UNITED STATES
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
For the fiscal year ended December 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Newark, New Jersey 07102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 624-0865
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Securities registered pursuant to section 12(g) of the Act:
(Title of class)
Common Stock, par value $10 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
I
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 31, 2006 was approximately $4,335,000.
There were 133,650 shares of common stock outstanding at December 31, 2005.
II
CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents
Page
-----
PART I
Item 1. Business ...................................................... 1
Item 1a. Risk Factors .................................................. 3
Item 2. Properties .................................................... 3
Item 3. Legal Proceedings ............................................. 3
Item 4. Submission of Matters to a Vote of Security Holders ........... 4
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ........................................ 4
Item 6. Selected Financial Data ....................................... 5
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 6-17
Item 7a. Quantitative and Qualitative Disclosure about Market Risk ..... 17
Item 8. Financial Statements and Supplementary Data ................... 18-33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ..................... 34
Item 9a. Controls and Procedures ....................................... 34
PART III
Item 10. Directors and Executive Officers of Registrant ................ 34
Item 11. Executive Compensation ........................................ 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................. 34
Item 13. Certain Relationships and Related Transactions ................ 34
PART IV
Item 14. Principal Accountant Fees and Services ........................ 34
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ................................................... 34-36
Signatures ............................................................. 37
III
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, 2005, CNBC
had consolidated total assets of $363.4 million, total deposits of $312.4
million and stockholders' equity of $25.1 million.
City National Bank (the "Bank" or "CNB"), a wholly-owned subsidiary of CNBC, 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.
The Bank owns a thirty-three percent interest in a leasing company, along with
two other minority banks and has small investments in a Haitian financial
organization that provides microloan financing to rural Haitian individuals for
business purposes and a mutual fund which invests in targeted projects
throughout the country that are eligible for Community Reinvestment Act ("CRA")
credit.
Both City National Bancshares Corporation and City National Bank have been
designated by the United States Department of the Treasury 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 a thrift organization, 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 raised the target Federal funds rate from
1.00% to 2.25% in 2004 and to 4.25% by the end of 2005. The three-month U.S.
Treasury bill rate started 2004 at .90%, rising to 2.22% at the end of 2004 and
4.08% at the end of 2005. The ten-year Treasury note, however, rose only 17
basis points during 2005, from 4.24% to 4.39%. As a result of the increasing
interest rate environment, the Bank raised its prime lending rate eight times
during 2005, from 5.25% to 7.25%, after raising it from 4.00% to 5.25% in 2004.
1
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which became law on July
30, 2002, added new legal requirements for public companies affecting corporate
governance, accounting and corporate reporting. The Sarbanes-Oxley Act provides
for, among other things a prohibition on personal loans made or arranged by the
issuer to its directors and executive officers (except for loans made by a bank
subject to Regulation O), independence requirements for audit committee members,
independence requirements for company auditors, certification of financial
statements on SEC Forms 10-K and 10-Q reports by the chief executive officer and
the chief financial officer, two-business day filing requirements for insiders
filing SEC Form 4s, restrictions on the use of non-GAAP financial measures in
press releases and SEC filings, the formation of a public accounting oversight
board and various increased criminal penalties for violations of securities
laws.
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
2
activities. In addition, each federal banking agency has promulgated
regulations, specifying the levels at which a financial institution would be
considered "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized", or "critically undercapitalized", and to take
certain mandatory and discretionary supervisory actions based on the capital
level of the institution.
The OCC's regulations implementing these provisions of FDICIA provide that an
institution will be classified as "well capitalized" if it has a total
risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital ratio
of at least 6%, has a Tier 1 leverage ratio of at least 5%, and meets certain
other requirements. An institution will be classified as "adequately
capitalized" if it has a total risk-based capital ratio of at least 8%, has a
Tier 1 risk-based capital ratio of at least 4%, and has Tier 1 leverage ratio of
at least 4%. An institution will be classified as "undercapitalized" if it has a
total risk-based capital ratio of less than 6%, has a Tier 1 risk-based capital
ratio of less than 3%, or has a Tier 1 leverage ratio of less than 3%. An
institution will be classified as "significantly undercapitalized" if it has a
total risk-based capital ratio of less than 6%, or a Tier I risk-based capital
ratio of less than 3%, or a Tier I leverage ratio of less than 3%. An
institution will be classified as "critically undercapitalized" if it has a
tangible equity to total assets ratio that is equal to or less than 2%. An
insured depository institution may be deemed to be in a lower capitalization
category if it receives an unsatisfactory examination.
Insured institutions are generally prohibited from paying dividends or
management fees if after making such payments, the institution would be
"undercapitalized". An "undercapitalized" institution also is required to
develop and submit to the appropriate federal banking agency a capital
restoration plan, and each company controlling such institution must guarantee
the institution's compliance with such plan.
As part of the USA Patriot Act, signed into law on October 26, 2001, Congress
adopted the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the "Act"). The Act authorizes the Secretary of the
Treasury, in consultation with the heads of other government agencies, to adopt
special measures applicable to financial institutions such as banks, bank
holding companies, broker-dealers and insurance companies. Among its other
provisions, the Act requires each financial institution: (i) to establish an
anti-money laundering program; (ii) to establish due diligence policies,
procedures and controls that are reasonably designed to detect and report
instances of money laundering in United States private banking accounts and
correspondent accounts maintained for non-United States persons or their
representatives; and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign shell bank that does not have a physical presence in any country. In
addition, the Act expands the circumstances under which funds in a bank account
may be forfeited and requires covered financial institutions to respond under
certain circumstances to requests for information from federal banking agencies
within 120 hours.
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, 2005, CNBC and its subsidiaries had 95 full-time equivalent
employees. Management considers relations with employees to be satisfactory.
ITEM 1A. RISK FACTORS
Shares of CNBC common stock, while publicly traded on the over-the-counter
market, are not readily marketable. The last reported over-the-counter trade
occurred in 1990. Accordingly, shareholders of the Corporation's common stock
may encounter significant difficulty when attempting to dispose of their shares.
All issues of the Corporation's preferred stock are restricted and may be
transferred or otherwise disposed of only under certain conditions. Accordingly,
preferred shareholders may also encounter significant difficulties when
attempting to liquidate their stock.
Some of the material risks and uncertainties that management believes affect the
Corporation are described below. Additional risks and uncertainties that
management is not aware of or that management currently considers insignificant
may also impair the Corporation's business operations. If any of those risks
occur, the Corporation's financial condition and results of operations could be
materially and adversely affected.
CHANGES IN INTEREST RATES
The Corporation's earnings and cash flows are largely dependent upon its net
interest income. Interest rates are highly sensitive to many factors that are
beyond the Corporation's control, including general economic conditions,
competition, and policies of various government and regulatory agencies and, in
particular, the Board of Governors of the Federal Reserve System. Changes in
monetary policy, including changes in interest rates, could influence not only
the interest received on loans and investment securities and the amount of
interest the Corporation pays on deposits and borrowings, but such changes could
also affect the Corporation's ability to originate loans and obtain deposits,
the fair value of the Corporation's financial assets and liabilities, and the
average duration of the Corporation's assets and
3
liabilities. If the interest rates paid on deposits and other borrowings
increase at a faster rate than the interest rates received on loans and other
investments, the Corporation's net interest income, and therefore earnings,
could be adversely affected. Earnings could also be adversely affected if the
interest rates received on loans and other investments fall more quickly than
the interest rates paid on deposits and other borrowings.
COMPETITION
The Corporation faces substantial competition in all areas of its operations
from a variety of different competitors, many of which are larger and may have
more financial resources. The Corporation competes with other providers of
financial services such as other bank holding companies, commercial and savings
banks, savings and loan associations, credit unions, money market and mutual
funds, mortgage companies, title agencies, asset managers, insurance companies
and a growing list of other local, regional and national institutions which
offer financial services. If the Corporation is unable to compete effectively,
it will lose market share and income generated from loans, deposits, and other
financial products will decline.
REGULATION
The Corporation, through its principal subsidiary City National Bank of New
Jersey, is subject to extensive federal and state regulations and supervision.
Banking regulations are primarily intended to protect depositor's funds, federal
deposit insurance funds and the banking system as a whole, not shareholders.
These regulations affect the Corporation's lending practices, capital structure,
investment practices, dividend policy and growth, among other things. The
Corporation is also subject to a number of federal laws, which, among other
things, require it to lend to various sectors of the economy and population, and
establish and maintain comprehensive programs relating to anti-money laundering
and customer identification.
Failure to comply with laws, regulations or policies could result in sanctions
by regulatory agencies, civil money penalties and/or reputation damage, which
could have a material adverse effect on the Corporation's business, financial
condition and results of operations. The Corporation's compliance with certain
of these laws will be considered by banking regulators when reviewing bank
merger and bank holding company acquisitions.
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 on property
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, and one in Harlem, New York, which are leased and
Brooklyn, New York, which is owned.
In addition to its branch network, the Bank currently maintains five ATM's at
remote sites.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is periodically involved in legal proceedings in the normal
course of business, such as claims to enforce liens, claims involving the making
and servicing of real property loans, and other issues incident to the business
of the Corporation. Management believes that there is no pending pr threatened
proceeding against the Corporation, which, if determined adversely, would have a
material effect on the business or financial position of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2005 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 2005.
At January 31, 2006, the Corporation had 1,439 common stockholders of record.
On April 22, 2005, the Corporation paid a cash dividend of $3.00 per share to
stockholders of record on April 8, 2005. Whether cash dividends on the common
stock will be paid in the future depends upon various factors, including the
earnings and financial condition of the Bank and the Corporation at the time.
Additionally, federal and state laws and regulations contain restrictions on the
ability of the Bank and the Corporation to pay dividends.
FORM 10-K
THE ANNUAL REPORT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K
IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST TO CITY NATIONAL BANCSHARES
CORPORATION, EDWARD R. WRIGHT, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER, 900 BROAD STREET, NEWARK, NEW JERSEY, 07102.
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
4
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY
Dollars in thousands, except per share data 2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
YEAR-END BALANCE SHEET DATA
Total assets $363,406 $325,288 $236,385 $215,199 $222,298
Gross loans 179,093 159,359 131,771 109,195 99,190
Allowance for loan losses 2,300 2,200 2,200 2,100 1,700
Investment securities 149,144 142,470 77,193 79,941 71,291
Total deposits 312,429 280,863 198,371 181,894 194,129
Long-term debt 20,700 22,750 19,318 16,272 13,204
Stockholders' equity 25,142 16,279 14,311 13,251 11,434
======== ======== ======== ======== ========
INCOME STATEMENT DATA
Interest income $ 18,173 $ 14,411 $ 12,084 $ 12,221 $ 12,887
Interest expense 7,280 4,767 3,266 3,994 5,268
-------- -------- -------- -------- --------
Net interest income 10,893 9,644 8,818 8,227 7,619
Provision for loan losses 126 213 129 356 356
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 10,767 9,431 8,689 7,871 7,263
Other operating income 2,136 2,573 2,605 2,856 2,589
Other operating expenses 9,706 9,016 8,847 8,089 7,827
-------- -------- -------- -------- --------
Income before income tax expense 3,197 2,988 2,447 2,638 2,025
Income tax expense 862 862 726 918 719
-------- -------- -------- -------- --------
Net income $ 2,335 $ 2,126 $ 1,721 $ 1,720 $ 1,306
======== ======== ======== ======== ========
PER COMMON SHARE DATA
Net income per basic share $ 16.20 $ 15.52 $ 12.94 $ 13.35 $ 10.05
Net income per diluted share 15.52 15.52 12.55 12.54 9.33
Book value 118.23 113.79 100.89 97.94 83.01
Dividends declared 3.00 2.75 2.50 2.25 2.00
Basic average number of common shares
outstanding 133,654 132,646 127,854 123,852 123,241
Diluted average number of common shares
outstanding 139,511 132,646 132,129 132,402 133,766
Number of common shares outstanding at year-end 133,650 133,866 131,469 124,611 125,125
FINANCIAL RATIOS
Return on average assets .66% .71% .75% .80% .65%
Return on average common equity 13.83 14.90 13.21 14.76 12.69
Stockholders' equity as a percentage of total assets 6.92 5.00 6.05 6.16 5.14
Common dividend payout ratio 19.33 17.72 19.32 16.85 19.90
======== ======== ======== ======== ========
5
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.
On June 25, 2004, the Bank purchased the money market and time deposit
portfolios of two financial institutions totalling $80.7 million. The portfolios
were purchased at a net discount of $1.9 million. At December 31, 2005 and
December 31, 2004, the remaining balances in these portfolios totalled $52.2
million and $64.4 million, respectively, while the related net discount
remaining totalled $284,000 and $1.3 million, respectively.
Additionally, the Bank received $20 million in time deposits from the New York
State Business Development District Program. This Program rewards financial
institutions for establishing bank branches in geographic locations where there
is a demonstrated need for banking services. City National Bank received these
deposits for its East New York branch location. These deposits are scheduled to
mature in 2006 and there is no assurance that they will be renewed.
The Bank is also eligible to receive an additional $25 million from the State of
New York under the Program and expects to do so during 2006 if the
aforementioned deposits are not renewed. All deposits received under the
aforementioned Program must be fully collateralized.
Net income rose 9.8% to a record $2,335,000 in 2005 from $2,126,000 in 2004 due
primarily to an increase in net interest income. Net income per fully diluted
common share of $15.52 remained unchanged from a year earlier due to higher
preferred dividend requirements offsetting the increased earnings. 2005
represented the seventh consecutive year of improved earnings performance.
Additionally, the common dividend per share was raised from $2.75 to $3.00, the
twelfth consecutive year that the dividend has been increased.
Total assets increased 11.7% to a record $363.4 million at the end of 2005 from
$325.3 million a year earlier due primarily to higher municipal account
balances, while average assets rose to $352.2 million in 2005 from $300.8
million in 2004 due to the deposit purchase.
During 2005, the Corporation sold $8.2 million in noncumulative preferred stock
in private placements. The capital will be used to support growth through
acquisitions, but until such acquisitions occur, the Corporation will experience
significant dilution in per share earnings.
CASH AND DUE FROM BANKS
Cash and due from banks rose to $6.3 million at the end of 2005 from $4.7
million a year earlier. Average cash and due from banks in 2005 totalled $6.7
million, compared to $6 million a year earlier.
FEDERAL FUNDS SOLD
Federal funds sold rose to $15.2 million at the end of 2005 from $7 million at
December 31, 2004, while the related average balance rose to $23.6 million from
$21.1 million in 2004. The increases occurred due to the increased liquidity
resulting from the investment of higher short-term municipal deposit balances.
INTEREST-BEARING DEPOSITS WITH BANKS
Interest-bearing deposits with banks rose to $1.3 million at December 31, 2005
from $861,000 a year earlier, while the related average balances were $862,000
in 2005 and $1.5 million in 2004. 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. $20,000 and
$199,000 were recorded as interest income from interest-bearing deposits with
banks in 2005 and 2004, respectively, representing a yield enhancement on the
CDFI deposits.
The decline in the average balance resulted from the maturities of the deposits
made under the Program.
INVESTMENTS
The fair market value of the portfolio was negatively affected by the higher
interest rate environment in effect during 2005. Although steps were taken to
mitigate the Corporation's interest rate risk, the portfolio was vulnerable due
to the large amount of mortgage-backed securities held in the portfolio. The
weighted average life of the overall portfolio at December 31, 2005 was 5.79
years, rising slightly from 5.68 years at the end of 2004. Average duration in
the portfolio remained at 4.37. The Corporation expects to limit the amount of
security purchases with call features to limit the amount of interest rate risk
related to embedded options.
Mortgage-backed securities ("MBS"), at amortized cost, comprised of $77.7
million, or 52.1% of the total investment portfolio at the end of 2005 compared
to $85.7 million, or 60.2% a year earlier, as the Corporation continued to
mitigate its interest rate risk by reducing its exposure to extension risk
inherent in MBS collateral.
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 2004, substantial prepayments were
received and reinvested along with normal recurring payments at lower yields,
while during 2005 such prepayments declined due to the rising interest rate
environment, although such prepayments along with the normal recurring payments
were reinvested at higher yields.
6
The investment securities available for sale ("AFS") portfolio rose to $109.7
million at December 31, 2005 from $105.3 million a year earlier, while the
related gross unrealized net loss amounted to $1.6 million compared to a net
gain of $177,000 a year earlier. The unrealized loss reflected the impact of the
increase in interest rates during 2005.
The most significant change in the portfolio occurred in tax-exempt obligations
of state and political subdivisions, which rose from $15.6 million at the end of
2004 to $22.5 million at the end of 2005. This increase occurred as a result of
the flat yield curve in the taxable bond market, while there was still value in
extending maturities in the tax-exempt bond market.
The investment securities held to maturity ("HTM") portfolio totaled $39.4
million at December 31, 2005, compared to $37.2 million a year earlier. Since
most purchases made during 2005 were MBS with relatively short weighted average
lives, minimal purchases were placed in this category.
Information pertaining to the average weighted yields of investments in debt
securities at December 31, 2005 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 One Year But Five Years But
Within Within Within Maturing After
One Year Five Years Ten Years Ten Years
------------- -------------- -------------- -------------- Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------- ----- ------- ----- -------- -----
U.S. Treasury securities
and obligations of U.S.
government agencies $2,083 3.98% $ -- --% $ 135 5.50% $ 1,613 4.62% $ 3,831 4.31%
Obligations of U.S. govern-
ment sponsored entities 6,191 4.19 7,932 4.40 6,516 4.17 8,689 4.55 29,328 4.35
Mortgage-backed securities -- -- -- -- 5,722 4.04 65,112 4.40 70,834 4.37
Obligations of state and
political and subdivisions -- -- -- -- 696 7.59 247 9.24 943 8.03
Other debt securities -- -- -- -- 1,000 4.03 3,424 5.27 4,424 5.02
------ ---- ------ ---- ------- ---- ------- ---- -------- ----
Total amortized cost $8,274 4.14% $7,932 4.40% $14,069 4.29% $79,085 4.45% $109,360 4.40%
====== ==== ====== ==== ======= ==== ======= ==== ======== ====
INVESTMENT SECURITIES HELD TO MATURITY
Maturing After Maturing After
Maturing One Year But Five Years But
Within Within Within Maturing After
One Year Five Years Ten Years Ten Years
------------- -------------- -------------- -------------- Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------- ----- ------- ----- -------- -----
U.S. Treasury securities and
obligations of U.S.
government agencies $-- --% $ 8 9.58% $ -- --% $ -- --% $ 8 9.58%
Obligations of U.S. govern-
ment sponsored entities -- -- -- -- 1,500 5.13 7,500 5.56 9,000 5.49
Mortgage-backed securities -- -- -- -- 440 5.06 6,397 5.08 6,837 5.08
Obligations of state and
political subdivisions -- -- 337 6.08 9,388 5.98 11,838 6.45 21,563 6.24
Other debt securities -- -- 2,011 8.01 -- -- -- -- 2,011 8.01
--- --- ------ ---- ------- ---- ------- ---- ------- ----
Total amortized cost $-- --% $2,356 7.74% $11,328 5.83% $25,735 5.85% $39,419 5.96%
=== === ====== ==== ======= ==== ======= ==== ======= ====
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, 2005. 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 rose to 4.40% at December 31, 2005 from
3.99% at December 31, 2004, while the yield on the HTM portfolio declined
thirteen basis points to 5.96% at December 31, 2005 from 6.09% at December 31,
2004.
7
The following table sets forth the carrying value of the Corporation's portfolio
for the three years ended December 31:
INVESTMENT SECURITIES AVAILABLE FOR SALE
2005 2004 2003
-------------------- -------------------- -------------------
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 $ 3,831 $ 3,831 $ 2,091 $ 2,090 $ 4,996 $ 5,011
Obligations of U.S. government sponsored entities 29,328 28,899 18,272 18,191 3,209 3,210
Obligations of state and political subdivisions 943 998 1,267 1,365 1,879 2,006
Mortgage-backed securities 70,834 69,636 76,943 76,994 31,215 31,066
Other debt securities 4,424 4,427 4,421 4,510 4,168 4,123
Equity securities:
Marketable securities 589 558 891 912 897 900
Nonmarketable securities 115 115 115 115 115 115
Federal Reserve Bank and Federal Home Loan Bank stock 1,261 1,261 1,089 1,089 865 865
-------- -------- -------- -------- ------- -------
Total $111,325 $109,725 $105,089 $105,266 $47,344 $47,296
======== ======== ======== ======== ======= =======
INVESTMENT SECURITIES HELD TO MATURITY
2005 2004 2003
-------------------- -------------------- -------------------
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 $ 8 $ 8 $ 15 $ 16 $ 28 $ 29
Obligations of U.S. government sponsored entities 9,000 8,776 12,097 11,956 11,339 11,251
Obligations of state and political subdivisions 21,563 21,710 14,344 14,792 6,379 6,786
Mortgage-backed securities 6,837 6,759 8,734 8,825 10,133 10,292
Other debt securities 2,011 2,174 2,014 2,290 2,018 2,374
------- ------- ------- ------- ------- -------
Total $39,419 $39,427 $37,204 $37,879 $29,897 $30,732
======= ======= ======= ======= ======= =======
8
CONSOLIDATED AVERAGE BALANCE SHEET WITH RELATED INTEREST AND RATES
2005 2004 2003
--------------------------- --------------------------- ---------------------------
Average Average Average Average Average Average
Tax equivalent basis; dollars 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 $ 23,850 $ 759 3.18% $ 21,082 $ 280 1.33% $ 11,679 $ 128 1.10%
Interest-bearing deposits with banks(1) 862 35 4.06 1,544 245 15.87 3,609 510 14.13
Investment securities(2):
Taxable 127,919 5,707 4.46 109,987 4,552 4.14 71,990 3,267 4.54
Tax-exempt 15,800 1,049 6.64 10,213 717 7.02 8,920 628 7.04
-------- -------- ---- -------- ------- ----- -------- ------- -----
Total investment securities 143,719 6,756 4.70 120,200 5,269 4.38 80,910 3,895 4.81
-------- -------- ---- -------- ------- ----- -------- ------- -----
Loans (3), (4)
Commercial (7) 22,437 1,413 6.30 21,084 1,428 6.77 16,623 992 5.97
Real estate 142,379 9,432 6.62 118,748 7,318 6.16 98,240 6,653 6.77
Installment 1,453 135 9.29 1,431 115 8.04 1,483 120 8.09
-------- -------- ---- -------- ------- ----- -------- ------- -----
Total loans 166,269 10,980 6.60 141,263 8,861 6.27 116,346 7,765 6.67
-------- -------- ---- -------- ------- ----- -------- ------- -----
Total interest earning assets 334,700 18,530 5.54 284,089 14,655 5.16 212,544 12,298 5.79
-------- -------- ---- -------- ------- ----- -------- ------- -----
Noninterest earning assets:
Cash and due from banks 6,743 6,027 6,610
Net unrealized (loss) gain on
investment securities available
for sale (526) (272) 230
Allowance for loan losses (2,283) (2,171) (2,191)
Other assets 13,516 13,080 12,639
-------- -------- --------
Total noninterest earning assets 17,450 16,664 17,288
-------- -------- --------
Total assets $352,150 $300,753 $229,832
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings deposits (5) $ 34,193 180 .53 $ 34,079 182 .53 $ 33,647 192 .57
Money market deposits 79,342 2,193 2.76 62,756 913 1.45 41,873 516 1.23
Super-NOW deposits 33,487 145 .43 30,032 88 .29 31,947 111 .35
Time deposits 120,956 3,452 2.85 98,083 2,479 2.53 54,249 1,524 2.81
-------- -------- ---- -------- ------- ----- -------- ------- -----
Total interest bearing deposits 267,978 5,970 2.23 224,950 3,662 1.63 161,716 2,343 1.45
Short-term borrowings 2,475 85 3.43 755 8 1.06 1,041 10 .96
Long-term debt 22,213 1,225 5.52 22,248 1,097 4.93 17,557 913 5.20
-------- -------- ---- -------- ------- ----- -------- ------- -----
Total interest bearing liabilities 292,666 7,280 2.49 247,953 4,767 1.92 180,314 3,266 1.81
-------- -------- ---- -------- ------- ----- -------- ------- -----
Noninterest bearing liabilities:
Demand deposits 34,793 33,588 32,722
Other liabilities 5,377 4,345 3,228
-------- -------- --------
Total noninterest bearing liabilities 40,170 37,933 35,950
-------- -------- --------
Stockholders' equity 19,314 14,867 13,568
-------- -------- --------
Total liabilities and stockholders' equity $352,150 $300,753 $229,832
======== ======== ==== ======== ======= ===== ======== ======= =====
Net interest income (tax equivalent basis) 11,250 3.05 9,888 3.24 9,032 3.98
Tax equivalent basis adjustment (6) (357) (244) (214)
-------- ------- -------
Net interest income(8) $ 10,893 $ 9,644 $ 8,818
======== ======= =======
Average rate paid to fund interest earning
assets 2.18 1.68 1.54
---- ----- -----
Net interest income as a percentage of
interest earning assets (tax equivalent
basis) 3.36% 3.48% 4.25%
==== ===== =====
(1) Includes $20,000 in 2005, $199,000 in 2004 and $386,000 in 2003,
attributable to income received under the U.S. Treasury Department's Bank
Enterprise Award certificate of deposit program.
(2) Includes investment securities available for sale and held to maturity at
amortized cost.
(3) Includes nonperforming loans.
(4) Includes loan fees of $491,000, $290,000 and $416,000 in 2005, 2004 and
2003 respectively.
(5) Includes noninterest bearing deposits maintained by a state governmental
agency of $194,000 in 2005 and $694,000 in 2004 and 2003, and all passbook
and statement saving accounts.
(6) The tax equivalent adjustment was computed assuming a 34% statutory federal
income tax rate in 2005, 2004 and 2003.
(7) Includes $54,000 in 2005, $345,000 in 2004 and $94,000 in 2003 attributable
to income received under the U.S. Treasury Department's Bank Enterprise
Award loan program
(8) The total yield enhancements on the interest bearing deposits with banks
and loans increased net interest income by three basis points in 2005,
nineteen basis points in 2004 and twenty-three basis points in 2003.
9
The table below set forth, on a fully tax-equivalent basis, an analysis of the
increase (decrease) in net interest income resulting from the specific
components of income and expenses due to changes in volume and rate. Because of
the numerous simultaneous balance and rate changes, it is not possible to
precisely allocate such changes between balances and rates. Therefore, for
purposes of this table, changes which are not due solely to balance and rate
changes are allocated to rate.
2005 Net Interest Income Increase 2004 Net Interest Income Increase
(Decrease) from 2004 due to: (Decrease) from 2003 due to:
--------------------------------- ---------------------------------
In thousands Volume Rate Total Volume Rate Total
------ ------- ------- ------- ------- -------
INTEREST INCOME
Loans:
Commercial $ 91 $ (106) $ (15) $ 266 $ 170 $ 436
Real estate 1,456 658 2,114 1,388 (723) 665
Installment 2 18 20 (4) (1) (5)
------ ------- ------- ------- ------- -------
Total loans 1,549 570 2,119 1,650 (554) 1,096
Taxable investment securities 742 413 1,155 1,725 (440) 1,285
Tax-exempt investment securities 392 (60) 332 91 (2) 89
Federal funds sold and securities
purchased under agreements to resell 33 446 479 103 49 152
Interest-bearing deposits with banks (108) (102) (210) (61) (204) (265)
------ ------- ------- ------- ------- -------
Total interest income 2,608 1,267 3,875 3,508 (1,151) 2,357
------ ------- ------- ------- ------- -------
INTEREST EXPENSE
Savings deposits (1) 3 2 (2) 12 10
Money market deposits (240) (1,040) (1,280) (257) (140) (397)
Super-NOW deposits (10) (47) (57) 6 17 23
Time deposits (579) (394) (973) (1,232) 277 (955)
Short-term borrowings (18) (59) (77) (27) 29 2
Long-term debt 2 (130) (128) (244) 60 (184)
------ ------- ------- ------- ------- -------
Total interest expense (846) (1,667) (2,513) (1,756) 255 (1,501)
------ ------- ------- ------- ------- -------
Net interest income $1,762 $ (400) $ 1,362 $ 1,752 $ (896) $ 856
====== ======= ======= ======= ======= =======
LOANS
Loans rose 12.4% to $179.1 million December 31, 2005 from $159.4 million a year
earlier with most of the increase occurring in the commercial real estate
portfolio.
Loans held for sale totalled $124,000 at December 31, 2005, while there were no
loans held for sale at December 31, 2004. Loans originated for sale declined to
$2.1 million in 2005 from $4.8 million in 2004 due to the higher rate
environment, while sales decreased correspondingly. These loans represent
long-term fixed rate residential mortgages that the Corporation does not want to
keep in the portfolio to mitigate its interest rate risk to rising interest
rates.
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 may be 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, 2005, loans to churches totalled $58 million, representing 32.4%
of total loans outstanding, all of which are secured by real estate, compared to
$39 million and 24.5% at December 31, 2004. 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, New York City 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, 2005 is presented below.
Due from
One Year
Due in One Through Due After
In thousands Year or Less Five Years Five Years Total
------------ ---------- ---------- --------
Commercial $ 3,793 $ 4,067 $ 14,676 $ 22,536
Real estate:
Construction 30,588 8,066 -- 38,654
Mortgage 8,814 11,068 96,884 116,766
Installment 422 639 200 1,261
------- ------- -------- --------
Total $43,617 $23,840 $111,760 $179,217
======= ======= ======== ========
Loans at fixed
interest rates $ 4,384 $12,645 $ 30,583 $ 47,612
Loans at variable
interest rates 39,233 11,195 81,177 131,605
------- ------- -------- --------
Total $43,617 $23,840 $111,760 $179,217
======= ======= ======== ========
The following table reflects the composition of the loan portfolio for the five
years ended December 31:
In thousands 2005 2004 2003 2002 2001
-------- -------- -------- -------- -------
Commercial $ 22,536 $ 16,450 $ 20,052 $ 15,510 $17,448
Real estate 155,711 142,085 110,802 92,323 80,466
Installment 1,261 1,171 1,035 1,492 1,385
-------- -------- -------- -------- -------
Total loans 179,508 159,706 131,889 109,325 99,299
Less: Unearned income 291 347 118 130 109
-------- -------- -------- -------- -------
Loans $179,217 $159,359 $131,771 $109,195 $99,190
======== ======== ======== ======== =======
10
SUMMARY OF LOAN LOSS EXPERIENCE
Changes in the allowance for loan losses are summarized below.
Dollars in thousands 2005 2004 2003 2002 2001
------- ------- ------- ------ ------
Balance, January 1 $ 2,200 $ 2,200 $ 2,100 $1,700 $1,200
------- ------- ------- ------ ------
Charge-offs:
Commercial loans 68 229 164 6 121
Real estate loans -- 8 -- 34 --
Installment loans 16 9 43 19 34
------- ------- ------- ------ ------
Total 84 246 207 59 155
------- ------- ------- ------ ------
Recoveries:
Commercial loans 5 23 89 93 265
Real estate loans 29 -- 73 -- --
Installment loans 24 10 16 10 34
------- ------- ------- ------ ------
Total 58 33 178 103 299
------- ------- ------- ------ ------
Net (charge-offs) recoveries (26) (213) (29) 44 144
Provision for loan
losses charged to operations 126 213 129 356 356
------- ------- ------- ------ ------
Balance, December 31 $ 2,300 $ 2,200 $ 2,200 $2,100 $1,700
======= ======= ======= ====== ======
Net charge-offs as a
percentage of average loans .02% .15% .02% --% --%
Allowance for loan losses as a
percentage of loans 1.28 1.38 1.67 1.92 1.71
Allowance for loan losses as a
percentage of nonperforming loans 114.09 181.37 177.99 201.92 137.65
======= ======= ======= ====== ======
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
probable losses inherent 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 1.28% of total loans at December 31, 2005 compared to
1.38% a year earlier. The decrease 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 the stable business and economic environment 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.
2005 2004 2003 2002 2001
------------------- ------------------- ------------------- ------------------- -------------------
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 $ 626 13.14% $ 567 10.32% $ 686 15.22% $ 422 14.20% $ 482 17.57%
Real estate 1,174 86.39 1,120 88.94 798 84.00 622 84.43 555 81.03
Installment 25 .47 35 .74 75 .78 43 1.37 39 1.40
Unallocated 475 -- 478 -- 641 -- 1,013 -- 624 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,300 100.00% $2,200 100.00% $2,200 100.00% $2,100 100.00% $1,700 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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.
11
NONPERFORMING ASSETS
Information pertaining to nonperforming assets at December 31 is summarized
below.
In thousands 2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Nonperforming loans
Commercial $ 742 $ 146 $ 314 $ 296 $ 199
Real estate 1,182 981 894 697 985
Installment 92 86 28 47 52
------ ------ ------ ------ ------
Total nonperforming loans 2,016 1,213 1,236 1,040 1,236
Other real estate owned -- -- 290 352 326
------ ------ ------ ------ ------
Total $2,016 $1,213 $1,526 $1,392 $1,562
====== ====== ====== ====== ======
Nonperforming assets rose 66.2% at December 31, 2005, compared to a year earlier
due to a rise in short-term construction loan participation delinquencies.
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, 2005 and
2004.
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 $312.4 million at December 31, 2005 from $280.9 million a
year earlier, while average deposits increased 17% to $302.8 million in 2005
from $258.8 million in 2004. The increase in year-end deposits occurred due to
higher municipal account balances, while the higher average balance resulted
primarily from the acquired deposits.
Demand account balances increased to $31.5 million at December 31, 2005 compared
to $28.5 million a year earlier while average demand deposits rose slightly in
2005 to $34.8 million from $33.6 million in 2004.
Passbook and statement savings deposits totalled $32.7 million at December 31,
2005 compared to $33.6 million a year earlier, while such savings accounts
averaged $34.2 million in 2005, compared to $34.1 million in 2004.
Money market deposit accounts rose 30% to $94.1 million at December 31, 2005
from $72.4 million a year earlier, while average money market deposit accounts
increased 26.3% to $79.3 million in 2005 from $62.8 million in 2004. The
increase in year-end deposits occurred due to higher municipal account balances,
while the higher average balance resulted primarily from the acquired deposits.
Super-Now deposit accounts rose 24% to $28.4 million at December 31, 2005
compared to $22.9 million a year earlier, while average Super-Now balances
totalled $33.5 million in 2005 compared to $30 million a year earlier. Both
changes resulted from higher municipal account balances.
Time deposits rose to $125.7 million at December 31, 2005 from $123.5 million at
the end of 2004, while average time deposits were $121 million in 2005, 23.3%
greater than in 2004. The increase in the average balance resulted from having
the acquired deposits for a full year.
Certain governmental agencies maintain noninterest-bearing savings accounts with
the Bank as compensation for services performed. At December 31, 2005, such
balances totalled $194,000.
SHORT-TERM BORROWINGS
Short-term borrowings totalled $540,000 at December 31, 2005 compared to
$930,000 at December 31, 2004, while average short-term borrowings of $2.5
million in 2005 was 227.8% higher than 2004. 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. The increase in the
average balances was due to higher balances of securities sold under repurchase
agreements.
LONG-TERM DEBT
Long-term debt declined to $20.7 million at December 31, 2005 from $22.8 million
a year earlier, while the related average balance was $22.2 million in 2005 and
2004.
RESULTS OF OPERATIONS - 2005 COMPARED WITH 2004
Net income rose to $2,335,000 in 2005 from $2,126,000 in 2004 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 in part on the Bank's lending efforts in
qualifying lower income communities. Award income totalled $54,000 in 2005,
$345,000 in 2004 and $94,000 in 2003.
Additionally, the Bank recorded award income related to deposits made in other
CDFI's of $20,000 in 2005, $199,000 in 2004 and $386,000 in 2003, respectively.
Finally additional award income of $63,000 was also recorded in 2005 compared to
$115,000 in 2004 and $3,000 in 2003, representing awards received for opening a
branch office in a low-income area.
In total, $137,000 of award income was recorded in 2005, while $659,000 was
recorded in 2004 and $483,000 was recorded in 2003. Excluding these awards, net
income would have totaled $2,403,000 in 2005 and $1,657,000 in 2004 and
$1,383,000 in 2003.
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.
On a fully taxable equivalent ("FTE") basis, net interest income rose 13.8% to
$11.3 million in 2005 from $9.9 million in 2004, while the related net interest
margin declined 14 basis points, from 3.48% to 3.34%. Higher levels of interest
earning assets was the primary reason for the increased net interest income,
while compression from the flat yield curve contributed to the lower margin.
A continuation of an interest rate environment where the yield curve remains
flat, or becomes inverted, will cause a continuing decline in the net interest
margin as the Bank will be paying higher rates on interest bearing liabilities
without the ability to pass the rate increases along through rate increases on
interest earning assets. In the event of such a decline, net interest income may
still rise, as occurred during 2005, depending on the amount of increase in
interest earning assets.
12
Interest income on a FTE basis rose $3.9 million, or 26.4% in 2005. Higher
levels of interest earning assets was the reason for this increase. Because of
the higher interest rate environment, the yield on interest earning assets rose
38 basis points, from 5.16% to 5.54%. Average interest earning assets increased
$50.6 million, or 17.8%, with the loan portfolio providing the greatest
increase.
Interest income from Federal funds sold rose by 171.1%, due to an increase in
the related yield from 1.33% to 3.18%.
Interest income on taxable investment securities increased $1.2 million in 2005
due both to higher volume and higher interest rates on portfolio investments.
Tax-exempt income rose 46.3% due to purchases of tax-exempt securities in 2005.
The average rate declined due to lower rates on the newly acquired investments.
Interest income on loans rose $2.1 million, or 23.9% due to both a higher volume
and higher yields. Average commercial loans increased 6.4%, while related
interest income was slightly lower due to a lower yield on the portfolio, which
decreased 47 basis points, from 6.77% to 6.30%. The real estate portfolio,
comprised mainly of commercial real estate loans, increased $23.6 million, or
19.9% in 2005, while the related yield rose to 6.62% in 2005 from 6.16% in 2004,
due to increases in the Bank's prime lending rate.
Interest expense totalled $7.3 million in 2005, an increase of 52.7% from 2004.
This increase resulted primarily from the higher short-term interest rate
environment, which impacted most of the Corporation's interest bearing
liabilities.
The average rate paid on deposits rose by 60 basis points, from 1.63% to 2.23%,
mostly due to the higher rates paid on money market deposits and certificates of
deposit.
Interest expense on money market deposits increased 140.2% due to both higher
volume and higher rates paid. The average rate paid rose to 2.76% from 1.45% in
2004.
Interest expense on time deposits rose due to both higher volume and higher
rates paid. The average rate paid was 32 basis points higher in 2005, averaging
2.85% compared to 2.53% in 2004.
Interest expense on short-term borrowings rose due to both higher volume and
higher rates paid.
Interest expense on long-term debt rose due to the higher rates paid on
long-term subordinated debentures. The related interest rate increased 59 basis
points to 5.52% in 2005 compared to 4.93% in 2004.
The overall cost of funds rose 57 basis points in 2005, more than the 38 basis
point increase in the yield on interest earning assets. As a result, overall net
interest margin was 12 basis points lower in 2005, declining to 3.36% from
3.48%, which was a decrease from 4.25% in 2003. This trend will continue during
2006 if the yield curve remains flat or inverts and will negatively impact the
Corporation's net interest margin.
Service charges on deposit accounts was 5.7% lower in 2005 due to continued
competitive business pressures limiting the Bank's ability to raise charges to
reflect higher costs.
Other income declined 20.9% in 2005. Award income, earnings from cash surrender
value of bank-owned life insurance and gains on sale of loans, all declined,
while the loss from the Bank's investment in an unconsolidated leasing investee
rose to $208,000 from $45,000 in 2004.
Net losses incurred on securities transactions totalled $96,000 in 2005 compared
to net losses of $13,000 in 2004. The losses occurred due to investment swap
transactions consummated during 2005 to mitigate interest rate risk by selling
securities and purchasing other securities with different interest rate
characteristics.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for loan losses, totalled $9.7 million in 2005, a 7.1%
increase compared to $9 million in 2004.
Salary expense rose 7.4% due to normal recurring merit increases along with
higher bonus expense due to the improved earnings performance. Employee benefits
expense increased 15.5% due to higher 401K plan expense, along with an increase
in supplemental executive retirement plan expense.
Occupancy expense rose 12.1% due primarily to higher rental costs resulting from
the relocation of a branch to a more strategic location, along with higher
energy costs.
Equipment expense was 18.7% higher in 2005 than in 2004 due primarily to higher
depreciation expense along with the increased costs of service contracts.
Other expenses were relatively unchanged in 2005, although various components
changed significantly. Marketing expense rose to $397,000 in 2005 from $242,000
a year earlier due largely to the opening of a relocated branch office. Data
processing costs rose to $375,000 from $322,000 due primarily to the additional
accounts acquired for a full year. Merchant card charges, which represents
credit card fees incurred by customers but absorbed by the Bank and offset by
compensating deposit account balances, rose to $228,000 from $146,000. Finally,
the Bank recorded an insurance recovery of $217,000 for a credit card fraud loss
incurred in 2003.
Income tax expense as a percentage of pre-tax income was 27% in 2005 compared to
28.8% in 2004, due to higher levels of tax-exempt income.
LIQUIDITY
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
The Bank depends primarily on deposits as a source of funds and also provides
for a portion of its funding needs through short-term borrowings, such as
Federal Funds purchased, securities sold under repurchase agreements and
borrowings under the U.S. Treasury tax and loan note option program. The Bank
also utilizes the Federal Home Loan Bank for longer-term funding purposes.
Finally, the Corporation has ready access to the capital markets, having issued
$7 million in subordinated debentures since 2002 and $8.2 million in preferred
stock during 2005.
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
deposit relationships. Municipal deposit levels may fluctuate significantly
depending on the cash requirements of the municipalities. The Bank has ready
sources of available short-term borrowings in the event that the municipalities
have unanticipated cash requirements. Such sources include Federal funds lines,
FHLB advances and access to the repurchase agreement market, utilizing the
collateral for the withdrawn deposits. The Bank expects to continue emphasizing
these relationships.
The major contribution during 2005 from operating activities to the
Corporation's liquidity came from net income.
Net cash used in investing activities during 2005 was primarily used for
purchases of investment securities available for sale, which totalled $87.5
million, while sources of cash provided by
13
investing activities were derived primarily from proceeds from maturities,
principal payments and early redemptions of investment securities available for
sale and held to maturity, amounting to $89.6 million. These volumes were
significantly lower in 2005 than in 2004 due to the purchase during 2004 of
investment securities with the proceeds received from the deposit acquisition.
Many of these investments were short-term and were rolled over upon maturity
pending the determination of the deposit runoff experience rate.
The primary source of funds from financing activities resulted from the 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 14 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, 2005. 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 $37,968 $-- $ -- $37,968
Commercial mortgages 46,144 -- -- 46,144
Credit cards -- -- 589 589
Residential mortgages 260 -- -- 260
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 3.5% in 2005 compared to 3.3% in 2004
and 1.9% in 2003.
The asset and liability structure of the Corporation and subsidiary bank differ
from that of an industrial company since its assets and liabilities fluctuate
over time based upon monetary policies and changes in interest rates. The growth
in earning assets, regardless of the effects of inflation, will increase net
income if the Corporation is able to maintain a consistent interest spread
between earning assets and supporting liabilities. In an inflationary period,
the purchasing power of these net monetary assets necessarily decreases.
However, changes in interest rates may have a more significant impact on the
Corporation's performance than inflation. While interest rates are affected by
inflation, they do not necessarily move in the same direction, or in the same
magnitude as the prices of other goods and services.
The impact of inflation on the future operations of the Corporation should not
be viewed without consideration of other financial and economic indicators, as
well as historical financial statements and the preceding discussion regarding
the Corporation's liquidity and asset and liability management.
INTEREST RATE SENSITIVITY
The management of interest rate risk is also important to the profitability of
the Corporation. Interest rate risk arises when an earning asset matures or when
its interest rate changes in a time period different from that of a supporting
interest bearing liability, or when an interest bearing liability matures or
when its interest rate changes in a time period different from that of an
earning asset that it supports. While the Corporation does not match specific
assets and liabilities, total earning assets and interest bearing liabilities
are grouped to determine the overall interest rate risk within a number of
specific time frames.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to
monitor and oversee the activities of interest rate sensitivity management and
the protection of net interest income from fluctuations in interest rates.
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
interest sensitive gap. At any given point in time, the Corporation may be in an
asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities or in a liability-sensitive position, whereby its
interest-sensitive liabilities exceed its interest-sensitive assets, depending
on management's judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which
details the repricing differences for assets and liabilities for given periods.
The primary limitation of this analysis is that it is a static (i.e., as of a
specific point in time) measurement which does not capture risk that varies
nonproportionally with changes in interest rates. Because of this limitation,
the Corporation uses a simulation model as its primary method of measuring
interest rate risk. This model, because of its dynamic nature, forecasts the
effects of different patterns of rate movements on the Corporation's mix of
interest sensitive assets and liabilities.
The following table presents the Corporation's sensitivity to changes in
interest rates, categorized by repricing period. Various assumptions are used to
estimate expected maturities. The actual maturities of these instruments could
vary substantially if future prepayments differ from estimated experience.
14
INTEREST SENSITIVITY GAP ANALYSIS
December 31, 2005
---------------------------------------------------------------------------
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 $ 15,200 -- -- $ 15,200 $ -- $ 15,200
Interest-bearing deposits with banks 500 -- 260 760 500 1,260
Investment securities:
Available for sale 1,102 981 6,191 8,274 101,451 109,725
Held to maturity -- -- -- -- 39,419 39,419
Loans 16,390 9,075 18,151 43,616 135,477 179,093
--------- --------- --------- --------- -------- --------
33,192 10,056 24,602 67,850 276,847 344,697
--------- --------- --------- --------- -------- --------
INTEREST BEARING LIABILITIES:
Deposits:
Savings 155,232 -- -- 155,232 -- 155,232
Time 34,827 17,406 23,886 76,119 49,586 125,705
Short-term borrowings 540 -- -- 540 -- 540
Long-term debt 31 31 263 325 20,375 20,700
Non-interest bearing liabilities -- -- -- -- 36,087 36,087
--------- --------- --------- --------- -------- --------
190,630 17,437 24,149 232,216 106,048 338,264
--------- --------- --------- --------- -------- --------
Asset (liability) sensitivity gap:
Period gap $(157,438) $ (7,381) $ (453) $(164,366) $170,799 $ 6,433
Cumulative gap (157,438) (164,819) (164,366) -- -- --
========= ========= ========= ========= ======== ========
The Corporation was highly liability-sensitive at the 90-day interval with a
$157.4 million negative gap due primarily to the inclusion of all categories of
savings accounts as rate-sensitive, although certain categories of savings
accounts are less rate-sensitive than others.
Because individual interest earning assets and interest bearing liabilities
respond differently to changes in prime, more refined results are obtained when
a simulation model is used. The Corporation uses a simulation model to analyze
earnings sensitivity to movements in interest rates. The simulation model
projects earnings based on parallel shifts in interest rates over a twelve-month
period. The model is based on the actual maturity and re-pricing characteristics
of rate sensitive assets and liabilities, and incorporates various assumptions
which management believes to be reasonable.
At December 31, 2005, the most recently prepared model indicates that net income
would decline 6.1% from base case scenario if interest rates rise 200 basis
points and 26.2% if rates decrease 200 basis points. Additionally, the economic
value of equity would decrease 17.9% if rates rose 200 basis points and 1.3% if
rates declined 200 basis points.
CAPITAL
The following table presents the consolidated and bank-only capital components
and related ratios as calculated under regulatory accounting practice.
Consolidated Bank Only
December 31, December 31,
------------------- -------------------
Dollars in thousands 2005 2004 2005 2004
-------- -------- -------- --------
Total stockholders' equity $ 25,142 $ 16,279 $ 20,917 $ 20,474
Net unrealized loss (gain) on investment
securities available for sale 973 (106) 973 (83)
Net unrealized loss on equity securities
available for sale (19) -- (19) (10)
Disallowed intangibles (490) (610) (490) (610)
Qualifiying trust preferred securities 7,000 5,391 -- --
-------- -------- -------- --------
Tier 1 capital 32,606 20,954 21,381 19,771
-------- -------- -------- --------
Qualifying long-term debt 460 620 -- --
Allowance for loan losses 2,300 2,200 2,300 2,200
Qualifiying trust preferred securities -- 1,609 -- --
Other -- 10 -- --
-------- -------- -------- --------
Tier 2 capital 2,760 4,439 2,300 2,200
-------- -------- -------- --------
Total capital $ 35,366 $ 25,393 $ 23,681 $ 21,971
======== ======== ======== ========
Risk-adjusted assets $212,783 $181,562 $212,601 $181,159
Average total assets 373,810 341,636 373,796 340,643
-------- -------- -------- --------
Risk-based capital ratios:
Tier 1 capital to risk-adjusted assets 15.32 11.54 10.06 10.91%
Regulatory minimum 4.00 4.00 4.00 4.00
Total capital to risk-adjusted assets 16.62 13.99 11.14 12.13
Regulatory minimum 8.00 8.00 8.00 8.00
Leverage ratio 8.72 6.14 5.72 5.80
Total stockholders' equity to total assets 6.92 5.00 5.75 6.18
======== ======== ======== ========
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 is
payable at the 3-month LIBOR rate plus 3.65%, adjustable quarterly. The
quarterly distributions may, at the option of the Trust, be deferred for up to
20 consecutive quarterly periods. The proceeds have
15
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 any interest payment date, 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.
Additionally, on March 17, 2004, City National Bancshares Corporation issued $4
million of preferred capital securities through City National Bank of New Jersey
Capital Trust II ("the Trust II"), a special-purpose statutory trust created
expressly for the issuance of these securities. Distribution of interest on the
securities is payable at the 3-month LIBOR rate plus 2.79%, adjustable
quarterly. 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 March 17, 2009, at any interest payment date, at a price
equal to 100% of the principal amount plus accrued interest to the date of
redemption. The securities must be redeemed by March 17, 2034.
The subsidiary trusts are 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 - 2004 COMPARED WITH 2003
Net income rose to $2,126,000 in 2004 from to $1,721,000 in 2003 due primarily
to an increase in net interest income. Related net income per share increased to
$15.52 from $12.94.
On a fully taxable equivalent ("FTE") basis, net interest income rose 9.5% to
$9.9 million in 2004 from $8.8 million in 2003, while the related net interest
margin declined 77 basis points, from 4.25% to 3.48%. 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 rose $2.4 million, or 19.2% in 2004. Higher
levels of interest earning assets was the reason for this decrease. Because of
the lower interest rate environment, the yield on interest earning assets fell
63 basis points, from 5.79% to 5.16%. Interest earning assets averaged $71.5
million, or 33.7% higher than in 2003, with the investment portfolio providing
the greatest increase.
Interest income from Federal funds sold rose by 118.8%, reflecting the liquidity
from the deposit acquisition pending reinvestment into higher earning assets.
The related yield increased from 1.10% to 1.33%.
Interest income on taxable investment securities declined $1.3 million in 2004
due to the investment of part of the deposit acquisition proceeds. The taxable
investment portfolio averaged $110 million in 2004 compared to $72 million in
2003 with most of the increase occurring in mortgage-backed agency securities.
Tax-exempt income rose 14.2% due to purchases of tax-exempt securities in 2004.
Interest income on loans rose $1.1 million, or 14.1% due to higher loan volumes.
Average commercial loans increased 26.8%, while related interest income was 44%
higher. The related yield increased 80 basis points, from 5.97% to 6.77%, due to
an increase in the prime lending rate. The real estate portfolio, comprised
mainly of commercial real estate loans, increased $20 million, or 20.9% in 2004,
while the related yield decreased to 6.16% in 2004 from 6.77% in 2003. Finally,
installment loans averaged slightly less in 2004 than in 2003, while the related
yield declined five basis points.
Interest expense totalled $4.8 million in 2004, an increase of 46% from 2003.
This increase resulted primarily from the deposit acquisition. The average rate
paid on deposits rose by 18 basis points, from 1.45% to 1.63%, also due to the
higher cost of the acquired deposits.
Interest expense on savings deposits was slightly lower in 2004 due to the low
interest rate environment that existed for most of the year. The average rate
paid decreased from .57% to .53%.
Interest expense on money market deposits increased $397,000 due to the acquired
deposits. The average rate paid was four basis points lower in 2004.
Interest expense on time deposits rose $955,000 due to the acquired deposits.
The average rate paid was 28 basis points lower in 2004, averaging 2.53%
compared to 2.81% in 2003.
Average short-term borrowings, along with related interest expense, declined
while the average rate paid rose by ten basis points, from .96% in 2003 to
1.09%, because the rates on these liabilities are tied to the Federal funds
rate.
Interest expense on long-term debt rose due to the issuance of long-term
subordinated debentures in March 2004. The related interest rate decreased 27
basis points due to lower rates on the debt.
Service charges on deposit accounts was relatively unchanged from 2004 due to
continued competitive business pressures.
Other operating income was relatively unchanged in 2004, although various
components changed significantly. Service changes from off-site ATM's rose to
$81,000 in 2004 from $22,000 in 2003 due to the operation of a new location for
a full year in 2004. Agency fees from commercial loans and lines of credit rose
18.1%. Award income rose to $116,000 from $3,000. Earnings from the Bank's
investment in an unconsolidated leasing subsidiary declined to a loss of $45,000
from earnings of $300,000 due to the competitive interest rate pressures in the
leasing business.
Net losses incurred on securities transactions totalled $13,000 in 2004 compared
to net gains of $12,000 in losses in 2003. The gains occurred primarily in
CNBC's equity securities portfolio.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for loan losses, totalled $9 million in 2004, a 1.9%
increase compared to $8.8 million in 2003. Significantly higher audit fees,
along with higher data processing and merchant card charges were the primary
factors contributing to the increase, which was offset in part by the $295,000
credit card loss recorded in 2003 which did not recur in 2004.
Salary expense rose 2.3% due to normal recurring merit increases and additional
staff, offset in part by staffing vacancies. Employee benefits expense declined
21% due to lower 401K plan expense, offset in part by the increased cost of
employee health insurance.
Occupancy and equipment expense rose 8% due primarily to higher property taxes
resulting from the first revaluation performed in the city of Newark in 40
years.
Income tax expense as a percentage of pre-tax income was 28.8% in 2004 compared
to 29.7% in 2003, due to higher levels of tax-exempt income.
16
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 to reserve for probable losses inherent in its
loan portfolio, 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 SHEETS
December 31,
-------- --------
Dollars in thousands, except per share data 2005 2004
-------- --------
ASSETS
Cash and due from banks (Note 2) $ 6,260 $ 4,717
Federal funds sold (Note 3) 15,200 7,000
Interest-bearing deposits with banks 1,260 861
Investment securities available for sale (Note 4) 109,725 105,266
Investment securities held to maturity (Market value of $39,427
at December 31, 2005 and $37,879 at December 31, 2004) (Note 5) 39,419 37,204
Loans held for sale 124 --
Loans (Note 6) 179,093 159,359
Less: Allowance for loan losses (Note 7) 2,300 2,200
-------- --------
Net loans 176,793 157,159
-------- --------
Premises and equipment (Note 8) 4,342 3,993
Accrued interest receivable 1,917 1,526
Cash surrender value of life insurance 3,870 3,824
Other assets (Notes 13 and 14) 4,496 3,738
-------- --------
TOTAL ASSETS $363,406 $325,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits: (Notes 4, 5, and 9)
Demand $ 31,492 $ 28,460
Savings 155,232 128,926
Time 125,705 123,477
-------- --------
Total deposits 312,429 280,863
Accrued expenses and other liabilities 4,595 4,466
Short-term borrowings (Note 10) 540 930
Long-term debt (Note 11) 20,700 22,750
-------- --------
Total liabilities 338,264 309,009
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 2005 and 2004 200 200
Series C, issued and outstanding 108 shares in 2005 and 2004 27 27
Series D, issued and outstanding 3,280 shares in 2005 and 2004 820 820
Preferred stock, no par value, perpetual noncumulative:
Authorized 200 shares;
Series E, issued and outstanding 28 shares in 2005 1,400 --
Preferred stock, no par value, perpetual noncumulative:
Authorized 7,000 shares;
Series F, issued and outstanding 7,000 shares in 2005 6,790 --
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2005 and 2004
133,650 shares outstanding in 2005 and 133,866 shares outstanding
in 2004 1,345 1,345
Surplus 1,115 1,113
Retained earnings 14,464 12,701
Accumulated other comprehensive (loss) gain (973) 106
Treasury stock, at cost - 880 and 664 common shares in 2005 and 2004,
respectively (46) (33)
-------- --------
Total stockholders' equity 25,142 16,279
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $363,406 $325,288
======== ========
See accompanying notes to consolidated financial statements.
18
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
------------------------------
Dollars in thousands, except per share data 2005 2004 2003
-------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 10,980 $ 8,861 $ 7,765
Interest on Federal funds sold and securities
purchased under agreements to resell 759 280 128
Interest on deposits with banks 35 245 510
Interest and dividends on investment securities:
Taxable 5,707 4,552 3,267
Tax-exempt 692 473 414
-------- -------- --------
Total interest income 18,173 14,411 12,084
-------- -------- --------
INTEREST EXPENSE
Interest on deposits (Note 9) 5,970 3,662 2,343
Interest on short-term borrowings 85 8 10
Interest on long-term debt 1,225 1,097 913
-------- -------- --------
Total interest expense 7,280 4,767 3,266
-------- -------- --------
Net interest income 10,893 9,644 8,818
Provision for loan losses (Note 7) 126 213 129
-------- -------- --------
Net interest income after provision
for loan losses 10,767 9,431 8,689
-------- -------- --------
OTHER OPERATING INCOME
Service charges on deposit accounts 1,152 1,221 1,197
Other income (Note 12) 1,080 1,365 1,396
Net (losses) gains on securities transactions (Notes 4 and 5) (96) (13) 12
-------- -------- --------
Total other operating income 2,136 2,573 2,605
-------- -------- --------
OTHER OPERATING EXPENSES
Salaries and other employee benefits (Note 14) 5,312 4,868 4,760
Occupancy expense (Note 8) 846 755 717
Equipment expense (Note 8) 579 488 434
Other expenses (Note 12) 2,969 2,905 2,936
-------- -------- --------
Total other operating expenses 9,706 9,016 8,847
-------- -------- --------
Income before income tax expense 3,197 2,988 2,447
Income tax expense (Note 13) 862 862 726
-------- -------- --------
NET INCOME $ 2,335 $ 2,126 $ 1,721
======== ======== ========
NET INCOME PER COMMON SHARE (NOTE 17)
Basic $ 16.20 $ 15.52 $ 12.94
Diluted 15.52 15.52 12.55
======== ======== ========
Basic average common shares outstanding 133,654 132,646 127,854
Diluted average common shares outstanding 139,511 132,646 132,129
-------- -------- --------
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 3.00 $ 2.75 $ 2.50
======== ======== ========
See accompanying notes to consolidated financial statements.
19
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS 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, 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 ($193)) -- -- -- -- (359) -- (359)
Reclassification adjustment for gains (losses)
included in net income (net of tax of $5) -- -- -- -- 7 -- 7
-------
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
Comprehensive income:
Net income -- -- -- 2,126 -- -- 2,126
Unrealized holding gains on securities
arising during the period (net of tax of $78) -- -- -- -- 146 -- 146
Reclassification adjustment for gains (losses)
included in net income (net of tax of $(5)) -- -- -- -- (8) -- (8)
-------
Total comprehensive income 2,264
Proceeds from issuance of common stock -- 45 -- -- -- 123 168
Purchase of treasury stock -- -- -- -- -- (36) (36)
Dividends paid on common stock -- -- -- (361) -- -- (361)
Dividends paid on preferred stock -- -- -- (67) -- -- (67)
------ ------ ------ ------- ------- ---- -------
BALANCE, DECEMBER 31, 2004 1,345 1,113 1,047 12,701 106 (33) 16,279
Comprehensive income:
Net income -- -- -- 2,335 -- -- 2,335
Unrealized holding losses on securities
arising during the period (net of tax of $698) -- -- -- -- (1,010) -- (1,010)
Reclassification adjustment for gains (losses)
included in net income (net of tax of $(27)) -- -- -- -- (69) -- (69)
-------
Total comprehensive income 1,256
Proceeds from issuance of preferred stock 8,190 -- -- -- 8,190
Proceeds from issuance of common stock -- 2 -- -- -- 23 25
Purchase of treasury stock -- -- -- -- -- (36) (36)
Dividends paid on common stock -- -- -- (402) -- -- (402)
Dividends paid on preferred stock -- -- -- (170) -- -- (170)
------ ------ ------ ------- ------- ---- -------
Balance, December 31, 2005 $1,345 $1,115 $9,237 $14,464 ($973) ($46) $25,142
====== ====== ====== ======= ======= ==== =======
See accompanying notes to consolidated financial statements.
20
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
IN THOUSANDS 2005 2004 2003
-------- --------- --------
OPERATING ACTIVITIES
Net income $ 2,335 $ 2,126 $ 1,721
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 465 424 422
Provision for loan losses 126 213 129
Premium amortization (discount accretion) on investment securities 118 (129) 217
Amortization of intangible assets 120 120 120
Net losses (gains) on securities transactions 96 13 (12)
Net gains on sales of loans held for sale (18) (46) (20)
Loans originated for sale (2,088) (4,788) (2,966)
Proceeds from sales and principal payments of loans held for sale 1,982 5,386 2,434
(Increase) decrease in accrued interest receivable (391) (361) 91
Deferred taxes (698) 346 (42)
Net increase in bank-owned life insurance (46) (93) (147)
Decrease (increase) in other assets 950 (213) (71)
(Decrease) increase in accrued expenses and other liabilities (305) 1,188 (287)
-------- --------- --------
Net cash provided by operating activities 2,646 4,186 1,589
-------- --------- --------
INVESTING ACTIVITIES
Increase in loans (19,758) (27,801) (22,605)
(Increase) decrease in interest-bearing deposits with banks (399) 2,855 (188)
Proceeds from maturities of investment securities available for sale,
including principal payments and early redemptions 64,944 226,086 34,607
Proceeds from maturities of investment securities held to maturity,
including principal payments and early redemptions 8,536 9,025 20,166
Proceeds from sales of investment securities available for sale 16,100 905 5,222
Purchases of investment securities available for sale (87,508) (284,655) (37,545)
Purchases of investment securities held to maturity (10,737) (16,297) (20,481)
Purchase of bank-owned life insurance -- -- (1,000)
Purchases of premises and equipment (814) (409) (263)
Decrease in other real estate owned, net -- 290 62
-------- --------- --------
Net cash used in investing activities (29,636) (90,001) (22,025)
-------- --------- --------
FINANCING ACTIVITIES
Purchase of deposits -- 80,704 --
Increase in deposits 31,566 1,788 16,477
(Decrease) increase in short-term borrowings (390) 40 890
Proceeds from issuance of long-term debt -- 4,000 4,500
Repayments of long-term debt (2,050) (568) (1,300)
Proceeds from issuance of common stock 25 168 --
Proceeds from issuance of preferred stock 8,190 -- --
Purchases of treasury stock (36) (36) (85)
Dividends paid on preferred stock (170) (67) (67)
Dividends paid on common stock (402) (361) (311)
-------- --------- --------
Net cash provided by financing activities 36,733 85,668 20,104
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 9,743 (147) (332)
Cash and cash equivalents at beginning of year 11,717 11,864 12,196
-------- --------- --------
Cash and cash equivalents at end of year $ 21,460 $ 11,717 $ 11,864
======== ========= ========
Cash paid during the year:
Interest $ 7,417 $ 4,245 $ 3,333
Income taxes 531 851 472
Supplemental schedule for noncash investing activities:
Conversion of long-term debt into common stock -- -- 154
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 subsidiaries, City National Bank of New
Jersey (the "Bank" or "CNB") City National Bank of New Jersey Capital Trust I
and City National Bank of New Jersey Capital Trust II conform with U.S.
generally accepted accounting principles 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 implemented a new capital plan effective December 1, 2005.
Overall, the plan better correlates member stock ownership with advance activity
levels to provide sufficient capital to conservatively manage the business.
The key changes in the capital plan include: (1)new risk-based capital
requirements, (2)membership capital requirements based on mortgage-related
assets, (3)activity-based capital requirements for advances, and (4)a five-year
waiting period for membership withdrawal. The new plan allows the Bank to use as
eligible collateral for advances a higher level of mortgage-related assets and
reduces the amount of the Bank's stock requirement.
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. Generally, losses on loans are charged against
the allowance for loan losses when it is believed that the collection of all or
a portion of the principal balance is unlikely and the collateral is not
adequate. 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. Leasehold improvements, carried at cost, net of
accumulated depreciation, are amortized over the terms of the leases or the
estimated useful lives of the assets, whichever are shorter, using the
straight-line
22
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 ASSETS
Other assets includes the Corporation's thirty-three percent ownership interest
in a limited liability leasing company. The investment in the unconsolidated
investee is carried on the equity method of accounting whereby the carrying
value of the investment reflects the Corporation's initial cost of the
investment and the Corporation's share of the leasing company's annual net
income or loss.
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.
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, its estimated useful life, and is reviewed for impairment in
accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long
Lived Assets." Amortization totaled $120,000 in 2005, 2004 and 2003,
respectively.
The net discount recorded on the deposits purchased during 2004 is being
accreted into income as a cost of funds adjustment on the related deposits over
the estimated average life of such deposits. Additional premium amortization or
discount accretion is recorded as an increase or decrease of amortization
expense of core deposit intangibles for accounts that terminate their
relationships earlier than expected.
LONG-TERM DEBT
The Corporation has sold $7 million of trust preferred securities through two
wholly-owned statutory business trusts. Neither trust has independent assets or
operations and both exist for the sole purpose of issuing trust preferred
securities and investing the proceeds thereof in an equivalent amount of junior
subordinated debentures issued by the Corporation. The junior subordinate
debentures, which are the sole assets of the trusts, are unsecured obligations
of the Corporation and are subordinate and junior in right of payment to all
present and future senior and subordinated indebtedness and certain other
financial obligations of the Corporation.
On December 10, 2003, the FASB issued FASB Interpretation No. 46R ("FIN 46R"),
which replaced FIN 46. FIN 46R clarifies the applications of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements" to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN 46R required
the Corporation to de-consolidate its investments in the trusts recorded as
long-term debt.
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 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 May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 154, "Accounting Changes and Error
Corrections: a replacement of APB Opinion No. 20 and FASB Statement 3."
(SFAS No. 154), which requires a corporation to apply voluntary changes in
accounting principles retrospectively wherever it is practicable. The
retrospective application requirement replaces the requirement in APB 20 to
recognize most voluntary changes in accounting principles by including the
cumulative effect of the change in net income during the period the change
occurred. Retrospective application will be the required transition period for
new accounting pronouncements in the event that a newly-issued pronouncement
does not specify transition guidance. SFAS No. 154 is effective for accounting
periods starting in the fiscal year beginning after December 15, 2005.
In November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
"The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("FSP FAS 115-1"). FSP FAS 115-1 addresses the determination as to
whether an investment is considered impaired, whether the impairment is other
than temporary, and the measurement of an impairment loss. FSP FAS 115-1
requires that (1) for each individual impaired security, a company assert its
ability and intent to hold to recovery and to designate an expected recovery
period in order to avoid recognizing an impairment charge through earnings; (2)
a company need not make such an assertion for minor impairments caused by
changes in interest rate and sector spreads; (3) the company must recognize an
impairment charge on securities impaired as a result of interest rate and/or
sector spreads immediately upon changing their assertion to an intent to sell
such security; and (4) defines when a change in a company's assertion for one
security would not call into question assertions made for the other impaired
securities. FSP FAS 115-1 is effective for other-than-temporary impairment
analysis conducted in reporting periods beginning after December 15, 2005. City
National Bank does not expect the adoption of FSP FAS 115-1 to have a
significant impact on its financial condition or results of operations.
23
RECLASSIFICATIONS
Certain reclassifications have been made to the 2004 and 2003 consolidated
financial statements in order to conform with the 2005 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 $1,300,000 in
2005 and $1,123,000 in 2004.
NOTE 3 FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Federal funds sold averaged $23.6 million during 2005 and $21.1 million in 2004,
while the maximum balance outstanding at any month-end during 2005, 2004 and
2003 was $39.1 million, $35.3 million and $28.4 million, respectively. There
were no securities purchased under repurchase agreements in either 2005 or 2004.
There were no such transactions outstanding at any month-end during 2005, 2004
or 2003.
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
2005 In thousands Cost Gains Losses Value
--------- ---------- ---------- --------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 3,831 $ 8 $ 8 $ 3,831
Obligations of U.S.
government sponsored
entities 29,328 8 437 28,899
Obligations of state and
political subdivisions 943 55 -- 998
Mortgage-backed
securities 70,834 51 1,249 69,636
Other debt securities 4,424 91 88 4,427
Equity securities:
Marketable securities 589 -- 31 558
Nonmarketable
securities 115 -- -- 115
Federal Reserve Bank
and Federal Home
Loan Bank stock 1,261 -- -- 1,261
-------- ---- ------ --------
Total $111,325 $213 $1,813 $109,725
======== ==== ====== ========
Gross Gross
Amortized Unrealized Unrealized Market
2004 In thousands Cost Gains Losses Value
--------- ---------- ---------- --------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 2,091 $ -- $ 1 $ 2,090
Obligations of U.S.
government sponsored
entities 18,272 34 115 18,191
Obligations of state and
political subdivisions 1,267 98 -- 1,365
Mortgage-backed securities 76,943 585 534 76,994
Other debt securities 4,421 90 1 4,510
Equity securities:
Marketable securities 891 31 10 912
Nonmarketable
securities 115 -- -- 115
Federal Reserve Bank
and Federal Home
Loan Bank stock 1,089 -- -- 1,089
-------- ---- ---- --------
Total $105,089 $838 $661 $105,266
======== ==== ==== ========
The amortized cost and the market values of investments in debt securities
available for sale as of December 31, 2005 and 2004 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 $ 2,083 $ 2,081
Obligation of U.S. government sponsored
entities 6,191 6,184
Due after one year but within five years:
Obligations of U.S. government sponsored
entities 7,932 7,867
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 135 135
Obligation of U.S. government sponsored
entities 6,516 6,276
Mortgage-backed securities 5,722 5,550
Obligations of state and political
subdivisions 696 722
Other debt securities 1,000 912
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 1,613 1,615
Obligation of U.S. government sponsored
entities 8,689 8,572
Mortgage-backed securities 65,112 64,086
Obligations of state and political
subdivisions 247 276
Other debt securities 3,424 3,515
-------- --------
Total debt securities 109,360 107,791
Equity securities 1,965 1,934
-------- --------
Total $111,325 $109,725
======== ========
Sales of investment securities available for sale resulted in gross gains of
$32,000, $39,000 and $24,000 and gross losses of $131,000, $53,000 and $21,000
in 2005, 2004 and 2003 respectively.
Interest and dividends on investment securities available for sale was as
follows:
In thousands 2005 2004 2003
------ ------ ------
Taxable $4,567 $3,225 $1,936
Tax-exempt 67 71 92
------ ------ ------
Total $4,634 $3,296 $2,028
====== ====== ======
Investment securities available for sale with a carrying value of $78,882,000
were pledged to secure U.S. government and municipal deposits at December 31,
2005.
24
Investment securities available for sale which have had continuous unrealized
losses as of December 31, are set forth below
Less than 12 Months 12 Months or More Total
------------------------- ------------------------- -------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
2005 In thousands Market Value Losses Market Value Losses Market Value Losses
------------ ---------- ------------ ---------- ------------ ----------
U.S. Treasury securities and obligations
of U.S. government agencies $ 3,125 $ 8 $ -- $ -- $ 3,125 $ 8
Obligations of U.S. government sponsored
entities 11,345 241 4,081 196 15,426 437
Mortgaged-backed securities 37,079 710 17,469 539 54,548 1,249
Other debt securities 1,000 -- 912 88 1,912 88
Equity securities 558 31 -- -- 558 31
------- ---- ------- ---- ------- ------
Total $53,107 $990 $22,462 $823 $75,569 $1,813
======= ==== ======= ==== ======= ======
Less than 12 Months 12 Months or More Total
------------------------- ------------------------- -------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
2004 In thousands Market Value Losses Market Value Losses Market Value Losses
------------ ---------- ------------ ---------- ------------ ----------
U.S. Treasury securities and obligations
of U.S. government agencies $ 2,090 $ 98 $1,614 $ 34 $ 3,704 $132
Mortgaged-backed securities 52,608 251 8,086 267 60,694 518
Other debt securities 999 1 -- -- 999 1
Equity securities 9 1 62 9 71 10
------- ---- ------ ---- ------- ----
Total $55,706 $351 $9,762 $310 $65,468 $661
======= ==== ====== ==== ======= ====
The gross unrealized losses set forth above as of December 31, 2005 were
attributable primarily to mortgage-backed securities, the market value of which
has been negatively impacted by the higher interest rate environment. Management
does not believe that any individual unrealized loss as of December 31, 2005 or
2004 represents an other-than-temporary impairment. 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
2005 In thousands Value Gains Losses Value
------- ---------- ---------- -------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 8 $ -- $ -- $ 8
Obligations of U.S.
government sponsored
entities 9,000 -- 224 8,776
Obligations of state and
political subdivisions 21,563 293 146 21,710
Mortgage-backed securities 6,837 44 122 6,759
Other debt securities 2,011 163 -- 2,174
------- ---- ---- -------
Total $39,419 $500 $492 $39,427
======= ==== ==== =======
Gross Gross
Book Unrealized Unrealized Market
2004 In thousands Value Gains Losses Value
------- ---------- ---------- -------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 15 $ 1 $ -- $ 16
Obligations of U.S.
government sponsored
entities 12,097 15 156 11,956
Obligations of state and
political subdivisions 14,344 469 21 14,792
Mortgage-backed securities 8,734 134 43 8,825
Other debt securities 2,014 276 -- 2,290
------- ---- ---- -------
Total $37,204 $895 $220 $37,879
======= ==== ==== =======
During 2005, $6.7 million of Agency callable securities were redeemed by the
issuers prior to maturity, resulting in gross gains of $3,000, while in 2004
$6.3 million of such securities were redeemed, resulting in gross gains of
$1,000 and $15.6 million were redeemed in 2003 resulting in gross gains of
$9,000.
The book value and the market value of investment securities held to maturity as
of December 31, 2005 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 after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies $ 8 $ 8
Obligations of state and political
subdivisions 337 345
Due after five years but within ten years:
Obligations of U.S. government sponsored
entities 1,500 1,471
Obligations of state and political
subdivisions 9,388 9,440
Mortgage-backed securities 440 441
Other debt securities 2,011 2,174
Due after ten years:
Obligations of U.S. government sponsored
entities 7,500 7,305
Obligations of state and political
subdivisions 11,838 11,925
Mortgage-backed securities 6,397 6,318
------- -------
Total $39,419 $39,427
======= =======
Interest and dividends on investment securities held to maturity was as follows:
In thousands 2005 2004 2003
------ ------ ------
Taxable $1,140 $1,321 $1,331
Tax-exempt 625 402 322
------ ------ ------
Total $1,765 $1,723 $1,653
====== ====== ======
Investment securities held to maturity with a carrying value of $12,325,000 were
pledged to U.S. government and municipal deposit funds at December 31, 2005.
25
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
Unrealized Unrealized Unrealized
2005 In thousands Market Value Losses Market Value Losses Market Value Losses
------------ ---------- ------------ ---------- ------------ ----------
Obligations of U.S. government
sponsored entities $ 4,921 $ 79 $3,855 $145 $ 8,776 $224
Obligations of state and political
subdivisions 9,531 133 183 13 9,714 146
Mortgage-backed securities 3,178 31 2,228 91 5,406 122
Other debt securities -- -- -- -- -- --
------- ---- ------ ---- ------- ----
Total $17,630 $243 $6,266 $249 $23,896 $492
======= ==== ====== ==== ======= ====
Less than 12 Months 12 Months or More Total
------------------------- ------------------------- -------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
2004 In thousands Market Value Losses Market Value Losses Market Value Losses
------------ ---------- ------------ ---------- ------------ ----------
U.S. Treasury securities and obligations
of U.S. government agencies $5,180 $59 $2,403 $ 97 $ 7,583 $156
Obligations of state and political
subdivisions 2,986 11 196 10 3,182 21
Mortgaged-backed securities 883 10 2,554 33 3,437 43
------ --- ------ ---- ------- ----
Total $9,049 $80 $5,153 $140 $14,202 $220
====== === ====== ==== ======= ====
Management does not believe that any individual unrealized loss as of December
31, 2005 or 2004 represents an other-than-temporary impairment. 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 2005 2004
-------- --------
Commercial $ 22,536 $ 16,450
Real estate 155,711 142,085
Installment 1,261 1,171
Total loans 179,508 159,706
Less:Unearned income 291 347
-------- --------
Loans $179,217 $159,359
======== ========
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 2005 2004
------ ------
Nonaccrual loans $1,848 $ 991
Loans with interest or principal 90
days or more past due and still
accruing 168 222
------ ------
Total nonperforming loans $2,016 $1,213
====== ======
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 2005 2004 2003
---- ---- ----
Interest income foregone $(56) $(42) $(54)
Interest income received 162 88 45
---- ---- ----
$106 $ 46 $ (9)
==== ==== ====
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, 2005 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. The 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, 2005, or at December 31, 2004.
NOTE 7 ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
In thousands 2005 2004 2003
------ ------ ------
Balance, January 1 $2,200 $2,200 $2,100
Provision for loan losses 126 213 129
Recoveries of loans previously charged off 58 32 178
------ ------ ------
2,384 2,445 2,407
Less: Charge-offs 84 245 207
------ ------ ------
Balance, December 31 $2,300 $2,200 $2,200
====== ====== ======
NOTE 8 PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
In thousands 2005 2004
------ ------
Land $ 476 $ 476
Premises 1,892 1,892
Furniture and equipment 3,869 3,582
Leasehold improvements 3,222 2,698
------ ------
Total cost 9,459 8,648
Less: Accumulated depreciation and amortization 5,117 4,655
------ ------
Total premises and equipment $4,342 $3,993
====== ======
Depreciation and amortization expense charged to operations amounted to
$465,000, $424,000, and $422,000 in 2005, 2004, and 2003, respectively.
26
NOTE 9 DEPOSITS
Deposits at December 31 are presented below.
In thousands 2005 2004
-------- --------
Noninterest bearing:
Demand $ 31,492 $ 28,460
Savings 194 694
-------- --------
Total noninterest bearing deposits 31,686 29,154
-------- --------
Interest bearing:
Savings 32,499 32,920
Money market 94,128 72,384
Super-NOW 28,411 22,928
Time 125,705 123,477
-------- --------
Total interest bearing deposits 280,743 251,709
-------- --------
Total deposits $312,429 $280,863
======== ========
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 2005 2004
------- -------
Three months or less $23,525 $20,618
Over three months but within six months 11,105 12,433
Over six months but within twelve months 10,107 8,689
Over twelve months 16,759 14,139
------- -------
Total deposits $61,496 $55,879
======= =======
Interest expense on certificates of deposits of $100,000 or more was $918,000,
$894,000 and $438,000 in 2005, 2004 and 2003, respectively.
On June 25, 2004, the Bank purchased the money market and time deposit
portfolios of two financial institutions totalling $80.7 million. The portfolios
were purchased at a net discount of $1.9 million, of which $284,000 remained at
December 31, 2005.
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
------- -------- -------- -------- -------
2005
Federal funds purchased $ -- --% $1,333 3.65% $ 9,200
Securities sold under repurchase
agreements 540 .50% 588 3.47 3,254
Demand note issued to the U.S.
Treasury -- -- 553 2.82 6,000
---- --- ------ ---- -------
Total $540 .50% $2,474 3.42% $18,454
==== === ====== ==== =======
2004
Federal funds purchased $ -- --% $ -- --% $ --
Securities sold under repurchase
agreements 930 .30 60 .28 1,560
Demand note issued to the U.S.
Treasury -- -- 695 1.15 813
---- --- ------ ---- -------
Total $930 .30% $ 755 1.06% $ 2,373
==== === ====== ==== =======
The demand note, which has no stated maturity, issued by the Bank to the U.S.
Treasury Department is payable with interest at 25 basis points less than the
weekly average of the daily effective Federal Funds rate and is collateralized
by various investment securities held at the Federal Reserve Bank of New York
with a book value of $7,743,000. There was no balance outstanding under the note
at December 31, 2005.
The Corporation has borrowing lines totalling $8 million at December 31, 2005
with the Federal Home Loan Bank and various correspondent banks which were
unused at December 31, 2005 and 2004.
NOTE 11 LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
In thousands 2005 2004
------- -------
FHLB convertible advances due from
April 7, 2008 through October 4, 2010 $11,700 $13,200
5.25% capital note, due December 28, 2005 -- 450
5.00% capital note, due July 1, 2008 300 400
6.00% capital note, due December 28, 2010 500 500
7.00% note, due January 1, 2014 1,000 1,000
8.00% capital note, due May 6, 2017 200 200
Subordinated debt 7,000 7,000
------- -------
Total $20,700 $22,750
======= =======
Interest is payable quarterly on the FHLB advances. The advances bear fixed
interest rates ranging from 2.56% 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 5.00% capital note with principal
payments continuing annually until July, 2008.
Interest is payable quarterly on the 6.00% capital note 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 on the 8.00% capital note semiannually through May 6, 2017,
at which time the entire principal balance is due. The note is renewable at the
option of the Corporation for an additional fifteen years at the prevailing rate
of interest.
Scheduled repayments on long-term debt are as follows:
In thousands Amount
-------
2006 $ 325
2007 1,825
2008 7,825
2009 1,600
2010 2,125
Thereafter 7,000
-------
Total $20,700
=======
In July 2002, CNB issued $3 million in subordinated debentures to an
unconsolidated subsidiary trust, based on the current three month LIBOR rate,
plus 3.65%. The rate in effect at December 31, 2005 was 7.80%.
In March 2004, City National Bancshares Corporation issued $4 million of
subordinated debentures to an unconsolidated subsidiary trust, based on the
current three-month LIBOR rate, plus 2.79%. The rate in effect at December 31,
2005 was 7.29%.
Both debentures are eligible for inclusion in Tier 1 capital for regulatory
purposes.
The Corporation has borrowing lines with the Federal Home Loan Bank totaling $17
million, of which $11.7 million and $13.2 million was used and outstanding at
December 31, 2005 and 2004, respectively.
NOTE 12 OTHER OPERATING INCOME AND EXPENSES
The following table presents the major items of other operating income and
expenses:
27
In thousands 2005 2004 2003
------ ------ ------
OTHER INCOME
Agency fees on commercial loans $ 377 $ 385 $ 326
Income from off-site ATM's 316 324 235
Earnings on cash surrender value of
life insurance 179 212 187
Undistributed income (loss) from
unconsolidated investee (208) (45) 300
Miscellaneous other income 416 489 345
------ ------ ------
Total other income $1,080 $1,365 $1,396
====== ====== ======
OTHER EXPENSES
Data processing $ 375 $ 322 $ 292
Professional fees 351 337 259
Marketing expense 397 242 270
Merchant card charges 228 146 74
Communication expense 128 124 136
Credit card loss -- -- 295
Credit card loss recovery (217) -- --
Miscellaneous other expenses 1,707 1,734 1,610
------ ------ ------
Total other expenses $2,969 $2,905 $2,936
====== ====== ======
During 2005, the Bank received an award of $130,000 from the CDFI fund, of which
$40,000 was attributable to the Bank's lending efforts and $90,000 was
attributable to purchasing long-term deposits from banks in low-income areas.
The $40,000 award was recorded as other income because the related loans were
originated and repaid in 2003, while the $90,000 award is being recorded as
interest income, representing yield enhancement on the lives of the deposits
through 2006. No awards were received in 2004.
During 2003, the Bank received an award of $513,000 from the 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 in 2003 for opening a branch in a low-income
community. The loan and deposit awards received in 2003 awards are being
recorded as interest income, representing yield enhancement on the lives of the
loans and deposits through 2006.
During 2005, 2004 and 2003, $20,000, $199,000 and $386,000 respectively, was
recorded as interest income on deposits with banks as a yield enhancement. An
additional $54,000, $345,000 and $94,000 was recorded as interest income on
loans as a yield enhancement during 2005, 2004 and 2003, respectively.
NOTE 13 INCOME TAXES
The components of income tax expense are as follows:
In thousands 2005 2004 2003
------ ---- ----
CURRENT EXPENSE
Federal $ 922 $215 $574
State 297 105 194
------ ---- ----
1,219 320 768
------ ---- ----
DEFERRED EXPENSE (BENEFIT)
Federal (265) 479 (36)
State (92) 63 (6)
(357) 542 (42)
------ ---- ----
Total income tax expense $ 862 $862 $726
====== ==== ====
Not included in the above table is deferred income tax expense (benefit) of
$(698,000), $78,000 and $(193,000) for 2005, 2004 and 2003, respectively, which
represents the deferred income tax expense (benefit) included in accumulated
other comprehensive income 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 2005 2004 2003
------ ------ -----
Federal income tax at statutory rate $1,087 $1,016 $ 832
Increase (decrease) in income tax expense
resulting from:
State income tax expense, net of federal
benefit 135 111 124
Tax-exempt income (351) (233) (171)
Life insurance (45) (56) (59)
Other, net 36 24 --
------ ------ -----
Total income tax expense $ 862 $ 862 $ 726
====== ====== =====
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 2005 2004
------ ------
DEFERRED TAX ASSETS
Unrealized losses on investment securities
available for sale $ 627 $ --
Allowance for loan losses 684 545
Premises and equipment 84 59
Deposit intangible 93 73
Deferred compensation 734 558
Deferred income 114 80
Other assets 59 150
------ ------
Total deferred tax asset 2,395 1,465
====== ======
DEFERRED TAX LIABILITIES
Investment in partnership 323 377
Unrealized gains on investment securities
available for sale -- 71
Total deferred tax liabilities 323 448
------ ------
Net deferred tax asset $2,072 $1,017
====== ======
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 $72,000 in 2005, $12,000 in 2004 and $66,000 in
2003. Forfeited contributions were used to fund part of the 2004 savings plan
contributions.
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 2005, 2004 and 2003 amounted to $333,000, $205,000, and $170,000,
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 $231,000 in 2005, $164,000 in 2004 and
$147,000 in 2003. The Bank also has a director retirement plan ("DRIP"). DRIP
expense was $56,000 in 2005, $44,000 in 2004 and $52,000 in 2003.
Benefits under both plans are funded through bank-owned life insurance policies.
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
policies. Such increases are included in "Other income" and totalled $179,000 in
28
2005, $212,000 in 2004 and $187,000 in 2003, while the related life insurance
expense was $46,000 in 2005, $45,000 in 2004 and $40,000 in 2003.
Stock options
No stock options have been issued since 1997 and there were no stock options
outstanding at December 31, 2005, 2004 and 2003.
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 and liquidation rights. 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,
Year Dividend Stated Number -----------------------
Issued Rate Value of Shares 2005 2004
------ -------- --------- --------- ---------- ----------
Series A 1996 6.00% $ 25,000 8 $ 200,000 $ 200,000
Series C 1996 8.00 250 108 27,000 27,000
Series D 1997 6.50 250 3,280 820,000 820,000
Series E 2005 6.00 50,000 28 1,400,000 --
Series F 2005 8.53 7,000,000 7,000 6,790,000 --
---------- ----------
$9,237,000 $1,047,000
========== ==========
The Series E shares are convertible at any time into 333 shares of common stock
of the Corporation, and are redeemable any time by the Corporation after 2008 at
liquidation value. The Series F shares are redeemable after 2010 by the
Corporation at a declining premium until 2020, at which time the shares are
redeemable at par.
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, $4,380,000
was available for the payment of dividends to the parent corporation at December
31, 2005.
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 2005 2004 2003
-------- -------- --------
Net income $ 2,335 $ 2,126 $ 1,721
Dividends on preferred stock (170) (67) (67)
-------- -------- --------
Net income applicable to basic
common shares 2,165 2,059 1,654
Interest expense on convertible
subordinated debentures, net of
income taxes -- -- 4
Net income applicable to diluted -------- -------- --------
common shares $ 2,165 $ 2,059 $ 1,658
======== ======== ========
NUMBER OF AVERAGE COMMON SHARES
Basic 133,654 132,646 127,854
-------- -------- --------
Diluted:
Average common shares outstanding 133,654 132,646 127,854
Average potential dilutive common
shares 5,857 -- 4,275
-------- -------- --------
139,511 132,646 132,129
======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 16.20 $ 15.52 $ 12.94
Diluted 15.52 15.52 12.55
NOTE 18 RELATED PARTY TRANSACTIONS
Certain directors, including organizations in which they are officers or have
significant ownership, were customers of, and had other transactions with the
Bank in the ordinary course of business during 2005 and 2004. 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
$2,599,000 and $1,373,000 at December 31, 2005 and 2004, respectively. The
highest amount of such indebtedness during 2005 and 2004 was $2,599,000 and
$1,373,000, respectively. During 2005, new loans totalled $1,261,000 and
paydowns totalled $35,000. All related party loans were performing as of
December 31, 2005.
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, 2005 and 2004.
CASH, SHORT-TERM INVESTMENTS AND INTEREST-BEARING DEPOSITS WITH BANKS
These financial instruments have relatively short maturities or no defined
maturities but are payable on demand, with little or no credit risk. For these
instruments, the carrying amounts represent a reasonable estimate of fair value.
INVESTMENT SECURITIES
Investment securities are reported at their fair values based on quoted market
prices.
LOANS
Fair values were estimated for performing loans by discounting the future cash
flows using market discount rates that reflect the credit
29
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.
LOANS HELD FOR SALE
The fair value for loans held for sale is based on estimated secondary market
prices.
DEPOSIT LIABILITIES
The fair values of demand deposits, savings deposits and money market accounts
were the amounts payable on demand at December 31, 2005 and 2004. 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, 2005 and 2004.
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
2005 2004
Carrying Fair Carrying Fair
In thousands Value Value Value Value
-------- ------- -------- --------
FINANCIAL ASSETS
Cash and other short-term Investments $ 21,460 21,460 $ 11,717 $ 11,717
Interest-bearing deposits with banks 1,260 1,260 861 861
Investment securities AFS 109,725 109,725 105,266 105,266
Investment securities HTM 39,419 39,427 37,204 37,879
Loans 176,793 173,273 157,159 153,142
Loans held for sale 124 124 -- --
FINANCIAL LIABILITIES
Deposits 312,429 291,914 $280,863 $272,761
Short-term borrowings 540 540 930 930
Long-term debt 20,700 20,955 22,750 23,649
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.
At December 31, 2005 the Bank was obligated under a number of noncancelable
leases for premises and equipment, many of which provide for increased rentals
based upon increases in real estate taxes and the cost of living index. These
leases, most of which have renewal provisions, are considered operating leases.
Minimum rentals under the terms of these leases for the years 2006 through 2010
are $268,000, $248,000, $231,000, $234,000, and $240,000 respectively. Payments
due thereafter totalled $1,026,000.
Rental expense under the leases amount to $202,000, $163,000 and $131,000 during
2005, 2004 and 2003 respectively.
NOTE 21 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, commitments to extend standby
letters of credit, and could involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the consolidated financial
statements.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis, and the amount of collateral or other
security obtained is based on management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
primarily issued to support borrowing arrangements and extend for up to one
year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. Accordingly,
collateral is generally required to support the commitment.
At December 31, 2005 and 2004 the Bank had mortgage commitments of $46,144,000
and $27,077,000, unused commercial lines of credit of $37,968,000 and
$41,206,000, and $589,000 and $761,000 of other loan commitments, respectively.
There were no financial standby letters of credit outstanding at December 31,
2005, while $100,000 was outstanding at December 31, 2004.
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 2005 2004
------- -------
Assets
Cash and cash equivalents $ 60 $ 88
Investment securities available for sale -- 365
Investment in subsidiary 21,163 20,706
Due from subsidiary 13,190 4,963
Other assets 125 12
------- -------
Total assets $34,538 $26,134
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 179 $ 88
Notes payable 2,000 2,550
Subordinated debt 7,217 7,217
------- -------
Total liabilities 9,396 9,855
Stockholders' equity 25,142 16,279
------- -------
Total liabilities and stockholders' equity $34,538 $26,134
======= =======
30
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
------------------------
In thousands 2005 2004 2003
------ ------ ------
INCOME
Interest income $ 3 $ 13 $ 23
Dividends from subsidiaries 850 767 561
Interest from subsidiaries 551 186 56
------ ------ ------
Total income 1,404 966 640
------ ------ ------
EXPENSES
Interest expense 626 484 356
Other operating expenses 3 6 5
Net (gains) losses on sales of
investment securities (32) 34 7
Income tax benefit (15) (89) (95)
------ ------ ------
Total expenses 582 367 259
------ ------ ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED
income of subsidiaries 822 599 381
Equity in undistributed income
of subsidiaries 1,513 1,527 1,340
------ ------ ------
Net income $2,335 $2,126 $1,721
====== ====== ======
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
--------------------------
In thousands 2005 2004 2003
------- ------- ------
OPERATING ACTIVITIES
Net income $ 2,335 $ 2,126 $1,721
Adjustments to reconcile net income
to cash used in operating activities:
Discount accretion amortization
on investment securities -- -- (1)
Net (gains) losses on sales of investment
securities (32) (34) (7)
Equity in undistributed income of
subsidiary (1,513) (1,527) (1,340)
(Increase) decrease in other assets (113) 39 39
Increase (decrease) in other liabilities 91 13 (38)
------- ------- ------
Net cash provided by operating activities 768 617 374
------- ------- ------
INVESTING ACTIVITIES
Proceeds from sales and maturities of
investment securities available for sale
including principal payments 652 977 1,214
Proceeds from maturities of investment
securities held to maturity including
principal payments -- 174 151
Purchases of investment securities
available for sale (293) (5) (964)
Purchases of investment securities
held to maturity -- (900) --
Decrease (increase) in investment in
subsidiaries 15 (252) (174)
(Increase) decrease in loans to
subsidiaries (8,227) (3,962) 104
------- ------- ------
Net cash (used in) provided by investing
activities (7,853) (3,968) 331
------- ------- ------
FINANCING ACTIVITIES
Increase in subordinated debt -- 4,124 --
Decrease in notes payable (550) (475) (300)
Proceeds from issuance of preferred stock 8,190 -- --
Proceeds from issuance of common stock 25 168 --
Purchases of treasury stock (36) (36) (85)
Dividends paid (572) (428) (378)
------- ------- ------
Net cash provided by (used in) financing
activities 7,057 3,353 (763)
------- ------- ------
(Decrease) increase in cash and
cash equivalents (28) 2 (58)
Cash and cash equivalents at
beginning of year 88 86 144
------- ------- ------
Cash and cash equivalents at
end of year $ 60 $ 88 $ 86
======= ======= ======
NOTE 23 REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 2004, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total average assets
of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-adjusted
assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized bank. Such actions could have a direct material
effect on such bank's financial statements. The regulations establish a
framework for the classification of banks into five categories:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Generally, a bank is
considered well-capitalized if it has a leverage capital ratio of at least 5.0%,
a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FDIC about capital components, risk
adjustments and other factors.
Management believes that, as of December 31, 2005 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, 2005 and 2004, 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, 2005
Leverage (Tier 1)
capital $21,381 5.72% $ 8,511 4.00% $10,639 5.00%
Risk-based capital:
Tier 1 21,381 10.06 8,511 4.00 10,639 5.00
Total 23,681 11.14 17,022 8.00 21,277 10.00
December 31, 2004
Leverage (Tier 1)
capital 19,771 5.80 10,699 4.00 10,699 5.00
Risk-based capital:
Tier 1 19,771 10.91 7,145 4.00 7,530 6.00
Total 21,971 12.13 14,286 8.00 12,549 10.00
The Corporation was required to deconsolidate its investment in the subsidiary
trust formed in connection with the issuance of trust preferred securities in
2002 and 2004. 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,
2005, assuming the Corporation was not allowed to include the trust preferred
securities issued by the subsidiary trusts 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 trusts.
31
NOTE 24 SUMMARY OF QUARTERLY FINANCIAL INFORMATION
(unaudited) 2005
-------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
- ------------------------ ------- ------- ------- -------
Interest income $4,221 $4,419 $4,507 $5,026
Interest expense 1,541 1,643 1,856 2,240
------ ------ ------ ------
Net interest income 2,680 2,776 2,651 2,786
Provision for loan losses 40 37 15 34
Net gains (losses) on sales
of investment securities 27 (54) 4 (73)
Other operating income 623 589 587 433
Other operating expenses 2,303 2,268 2,479 2,656
------ ------ ------ ------
Income before income
tax expense 987 1,006 748 456
Income tax expense 301 295 197 69
------ ------ ------ ------
Net income 686 711 551 387
====== ====== ====== ======
Net income per share- basic $ 4.64 $ 5.31 $ 4.12 $ 2.13
====== ====== ====== ======
Net income per share- diluted $ 4.58 $ 5.10 $ 3.92 $ 1.99
====== ====== ====== ======
2004
-------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
- ---------------------- ------- ------- ------- -------
Interest income $3,206 $3,391 $3,750 $4,064
Interest expense 838 957 1,467 1,505
------ ------ ------ ------
Net interest income 2,368 2,434 2,283 2,559
Provision for loan losses 126 42 27 18
Net (losses) gains on sales
of investment securities 4 9 2 (28)
Other operating income 573 663 696 654
Other operating expenses 2,196 2,174 2,276 2,370
------ ------ ------ ------
Income before income
tax expense 623 890 678 797
Income tax expense 197 268 185 212
------ ------ ------ ------
Net income $ 426 $ 622 $ 493 $ 585
====== ====== ====== ======
Net income per share- basic $ 2.73 $ 4.73 $ 3.68 $ 4.37
====== ====== ====== ======
Net income per share-diluted $ 2.73 $ 4.73 $ 3.68 $ 4.37
====== ====== ====== ======
Net income per share data has been revised for 2004 and for the first, second
and third quarters of 2005. For these periods the Corporation had accrued the
dividends to be paid on preferred stock. SFAS No. 128, "Earnings per Share" (FAS
128) requires that net income available to common shareholders be computed by
deducting from net income dividends declared in the period, not accrued, on
preferred stock. In addition, during 2005, the Corporation issued convertible
preferred stock. FAS 128 requires that the dilutive effect of convertible
securities be reflected in net income per share by applying the if-converted
method. The Corporation had not applied the if-converted method in calculating
net income per share for the first, second and third quarters of 2005. The
Corporation has concluded that these adjustments are immaterial to the financial
statements on both a qualitative and quantitative basis for previously issued
quarterly financial statements. Accordingly, the adjustments have been made in
the current period financial statements.
Additionally, during the fourth quarter of 2005, the Corporation recorded in
"Other income" an $35,000 loss associated with a cumulative adjustment to
reflect the Bank's proportionate share of its equity investee's losses for the
nine-month period ended September 30, 2005.
32
Report of Independent Registered Public Accounting Firm
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 as of December 31, 2005 and 2004, 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,
2005. These consolidated financial statements are the responsibility of the
Company'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 the standards of the Public Company
Accounting Oversight Board (United States). 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 and subsidiary as of December 31, 2005 and 2004, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
/s/ KPMG LLP
- -----------------------
Short Hills, New Jersey
April 14, 2006
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants during 2005.
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 18, 2006.
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).
(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).
34
(3)(f) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual Preferred
Stock, Series E (incorporated by reference to Exhibit (3)(f) to
the Corporation's Quarterly Report on Form 10-Q for quarter ended
September 30, 2005).
(3)(g) 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 5, 2003 (incorporated herein by
reference to Exhibit 10(b) of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 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).
(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).
(10)(l) Purchase and Assumption Agreement dated as of March 31, 2004 by
and between Prudential Savings Bank, F.S.B., The Prudential Bank
and Trust Company and the Bank. (incorporated by reference to
Exhibit 10(l) to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004).
(11) Statement regarding computation of per share earnings. The
required information is included on page 27.
(21) Subsidiaries of the registrant. The required information is
included on page 3.
(31) Certificate of Periodic Report (302).
35
(32) Certificate of Periodic Report (906).
(c) No reports on Form 8-K were filed during the quarter ended
December 31, 2005.
36
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 23, 2006 Date: March 23, 2006
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 23, 2006
- -------------------------------------
Douglas E. Anderson
/s/ Barbara Bell Coleman Director March 23, 2006
- -------------------------------------
Barbara Bell Coleman
/s/ Eugene Giscombe Director, March 23, 2006
- ------------------------------------- Chairperson of the Board
Eugene Giscombe
/s/ Louis E. Prezeau Director, March 23, 2006
- ------------------------------------- President and Chief
Louis E. Prezeau Executive Officer
/s/ Lemar C. Whigham Director March 23, 2006
- -------------------------------------
Lemar C. Whigham
/s/ H. O'Neil Williams Director March 23, 2006
- -------------------------------------
H. O'Neil Williams
37