 129,571 143,499 107,095 134,126
Loans held for sale 552 552 -- --
FINANCIAL LIABILITIES
Deposits $198,371 $200,089 $181,894 $184,013
Short-term borrowings 890 890 -- --
Long-term debt 19,318 20,716 16,272 18,456
NOTE 20 COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements will not be materially affected by the outcome of any pending legal
proceedings.
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB 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 the entity's fidelity bond. It is unlikely that CNB will receive any
of the judgment, and the amount that CNB will ultimately recover, if any, under
the insurance policy cannot be determined.
During 2003, the Bank incurred a credit card fraud loss of $295,000. The Bank
has filed a claim with its fidelity bond carrier to recover this loss and is
contemplating legal action. The amount that CNB will ultimately recover, if any,
under the insurance policy or from such legal action cannot be determined.
NOTE 21 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, commitments to extend standby
letters of credit, and could involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the consolidated financial
statements.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the
29
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, 2003 and 2002 the Bank had mortgage commitments of $16,436,000
and $12,750,000, unused corporate lines of credit of $30,559,000 and
$34,143,000, and $647,000 and $583,000 of other loan commitments, respectively.
There were $40,000 of financial standby letters of credit outstanding at
December 31, 2003, while there were none outstanding at December 31, 2002.
The aforementioned commitments and credit lines are made at both fixed and
floating rates of interest based on the Bank's prime lending rate.
NOTE 22 PARENT COMPANY INFORMATION
Condensed financial statements of the parent company only are presented below.
CONDENSED BALANCE SHEET
December 31,
In thousands 2003 2002
- ------------------------------------ ------- -------
ASSETS
Cash and cash equivalents $ 86 $ 144
Investment securities held to -- 151
maturity
Investment securities available for 388 580
sale
Investment in subsidiary 18,929 17,817
Due from subsidiary 1,050 1,154
Other assets 51 90
------- -------
Total assets $20,504 $19,936
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 75 $ 113
Subordinated debt 6,118 6,572
------- -------
Total liabilities 6,193 6,685
Stockholders' equity 14,311 13,251
------- -------
Total liabilities and stockholders' equity $20,504 $19,936
======= =======
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
In thousands 2003 2002 2001
- ------------------------------- ------- ------- -------
INCOME
Interest income $ 23 $ 60 $ 52
Dividends from subsidiaries 561 300 690
Interest from subsidiaries 56 56 19
------- ------- -------
Total income 640 416 761
------- ------- -------
EXPENSES
Interest expense 356 299 148
Other operating expenses 5 5 4
Net gains (losses) on sales of
investment securities 7 (43) (3)
Income tax benefit (95) (79) (29)
------- ------- -------
Total expenses 259 268 126
------- ------- -------
Income before equity in
undistributed income of
subsidiaries 381 148 635
Equity in undistributed income
of subsidiaries 1,340 1,572 671
------- ------- -------
Net income $ 1,721 $ 1,720 $ 1,306
======= ======= =======
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
In thousands 2003 2002 2001
- -------------------------------------------- -------- -------- --------
OPERATING ACTIVITIES
Net income $ 1,721 $ 1,720 $ 1,306
Adjustments to reconcile net income
to cash used in operating
activities:
(Discount accretion) premium
amortization on investment securities (1) (11) 2
Net (gains) losses on sales of
investment securities available for sale (7) 43 3
Equity in undistributed income of subsidiary (1,340) (1,572) (671)
Decrease (increase) in other assets 39 (19) (65)
(Decrease) increase in other liabilities (38) 88 2
-------- -------- --------
Net cash provided by operating activities 374 249 577
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from sales and maturities of
investment securities available for sale
including principal payments 1,214 125 92
Proceeds from maturities of investment
securities held to maturity including
principal payments 151 21,396 103
Purchases of investment securities
available for sale (964) (21,211) (97)
Purchases of investment securities
held to maturity -- (150) (128)
Increase in investment in subsidiary (174) (2,093) (1,000)
Decrease(increase) in loans to subsidiaries 104 (1,000) --
-------- -------- --------
Net cash provided by (used in) investing
activities 331 (2,933) (1,030)
-------- -------- --------
FINANCING ACTIVITIES
(Decrease) increase in subordinated debt (300) (25) 779
Increase in loans from subsidiaries -- 3,093 --
Proceeds from issuance of common stock -- -- 71
Purchases of treasury stock (85) (11) (5)
Dividends paid (378) (348) (310)
-------- -------- --------
Net cash (used in) provided by financing
activities (763) 2,709 535
-------- -------- --------
(Decrease) increase in cash and
cash equivalents (58) 25 82
Cash and cash equivalents at
beginning of year 144 119 37
-------- -------- --------
Cash and cash equivalents at
end of year $ 86 $ 144 $ 119
======== ======== ========
NOTE 23 REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 2003, the Bank was required to
maintain (i) a minimum leverage
30
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, 2003 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, 2003 and 2002, compared to the FDIC minimum capital
adequacy requirements and the FDIC requirements for classification as a
well-capitalized Bank:
FDIC REQUIREMENTS
---------------------------------------------------------------------
MINIMUM CAPITAL
MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL-CAPITALIZED
In thousands AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------- ------- ----- ------ ----- ------ -----
December 31, 2003
Leverage (Tier1) capital $18,134 7.75% 8,956 4.00% $11,195 5.00%
Risk-based capital:
Tier 1 18,134 12.40 5,847 4.00 8,771 6.00
Total 19,968 13.66 11,694 8.00 14,618 10.00
December 31, 2002
Leverage (Tier 1)
capital $16,531 7.75% $ 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
NOTE 24 SUMMARY OF QUARTERLY FINANCIAL INFORMATION
(unaudited) 2003
- ----------------------------------------------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
- ----------------------- ------- ------- ------- -------
Interest income $ 2,950 $ 2,958 $ 2,995 $ 3,181
Interest expense 827 816 801 822
------- ------- ------- -------
Net interest income 2,123 2,142 2,194 2,359
Provision (credit) for
loan losses 39 84 16 (10)
Net losses (gains) on sales
of investment securities 4 1 (16) (1)
Other operating income 598 652 663 680
Other operating expenses 2,072 2,237 2,106 2,432
------- ------- ------- -------
Income before income
tax expense 606 472 751 618
Income tax expense 212 166 246 102
------- ------- ------- -------
Net income $ 394 $ 306 $ 505 $ 516
======= ======= ======= =======
Net income per share- basic $ 3.03 $ 2.32 $ 3.74 $ 3.85
======= ======= ======= =======
Net income per share- diluted $ 2.85 $ 2.19 $ 3.68 $ 3.83
======= ======= ======= =======
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 (gains) losses 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
======= ======= ======= =======
31
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, 2003
and 2002, 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, 2003. 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Short Hills, New Jersey
March 8, 2004
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants during 2003.
ITEM 9A CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, management carried out an
evaluation of the effectiveness of the design and operation of the Corporation's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon the evaluation, they concluded that the Corporation's disclosure controls
and procedures are effective in timely alerting them to material information
relating to changes in the Corporation's internal controls or in other factors
that could significantly affect internal controls subsequent to the date of the
evaluation.
Management does not expect that the disclosure controls and procedures or the
internal controls will prevent all errors and all fraud. A control system, no
matter how well conceived and operated, provides reasonable, not absolute,
assurance that the objectives of the control system are met. The design of a
control system reflects resource constraints and the benefits of controls must
be considered relative to the costs. Because there are inherent limitations in
all control systems, no evaluation of controls can be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns occur because of simple error or mistake. Controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all future conditions; over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with the policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
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 20, 2004.
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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required is incorporated herein by reference to the material
responsive to such item in the Corporation's Proxy Statement.
ITEM 15. 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).
33
(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).
(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 25, 2003.
(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).
34
(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, 2003.
(21) Subsidiaries of the registrant. The required information is
included on page 3.
(31) Certificate of Periodic Report (302).
(32) Certificate of Periodic Report (906).
(c) No reports on Form 8-K were filed during the quarter ended
December 31, 2003.
35
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 24, 2004 Date: March 24, 2004
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 24, 2004
- ----------------------------------------
Douglas E. Anderson
Director
- ----------------------------------------
Barbara Bell Coleman
/s/ Leon Ewing Director March 24, 2004
- ----------------------------------------
Leon Ewing
/s/ Eugene Giscombe Director, March 24, 2004
- ----------------------------------------
Eugene Giscombe Chairperson of the Board
Director
- ----------------------------------------
Norman Jeffries
/s/ Louis E. Prezeau Director, March 24, 2004
- ---------------------------------------- President and Chief
Louis E. Prezeau Executive Officer
/s/ Lemar C. Whigham Director March 24, 2004
- ----------------------------------------
Lemar C. Whigham
36