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| file | filename |
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| EX-99 - EX-99 - CITY NATIONAL BANCSHARES CORP | y84532exv99.htm |
| EX-32 - EX-32 - CITY NATIONAL BANCSHARES CORP | y84532exv32.htm |
| EX-31 - EX-31 - CITY NATIONAL BANCSHARES CORP | y84532exv31.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
or
| o | 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 State or other jurisdiction of incorporation or organization |
22-2434751 (I.R.S. Employer 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.
o Yes þ No
o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes þ No
o Yes þ No
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. þ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
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. o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
o Yes o No
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):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer
þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
o Yes þ No
The aggregate market value of voting stock held by nonaffiliates of the Registrant as of April 29,
2010 was approximately $3,614,000.
There were 131,290 shares of common stock outstanding at April 29, 2010
CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents
FORM 10-K
Table of Contents
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| PART I |
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| PART II |
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Item 8. Financial Statements and Supplementary Data |
22 | |||||||
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| PART III |
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| PART IV |
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| 53 | ||||||||
| EX-31 | ||||||||
| EX-32 | ||||||||
| EX-99 | ||||||||
Table of Contents
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, 2009, CNBC had consolidated total assets of
$466.3 million, total deposits of $380.3 million and stockholders’ equity of $31 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, although the
primary focus is on establishing commercial and municipal relationships. 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 35.4% 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 CNBC and CNB for “having
a primary purpose of promoting community development” and will facilitate attracting capital by
allowing both entities to benefit from the federal government’s New Market Tax Program, as well as
from the Bank enterprise Award (“BEA”) program, which provides awards for making investments or
opening branch offices in low-income areas within the Bank’s market area.
The Bank has been, and intends to continue to be, an urban community-oriented financial
institution providing financial services and loans for housing and commercial businesses within
its market area. The Bank oversees its ten-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 also acquired a branch office in Philadelphia, PA from
another financial institution in March 2007.
The Bank gathers deposits primarily from the communities and neighborhoods in close proximity to
its branches and has extensive deposit relationships with municipalities in the communities where
the Bank does business.
The Bank’s loans consist primarily of commercial real estate loans. 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 other financial institutions through 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
urban community in part through affiliations with municipalities in the cities where the Bank has
offices.
Employees
At December 31, 2009, the Bank employed 103 full-time equivalent employees. Management considers
relations with its employees to be excellent.
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 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.
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Table of Contents
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.
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. Based upon this limitation, no funds were available
for the payment of dividends to the parent corporation at December 31, 2009 since the
aforementioned net profit was a loss of $7.8 million.
The Bank is subject to a Formal Agreement with the Comptroller of the Currency (the “OCC”),
entered into on June 29, 2009. The Agreement is based on the results of the most recent annual
examination of the Bank. The Agreement provides, among other things, the enhancement and
implementation of certain programs to reduce the Bank’s credit risk, along with the development of
a profit plan and capital program, the development of a contingency funding plan and the correction
of deficiencies in its loan administration. The OCC also indicated that the Bank improve its
capital ratios and seek outside capital.
The Agreement may significantly affect the operations of both the Bank and the parent holding
company, particularly in the event that the Bank fails to comply with the provisions of the
Agreement, which may also result in more severe enforcement actions and other restrictions. The
Bank is currently not in compliance with certain provisions of the Agreement, however, management
has taken steps to remedy these noncompliance matters. In addition, because the Bank’s leverage
ratio is less than 8%, management is currently discussing with the OCC the impact of falling
below this threshold. Management expects to achieve an 8% leverage ratio by December 31, 2010.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a
depository institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with the default of a commonly
controlled FDIC-insured depository institution or any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default, or deferred by the FDIC.
Further, under FIRREA, the failure to meet capital guidelines could subject a banking institution
to a variety of enforcement remedies available to federal regulatory authorities, including the
termination of deposit insurance by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires each federal
banking agency to revise its risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit risk and the risks of
non-traditional activities. In addition, each federal banking agency has promulgated regulations,
specifying the levels at which a financial institution would be considered “well capitalized”,
“adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, or “critically
undercapitalized”, and to take certain mandatory and discretionary supervisory actions based on
the capital level of the institution.
The OCC’s regulations implementing these provisions of FDICIA provide that an institution will be
classified as “well capitalized” if it has a total risk-based capital ratio of at least 10%, has a
Tier 1 risk-based
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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.
As a result of the rapid deterioration in economic conditions, the U.S. Treasury Department
enacted the Emergency Economic Stabilization Act of 2008, which includes provisions intended to
provide economic relief. Among them, and as part of the Troubled Asset Relief Program (“TARP”),
the Capital Purchase Program (“CPP”) authorized the investment by the Treasury Department of up to
$250 billion in eligible financial institutions in the form of non-voting senior preferred stock
bearing an annual dividend of 5% for the first five years and increasing to 9% thereafter. The
preferred stock will count as Tier I capital for regulatory purposes. The Corporation received
$9.4 million of this capital in April 2009, the maximum amount allowed. $9 million was
downstreamed to the Bank as common equity.
Additionally, the FDIC approved a Temporary Liquidity Guarantee Program (“TLG Program”), intended
to improve liquidity in the financial institution sector. Under this program, the FDIC is
providing FDIC insured financial institutions with the option of providing unlimited insurance
coverage on noninterest-bearing transaction accounts as well as NOW
accounts paying no more than a .50% rate of interest. This program will be effective until December 31, 2013. CNB has elected
to participate in this program. The fee for participating in this program is .10% of the covered
deposits.
Additionally, the TLG provides for a Debt Guarantee Program which provides FDIC insured financial
institutions with the option of providing FDIC insurance coverage for debt issued through June 30,
2009. This coverage expires on June 30, 2012. The fee for participating in this program ranges
from .50% to 1%, depending on the term of the debt. CNB has elected not to participate in this
program.
FDIC insurance
On May 22, 2009, the FDIC adopted a final rule levying a five basis point special assessment on
each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The special
assessment was paid on September 30, 2009. The Bank recorded an expense of $255,000 during the
quarter ended June 30, 2009, to reflect the special assessment.
On November 12, 2009, the FDIC issued a final rule that required insured depository institutions to
prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012, together with their quarterly risk-based
assessment for the third quarter 2009. The Bank prepaid approximately $3.4 million, of which $3.2
million was recorded as a prepaid asset, in assessments as of December 31, 2009. The payment
applicable to 2010 through 2012 will be charged to expense with quarterly amortization charges
based on deposit levels.
Financial regulatory reform proposals
Recent economic and market conditions have led to numerous proposals for changes in the regulation
of the financial industry in an effort to prevent future crises and reform the financial regulatory
system. President Obama’s administration has released a comprehensive plan for regulatory reform in
the financial industry. The Administration’s plan contains significant proposed structural reforms,
including heightened powers for the Federal Reserve to regulate risk across the financial agencies,
a Consumer Financial Protection Agency and a new National Bank Supervisor. The plan also calls for
new substantive regulation across the financial industry, including more heightened scrutiny and
regulation for any financial firm whose combination of size, leverage, and interconnectedness could
pose a threat to financial stability if it failed. In furtherance of the Administration’s plan,
legislation enabling the creation of the Consumer Financial Protection Agency has recently been
passed by the U.S House of Representatives. The legislation would subject federally chartered
financial institutions to state consumer protection laws that have historically been preempted.
Item 1a. Risk factors
An investment in City National Bancshares is subject to risks inherent to the financial services
business. The risks and uncertainties that management believes are material are described below.
Before making an investment decision, these risks and uncertainties should be carefully considered
together with all of the other information included or incorporated by reference herein. The risks
and uncertainties described below are not the only ones facing the Corporation. Additional risks
and uncertainties that management is not aware of or that management currently believes are
immaterial may
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also impair the Corporation’s business operations. The value or market price of our securities
could decline due to any of these identified or other risks, and all or part of your investment may
be lost as a result.
In addition to the aforementioned information contained in this Annual Report on Form 10-K, the
following risk factors represent material updates and additions to the risk factors previously
disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008.
Additional risks not presently known to us, or that we currently deem immaterial, may also
adversely affect our business, financial condition or results of operations. Further, to the
extent that any of the information contained herein constitutes forward looking statements, the
risk factor set forth below also is a cautionary statement identifying important factors that could
cause actual results to differ materially from those expressed in any forward looking statements
presented herein.
Illiquidity in the Corporation’s stock
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.
Concentration of deposit accounts
A substantial part of the Bank’s deposit customers are comprised of municipalities. Balances in
these accounts may change significantly on a day-to-day basis and must generally be collateralized
or otherwise secured. Additionally, these relationships may change rapidly based on factors other
than the cost of or quality of services provided by the Bank to the municipalities, such as
changes in elected officials.
Negative impact of a prolonged economic downturn
The economic downturn has resulted in uncertainty in the financial markets in general with the
possibility of a slow recovery or a fall back into recession. The Federal Reserve, in an attempt to
help the overall economy, has kept interest rates low through its targeted federal funds rate and
the purchase of mortgage- backed securities. If the Federal Reserve increases the federal funds
rate, overall interest rates will likely rise which may negatively impact the housing markets and
the U.S. economic recovery. A prolonged economic downturn or the return of negative developments in
the financial services industry could negatively impact the Corporation’s operations by causing an
increase in the provision for loan losses and a deterioration of the loan portfolio. Such a
downturn may also adversely affect the ability to originate or sell loans. The occurrence of any of
these events could have an adverse impact the financial performance of the Corporation.
Most of the Bank’s lending is in northern and central New Jersey, and the New York City
metropolitan area. As a result of this geographic concentration, a further significant broad-based
deterioration in economic conditions in New Jersey and the New York City metropolitan area could
have a material adverse impact on the quality of the Bank’s loan portfolio, results of operations
and future growth potential. A prolonged decline in economic conditions in the Bank’s market area
could restrict borrowers’ ability to pay outstanding principal and interest on loans when due, and,
consequently, adversely affect the Bank’s cash flows and results of operations.
The Bank’s loan portfolio is largely secured by real estate collateral. A substantial portion of
the property securing the loans is located in New Jersey and the New York City metropolitan area.
Conditions in the real estate markets in which the collateral for the Bank’s loans are located
strongly influence the level of the Bank’s non-performing loans and results of operations. A
continued decline in the New Jersey and New York City metropolitan area real estate markets could
adversely affect collateral values of the Bank’s loan portfolio.
Allowance for loan losses may be insufficient
An allowance for loan losses is maintained based on, among other things, national and regional
economic conditions, historical loss experience, and assumptions regarding delinquency trends and
future loss expectations. If the assumptions prove to be incorrect, the allowance for loan losses
may not be sufficient to cover losses inherent in the loan portfolio. Bank regulators review the
classification of the loans in their examinations and may required the Bank in the future to change
the classification on certain loans, which may require us to increase the provision for loan losses
or loan charge-offs. Management could also decide that the allowance for loan losses should be
increased. If actual net charge-offs were to exceed the allowance for loan losses, earnings would
be negatively impacted by additional provisions for loan losses. Any increase in the allowance for
loan losses or loan charge-offs as required by the OCC or otherwise could have an adverse effect on
the results of operations or financial condition.
Further increases in non-performing assets may occur and adversely affect the results of operations
and financial condition.
As a result of the economic downturn, loan delinquencies are increasing, particularly in the
commercial real estate portfolio, which comprises the largest segment of the loan portfolio. Until
economic and market conditions improve, charge-offs to the allowance for loan losses and lost
interest income relating to an increase in non-performing loans are expected to continue.
Non-performing assets adversely affect net income in various ways. Adverse changes in the value of
our non-performing assets, or the underlying collateral, or in the borrowers’ performance or
financial conditions could adversely affect the Bank’s business, results of operations and
financial condition. There can be no assurance that non-performing loans will not increase in the
future, or that non-performing assets will not result in lower financial returns in the future.
Declines in value may adversely impact the investment portfolio
The Corporation may be required to record impairment charges in earnings related to credit losses
in the investment portfolio if securities suffer a decline in value that is considered
other-than-temporary. Additionally, (a) if the Corporation intends to sell a security or (b) it is
more likely than not that the Corporation will be required to sell the security prior to recovery
of its amortized cost basis, the Corporation will be required to recognize an other-than-temporary
impairment charge in the statement of income equal to the full amount of the decline in fair value
below amortized cost. Numerous factors, including lack of liquidity for sales of certain investment
securities, absence of reliable pricing information for investment securities, adverse changes in
business climate, adverse actions by regulators, or unanticipated changes in the competitive
environment could have a negative effect on the investment portfolio and may result in
other-than-temporary impairment on these investment securities in future periods. If an impairment
charge is significant enough it could affect the ability of the Bank to upstream dividends to the
parent company, which could have a material adverse effect on liquidity and the ability to pay
dividends to shareholders and could also negatively impact regulatory capital ratios and result in
the Bank not being classified as “well-capitalized” for regulatory purposes.
Higher FDIC deposit insurance premiums and assessments may adversely affect the Corporation’s
financial condition or results of operations
FDIC insurance premiums increased substantially in 2009 and may increase significantly higher.
Numerous bank closings during 2009 significantly depleted the insurance fund of the FDIC and
reduced the ratio of reserves to insured deposits. The FDIC adopted a revised risk-based deposit
insurance assessment schedule during the first quarter of 2009, which raised regular deposit
insurance premiums. In May 2009, the FDIC also implemented a five basis point special assessment of
each insured depository institution’s total assets minus Tier 1 capital as of June 30, 2009, but no
more than 10 basis points times the institution’s assessment base for the second quarter of 2009,
collected by the FDIC on September 30, 2009. Notwithstanding this prepayment, the FDIC may impose
additional special assessments for future quarters or may increase the FDIC standard assessments.
Additional FDIC insurance assessments may be required, which could have an adverse effect on the
Corporation’s results of operations.
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Liquidity risk
Liquidity risk is the potential that the Corporation will be unable to meet its obligations as they
come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an
inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost
and within acceptable risk tolerances.
Liquidity is required to fund various obligations, including credit commitments to borrowers,
mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, dividends
to shareholders, operating expenses and capital expenditures.
Liquidity is derived primarily from retail deposit growth and retention; principal and interest
payments on loans; principal and interest payments on investment securities; sale, maturity and
prepayment of investment securities; net cash provided from operations and access to other funding
sources.
Access to funding sources in amounts adequate to finance ongoing operations could be impaired by
factors that affect the Corporation specifically or the financial services industry in general.
Factors that could detrimentally impact access to liquidity sources include a decrease in the level
of business activity due to a prolonged economic downturn or adverse regulatory action. The ability
to borrow could also be impaired by general factors, such as a severe disruption of the financial
markets or negative views and expectations about the prospects for the financial services industry
as a whole.
Because the Bank is operating under a Formal Agreement issued by the OCC, liquidity may become
impaired due to restrictions in asset growth and dividend payments. At December 31, 2009,
management believes that the Corporation has sufficient liquidity based on the detailed liquidity
analysis performed as of that date.
The cash dividend on the Corporation’s common or preferred stock may be reduced or eliminated
The common cash dividend payout per common share was greater than earnings per share for the year
ended December 31, 2009, thereby causing no earnings retention in 2009. This resulted from
earnings being negatively impacted by the increased loan loss provision and investment impairment
losses.
While our earnings retention rate may improve in the future due to the elimination of certain
dividends, other factors, including those resulting from the economic recession, may negatively
impact future earnings and the Corporation’s ability to pay dividends.
Stockholders are only entitled to receive such cash dividends as the Board of Directors may declare
out of funds legally available for such payments. Also, as a bank holding company, the ability to
declare and pay dividends is dependent on federal regulatory considerations including the
guidelines of OCC and the FRB regarding capital adequacy and dividends.
In February, 2010, CNBC deferred payment on all its preferred stock issues, including the Series G
cumulative perpetual preferred stock issued to the U.S. Treasury Department, as well as the
quarterly interest payment related to its outstanding trust preferred securities. The Corporation
is currently unable to determine when these payments may be resumed.
Market reform efforts may result in the Corporation’s business becoming subject to extensive
additional regulations
Recent economic and market conditions have led to numerous proposals for changes in the regulation
of the financial industry in an effort to prevent future crises and reform the financial regulatory
system. President Obama’s administration has released a comprehensive plan for regulatory reform in
the financial industry. The Administration’s plan contains significant proposed structural reforms,
including heightened powers for the Federal Reserve to regulate risk across the financial system; a
new Financial Services Oversight Council chaired by the U.S. Treasury; and two new federal
agencies, a Consumer Financial Protection Agency and a new National Bank Supervisor. The plan also
calls for new substantive regulation across the financial industry, including more heightened
scrutiny and regulation for any financial firm whose combination of size, leverage, and
interconnectedness could pose a threat to financial stability if it failed.
There can be no assurance as to whether or when any of the parts of the Administration’s plan or
other proposals will be enacted into legislation, and if adopted, what the final provisions of such
legislation will be. The financial services industry is highly regulated, and the Corporation is
subject to regulation by several government agencies, including the OCC, the FRB and the FDIC.
Legislative and regulatory changes, as well as changes in governmental economic and monetary
policy, can not only affect the Bank’s ability to attract deposits and make loans, but can also
affect the demand for business and personal lending and for real estate mortgages. Government
regulations affect virtually all areas of the Bank’s operations, including the range of permissible
activities, products and services, the amount of service fees or the ability to assess such fees,
the geographic locations in which such services can be offered, the amount of capital required to
be maintained to support operations, the right to pay dividends and the amount which the Bank can
pay to obtain deposits. New legislation and regulatory changes could require the Bank to change
certain business practices, impose additional costs, or otherwise adversely affect the Bank’s
business, results of operations or financial condition.
Changes in accounting policies or accounting standards
The Corporation’s accounting policies are fundamental to understanding its financial results and
condition. Some of these policies require use of estimates and assumptions that may affect the
value of the Corporation’s assets or liabilities and financial results. The Corporation identified
its accounting policies regarding the allowance for loan losses, security valuations, and income
taxes to be critical because they require management to make difficult, subjective and complex
judgments about matters that are inherently uncertain. Under each of these policies, it is possible
that materially different amounts would be reported under different conditions, using different
assumptions, or as new information becomes available.
From time to time the FASB and the SEC change their guidance governing the form and content of the
Corporation’s external financial statements. In addition, accounting standard setters and those who
interpret U.S. generally accepted accounting principles (“GAAP”), such as the FASB, SEC, banking
regulators and the Corporation’s outside auditors, may change or even reverse their previous
interpretations or positions on how these standards should be applied. Such changes are expected to
continue, and may accelerate as the FASB and International Accounting Standards Board have
reaffirmed their commitment to achieving convergence between U.S. GAAP and International Financial
Reporting Standards. Changes in U.S. GAAP and changes in current interpretations are beyond the
Corporation’s control, can be hard to predict and could materially impact how the Corporation
reports its financial results and condition. In certain cases, the Corporation could be required to
apply a new or revised guidance retroactively or apply existing guidance differently (also
retroactively) which may result in restating prior period financial statements for material
amounts. Additionally, significant changes to U.S. GAAP may require costly technology changes,
additional training and personnel, and other expenses that will negatively impact our results of
operations.
Severe weather, acts of terrorism or other external events could significantly impact the business
of the Bank
A significant portion of the Bank’s primary markets are located near coastal waters which could
generate naturally occurring severe weather, or in response to climate change, that could have a
significant impact on the Bank’s ability to conduct business. Additionally, New York City and New
Jersey remain central targets for potential acts of terrorism against the United States. Such
events could affect the stability of the Bank’s deposit base, impair the ability of borrowers to
repay outstanding loans, impair the value of collateral securing loans, cause significant property
damage, result in loss of revenue and/or cause the Bank to incur additional expenses. Although
management has established disaster recovery policies and procedures, the occurrence of any such
event in the future could have a material adverse effect on the Bank’s business, which, in turn,
could have a material adverse effect on the Corporation’s financial condition and results of
operations.
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
5
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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 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.
Additionally, higher interest rates may impact the ability of the Bank’s borrowers to repay their
loans, possibly requiring an increase in the allowance for loan losses. The Bank’s church
borrowers may be more adversely affected given their limited ability to pass on cost increases to
congregation members.
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. Additionally, several nonbanking companies have received approval to obtain banking
charters as a result of the deterioration in the financial services industry. Additionally, bank
closures have created consumer uncertainty causing chaotic deposit pricing. This could have a
significant impact on the Bank’s ability to attract deposits at an affordable price. Accordingly,
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.
The Bank is subject to a Formal Agreement with the Comptroller of the Currency
The Bank is subject to a Formal Agreement with the Comptroller of the Currency (the “OCC”), entered
into on June 29, 2009. The Agreement is based on the results of the most recent annual examination
of the Bank. The Agreement provides, among other things, the enhancement and implementation of
certain programs to reduce the Bank’s credit risk, along with the development of a profit plan and
capital program, the development of a contingency funding plan and the correction of deficiencies
in its loan administration. The OCC also indicated that the Bank improve its capital ratios and
seek outside capital.
The Agreement may significantly affect the operations of both the Bank and the parent holding
company, particularly in the event that the Bank fails to comply with the provisions of the
Agreement, which may also result in more severe enforcement actions and other restrictions. The
Bank is currently not in compliance with certain provisions of the Agreement; however, management
has taken steps to remedy these noncompliance matters. In addition, because the Bank’s leverage
ratio is less than 8%, management is currently discussing with the OCC the impact of falling below
this threshold. Management expects to achieve an 8% leverage ratio by December 31, 2010.
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 along with one in Philadelphia,
Pa. Five of the locations are in leased space while the others are owned by the Bank.
The New Jersey branch offices are located in Newark, which is owned, Hackensack, which is leased
and in Paterson, which is also leased. The Philadelphia branch 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 ten 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 or 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 2009 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
2008.
At March 1, 2010, the Corporation had 1,235 common stockholders of record.
On May 1, 2009 the Corporation paid a cash dividend of $3.60 per share to stockholders of record
on April 22, 2008. 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.
In February, 2010, CNBC deferred payment on all its preferred stock issues, including the Series G
cumulative perpetual preferred stock issued to the U.S. Treasury Department, as well as the
quarterly interest payment related to its outstanding trust preferred securities. The Corporation
is currently unable to determine when these payments may be resumed and does not expect to pay a
common stock dividend in 2010.
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
10 Commerce Drive
Cranford, NJ 07016
6
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Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the Corporation’s
consolidated financial statements and the accompanying notes thereto.
Five-Year Summary
| Dollars in thousands, except per share data | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Year-end Balance Sheet data |
||||||||||||||||||||
Total assets |
$ | 466,339 | $ | 494,539 | $ | 449,748 | $ | 395,217 | $ | 363,541 | ||||||||||
Gross loans |
276,242 | 271,906 | 232,824 | 199,284 | 179,093 | |||||||||||||||
Allowance for loan losses |
8,650 | 3,800 | 3,000 | 2,400 | 2,165 | |||||||||||||||
Investment securities |
162,401 | 178,061 | 157,556 | 169,598 | 149,144 | |||||||||||||||
Total deposits |
380,276 | 407,117 | 394,856 | 342,416 | 312,429 | |||||||||||||||
Short-term portion of long-term debt |
5,000 | 5,000 | — | — | — | |||||||||||||||
Long-term debt |
44,000 | 46,600 | 19,800 | 19,606 | 20,700 | |||||||||||||||
Stockholders’ equity |
31,013 | 28,092 | 28,872 | 27,762 | 25,142 | |||||||||||||||
Income Statement data |
||||||||||||||||||||
Interest income |
24,174 | 25,902 | 25,978 | 21,649 | 18,173 | |||||||||||||||
Interest expense |
9,495 | 11,309 | 14,233 | 10,848 | 7,280 | |||||||||||||||
Net interest income |
14,679 | 14,593 | 11,745 | 10,801 | 10,893 | |||||||||||||||
Provision for loan losses |
8,105 | 1,586 | 772 | 279 | 115 | |||||||||||||||
Net interest income after provision
for loan losses |
6,574 | 13,007 | 10,973 | 10,522 | 10,778 | |||||||||||||||
Other operating income |
3,124 | 279 | 2,694 | 2,724 | 2,136 | |||||||||||||||
Net impairment losses on securities |
(2,333 | ) | (2,688 | ) | — | — | — | |||||||||||||
Other operating expenses |
13,381 | 12,278 | 11,428 | 10,035 | 9,717 | |||||||||||||||
(Loss) income before income tax expense |
(6,016 | ) | 1,008 | 2,239 | 3,211 | 3,197 | ||||||||||||||
Income tax (benefit) expense |
1,806 | (50 | ) | 372 | 743 | 862 | ||||||||||||||
Net (loss) income |
$ | (7,822 | ) | $ | 1,058 | $ | 1,867 | $ | 2,468 | $ | 2,335 | |||||||||
Per common share data |
||||||||||||||||||||
Net (loss) income per basic share |
$ | (68.36 | ) | $ | 1.87 | $ | 8.28 | $ | 13.04 | $ | 16.20 | |||||||||
Net (loss) income per diluted share |
(68.36 | ) | 1.87 | 8.09 | 12.54 | 15.52 | ||||||||||||||
Book value |
85.50 | 130.10 | 141.04 | 129.88 | 118.23 | |||||||||||||||
Dividends declared |
2.00 | 3.60 | 3.50 | 3.25 | 3.00 | |||||||||||||||
Basic average number of common shares
outstanding |
131,300 | 131,688 | 132,306 | 133,246 | 133,654 | |||||||||||||||
Diluted average number of common shares
outstanding |
131,300 | 131,688 | 148,623 | 143,924 | 139,511 | |||||||||||||||
Number of common shares outstanding at year-end |
131,290 | 131,330 | 131,987 | 132,926 | 133,650 | |||||||||||||||
Financial ratios |
||||||||||||||||||||
Return on average assets |
(1.53 | )% | .23 | % | .44 | % | .65 | % | .66 | % | ||||||||||
Return on average common equity |
(36.55 | ) | 1.38 | 6.35 | 10.90 | 13.83 | ||||||||||||||
Stockholders’ equity as a percentage of total assets |
6.65 | 5.68 | 6.42 | 6.96 | 6.92 | |||||||||||||||
Common dividend payout ratio |
— | — | 42.22 | 25.92 | 19.33 | |||||||||||||||
7
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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 results of operations for each of the past three years and financial condition for
each of the past two years for City National Bancshares and its subsidiaries (the “Corporation” or
the “Bank”).
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, levels of
asset 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.
Critical accounting policies and use of estimates
The Corporation’s accounting and reporting policies conform, in all material respects, to U.S.
generally accepted accounting principles (“GAAP”). In preparing the consolidated financial
statements, management has made estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities as of the date of the consolidated statements of condition and
results of operations for the periods indicated. Actual results could differ significantly from
those estimates.
Accounting policies are fundamental to understanding management’s discussion and analysis of its
financial condition and results of operations. The significant accounting policies are presented in
Note 1 to the consolidated financial statements. Policies on the allowance for loan losses,
security valuations, and income taxes are considered to be critical as management is required to
make subjective and/or complex judgments about matters that are inherently uncertain and could be
most subject to revision as new information becomes available.
The judgments used by management in applying the critical accounting policies discussed below may
be affected by a further and prolonged deterioration in the economic environment, which may result
in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio,
in light of the factors then prevailing, may result in significant changes in the allowance for
loan losses in future periods, and the inability to collect on outstanding loans could result in
increased loan losses. In addition, the valuation of certain securities in the investment portfolio
could be negatively impacted by illiquidity or dislocation in marketplaces resulting in
significantly depressed market prices, or a deterioration in credit quality, thus leading to
further impairment losses.
Allowance for loan losses, impaired loans, TDRs and OREO
The allowance for loan losses represents management’s estimate of probable loan losses inherent in
the loan portfolio. Determining the amount of the allowance for loan losses is considered a
critical accounting estimate because it requires significant judgment and the use of estimates
related to the amount and timing of expected future cash flows on impaired loans, estimated losses
on pools of homogeneous loans based on historical loss experience, and consideration of current
economic trends and conditions, all of which may be susceptible to significant change. Bank
regulators, as an integral part of their examination process, also review the allowance for loan
losses. Such regulators may require, based on their judgments about information available to them
at the time of their examination, that certain loan balances be charged off or require that
adjustments be made to the allowance for loan losses when their credit evaluations differ from
those of management. Additionally, the allowance for loan losses is determined, in part, by the
composition and size of the loan portfolio, which represents the largest asset type on the
consolidated statement of financial condition.
The allowance for loan losses consists of four elements: (1) specific reserves for individually
impaired credits, (2) reserves for classified, or higher risk rated, loans based on historical
factors, (3) reserves for non-classified loans based on historical loss factors, and (4) reserves
based on general economic conditions and other qualitative risk factors both internal and external
to the Corporation, including changes in loan portfolio volume, the composition and concentrations
of credit, new market initiatives, and the impact of competition on loan structuring and pricing.
Management performs a formal quarterly evaluation of the adequacy of the allowance for loan losses.
The analysis of the allowance for loan losses has a component for impaired loan losses and a
component for general loan losses. Management has defined an impaired loan to be a loan for which
it is probable, based on current information, that the Corporation will not collect all amounts due
in accordance with the contractual terms of the agreement. The Corporation defined the population
of impaired loans subject to be all nonaccrual loans with an outstanding balance of $100,000 or
greater, and all loans subject to a troubled debt restructuring. Impaired loans are individually
assessed to determine that the loan’s carrying value is not in excess of the estimated fair value
of the collateral (less cost to sell), if the loan is collateral dependent, or the present value of
the expected future cash flows, if the loan is not collateral dependent. Management performs a
detailed evaluation of each impaired loan and generally obtains updated appraisals as part of the
evaluation. In addition, management adjusts estimated fair value down to appropriately consider
recent market conditions and costs to dispose of any supporting collateral. Determining the
estimated fair value of underlying collateral (and related costs to sell) can be subjective in
illiquid real estate markets and is subject to significant assumptions and estimates. Management
employs independent third party experts in appraisal preparations and performs reviews to ascertain
the reasonableness of updated appraisals. Projecting the expected cash flows under troubled debt
restructurings is inherently subjective and requires, among other things, an evaluation of the
borrower’s current and projected financial condition. Actual results may be significantly
different than projections and the established allowance for loan losses on these loans, and could
have a material effect on the Corporation’s financial results.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as
other real estate owned. When the Bank acquires other real estate owned, it generally obtains a
current appraisal to substantiate the net carrying value of the asset. The asset is recorded at
the lower of cost or estimated fair value, establishing a new cost basis. Holding costs and
declines in estimated fair value result in charges to expense after acquisition.
New appraisals are generally obtained annually for all impaired loans and impairment write-downs
are taken when appraisal values are less than the carrying value of the related loan.
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
8
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losses remains an estimate that is subject to significant judgment and short-term change.
Investment security valuations and impairments
Management utilizes various inputs to determine the fair value of its investment portfolio. To the
extent they exist, unadjusted quoted market prices in active markets (level 1) or quoted prices of
similar assets (level 2) are utilized to determine the fair value of each investment in the
portfolio. In the absence of quoted prices and illiquid markets, valuation techniques may be used
to determine fair value of any investments that require inputs that are both significant to the
fair value measurement and unobservable (level 3). Valuation techniques are based on various
assumptions, including, but not limited to, projected cash flows, discount rates, rate of return,
adjustments for nonperformance and liquidity, valuations of underlying collateral and liquidation
values. A significant degree of judgment is involved in valuing investments using level 3 inputs.
The use of different assumptions could have a positive or negative effect on consolidated
financial condition or results of operations.
Management periodically evaluates if unrealized losses (as determined based on the securities
valuation methodologies discussed above) on individual securities classified as held to maturity or
available for sale in the investment portfolio are considered to be other-than-temporary. The
analysis of other-than-temporary impairment requires the use of various assumptions, including, but
not limited to, the length of time an investment’s book value is greater than fair value, the
severity of the investment’s decline, any credit deterioration of the investment, whether
management intends to sell the security, and whether it is more likely than not that management
will be required to sell the security prior to recovery of its amortized cost basis. As a result of
the adoption of new authoritative guidance under ASC Topic 320, “Investments—Debt and Equity
Securities” on April 1, 2009, debt investment securities deemed to be other-than-temporarily
impaired were written down by the impairment related to the estimated credit loss and the
non-credit related impairment was recognized in other comprehensive income. Prior to the adoption
of the new authoritative guidance, if the decline in value of an investment was deemed to be
other-than-temporary, the investment was written down to fair value and a non-cash impairment
charge was recognized in the period of such evaluation.
City National Bank of New Jersey is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. As a member of the Federal Home Loan Bank of New York
(“FHLB-NY”) City National Bank is required to acquire and hold shares of capital stock in the
FHLB-NY in an amount determined by a “membership” investment component and an “activity-based”
investment component. As of December 31, 2009, City National Bank was in compliance with its
ownership requirement and held $2.4 million of FHLB-NY common stock. In performing the quarterly
evaluation of the investment in FHLB-NY stock, management reviews the most recent financial
statements of the FHLB of New York and determines whether there have been any adverse changes to
its capital position as compared to the previous period. In addition, management reviews the
FHLB-NY’s most recent President’s Report in order to determine whether or not a dividend has been
declared for the current reporting period. Finally, management obtains the credit rating of FHLB
from an accredited credit rating industry to ensure that no downgrades have occurred. At December
31, 2009, it was determined by management that the Bank’s investment in FHLB stock was not
impaired.
Income taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity’s financial statements or tax
returns. Judgment is required in assessing the future tax consequences of events that have been
recognized in the consolidated financial statements or tax returns. Fluctuations in the actual
outcome of these future tax consequences could impact the consolidated financial condition or
results of operations.
In connection with determining the income tax provision, a reserve is maintained related to certain
tax positions and strategies that management believes contain an element of uncertainty.
Periodically, management evaluates each tax position and strategy to determine whether the reserve
continues to be appropriate.
The Corporation uses the asset and liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. If it is determined that it is more likely
than not that the deferred tax assets will not be realized, a valuation allowance is established.
Management considers the determination of this valuation allowance to be a critical accounting
policy because of the need to exercise significant judgment in evaluating the amount and timing of
recognition of deferred tax liabilities and assets, including projections of future taxable income.
These judgments and estimates are reviewed quarterly as regulatory and business factors change. A
valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable
through loss carry-backs decline, or if lower levels of future taxable income are projected. Such
a valuation allowance would be established and any subsequent changes to such allowance would
require an adjustment to income tax expense that could adversely affect the Corporation’s operating
results.
Executive summary
In 2009, the economic recession showed signs of abating and the illiquidity in the financial
marketplace improved considerably. While various segments of the economy showed clear signs of
improvement, commercial real estate values continued to decline, particularly in the northeastern
part of the United States, which was affected later than the rest of the country. As a result,
the Corporation incurred significant loan losses, as well as investment securities impairments
where the underlying collateral behind the bank-issued trust preferred securities consisted of
commercial real estate.
Management cannot determine whether conditions will improve during 2010, although investment
portfolio valuations appear to have stabilized due primarily to securities writedowns.
Additionally, the Bank is operating under a regulatory agreement and expects to incur significant
costs in complying with its terms. Should asset quality continue to deteriorate, or should the
Bank be unable to comply with the terms of the agreement, additional sanctions may be imposed,
leading to additional costs and possible liquidity concerns.
In 2009, the Corporation received a $700,000 award from the U.S. Treasury’s Community Development
Financial Institution (“CDFI”) Fund. The award was based on the Bank’s lending efforts in
qualifying lower income communities and is being recorded as yield enhancement on the related
loans.
In 2008, the Corporation received $1.2 million of awards from the U.S. Treasury’s Community
Development Financial Institution (“CDFI”) Fund. The award was based on the Bank’s lending
efforts in qualifying lower income communities and is being recorded as yield enhancement on the
related loans. The Corporation also received a $43,000 award for technical assistance, which is
being offset against the related costs as they are incurred.
9
Table of Contents
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. Certain components of the investment portfolio are subject to credit risk as well.
Cash and due from banks
Cash and due from banks declined to $6.8 million at the end of 2009 from $7.6 million a year
earlier, while average cash and due from banks in 2008 decreased to $8.1 million compared to $8.6
million a year earlier.
Federal funds sold
Federal funds sold declined to $5.5 million at the end of 2009 from $18.2 million at December 31,
2008, while the related average balance rose to $34.6 million from $10.6 million in 2008. The
increase resulted primarily from the investment of the proceeds from a large temporary municipal
market account balance on deposit with the Bank during the first half of 2009, while the reduction
occurred due to lower 2009 year-end municipal account deposit balances.
Interest-bearing deposits with banks
Interest-bearing deposits with banks declined to $609,000 at December 31, 2009 from $726,000 a
year earlier, while the related average balances were $1.5 million in 2009 and $1 million in 2008.
The deposits represent the Bank’s participation in the U.S. Treasury Department’s Community
Development Financial Institution (“CDFI”) deposit program. Under this program, the Bank is
eligible for awards based on deposits made in other CDFI’s. $42,000 was recorded as interest
income from interest-bearing deposits with banks in 2009, representing a yield enhancement on the
CDFI deposits.
Investments
The available for sale (“AFS”) portfolio decreased to $122 million at December 31, 2009 from $125.6
million a year earlier due primarily to increased prepayments on mortgage-backed securities
(“MBS”). The related gross unrealized loss was $2.6 million compared to $2.7 million at the end of
2008 due largely to ASC 320-10-65-1, which required the recapture of $1 million of previous
impairment writedowns into retained earnings and Accumulated Other Comprehensive Income as of April
1, 2009.
Included in the AFS portfolio are four collateralized debt obligations (“CDOs”) that are comprised
of pools of trust preferred securities issued primarily by banks that have a book value of $1.2
million and a market value of $546,000. The unrealized loss of $605,000 is included in Other
Comprehensive Income (“OCI”). $494,000 of this loss pertains to one CDO which continues to be
fully performing and has substantial excess collateral coverage in the Bank’s tranche. The market
value of this security has been negatively impacted by illiquidity in the overall CDO market, as
well as losses sustained in the underlying collateral. During 2009, impairment losses of $2.3
million were recorded on two of the other CDOs.
Additionally, the available for sale portfolio includes two corporate debt securities with a
carrying value of $1.9 million that have an unrealized loss of $438,000, down from $782,000 at the
end of 2008. Both investments continue to perform and remain investment grade.
Finally, the Bank owns seven single-issue trust preferred securities issued by individual financial
institutions with a carrying value of $6.3 million and an unrealized loss of $1.1 million, compared
to an unrealized loss of $1.3 million a year earlier. No impairment losses have been incurred on
these securities, which are current as to the payment of interest and mostly investment grade. All
except one of the banks owning the issuers of these securities were well-capitalized at December
31, 2009. $5.8 million of these securities are included in AFS and one security with a carrying
value of $495,000 is included in HTM.
The fair market value of most components of the overall investment portfolio benefited by the
continued low interest rate environment during 2009. Both the AFS and HTM portfolios reflected
significant gains at the end of 2009 compared to a year earlier, due in part to writedowns in the
available for sale portfolio. Such writedowns totaled $2.3 million. The writedowns were incurred
in two investments in collateralized debt obligations (“CDOs”) where the unrealized losses were
deemed to be other-than-temporarily impaired.
Management does not believe that any individual unrealized losses as of December 31, 2009 represent
an other-than-temporary impairment. Additionally, the Corporation does not have the intent to sell
these securities and it is more likely than not that the Corporation will not be required to sell
the securities.
Most acquisitions during 2009 consisted of mortgage backed securities (“MBS”) and securities
issued by government sponsored entities (“GSE’s”). Both types of securities are used for
municipal deposit collateral purposes and are subject to large fluctuations based on collateral
requirements.
Investments held to maturity (“HTM”) declined to $40.4 million at the end of 2009 from $53.7
million at the end of 2008 due primarily to early redemptions of callable securities.
Information pertaining to the average weighted yields of investments in debt securities at
December 31, 2009 is presented below. Maturities of mortgaged-backed securities are based on the
maturity of the final scheduled payment. Such securities, which comprise most of the balances
shown as maturing beyond five years, generally amortize on a monthly basis and are subject to
prepayment.
| Investment Securities Available for Sale | Maturing After One | Maturing After Five | ||||||||||||||||||||||||||||||||||||||
| Maturing Within | Year But Within | Years But Within | Maturing After | |||||||||||||||||||||||||||||||||||||
| One Year | Five Years | Ten Years | Ten Years | Total | Total | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
U.S. Treasury securities and obligations of U.S. government agencies |
$ | — | — | % | $ | — | — | % | $ | 6,220 | 4.24 | % | $ | 6,298 | 5.16 | % | $ | 12,518 | 4.70 | % | ||||||||||||||||||||
Obligations of U.S. government sponsored entities |
3,000 | 4.29 | 3,025 | 4.40 | 1,295 | 5.02 | 9,969 | 1.81 | 17,289 | 3.11 | ||||||||||||||||||||||||||||||
Obligations of state and
political and subdivisions |
546 | 5.41 | — | — | — | — | — | — | 546 | 5.41 | ||||||||||||||||||||||||||||||
Mortgage-backed securities |
— | — | 96 | 3.85 | 2,245 | 4.30 | 72,076 | 5.08 | 74,417 | 5.06 | ||||||||||||||||||||||||||||||
Other debt securities |
994 | 5.58 | 2,452 | 4.12 | — | — | 8,823 | 3.64 | 12,269 | 3.89 | ||||||||||||||||||||||||||||||
Total amortized cost |
$ | 4,540 | 4.71 | % | $ | 5,573 | 4.27 | % | $ | 9,760 | 4.36 | % | $ | 97,166 | 4.62 | % | $ | 117,039 | 4.59 | % | ||||||||||||||||||||
10
Table of Contents
| Investment Securities Held to Maturity | Maturing After One | Maturing After Five | ||||||||||||||||||||||||||||||||||||||
| Maturing Within | Year But Within | Years But Within | Maturing After | |||||||||||||||||||||||||||||||||||||
| One Year | Five Years | Ten Years | Ten Years | Total | Total | |||||||||||||||||||||||||||||||||||
| Dollars in thousands | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
U.S. Treasury securities and
obligations of U.S.
government agencies |
$ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 1,585 | 5.06 | % | $ | 1,585 | 5.06 | % | ||||||||||||||||||||
Obligations of U.S. government sponsored entities |
— | — | — | — | — | — | 2,459 | 4.64 | 2,459 | 4.64 | ||||||||||||||||||||||||||||||
Obligations of state and
political subdivisions |
— | — | % | 8,458 | 5.56 | 13,712 | 5.97 | 5,809 | 6.62 | 27,979 | 5.98 | |||||||||||||||||||||||||||||
Mortgage-backed securities |
— | — | 163 | 5.24 | — | — | 7,714 | 5.40 | 7,877 | 5.40 | ||||||||||||||||||||||||||||||
Other debt securities |
— | — | — | — | — | — | 495 | 7.84 | 495 | 7.84 | ||||||||||||||||||||||||||||||
Total amortized cost |
$ | — | — | % | $ | 8,621 | 5.55 | % | $ | 13,712 | 5.97 | % | $ | 18,062 | 5 73 | % | $ | 40,395 | 5.77 | % | ||||||||||||||||||||
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, 2009. 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 declined to 4.59% at December 31, 2009 from 4.66% at
December 31, 2008, while the yield on the HTM portfolio declined to 5.77% at December 31, 2009
from 5.88% at December 31, 2008. The reduced yields in both portfolios were due to the lower
yields earned on newly acquired investments placed in the portfolios during 2009 along with the
effects of higher prepayment speeds in the MBS portfolio and the impact of several higher yielding
callable bonds being redeemed prior to final maturity. The weighted average life of the AFS
portfolio was 5.09 years at the end of 2009 compared to 4.86 years a year earlier, while the
average life of the HTM portfolio was 5.04 years at the end of 2009 compared to 4.44 years at the
end of 2008.
The following table sets forth the amortized cost and market values of the Corporation’s portfolio
for the three years ended December 31:
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Investment Securities Available for Sale | Amortized | Market | Amortized | Market | Amortized | Market | ||||||||||||||||||
| In thousands | Cost | Value | Cost | Value | Cost | Value | ||||||||||||||||||
U.S. Treasury securities and obligations
of U.S. government agencies |
$ | 12,518 | $ | 12,700 | $ | 4,009 | $ | 3,957 | $ | 6,860 | $ | 6,832 | ||||||||||||
Obligations of U.S. government sponsored entities |
17,289 | 17,324 | 19,157 | 19,012 | 10,844 | 10,895 | ||||||||||||||||||
Obligations of state and political subdivisions |
546 | 553 | 548 | 552 | 551 | 557 | ||||||||||||||||||
Mortgage-backed securities |
74,417 | 77,138 | 88,356 | 90,630 | 74,640 | 74,273 | ||||||||||||||||||
Other debt securities |
12,269 | 10,268 | 11,645 | 7,798 | 9,618 | 8,968 | ||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||
Marketable securities |
713 | 695 | 678 | 638 | 646 | 618 | ||||||||||||||||||
Nonmarketable securities |
115 | 115 | 115 | 115 | 115 | 115 | ||||||||||||||||||
Federal Reserve Bank and Federal Home Loan Bank stock |
3,213 | 3,213 | 2,889 | 2,889 | 1,360 | 1,360 | ||||||||||||||||||
Total |
$ | 121,080 | $ | 122,006 | $ | 127,397 | $ | 125,591 | $ | 104,634 | $ | 103,618 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Investment Securities Held to Maturity | Amortized | Market | Amortized | Market | Amortized | Market | ||||||||||||||||||
| In thousands | Cost | Value | Value | Value | Cost | Value | ||||||||||||||||||
U.S. Treasury securities and obligations
of U.S. government agencies |
$ | 1,585 | $ | 1,647 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Obligations of U.S. government sponsored entities |
2,459 | 2,405 | 8,500 | 8,520 | 14,594 | 14,522 | ||||||||||||||||||
Mortgage-backed securities |
7,877 | 8,186 | 12,089 | 12,358 | 5,175 | 5,132 | ||||||||||||||||||
Obligations of state and political subdivisions |
27,979 | 29,042 | 31,629 | 32,222 | 31,665 | 31,868 | ||||||||||||||||||
Other debt securities |
495 | 502 | 1,496 | 1,437 | 2,504 | 2,483 | ||||||||||||||||||
Total |
$ | 40,395 | $ | 41,782 | $ | 53,714 | $ | 54,537 | $ | 53,938 | $ | 54,005 | ||||||||||||
Due largely to illiquidity in various segments of the fixed income markets,
valuations have became more subjective, requiring alternate methods of valuation aside from quoted
trade prices, which often represented distressed sales prices. Such methods included underlying
collateral valuations and discounted cash flow analyses, often producing higher calculated
valuations than the quoted trade prices. Illiquidity in these markets also had a negative effect
on such quotations. Finally, credit weakness of various issuers also had a significant negative
impact on valuations. As a result, the services of third-party consultants were utilized in the
valuation process. These consultants prepared discounted cash flow analyses for the CDOs and
analyzed the default probabilities of underlying issuers in the Corporation’s CDO portfolio in
order to determine the fair values of such securities.
The following table presents the components of net interest income on tax-equivalent basis.
11
Table of Contents
Consolidated Average Balance Sheet with Related Interest and Rates
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| 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 |
$ | 34,625 | $ | 54 | .16 | % | $ | 10,647 | $ | 217 | 2.04 | % | $ | 28,179 | $ | 1,392 | 4.94 | % | ||||||||||||||||||
Interest-bearing deposits with banks1 |
1,494 | 50 | 3.33 | 1,008 | 24 | 2.41 | 1,429 | 90 | 6.30 | |||||||||||||||||||||||||||
Investment
securities2: |
||||||||||||||||||||||||||||||||||||
Taxable |
139,984 | 6,668 | 4.76 | 145,963 | 7,404 | 5.07 | 126,327 | 6,613 | 5.23 | |||||||||||||||||||||||||||
Tax-exempt |
31,457 | 1,903 | 6.05 | 32,123 | 1,955 | 6.08 | 34,095 | 2,080 | 6.10 | |||||||||||||||||||||||||||
Total investment securities |
171,441 | 8,571 | 5.00 | 178,086 | 9,359 | 5.25 | 160,422 | 8,693 | 5.42 | |||||||||||||||||||||||||||
Loans 3, 4,6 |
||||||||||||||||||||||||||||||||||||
Commercial |
53,198 | 3,094 | 5.82 | 44,929 | 2,832 | 6.28 | 38,882 | 2,640 | 6.79 | |||||||||||||||||||||||||||
Real estate |
223,992 | 12,960 | 5.79 | 206,289 | 14,026 | 6.80 | 178,579 | 13,753 | 7.70 | |||||||||||||||||||||||||||
Installment |
1,463 | 92 | 6.29 | 1,434 | 109 | 7.57 | 1,576 | 117 | 7.30 | |||||||||||||||||||||||||||
Total loans |
278,653 | 16,146 | 5.79 | 252,652 | 16,967 | 6.71 | 219,037 | 16,510 | 7.54 | |||||||||||||||||||||||||||
Total interest earning assets |
486,213 | 24,821 | 5.10 | 442,393 | 26,567 | 6.00 | 409,067 | 26,685 | 6.52 | |||||||||||||||||||||||||||
Noninterest earning assets: |
||||||||||||||||||||||||||||||||||||
Cash and due from banks |
8,147 | 8,605 | 7,591 | |||||||||||||||||||||||||||||||||
Net unrealized loss on investment
securities available for sale |
(1,681 | ) | (2,850 | ) | (1,806 | ) | ||||||||||||||||||||||||||||||
Allowance for loan losses |
(4,717 | ) | (3,231 | ) | (2,529 | ) | ||||||||||||||||||||||||||||||
Other assets |
21,700 | 16,708 | 15,597 | |||||||||||||||||||||||||||||||||
Total noninterest earning assets |
23,449 | 19,232 | 18,853 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 509,662 | $ | 461,625 | $ | 427,920 | ||||||||||||||||||||||||||||||
Liabilities and stockholders’ equity |
||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
$ | 53,321 | $ | 393 | .74 | $ | 46,320 | $ | 456 | .99 | $ | 37,804 | $ | 737 | 1.95 | |||||||||||||||||||||
Money market deposits |
107,336 | 1,092 | 1.02 | 98,804 | 2,107 | 2.13 | 108,498 | 4,324 | 3.99 | |||||||||||||||||||||||||||
Savings deposits |
24,859 | 128 | .52 | 26,608 | 138 | .52 | 29,881 | 157 | .53 | |||||||||||||||||||||||||||
Time deposits |
197,211 | 6,057 | 3.07 | 177,503 | 7,005 | 3.95 | 159,059 | 7,676 | 4.83 | |||||||||||||||||||||||||||
Total interest bearing deposits |
382,727 | 7,670 | 2.00 | 349,235 | 9,706 | 2.78 | 335,242 | 12,894 | 3.85 | |||||||||||||||||||||||||||
Short-term borrowings |
606 | 3 | .50 | 2,751 | 59 | 2.17 | 537 | 23 | 4.28 | |||||||||||||||||||||||||||
Long-term debt |
50,074 | 1,822 | 3.64 | 38,299 | 1,544 | 4.03 | 21,613 | 1,316 | 6.09 | |||||||||||||||||||||||||||
Total interest bearing liabilities |
433,407 | 9,495 | 2.19 | 390,285 | 11,309 | 2.90 | 357,392 | 14,233 | 3.98 | |||||||||||||||||||||||||||
Noninterest bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
34,509 | 38,149 | 37,393 | |||||||||||||||||||||||||||||||||
Other liabilities |
6,898 | 5,082 | 5,588 | |||||||||||||||||||||||||||||||||
Total noninterest bearing liabilities |
41,407 | 43,231 | 42,981 | |||||||||||||||||||||||||||||||||
Stockholders’ equity |
34,848 | 28,109 | 27,547 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity |
$ | 509,662 | $ | 461,625 | $ | 427,920 | ||||||||||||||||||||||||||||||
Net interest income (tax equivalent basis) |
15,326 | 2.91 | 15,258 | 3.10 | 12,452 | 2.54 | ||||||||||||||||||||||||||||||
Tax
equivalent basis adjustment5 |
(647 | ) | (665 | ) | (707 | ) | ||||||||||||||||||||||||||||||
Net interest income7 |
$ | 14,679 | $ | 14,593 | $ | 11,745 | ||||||||||||||||||||||||||||||
Average rate
paid to fund interest earning Assets |
1.95 | 2.56 | 3.48 | |||||||||||||||||||||||||||||||||
Net interest income as a percentage of
interest earning assets (tax equivalent basis) |
3.15 | % | 3.44 | % | 3.04 | % | ||||||||||||||||||||||||||||||
| 1 | Includes $42,000 in 2009, $- in 2008 and $39,000 in 2007, representing 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. | |
| 3 | Includes nonperforming loans. | |
| 4 | Includes loan fees of $421,000, $413,000 and $611,000 in 2009, 2008 and 2007 respectively. | |
| 5 | The tax equivalent adjustment was computed assuming a 34% statutory federal income tax rate in 2009, 2008 and 2007. | |
| 6 | Includes $387,000 in 2009, $421,000 in 2008 and $336,000 in 2007 representing income received under the U.S. Treasury Department’s Bank Enterprise Award loan program. | |
| 7 | The total yield enhancements on the interest bearing deposits with banks and loans increased net interest income by nine basis points in 2009, 2008 and 2007, respectively. |
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.
12
Table of Contents
| 2009 Net Interest Income Increase | 2008 Net Interest Income Increase | |||||||||||||||||||||||
| (Decrease) from 2008 due to: | (Decrease) from 2007 due to: | |||||||||||||||||||||||
| In thousands | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest income |
||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Commercial |
$ | 519 | $ | (257 | ) | $ | 262 | $ | 349 | $ | (157 | ) | $ | 192 | ||||||||||
Real estate |
1,204 | (2,270 | ) | (1,066 | ) | 2,134 | (1,861 | ) | 273 | |||||||||||||||
Installment |
(1 | ) | (16 | ) | (17 | ) | (1 | ) | (7 | ) | (8 | ) | ||||||||||||
Total loans |
1,722 | (2,543 | ) | (821 | ) | 2,482 | (2,025 | ) | 457 | |||||||||||||||
Taxable investment securities |
(303 | ) | (433 | ) | (736 | ) | 1,027 | (236 | ) | 791 | ||||||||||||||
Tax-exempt investment securities |
(40 | ) | (12 | ) | (52 | ) | (120 | ) | (5 | ) | (125 | ) | ||||||||||||
Federal funds sold and securities
purchased under agreements to resell |
489 | (652 | ) | (163 | ) | (866 | ) | (309 | ) | (1,175 | ) | |||||||||||||
Interest-bearing deposits with banks |
12 | 14 | 26 | (20 | ) | (46 | ) | (66 | ) | |||||||||||||||
Total interest income |
1,880 | (3,626 | ) | (1,746 | ) | 2,503 | (2,621 | ) | (118 | ) | ||||||||||||||
Interest expense |
||||||||||||||||||||||||
Demand deposits |
(69 | ) | 132 | 63 | (166 | ) | 447 | 281 | ||||||||||||||||
Savings deposits |
9 | 1 | 10 | 17 | 2 | 19 | ||||||||||||||||||
Money market deposits |
(182 | ) | 1,197 | 1,015 | (387 | ) | 2,604 | 2,217 | ||||||||||||||||
Time deposits |
(778 | ) | 1,726 | 948 | (891 | ) | 1,562 | 671 | ||||||||||||||||
Short-term borrowings |
46 | 10 | 56 | (95 | ) | 59 | (36 | ) | ||||||||||||||||
Long-term debt |
(475 | ) | 197 | (278 | ) | (1,017 | ) | 789 | (228 | ) | ||||||||||||||
Total interest expense |
(1,449 | ) | 3,263 | 1,814 | (2,539 | ) | 5,463 | 2,924 | ||||||||||||||||
Net interest income |
$ | 431 | $ | (363 | ) | $ | 68 | $ | (36 | ) | $ | 2,842 | $ | 2,806 | ||||||||||
Loans
Loans rose to $276.2 million at December 31, 2009 from $271.9 million at December 31, 2008, while
average loans in 2009 increased to $278.7 million from $252.7 in 2008. The increases were
comprised largely of short-term equipment finance loans to agencies of the U.S. government. The
Corporation originates nominal consumer or residential mortgage loans to hold in the portfolio and
expects this trend to continue.
At December 31, 2009, the Bank had concentrations of loans to churches and loan participations with
a third-party commercial real estate lender in New York City, both of which are experiencing credit
quality problems and represent significant components of the Bank’s nonperforming loans. Loans to
churches totaled $72.1 million at December 31, 2009, representing 26.1% of total loans outstanding,
all of which were secured by real estate, compared to $73.4 million and 25.2% at December 31, 2008.
Participations with the third-party lender totaled $32 million, of which $27.2 million were
construction loans. Both types of loans are secured by commercial real estate, the appraised
values of which have suffered large declines during the current economic downturn. Accordingly,
both types of loans currently have generally higher loan-to-value ratios than when they were
originated, which has been factored into the methodology for determining the allowance for loan
losses. Management believes that because construction-related credit issues in the Northeast have
lagged other parts of the country, there may be continued deterioration in portfolio credit
quality. However, management also believes that because the Northeast region was significantly
less overbuilt during more prosperous times, losses will not be as significant as in other parts of
the country.
Loans held for sale totalled $190,000 at December 31, 2009 compared to $267,000 at December 31,
2008, while loans originated for sale declined to $312,000 in 2009 compared to $1 million in 2008
due to the economic downturn. Sales of these loans, along with the related gains also declined.
These loans represent long-term fixed rate residential mortgages that the Corporation does not
retain 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. 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 reduce commercial real estate lending in
2010. If a loan is performing, appraisals are performed when the loan renews, if there is a
renewal date, and if nonperforming, appraisals are performed annually.
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, 2009 is presented below.
| Due from | ||||||||||||||||
| One Year | ||||||||||||||||
| Due in One | Through | Due After | ||||||||||||||
| In thousands | Year or Less | Five Years | Five Years | Total | ||||||||||||
Commercial |
$ | 14,982 | $ | 21,815 | $ | 13,525 | $ | 50,322 | ||||||||
Real estate: |
||||||||||||||||
Construction |
45,008 | 380 | 1,584 | 46,972 | ||||||||||||
Mortgage |
20,442 | 27,885 | 129,694 | 178,021 | ||||||||||||
Installment |
421 | 396 | 110 | 927 | ||||||||||||
Total |
$ | 80,853 | $ | 50,476 | $ | 144,913 | $ | 276,242 | ||||||||
Loans at fixed
interest rates |
$ | 19,417 | $ | 39,127 | $ | 21,886 | $ | 80,430 | ||||||||
Loans at variable
interest rates |
61,436 | 11,349 | 123,027 | 195,812 | ||||||||||||
Total |
$ | 80,853 | $ | 50,476 | $ | 144,913 | $ | 276,242 | ||||||||
The Bank currently has $80.9 million in loans scheduled to mature in 2010, which includes $5
million in loans that are on nonaccrual status at December 31, 2009. For performing loans, updated
financial information is requested from the borrower, as well as updated appraisals when the value
of the underlying real estate, if any, is questionable.
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The following table reflects the composition of the loan portfolio for the five years ended
December 31:
| In thousands | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Commercial |
$ | 53,820 | $ | 44,366 | $ | 44,504 | $ | 32,572 | $ | 2,536 | ||||||||||
Real estate |
221,601 | 226,546 | 187,447 | 165,828 | 155,711 | |||||||||||||||
Installment |
926 | 1,153 | 1,061 | 1,176 | 1,261 | |||||||||||||||
Total loans |
276,347 | 272,065 | 233,012 | 199,576 | 179,508 | |||||||||||||||
Less: Unearned income |
105 | 159 | 188 | 292 | 291 | |||||||||||||||
Loans |
$ | 276,242 | $ | 271,906 | $ | 232,824 | $ | 199,284 | $ | 179,217 | ||||||||||
Summary of loan loss experience
Changes in the allowance for loan losses are summarized below.
| Dollars in thousands | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Balance, January 1 |
$ | 3,800 | $ | 3,000 | $ | 2,400 | $ | 2,165 | $ | 2,076 | ||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial loans |
1,703 | 651 | 118 | 108 | 68 | |||||||||||||||
Real estate loans |
1,537 | 118 | 22 | 2 | — | |||||||||||||||
Installment loans |
30 | 23 | 66 | 39 | 16 | |||||||||||||||
Total |
3,270 | 792 | 206 | 149 | 84 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial loans |
— | 5 | 2 | 87 | 5 | |||||||||||||||
Real estate loans |
15 | — | 2 | — | 29 | |||||||||||||||
Installment loans |
— | 1 | 30 | 18 | 24 | |||||||||||||||
Total |
15 | 6 | 34 | 105 | 58 | |||||||||||||||
Net (charge-offs) recoveries |
(3,255 | ) | (786 | ) | (172 | ) | (44 | ) | (26 | ) | ||||||||||
Provision for loan
losses charged to operations |
8,105 | 1,586 | 772 | 279 | 115 | |||||||||||||||
Balance, December 31 |
$ | 8,650 | $ | 3,800 | $ | 3,000 | $ | 2,400 | $ | 2,165 | ||||||||||
Net charge-offs as a
percentage of average loans |
1.17 | % | .31 | % | .08 | % | .03 | % | .02 | % | ||||||||||
Allowance for loan losses as a
percentage of loans |
3.13 | 1.40 | 1.29 | 1.20 | 1.21 | |||||||||||||||
Allowance for loan losses as a
percentage of nonperforming loans |
48.35 | 44.13 | 37.67 | 40.45 | 107.39 | |||||||||||||||
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 that cannot
currently be identified. 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.
Management maintains the allowance for credit losses at a level estimated to absorb probable loan
losses of the loan portfolio at the balance sheet date. The allowance is based on ongoing
evaluations of the probable estimated losses inherent in the loan portfolio. The methodology for
evaluating the appropriateness of the allowance includes segmentation of the loan portfolio into
its various components, tracking the historical levels of classified loans and delinquencies,
applying economic outlook factors, assigning specific incremental reserves where necessary,
providing specific reserves on impaired loans, and assessing the nature and trend of loan
charge-offs. Additionally, the volume of non-performing loans, concentration risks by size and
type, collateral adequacy and economic conditions are taken into consideration.
The allowance established for probable losses on specific loans is based on a regular analysis and
evaluation of classified loans. Loans are classified based on an internal credit risk grading
process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying
collateral, if any; and (iii) the economic environment and the industry in which the borrower
operates. Specific valuation allowances are determined by analyzing the borrower’s ability to
repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic
conditions affecting the borrower’s industry, among other things.
Additionally, nonaccrual loans over a specific dollar amount are individually evaluated, along with
all troubled debt restructured loans for impairment based on the underlying anticipated method of
payment consisting of either the expected future cash flows or the related collateral. If payment
is expected solely based on the underlying collateral, an appraisal is completed to assess the fair
value of the collateral. Collateral dependent impaired loan balances are written down to the
current fair value of each loan’s underlying collateral resulting in an immediate charge-off to the
allowance. If repayment is based upon future expected cash flows, the present value of the
expected future cash flows discounted at the loan’s original effective interest rate is compared to
the carrying value of the loan, and any shortfall is recorded as a specific valuation allowance in
the allowance for credit losses.
The allowance allocations for non-impaired loans are calculated by applying loss factors by
specific loan types to the applicable outstanding loans and unfunded commitments. Loss factors are
based on the Bank’s historical loss experience and may be adjusted for significant changes in the
current loan portfolio quality that, in management’s judgment, affect the collectability of the
portfolio as of the evaluation date.
The allowance contains reserves identified as unallocated in the table below to cover inherent
losses in the loan portfolio which have not been otherwise reviewed or measured on an individual
basis. Such reserves include management’s evaluation of the regional economy, loan portfolio
volumes, the composition and concentrations of credit, credit quality and delinquency trends. These
reserves reflect management’s attempt to ensure that the overall allowance reflects a margin for
judgmental factors and the uncertainty that is inherent in estimates of probable credit losses.
During the third quarter of 2009, management performed an evaluation of the methodology in
calculating the allowance, resulting in revisions to the loss factors for various types of loans,
14
Table of Contents
as well as using different appraisal assumptions in instances where nonperforming commercial real
estate properties may be rented instead of sold.
The allowance represented 3.13% of total loans at December 31, 2009 and 1.40% at December 31,
2008, while the allowance represented 48.35% of total nonperforming loans at December 31, 2009
compared to 44.13% for the prior year. The allowance at the end of 2009 rose to $8.6 million from
$3.8 million a year earlier due to an increase in the provision for loan losses resulting
primarily from an increase in nonperforming loans, the continuous deterioration in loan quality
and an increase in loss factors.
The provision for loan losses rose substantially in 2009 primarily due to the continued
deterioration in the Bank’s commercial real estate portfolio.
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.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| 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 |
$ | 1,352 | 18.13 | % | $ | 1,102 | 15.22 | % | $ | 1,098 | 19.11 | % | $ | 730 | 16.32 | % | $ | 626 | 13.14 | % | ||||||||||||||||||||
Real estate |
7,095 | 81.32 | 2,306 | 84.00 | 1,709 | 80.43 | 1,427 | 83.09 | 1,174 | 86.39 | ||||||||||||||||||||||||||||||
Installment |
19 | .55 | 6 | .78 | 91 | .46 | 21 | .49 | 25 | .47 | ||||||||||||||||||||||||||||||
Unallocated |
184 | — | 386 | — | 102 | — | 222 | — | 340 | — | ||||||||||||||||||||||||||||||
Total |
$ | 8,650 | 100.00 | % | $ | 3,800 | 100.00 | % | $ | 3,000 | 100.00 | % | $ | 2,400 | 100.00 | % | $ | 2,165 | 100.00 | % | ||||||||||||||||||||
Allowance allocations are subject to change based on the levels of classified loans in
each segment of the portfolio. The minimum allowance levels depend on the internal loan
classification and the risk assessment. Additionally, the current methodology reflects the most
recent year’s historical loan loss experience, giving effect to the current economic environment,
compared to previous years, when a five-year history was utilized. 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.
Nonperforming assets
Information pertaining to nonperforming assets at December 31 is summarized below.
| In thousands | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Loans past due 90 days or more and
still accruing: |
||||||||||||||||||||
Commercial |
$ | 555 | $ | — | $ | 43 | $ | — | $ | — | ||||||||||
Real estate |
1,012 | 376 | 377 | 1,254 | 162 | |||||||||||||||
Installment |
— | 8 | 18 | 5 | 7 | |||||||||||||||
Loans past due 90 days or more and
still accruing |
1,567 | 384 | 438 | 1,259 | 169 | |||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||
Commercial |
1,237 | 1,864 | 1,996 | 797 | 742 | |||||||||||||||
Real estate |
15,080 | 6,356 | 5,485 | 3,899 | 1,020 | |||||||||||||||
Installment |
6 | 7 | 45 | 38 | 85 | |||||||||||||||
Total nonaccrual loans |
16,323 | 8,227 | 7,526 | 4,734 | 1,847 | |||||||||||||||
Total nonperforming loans |
17,890 | 8,611 | 7,964 | 5,993 | 2,016 | |||||||||||||||
Other real estate owned |
2,352 | 1,547 | — | — | — | |||||||||||||||
Total |
$ | 20,242 | $ | 10,158 | $ | 7,964 | $ | 5,993 | $ | 2,016 | ||||||||||
Nonperforming assets rose to $20.2 million at the end of 2009 due primarily to higher
levels of nonaccruing commercial real estate loans. This category of loans continues to be
stressed by the effects of the economic recession in the Bank’s trade area, which has been
affected later than the rest of the country.
Nonaccrual loans includes $4.2 million of loans to religious organizations, which management
believes have been impacted by reductions in tithes and collections from congregation members due
to the deterioration in the economy, and $4.5 million of loans acquired from a third-party
non-bank lender. Church loans located in the State of New York may require significantly longer
to collect because approval is required by the state of New York before the underlying property
may be encumbered.
Impaired loans totaled $11.1 million at the end of 2009 compared to $12.1 million at
September 30, 2009 and $5.8 million at year-end 2008. The related allocation of the allowance for
loan losses amounted to $550,000 due to a shortfall in collateral values. Impaired loan
charge-offs totalled $1.4 million. The average balance of impaired loans in 2009 was $8.5 million
compared to $1 million in 2008. All of the impaired loans are secured by real estate. Included
in impaired loans are loans to churches totaling $2 million with no related allowance.
Additionally, impaired loans include $4.4 million of loan participations acquired from the
third-party lender, with a related allowance of $550,000. Such loans were comprised primarily of
construction loans.
Troubled debt restructured loans (“TDRs”) totaled $5.2 million, with a related allowance of
$760,000 at December 31, 2009 and were comprised of seven loans, three of which were church loans
totaling $3.2 million. One TDR of $1.4 million is accruing interest. The remaining TDRs are on
nonaccrual status and reflected in the above table.
Other assets
Other assets rose $2.5 million at the end of 2009 compared to a year earlier, with the increase
resulting primarily from the payment in December 2009 of a $3.4 FDIC insurance prepayment for 2010
through 2012.
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Table of Contents
Other real estate owned
Other real estate owned (“OREO”) was higher due to the transfer of foreclosed properties from the
loan portfolio.
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, 2009 and 2008. These accounts are used for operating and
short-term investment purposes by the municipalities and require collateralization with readily
marketable U.S. Government securities or Federal Home Loan Bank of New York municipal letters of
credit.
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 or
available for use as collateral for repurchase agreements.
Changes in all deposit categories discussed below were caused by fluctuations in municipal deposit
account balances unless otherwise indicated.
Total deposits declined to $380.3 million at December 31, 2009 from $407.1 million a year earlier,
while average deposits increased to $427.2 million in 2009 from $387.4 million in 2008. The
reduction resulted from a deleveraging program undertaken to improve capital ratios, while the
increase occurred due to the aforementioned temporary account balance.
Passbook and statement savings deposits totaled $24.7 million at December 31, 2009, unchanged from
a year earlier, while such savings accounts averaged $24.9 million in 2009 compared to $26.6
million in 2008. The decline resulted from a shift into higher earning deposit products.
Money market deposit accounts declined to $73.3 million at December 31, 2009 from $119.5 million a
year earlier, while average money market deposits increased 8.6% to $107.3 million in 2009 from
$98.8 million in 2008. The changes occurred primarily due to the aforementioned temporary account
balance.
Interest-bearing demand deposit account balances rose to $51.8 million at the end of 2009 compared
to $39 million at year-end 2008, while the related average balance of $53.3 million was 15.1%
higher in 2009 than the average of $46.3 million in 2008.
Time deposits rose to $201.1 million at December 31, 2009 from $187.7 million at the end of 2008,
while average time deposits were $197.2 million in 2009, 11.1% greater than the average of $177.5
million in 2008. Brokered deposits rose from $47 million at the end of 2008 to $52.2 million a
year later. The Bank does not expect to increase current brokered deposit levels for the
foreseeable future.
Short-term borrowings
Short-term borrowings totaled $100,000 at December 31, 2009 compared to $1.9 million at December
31, 2008, while average short-term borrowings of $606,000 in 2009 were significantly lower than
the 2008 average of $2.8 million due to higher short-term borrowing requirements during the summer
months of 2008 when certain municipal account balances were drawn down.
Long-term debt
Long-term debt decreased to $44 million at December 31, 2009 from $46.6 million a year earlier,
while the related average balance was $38.3 million in 2008 compared to $45.1 million in 2009.
Both declines resulted from repayments of Federal Home Loan Bank advances
Results of operations – 2009 compared with 2008
The Corporation recorded a net loss of $7.8 million in 2009 compared to net income of $1.1 million
a year earlier due primarily to a $4.7 million deferred tax asset valuation allowance and a $6.5
million increase in the provision for loan losses. Additionally, each year included substantial
impairment losses on investment securities, amounting to $2.3 million in 2009 and $2.7 million in
2008. Partially offsetting these losses were several expense reductions resulting from a cost
reduction initiative undertaken in the fourth quarter of 2009.
Included in both years’ earnings were awards received from the U.S. Treasury’s Community
Development Financial Institution (“CDFI”) Fund. The awards were based on the Bank’s lending
efforts in qualifying lower income communities. Award income attributable to its lending efforts
totaled $386,000 in 2009, $421,000 in 2008 and $336,000 in 2007. The Bank also recorded award
income related to time deposits made in other CDFI’s of $42,000 in 2009, $- in 2008 and $39,000 in
2007.
Finally, the Bank recorded award income of $71,000 in 2009, $18,000 in 2008 and $19,000 in 2007 as
a recovery of approved information technology-related costs. In total, $499,000 of award income
was recorded in 2009, while $439,000 was recorded in 2008 and $394,000 was recorded in 2007.
These awards are dependent on the availability of funds in the CDFI Fund as well as the
Corporation meeting various qualifying standards. Accordingly, there is no assurance that the
Corporation will continue to receive these awards in the future. However, The Corporation has
received various awards under these programs on a regular basis as follows over the past five
years: 2009 - $700,000, 2008 - $1.2 million, 2007 - $542,000, 2006 - $340,000 and 2005 -
$131,000. The Corporation expects to continue to apply for these awards.
On a fully taxable equivalent (“FTE”) basis, net interest income of $15.3 million in 2009 was flat
compared to 2008, while the related net interest margin declined 29 basis points, from 3.44% to
3.15%.
The reduced net interest margin occurred due to the average rate earned on interest-earning assets
declining more rapidly than the interest paid on interest-bearing liabilities, which in turn was
driven by the effects of reinvesting loan and investment principal and interest
payments in shorter-term earning assets in a low interest rate environment along with
variable-rate loans and investments repricing at lower rates in the low interest rate environment.
Additionally, the large temporary municipal money market account balance on which the spread was
minimal compressed the net interest margin.
Interest income on a FTE basis declined from $26.6 million in 2008 to $24.8 million in 2009 as the
decrease in income caused by the reduction in the average rate earned more than offset the higher
earnings from the increased asset levels. The yield on interest earning assets declined 90 basis
points, from 6% to 5.10%. Aside from the higher average Federal funds balance caused largely by
the temporary deposit, the most significant increase occurred in the real estate portfolio.
Interest income from Federal funds sold was lower in 2009 despite the higher average balance due to
the temporary deposit because of a reduction in the related yield from 2.04% to .16%. The low
yield resulted from the Federal Reserve Bank’s Federal Open Market Committee’s decision to leave
the Federal funds target rate at a range of 0% to .25%.
Interest income on taxable investment securities decreased in 2009 due to a lower average rate,
which declined from 5.07% to
16
Table of Contents
4.76%, as well as a lower average balance. Tax-exempt investment income was virtually unchanged.
Interest income on loans declined due to a lower average rate earned, which decreased from 6.71% to
5.79% partially offset by higher earnings from increased loan volume. The lower yield was caused
by the low interest rate environment along with the forgone income from nonperforming loans.
Interest expense declined 16% in 2009, as the average rate paid to fund interest-earning assets
decreased from 2.56% to 1.95%. This decline was due to the lower rates paid on almost all
interest-bearing liabilities. The most significant reduction occurred in interest expense on money
market accounts, which declined 48.2% in 2009. Almost all interest-bearing liabilities had volume
increases, partially offsetting the expense reduction from the lower rates paid.
Service charges on deposit accounts was essentially unchanged in 2009 from a year earlier as
higher service charges were offset by a reduction in overdraft fees.
Agency fees declined in 2009 as they have done in recent years due to elimination by large
companies of these programs.
Other income was up in 2009 due primarily to an increase in earnings from an unconsolidated
leasing company in which the Bank owns a minority interest and higher income from off-site ATMs.
Other operating expenses, which include expenses other than interest, income taxes and the
provision for loan losses, totaled $13.4 million in 2009, a 9% increase compared to $12.3 million
in 2008, driven primarily by higher FDIC insurance expense and management consulting fees.
Salaries and other employee benefits expense declined due to the reversals in the 2009
fourth quarter of bonus accruals totaling $417,000 and a $71,000 discretionary 401K savings plan
accrual, both of which management decided to forego as part of the cost reduction initiative.
Additionally, $127,000 of supplemental executive retirement plan benefit accruals related to a
participant who resigned in 2009 were reversed. These reductions were partially offset by higher
health insurance costs.
Occupancy expense rose nominally due to higher property taxes, while equipment expense was
essentially unchanged.
Management consulting fees rose from $212,000 in 2008 to $683,000 in 2009, and FDIC insurance
expense increased from $429,000 to $1.1 million. The increase in management consulting fees
resulted primarily from the necessity to comply with the terms of the regulatory agreement along
with the outsourcing of part of the internal audit function, while FDIC expense was higher due to
a second quarter $255,000 special assessment required to recapitalize the insurance fund and an
increase resulting from a change in the assessment calculation.
OREO expense rose due primarily to property writedowns.
Other expenses declined 5.5% in 2009 due primarily to a reduction in merchant card charges, which
represent credit card fees incurred by customers and previously absorbed by the Bank and offset by
compensating deposit account balances. These charges are currently being passed on directly to
the customers. Partially offsetting this reduction was an increase in other costs related to
carrying and liquidating nonperforming assets such as legal expense.
The changes in income tax expense as a percentage of pretax income compared to 2008 resulted from
the recording of the aforementioned valuation allowance.
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 the Federal Home Loan Bank, Federal Funds
purchased, securities sold under repurchase agreements and borrowings under the U.S. Treasury tax
and loan note option program. The Bank also utilizes the Federal Home Loan Bank for longer-term
funding purposes.
A significant part of the Bank’s deposit growth is from municipal deposits, which comprised $140.2
million, or 36.9% of total deposits at December 31, 2009. These relationships arise due to the
Bank’s urban market, leading to municipal deposit relationships. $67.7 million of investment
securities were pledged as collateral for these deposits.
Illiquidity in certain segments of the investment portfolio may limit the Corporation’s ability to
dispose of various securities, although management believes that the Corporation has sufficient
resources to meet all its liquidity demands. Should the market for these and similar types of
securities, such as single issuer trust preferred securities, continue to deteriorate, or should
credit weakness develop, additional illiquidity could occur within the investment portfolio.
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 the Federal Reserve
Bank discount window, Federal funds lines, FHLB advances and access to the repurchase agreement
market, utilizing the collateral for the withdrawn deposits. In certain instances, however, these
lines may be reduced or not available in the event of a significant decline in the Bank’s credit
quality or capital levels. On two occasions during 2009, the Bank successfully accessed the
aforementioned lines
As a result of the loss incurred, there were no significant sources of funds during 2009 from
operating activities.
Net cash provided by investing activities during 2009 was derived primarily from proceeds from
maturities, principal payments and early redemptions of investment securities available for sale,
amounting to $26.8, while the primary uses of cash were for purchases of investment securities
available for sale, which amounted to $22.1 million and net loan growth, which totaled $9 million.
The highest source of cash provided by financing activities resulted from the issuance of $9.4
million of preferred stock to the U.S. Treasury, while the most significant use of funds was an
outflow of $26.8 million deposits resulting from the deleveraging program.
As a result of the aforementioned Formal Agreement, the Corporation has implemented a contingency
funding plan which provides detailed procedures to be instituted in the event of a liquidity
crisis.
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.
17
Table of Contents
Commitments, contingent liabilities, and off-balance sheet arrangements
The following table shows the amounts and expected maturities of significant commitments as of
December 31, 2009. Further information on these commitments is included in Note 21 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 |
$ | 19,932 | $ | — | $ | — | $ | 19,932 | ||||||||
Commercial mortgages |
17,918 | — | — | 17,918 | ||||||||||||
Credit cards |
— | — | 1,142 | 1,142 | ||||||||||||
Residential
mortgages |
427 | — | — | 427 | ||||||||||||
Home equity and
other revolving
lines of credit |
607 | — | — | 607 | ||||||||||||
Standby letters of
credit |
34 | — | — | 34 | ||||||||||||
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 consumer price index (“CPI”), including all items for all urban
consumers, rose 2.7% in 2009 compared to 3.8% in 2008 and 2.8% in 2007.
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 that 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. Additionally, assets and liabilities reprice at different rates so that gaps
may not represent an accurate assessment of interest rate risk.
18
Table of Contents
Interest Sensitivity Gap Analysis
| December 31, 2009 | ||||||||||||||||||||
| One Year | Three Years | |||||||||||||||||||
| One Year | to | to | More than | |||||||||||||||||
| In thousands | Or Less | Three Years | Five Years | Five Years | Total | |||||||||||||||
Interest earning assets: |
||||||||||||||||||||
Federal funds sold and securities
purchased under agreements
to resell |
$ | 5,500 | $ | — | $ | — | $ | — | $ | 5,500 | ||||||||||
Interest-bearing deposits with
banks |
342 | 267 | — | 609 | ||||||||||||||||
Investment securities |
53,072 | 27,233 | 26,426 | 55,252 | 161,983 | |||||||||||||||
Loans |
126,012 | 76,248 | 50,930 | 23,052 | 276,242 | |||||||||||||||
| 184,926 | 103,748 | 77,356 | 78,304 | 444,334 | ||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Savings |
149,853 | — | — | 149,853 | ||||||||||||||||
Time |
133,525 | 39,846 | 23,530 | 4,218 | 201,119 | |||||||||||||||
Short-term borrowings |
100 | — | — | — | 100 | |||||||||||||||
Long-term debt |
7,300 | 18,000 | 8,500 | 15,200 | 49,000 | |||||||||||||||
| 290,778 | 57,846 | 32,030 | 19,418 | 400,072 | ||||||||||||||||
Interest sensitivity gap: |
||||||||||||||||||||
Period gap |
$ | (105,852 | ) | $ | 45,902 | $ | 45,326 | $ | 58,886 | $ | 44,262 | |||||||||
Cumulative gap |
(105,852 | ) | (59,950 | ) | (14,624 | ) | 44,262 | — | ||||||||||||
The cumulative gap between the Corporation’s interest rate sensitive assets and its
interest sensitive liabilities was $46.4 million at December 31, 2009. This means that the
Corporation has a “positive gap” position, which theoretically will cause its assets to reprice
faster than its liabilities. In a rising interest rate environment, interest income may be
expected to rise faster than the interest received on earning assets, thus improving the net
interest spread. Over a one-year time horizon, however, the gap is negative, although the period
gap becomes positive in the second year and all periods listed thereafter.
If interest rates decreased, the net interest received on earning assets will decline faster than
the interest paid on the Corporation’s liabilities, decreasing the net interest spread. Certain
shortcomings are inherent in the method of gap analysis presented below. Although certain assets
and liabilities may have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. The rates on certain types of assets and liabilities
may fluctuate in advance of changes in market rates, while rates on other types of assets and
liabilities may lag behind changes in market rates. In the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those assumed in
calculating the table. The ability of borrowers to service debt may decrease in the event of an
interest rate increase. Management considers these factors when reviewing its sensitivity gap
position and establishing its ongoing asset/liability strategy.
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, 2009, the most recently prepared model indicates that net interest income would
decline .02% from base case scenario if interest rates rise 200 basis points and decline 12.68% if
rates decrease 200 basis points. Additionally, the economic value of equity would decrease 24.62%
if rates rise 200 basis points and decline 8.34% if rates decline 200 basis points.
These results indicate that the Corporation is asset-sensitive, meaning that the interest rate risk
is higher if interest rates fall, which management doe not expect to occur during 2010 based on the
current low interest rate environment.
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 | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Total stockholders’ equity |
$ | 31,013 | $ | 28,092 | $ | 35,539 | $ | 32,386 | ||||||||
Net unrealized (gain) loss
on investment securities
available for sale |
(533 | ) | 1,124 | (533 | ) | 1,124 | ||||||||||
Net unrealized loss on
equity securities available
for sale |
(11 | ) | (25 | ) | (11 | ) | (25 | ) | ||||||||
Disallowed intangibles |
(744 | ) | (985 | ) | (744 | ) | (985 | ) | ||||||||
Disallowed deferred tax
assets |
— | — | — | |||||||||||||
Qualifying trust preferred
securities |
4,000 | 4,000 | — | — | ||||||||||||
Tier 1 capital |
33,725 | 32,206 | 34,251 | 32,500 | ||||||||||||
Qualifying long-term debt |
5,200 | 5,220 | 5,000 | 5,000 | ||||||||||||
Allowance for loan
losses |
4,013 | 3,800 | 4,011 | 3,800 | ||||||||||||
Other |
80 | 165 | 80 | 165 | ||||||||||||
Tier 2 capital |
9,293 | 9,185 | 9,091 | 8,965 | ||||||||||||
Total capital |
$ | 43,018 | $ | 41,391 | $ | 43,342 | $ | 41,465 | ||||||||
Risk-weighted assets |
$ | 322,838 | $ | 327,479 | $ | 322,606 | $ | 326,961 | ||||||||
Average total assets |
484,362 | 492,388 | 484,107 | 492,827 | ||||||||||||
Risk-based capital ratios: |
||||||||||||||||
Tier 1 capital to risk-adjusted assets |
10.45 | % | 9.83 | % | 10.62 | % | 9.94 | % | ||||||||
Regulatory minimum |
5.00 | 5.00 | 5.00 | 5.00 | ||||||||||||
Total capital to risk-adjusted assets |
13.32 | 12.64 | 13.43 | 12.68 | ||||||||||||
Regulatory minimum |
8.00 | 8.00 | 8.00 | 8.00 | ||||||||||||
Leverage ratio |
6.96 | 6.54 | 7.08 | 6.61 | ||||||||||||
Total stockholders’ equity
to total assets |
6.63 | 5.67 | 7.63 | 6.55 | ||||||||||||
Capital ratios for both the parent holding company and the Bank rose due to the $9.4 million
preferred stock issuance, most of which was downstreamed to the Bank.
While both the Corporation and the Bank were well-capitalized under the Prompt Corrective Action
Requirements at December
19
Table of Contents
31, 2009, additional losses from higher loan loss provisions or investment impairment charges could
be incurred reducing capital levels, although management believes that capital levels are
sufficient to absorb additional losses and still remain well-capitalized. Additionally, management
may improve capital ratios, if necessary, by reducing its municipal deposit levels or seeking
additional capital from external sources.
The Bank is subject to a Formal Agreement with the Comptroller of the Currency (the “OCC”),
entered into on June 29, 2009. The Agreement is based on the results of the most recent annual
examination of the Bank. The Agreement provides, among other things, the enhancement and
implementation of certain programs to reduce the Bank’s credit risk, along with the development of
a profit plan and capital program, the development of a contingency funding plan and the correction
of deficiencies in its loan administration. The OCC also indicated that the Bank needs to improve
its capital ratios and seek outside capital.
The Agreement may significantly affect the operations of both the Bank and the parent holding
company, particularly in the event that the Bank fails to comply with the provisions of the
Agreement, which may also result in more severe enforcement actions and other restrictions. The
Bank is currently not in compliance with certain provisions of the Agreement; however, management
has taken steps to remedy these noncompliance matters. In addition, because the Bank’s leverage
ratio is less than 8%, management is currently discussing with the OCC the impact of falling below
this threshold. Management expects to achieve an 8% leverage ratio by December 31, 2010.
Results of operations – 2008 compared with 2007
2008 earnings included investment portfolio writedowns totaling $2.7 million and a substantially
higher loan loss provision, which rose $814,000 from 2007. Despite these negative charges, the
Corporation still recorded net income of slightly over $1 million, compared to $1,867,000 in 2007
due to significantly higher net interest income along with various nonrecurring sources of 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 attributable to its lending
efforts totaled $421,000 in 2008, $336,000 in 2007 and $64,000 in 2006.
The Bank also recorded award income related to time deposits made in other CDFI’s of $39,000 in
2007 and $42,000 in 2006.
Finally, the Bank recorded award income of $18,000 in 2008 and $19,000 in 2007 as a recovery of
approved technology costs.
In total, $439,000 of award income was recorded in 2008, while $394,000 was recorded in 2007 and
$128,000 was recorded in 2006.
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 increased 16.8% to $14.6 million
from $12.5 million in 2007, while the related net interest margin rose 40 basis points, from 3.04%
to 3.44%. A lower interest rate environment along with a steepened yield curve, combined with an
increase in earning assets contributed to the higher net interest income and net interest margin.
A significantly lower cost of funds was the reason for the improved net interest margin. The
yield on interest earning assets declined 52 basis points, from 6.52% to 6%, while the cost to
fund those assets fell 92 basis points, from 3.48% to 2.56%. Average interest earning assets
increased 8.1%, with the loan portfolio providing the greatest increase.
Service charges on deposit accounts rose 8.5% from 2007 due primarily to higher income derived
from an overdraft protection program.
Other income was up 22.6% in 2008 due primarily to a gain from the Bank’s unconsolidated leasing
subsidiary of $185,000 compared to a $9,000 loss in 2007.
Other operating expenses, which include expenses other than interest, income taxes and the
provision for loan losses, totaled $12.3 million in 2008, a 7.4% increase compared to $11.4
million in 2007, driven primarily by higher compensation costs.
Salaries and other employee benefits expense rose 3.6%, an increase that was held down by various
nonqualified benefit plan overaccrual reversal adjustments. $76,000 of supplemental executive
retirement plan benefit overaccruals along with $26,000 of director retirement plan benefit
overaccruals were reversed, partially offsetting significant increases in merchant card fees and
FDIC insurance expense. Costs were also higher due to the operation of a branch acquired in March
2007 for a full year, normal recurring merit salary increases, and higher health insurance costs
and an increase in 401K savings plan expense due to the reversal in 2007 of accrued discretionary
401K plan expense that was never used.
Occupancy expense rose 8.6% due primarily to the branch acquisition.
Equipment expense was 15.8% higher due primarily to the branch acquisition along with higher
service agreement costs.
Other expenses rose 12.1% in 2008 due primarily to an increase in FDIC insurance expense from
$40,000 to $429,000 along with increased merchant card charges, which represent credit card fees
incurred by customers but absorbed by the Bank and offset by compensating deposit account
balances. These charges rose from $334,000 to $471,000.
The Corporation recorded an income tax benefit in 2008 due to the resolution of a tax contingency
item. Income tax expense as a percentage of pre-tax income was 16.6% in 2007.
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.
20
Table of Contents
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
| December 31, | ||||||||
| Dollars in thousands, except per share data | 2009 | 2008 | ||||||
Assets |
||||||||
Cash and due from banks (Note 2) |
$ | 6,808 | $ | 7,613 | ||||
Federal funds sold (Note 3) |
5,500 | 18,200 | ||||||
Interest-bearing deposits with banks |
609 | 726 | ||||||
Investment securities available for sale (Note 4) |
122,006 | 125,591 | ||||||
Investment securities held to maturity (Market value of $41,782
at December 31, 2009 and $54,537 at December 31, 2008) (Note 5) |
40,395 | 53,714 | ||||||
Loans held for sale |
190 | 267 | ||||||
Loans (Note 6) |
276,242 | 271,906 | ||||||
Less: Allowance for loan losses (Note 7) |
8,650 | 3,800 | ||||||
Net loans |
267,592 | 268,106 | ||||||
Premises and equipment (Note 8) |
2,949 | 3,242 | ||||||
Accrued interest receivable |
2,546 | 2,796 | ||||||
Cash surrender value of life insurance |
5,537 | 5,345 | ||||||
Other real estate owned |
2,352 | 1,547 | ||||||
Other assets (Notes 13 and 14) |
9,855 | 7,392 | ||||||
Total assets |
$ | 466,339 | $ | 494,539 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Deposits: (Notes 4, 5, and 9) |
||||||||
Demand |
$ | 29,304 | $ | 36,270 | ||||
Savings |
149,853 | 183,172 | ||||||
Time |
201,119 | 187,675 | ||||||
Total deposits |
380,276 | 407,117 | ||||||
Accrued expenses and other liabilities |
5,950 | 5,880 | ||||||
Short-term portion of long-term debt (Note 11) |
5,000 | 5,000 | ||||||
Short-term borrowings (Note 10) |
100 | 1,850 | ||||||
Long-term debt (Note 11) |
44,000 | 46,600 | ||||||
Total liabilities |
435,326 | 466,447 | ||||||
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 2009 and 2008 |
200 | 200 | ||||||
Series C , issued and outstanding 108 shares in 2009 and 2008 |
27 | 27 | ||||||
Series D , issued and outstanding 3,280 shares in 2009 and 2008 |
820 | 820 | ||||||
Preferred stock, no par value, perpetual noncumulative: Authorized 200 shares; |
||||||||
Series E, issued and outstanding 49 shares in 2009 and 2008 |
2,450 | 2,450 | ||||||
Preferred stock, no par value, perpetual noncumulative: Authorized 7,000 shares; |
||||||||
Series F, issued and outstanding 7,000 shares in 2009 and 2008 |
6,790 | 6,790 | ||||||
Preferred stock, no par value, perpetual noncumulative: Authorized 9,439 shares; |
||||||||
Series G, issued and outstanding 9,439 shares |
9,499 | — | ||||||
Common stock, par value $10: Authorized 400,000 shares; |
||||||||
134,530 shares issued in 2009 and 2008 |
||||||||
131,290 shares outstanding in 2009 and 131,330 shares outstanding in 2008 |
1,345 | 1,345 | ||||||
Surplus |
1,115 | 1,115 | ||||||
Retained earnings |
8,462 | 16,694 | ||||||
Accumulated other comprehensive loss |
533 | (1,124 | ) | |||||
Treasury stock, at cost - 3,240 and 3,200 common shares in 2009 and 2008, respectively |
(228 | ) | (225 | ) | ||||
Total stockholders’ equity |
31,013 | 28,092 | ||||||
Total liabilities and stockholders’ equity |
466,339 | $ | 494,539 | |||||
See accompanying notes to consolidated financial statements.
21
Table of Contents
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
| Year Ended December 31, | ||||||||||||
| Dollars in thousands, except per share data | 2009 | 2008 | 2007 | |||||||||
Interest income |
||||||||||||
Interest and fees on loans |
16,146 | $ | 16,967 | $ | 16,510 | |||||||
Interest on Federal funds sold and securities
purchased under agreements to resell |
54 | 217 | 1,392 | |||||||||
Interest on deposits with banks |
50 | 24 | 90 | |||||||||
Interest and dividends on investment securities: |
||||||||||||
Taxable |
6,668 | 7,404 | 6,613 | |||||||||
Tax-exempt |
1,256 | 1,290 | 1,373 | |||||||||
Total interest income |
24,174 | 25,902 | 25,978 | |||||||||
Interest expense |
||||||||||||
Interest on deposits (Note 9) |
7,670 | 9,706 | 12,894 | |||||||||
Interest on short-term borrowings |
3 | 59 | 23 | |||||||||
Interest on long-term debt |
1,822 | 1,544 | 1,316 | |||||||||
Total interest expense |
9,495 | 11,309 | 14,233 | |||||||||
Net interest income |
14,679 | 14,593 | 11,745 | |||||||||
Provision for loan losses (Note 7) |
8,105 | 1,586 | 772 | |||||||||
Net interest income after provision
for loan losses |
6,574 | 13,007 | 10,973 | |||||||||
Other operating income |
||||||||||||
Service charges on deposit accounts |
1,476 | 1,443 | 1,332 | |||||||||
Agency fees on commercial loans |
236 | 318 | 328 | |||||||||
Other income (Note 12) |
1,401 | 1,250 | 1,024 | |||||||||
Net gains (losses) on securities transactions (Notes 4 and 5) |
11 | (44 | ) | 10 | ||||||||
Other than temporary impairment losses on securities |
(2,443 | ) | (2,688 | ) | — | |||||||
Portion of loss recognized in other comprehensive income, before tax |
110 | — | — | |||||||||
Net impairment losses on securities recognized in earnings |
(2,333 | ) | (2,688 | ) | — | |||||||
Total other operating income |
791 | 279 | 2,694 | |||||||||
Other operating expenses |
||||||||||||
Salaries and other employee benefits (Note 14) |
5,800 | 6,205 | 5,992 | |||||||||
Occupancy expense (Note 8) |
1,326 | 1,304 | 1,201 | |||||||||
Equipment expense (Note 8) |
648 | 651 | 562 | |||||||||
Management consulting fees |
683 | 212 | 256 | |||||||||
FDIC insurance expense |
1,082 | 429 | 40 | |||||||||
Other real estate owned expense |
558 | — | — | |||||||||
Other expenses (Note 12) |
3,284 | 3,477 | 3,377 | |||||||||
Total other operating expenses |
13,381 | 12,278 | 11,428 | |||||||||
(Loss) income before income tax expense |
(6,016 | ) | 1,008 | 2,239 | ||||||||
Income tax expense (benefit) (Note 13) |
1,806 | (50 | ) | 372 | ||||||||
Net (loss) income |
$ | (7,822 | ) | $ | 1,058 | $ | 1,867 | |||||
Net (loss) income per common share (Note 17) |
||||||||||||
Basic |
$ | (68.36 | ) | $ | 1.87 | $ | 8.28 | |||||
Diluted |
(68.36 | ) | 1.87 | 8.09 | ||||||||
Basic average common shares outstanding |
131,300 | 131,688 | 132,306 | |||||||||
Diluted average common shares outstanding |
131,300 | 131,688 | 148,623 | |||||||||
Cash dividends declared per common share |
$ | 2.00 | $ | 3.60 | $ | 3.50 | ||||||
See accompanying notes to consolidated financial statements.
22
Table of Contents
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes
in Stockholders’ Equity
in Stockholders’ Equity
| Accumulated | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Common | Preferred | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||
| Dollars in thousands | Stock | Surplus | Stock | Earnings | (Loss) Income | Stock | Total | |||||||||||||||||||||
Balance, January 1, 2007 |
$ | 1,345 | $ | 1,115 | $ | 10,287 | $ | 16,290 | $ | (978 | ) | $ | (109 | ) | $ | 27,950 | ||||||||||||
Net income |
— | — | — | 1,867 | — | — | 1,867 | |||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||
Unrealized holding gains on securities
arising during the period (net of tax of $(145)) |
— | — | — | — | 363 | — | 363 | |||||||||||||||||||||
Reclassification adjustment for gains (losses)
included in net income (net of tax of $2) |
— | — | — | — | (8 | ) | — | (8 | ) | |||||||||||||||||||
Total comprehensive income |
— | — | 2,222 | |||||||||||||||||||||||||
Proceeds from issuance of preferred stock |
— | — | — | — | — | — | — | |||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | — | (65 | ) | (65 | ) | |||||||||||||||||||
Dividends paid on common stock |
— | — | — | (464 | ) | — | — | (464 | ) | |||||||||||||||||||
Dividends paid on preferred stock |
— | — | — | (771 | ) | — | — | (771 | ) | |||||||||||||||||||
Balance, December 31, 2007 |
1,345 | 1,115 | 10,287 | 16,922 | (623 | ) | (174 | ) | 28,872 | |||||||||||||||||||
Net income |
— | — | — | 1,058 | — | — | 1,058 | |||||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||
Unrealized holding losses on securities
arising during the period (net of tax of $922) |
— | — | — | — | (2,304 | ) | — | (2,304 | ) | |||||||||||||||||||
Reclassification adjustment for gains (losses)
included in net income (net of tax of $(929)) |
— | — | — | — | 1,803 | — | 1,803 | |||||||||||||||||||||
Total comprehensive income |
— | — | 557 | |||||||||||||||||||||||||
Proceeds from issuance of preferred stock |
— | — | — | — | — | — | — | |||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | — | (51 | ) | (51 | ) | |||||||||||||||||||
Dividends paid on common stock |
— | — | — | (474 | ) | — | — | (474 | ) | |||||||||||||||||||
Dividends paid on preferred stock |
— | — | — | (812 | ) | — | — | (812 | ) | |||||||||||||||||||
Balance, December 31, 2008 |
1,345 | 1,115 | 10,287 | 16,694 | (1,124 | ) | (225 | ) | 28,092 | |||||||||||||||||||
Net loss |
— | — | — | (7,822 | ) | — | — | (7,822 | ) | |||||||||||||||||||
Other comprehensive income |
||||||||||||||||||||||||||||
Unrealized holding gains on securities
arising during the period (net of tax of $(470)) |
— | — | — | — | 705 | — | 705 | |||||||||||||||||||||
Reclassification adjustment for losses
included in net income (net of tax of $(374)) |
— | — | — | — | 1,959 | — | 1,959 | |||||||||||||||||||||
Total other comprehensive income |
(5,158 | ) | ||||||||||||||||||||||||||
Transition adjustment for adoption of FASB ASC
320-10-65-1 |
1,007 | (1,007 | ) | — | ||||||||||||||||||||||||
Proceeds from issuance of preferred stock |
— | — | 9,439 | — | — | — | 9,439 | |||||||||||||||||||||
Purchase of treasury stock |
— | — | — | — | — | (3 | ) | (3 | ) | |||||||||||||||||||
Dividends paid on common stock |
— | — | — | (1,094 | ) | — | — | (1,094 | ) | |||||||||||||||||||
Dividends paid on preferred stock |
— | — | — | (263 | ) | — | — | (263 | ) | |||||||||||||||||||
Dividends accrued on preferred stock |
60 | (60 | ) | — | ||||||||||||||||||||||||
Balance, December 31, 2009 |
$ | 1,345 | $ | 1,115 | $ | 19,786 | $ | 8,462 | $ | 533 | $ | (228 | ) | $ | 31,013 | |||||||||||||
See accompanying notes to consolidated financial statements.
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CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||||||||
| In thousands | 2009 | 2008 | 2007 | |||||||||||||
Operating activities |
||||||||||||||||
Net (loss) income |
$ | (7,822 | ) | $ | 1,058 | $ | 1,867 | |||||||||
Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||||||
Depreciation and amortization |
432 | 495 | 430 | |||||||||||||
Provision for loan losses |
8,105 | 1,586 | 772 | |||||||||||||
Premium amortization (discount accretion) of investment securities |
17 | (65 | ) | (335 | ) | |||||||||||
Amortization of intangible assets |
194 | 213 | 197 | |||||||||||||
Net (gains) losses on sales and early redemptions of investment securities |
(11 | ) | 44 | (10 | ) | |||||||||||
Net impairment losses on investment securities |
2,333 | 2,688 | — | |||||||||||||
Net losses (gains) on sales of loans held for sale |
10 | (18 | ) | (72 | ) | |||||||||||
Net losses and writedowns of other real estate owned |
427 | — | — | |||||||||||||
Loans originated for sale |
(312 | ) | (1,001 | ) | (3,312 | ) | ||||||||||
Proceeds from sales and principal payments from loans held for sale |
273 | 978 | 3,767 | |||||||||||||
Decrease (increase) in accrued interest receivable |
250 | (124 | ) | (167 | ) | |||||||||||
Deferred taxes |
2,372 | (1,056 | ) | (453 | ) | |||||||||||
Net increase in bank-owned life insurance |
(192 | ) | (197 | ) | (185 | ) | ||||||||||
Increase in other assets |
(6,104 | ) | (383 | ) | (1,560 | ) | ||||||||||
Increase in accrued expenses and other liabilities |
70 | 777 | 226 | |||||||||||||
Net cash provided by operating activities |
42 | 4,995 | 1,165 | |||||||||||||
Investing activities |
||||||||||||||||
Purchase of loans |
— | — | (18,734 | ) | ||||||||||||
Increase in loans, net |
(8,993 | ) | (41,415 | ) | (14,978 | ) | ||||||||||
Decrease (increase) in interest bearing deposits with banks |
117 | (448 | ) | 375 | ||||||||||||
Proceeds from maturities of investment securities available for
sale, including principal repayments and early redemptions |
27,100 | 21,774 | 48,501 | |||||||||||||
Proceeds from maturities of investment securities held to
maturity, including principal repayments and early redemptions |
15,574 | 10,964 | 4,792 | |||||||||||||
Proceeds from sales of investment securities available for sale |
189 | 5,179 | 3,195 | |||||||||||||
Purchases of investment securities available for sale |
(22,096 | ) | (50,849 | ) | (38,230 | ) | ||||||||||
Purchases of investment securities held to maturity |
(2,462 | ) | (12,274 | ) | (5,280 | ) | ||||||||||
Purchases of bank-owned life insurance, net |
— | (220 | ) | — | ||||||||||||
Proceeds from sales of other real estate owned |
275 | — | — | |||||||||||||
Purchases of premises and equipment |
(139 | ) | (136 | ) | (302 | ) | ||||||||||
Net cash provided by (used in) investing activities |
9,565 | (67,425 | ) | (20,661 | ) | |||||||||||
Financing activities |
||||||||||||||||
Purchase of deposits |
— | — | 11,016 | |||||||||||||
(Decrease) increase in deposits |
(26,841 | ) | 12,261 | 41,424 | ||||||||||||
(Decrease) increase in short-term borrowings |
(1,750 | ) | 700 | 750 | ||||||||||||
(Decrease) increase in long-term debt |
(2,600 | ) | 31,800 | 194 | ||||||||||||
Proceeds from issuance of preferred stock |
9,439 | — | — | |||||||||||||
Purchases of treasury stock |
(3 | ) | (51 | ) | (65 | ) | ||||||||||
Dividends paid on preferred stock |
(1,094 | ) | (812 | ) | (771 | ) | ||||||||||
Dividends paid on common stock |
(263 | ) | (474 | ) | (464 | ) | ||||||||||
Net cash (used in) provided by financing activities |
(23,112 | ) | 43,424 | 52,084 | ||||||||||||
Net (decrease) increase in cash and cash equivalents |
(13,505 | ) | (19,006 | ) | 32,588 | |||||||||||
Cash and cash equivalents at beginning of year |
25,813 | 44,819 | 12,231 | |||||||||||||
Cash and cash equivalents at end of year |
$ | 12,308 | $ | 25,813 | $ | 44,819 | ||||||||||
Cash paid during the year: |
||||||||||||||||
Interest |
$ | 9,864 | $ | 11,728 | $ | 14,050 | ||||||||||
Income taxes |
1,279 | 1,582 | 842 | |||||||||||||
Non-cash transactions |
||||||||||||||||
Transfer of investments from held to maturity to available for sale |
184 | 1,500 | — | |||||||||||||
Transfer of loans to other real estate owned |
1,508 | 1,547 | — | |||||||||||||
Transfer of loans held for sale to loans |
106 | — | — | |||||||||||||
See accompanying notes to consolidated financial statements.
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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”) and City
National Bank of New Jersey Capital Trust II conform with U.S. generally accepted accounting
principles (“GAAP”) 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. A material estimate that is particularly susceptible to
significant change in the near term is the allowance for loan losses. In connection with the
determination of this allowance, management generally obtains independent appraisals for
significant properties. Judgments related to securities valuation and impairment are also critical
because they involve a higher degree of complexity and subjectivity and require estimates and
assumptions about highly uncertain matters. Accordingly, it is reasonably possible that the
Corporation may be required to record additional other than temporary impairment charges in future
periods. The following is a summary of the more significant policies and practices.
Business
City National Bancshares Corporation (“the Corporation”), primarily through its subsidiary City
National Bank of New Jersey (“CNB”), offers a broad range of lending, leasing, depository and
related financial services to individual consumers, businesses and governmental units through ten
full-service offices located in New Jersey, Philadelphia, PA, New York City and Long Island, New
York. CNB competes with other banking and financial institutions in its primary market
communities, including financial institutions with resources substantially greater than its own.
Commercial banks, savings banks, savings and loan associations, credit unions, and money market
funds actively compete for deposits and loans. Such institutions, as well as consumer finance and
insurance companies, may be considered competitors with respect to one or more services they
render.
CNB offers equipment leasing services through its minority ownership interest in an unconsolidated
leasing company.
Principles of consolidation
The financial statements include the accounts of CNBC and its wholly-owned subsidiaries. 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.
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. Premiums are amortized and discounts are accreted using the “level
yield” method.
Investment securities classified as held to maturity or available for sale are evaluated quarterly
for other-than-temporary impairment. Other-than-temporary impairment means that the security’s
impairment is due to factors that could include its inability to pay interest or dividends, its
potential for default, and/or other factors. As a result of the adoption of new authoritative
guidance under ASC Topic 320, “Investments—Debt and Equity Securities” on April 1, 2009, when a
held to maturity or available for sale debt security is assessed for other-than-temporary
impairment, the Corporation has to first consider (a) whether it intends to sell the security, and
(b) whether it is more likely than not that the Corporation will be required to sell the security
prior to recovery of its amortized cost basis. If one of these circumstances applies to a security,
an other-than-temporary impairment loss is recognized in the statement of income equal to the full
amount of the decline in fair value below amortized cost. If neither of these circumstances applies
to a security, but the Corporation does not expect to recover the entire amortized cost basis, an
other-than-temporary impairment loss has occurred that must be separated into two categories:
(a) the amount related to credit loss, and (b) the amount related to other factors. In assessing
the level of other-than-temporary impairment attributable to credit loss, the Corporation compares
the present value of cash flows expected to be collected with the amortized cost basis of the
security. The portion of the total other-than-temporary impairment related to credit loss is
recognized in earnings, while the amount related to other factors is recognized in other
comprehensive income. The total other-than-temporary impairment loss is presented in the statement
of income, less the portion recognized in other comprehensive income. When a debt security becomes
other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the
total impairment related to credit loss. Prior to the adoption of the new authoritative guidance,
total other-than-temporary impairment losses (i.e., both credit and non-credit losses) on debt
securities were recognized through earnings with an offset to reduce the amortized cost basis of
the applicable debt securities by their entire impairment amount.
To determine whether a security’s impairment is other-than-temporary, the Corporation considers
factors that include the causes of the decline in fair value, such as credit problems, interest
rate fluctuations, or market volatility, the severity and duration of the decline, its ability and
intent to hold equity security investments until they recover in value (as well as the likelihood
of such a recovery in the near term), the intent to sell security investments, or if it is more
likely than not that the Corporation will be required to sell such securities before recovery of
their individual amortized cost basis less any current-period credit loss. For debt securities, the
primary consideration in determining whether impairment is other-than-temporary is whether or not
it is probable that current or future contractual cash flows have been or may be impaired.
The Bank holds mortgage-backed securities in its investment portfolios, none of which are
private-label. 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.
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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 collectability 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 collectability is expected.
The Corporation has defined the population of impaired loans to be all nonaccrual loans of $100,000
or more. 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 are specifically excluded from the impaired loan portfolio.
Trouble debt restructured (“TDR”) loans are those loans whose terms have been modified because of
deterioration of the financial condition of the borrower to provide for a reduction of interest or
principal payments, or both. An allowance is established for all TDR loans based on the present
value of the respective loan’s future cash flows unless the loan is deemed collateral dependent.
Allowance for loan losses
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 maintained at a level estimated to absorb probable credit losses inherent in the
loan portfolio as well as other credit risk related charge-offs. The allowance is based on ongoing
evaluations of the probable estimated losses inherent in the loan portfolio. The Bank’s methodology
for evaluating the appropriateness of the allowance includes segmentation of the loan portfolio
into its various components, tracking the historical levels of classified loans and delinquencies,
applying economic outlook factors, assigning specific incremental reserves where necessary,
providing specific reserves on impaired loans, and assessing the nature and trend of loan
charge-offs. Additionally, the volume of non-performing loans, concentration risks by size, type,
and geography, new markets, collateral adequacy and economic conditions are taken into
consideration.
The allowance established for probable losses on specific loans are based on a regular analysis and
evaluation of classified loans. Loans are classified based on an internal credit risk grading
process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying
collateral, if any; and (iii) the economic environment and industry in which the borrower operates.
Loans with a grade that is below a predetermined grade are adversely classified. Any change in the
credit risk grade of performing and/or non-performing loans affects the amount of the related
allowance.
Once a loan is classified, the loan is analyzed to determine whether the loan is impaired and, if
impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan.
Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts
owed, collateral deficiencies, the relative risk grade of the loan and economic conditions
affecting the borrower’s industry, among other things.
Additionally, management individually evaluates nonaccrual loans and all troubled debt restructured
loans for impairment based on the underlying anticipated method of payment consisting of either the
expected future cash flows or the related collateral. If payment is expected solely based on the
underlying collateral, an appraisal is completed to assess the fair value of the collateral.
Collateral dependent impaired loan balances are written down to the current fair value of each
loan’s underlying collateral resulting in an immediate charge-off to the allowance, excluding any
consideration for personal guarantees that may be pursued in the Bank’s collection process. If
repayment is based upon future expected cash flows, the present value of the expected future cash
flows discounted at the loan’s original effective interest rate is compared to the carrying value
of the loan, and any shortfall is recorded as a specific valuation allowance in the allowance for
credit losses.
The allowance also contains reserves to cover inherent losses within a given loan category which
have not been otherwise reviewed or measured on an individual basis. Such reserves include
management’s evaluation of national and local economic and business conditions, loan portfolio
volumes, the composition and concentrations of credit, credit quality and delinquency trends. These
reserves reflect management’s attempt to ensure that the overall allowance reflects a margin for
the judgment uncertainty that is inherent in estimates of probable credit losses.
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 40 years, computed using the straight-line method. Leasehold improvements,
carried at cost, net of accumulated depreciation, are generally amortized over the terms of the
leases or the estimated useful lives of the assets, whichever are shorter, using the straight-line
method. Expenditures for maintenance and repairs are charged to operations as incurred, while
major replacements and improvements are capitalized. The net asset values of assets retired or
disposed of are removed from the asset accounts and any related gains or losses are included in
operations.
Other assets
Other assets include the Bank’s 35.4% interest in a leasing company. The investment in the
unconsolidated investee is carried using 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
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losses. Operating results, including any future
writedowns of OREO, rental income and operating expenses, are included in “Other expenses.”
An allowance for OREO is 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 at least annually for impairment. If an impairment is found to exist, the carrying value
is reduced by a charge to earnings. Amortization totaled $194,000 in 2009, $213,000 in 2008 and
$197,000 in 2007.
Long-term debt
The Corporation has sold $4 million of trust preferred securities through a wholly-owned statutory
business trust. The trust has no independent assets or operations and exists for the sole purpose
of issuing trust preferred securities and investing the proceeds thereof in an equivalent amount of
junior 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. Where applicable, deferred tax assets are reduced by a valuation allowance
for any portions determined not likely to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.
A reserve is maintained related to certain tax positions and strategies that management believes
contain an element of uncertainty. Management periodically evaluates each of its tax positions and
strategies to determine whether the reserve continues to be appropriate.
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, if determined to be dilutive.
Comprehensive income
Other comprehensive income includes unrealized gains (losses) on securities available for sale
(including the non-credit portion of any other-than-temporary impairment charges relating to these
securities effective April 1, 2009. Comprehensive income and its components are included in the
consolidated statements of changes in shareholders’ equity.
Recent accounting pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards
Codification (“ASC”), which became effective on July 1, 2009. On that date, the FASB’s ASC became
the official source of authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in conformity with U.S. GAAP.
The ASC supersedes all existing FASB, American Institute of Certified Public Accountants (“AICPA”),
Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the
Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative guidance for SEC registrants. All guidance contained in the ASC carries an
equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the
ASC is superseded and deemed non-authoritative. While the conversion to the ASC affects the way
companies refer to U.S. GAAP in financial statements and accounting policies, it does not change
U.S. GAAP. Citing particular content in the ASC involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph structure.
This Statement was effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The implementation of this standard did not have an impact on the
Corporation’s consolidated financial condition or results of operations.
On September 15, 2006, the Financial Accounting Standards Board issued, SFAS No. 157, “Fair Value
Measurements” as codified in FASB ASC (“Accounting Standards Codification”) topic 820, “Fair Value
Measurements and Disclosures (“ASC 820”). This standard provides guidance for using fair value to
measure assets and liabilities, and clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing the asset or liability. ASC 820 applies
whenever other standards require, or permit assets or liabilities to be measured at fair value but
does not expand the use of fair value in any new circumstances. ASC 820 was effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Corporation’s adoption of this standard did not have a significant
impact on its financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations” as codified in FASB ASC
topic 805, “Business Combinations” (“ASC 805”) This standard replaces FASB SFAS No. 141 and
provides principles and requirements for how an acquirer (1) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in an acquiree; (2) recognizes and measures the goodwill acquired in a
business combination or a gain from a bargain purchase; (3) determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. The provisions of ASC 805 shall be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Corporation’s adoption of this
standard did not have an impact on its financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements” (an amendment of ARB No. 51) as codified in FASB ASC topic 810, “Consolidation” (“ASC
810”). This standard establishes accounting and reporting standards that require (1) the ownership
interests in subsidiaries held by parties other than the parent be
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clearly identified in the
consolidated statement of financial position within equity, but separate from the parent’s equity;
(2) the amount of consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified on the face of the consolidated statement of income; (3) changes in
a parent’s ownership interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently; (4) when a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary be initially measured at fair value.
This Statement applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This
Statement was effective for fiscal years beginning on or after December 15, 2008. The
Corporation’s adoption of this standard did not have a significant impact on its financial
condition or results of operations.
In April 2009, the FASB issued Staff Position (“FSP”) No. 157-e, “Determining Whether a Market is
Not Active and a Transaction is Not Distressed”. This FSP clarifies the guidance in ASC 820 for
fair value measurements in inactive markets, modifies the recognition and measurement of
other-than-temporary impairments of debt securities and requires the disclosure of fair values of
financial instruments in interim periods. This FSP was effective for interim and annual periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
The Corporation’s adoption of this standard did not have a significant impact on the financial
condition or results of operations of the Corporation.
In April 2009, the FASB issued the following three Staff Positions: Staff Position No. FAS 115-2
and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” as codified in
ASC 320-10-65-1. The objective of an other-than-temporary impairment analysis under existing U.S.
Generally Accepted Accounting Principles (“GAAP”) is to determine whether the holder of an
investment in a debt or equity security for which changes in fair value are not regularly
recognized in earnings (such as securities classified as held to maturity or available for sale)
should recognize a loss in earnings when the investment is impaired. An investment is impaired if
the fair value of the investment is less than its amortized cost basis. This amends the
other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more
operational and to improve the presentation and disclosure of other-than-temporary impairments of
equity securities.
Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”
as codified in ASC 820-10-65-4. This FSP provides additional guidance for estimating fair value in
accordance with ASC 820, when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying circumstances that indicate
a transaction is not orderly. This FSP emphasizes that even if there has been a significant
decrease in the volume and level of activity for the asset or liability and regardless of the
valuation technique(s) used, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions.
Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments” as codified in ASC 825-10-65-1. This FSP amends FASB Statement No. 107, Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual
financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to
require those disclosures in summarized financial information at interim reporting periods.
Each of the aforementioned FSPs is effective for interim and annual periods ending after June 15,
2009 and was adopted by the Corporation on April 1, 2009. The Corporation’s adoption of ASC
820-10-65-4 had an immaterial effect on its fair value estimates. The effect of the adoption of
ASC 320-10-65-1 is discussed in Note 7, while the additional disclosures required by ASC
825-10-65-1 are provided in Note 10.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” as codified in FASB ASC topic 855,
“Subsequent Events“7 (“ASC 855”). ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. The Corporation adopted ASC 855 during the second quarter of
2009. In accordance with ASC 855, the Corporation evaluated subsequent events through the date its
financial statements were filed. The adoption of this standard did not have an impact on the
Corporation’s financial position or results of operations.
In May 2009, the FASB issued Statements No. 166, “Accounting for Transfers of Financial Assets” and
167, “Amendments to FASB Interpretation No. 46(R),” as codified in ASC 860-10 and 810-10,
respectively, which establish new criteria governing whether transfers of financial assets are
accounted for as sales and are expected to result in more variable interest entities being
consolidated. The Statements were effective for annual periods beginning after November 15, 2009.
The Corporation is evaluating the impact of these Statements.
Reclassifications
Certain reclassifications have been made to the 2008 and 2007 consolidated financial statements in
order to conform with the 2009 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 $1.9 million in 2009 and $2 million in 2008.
Note 3 Federal funds sold and securities purchased under agreements to resell
Federal funds sold averaged $34.6 million during 2009 and $10.6 million in 2008, while the maximum
balance outstanding at any month-end during 2009, 2008 and 2007 was $70.5 million, $23.8 million
and $79.5 million, respectively. There were no securities purchased under repurchase agreements in
2009, 2008 or 2007.
Note 4 Investment securities available for sale
The amortized cost and fair values at December 31 of investment securities available for sale were
as follows:
28
Table of Contents
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| 2009 In thousands | Cost | Gains | Losses | Value | ||||||||||||
U.S. Treasury securities
and obligations of U.S.
government agencies |
$ | 12,518 | $ | 231 | $ | 49 | $ | 12,700 | ||||||||
Obligations of U.S.
government sponsored
entities |
17,289 | 222 | 187 | 17,324 | ||||||||||||
Obligations of state and
political subdivisions |
546 | 7 | — | 553 | ||||||||||||
Mortgage-backed
securities |
74,417 | 2,797 | 76 | 77,138 | ||||||||||||
Other debt securities |
12,269 | 266 | 2,267 | 10,268 | ||||||||||||
Equity securities: |
||||||||||||||||
Marketable securities |
713 | — | 18 | 695 | ||||||||||||
Nonmarketable
securities |
115 | — | — | 115 | ||||||||||||
Federal Reserve Bank
and Federal Home
Loan Bank stock |
3,213 | — | — | 3,213 | ||||||||||||
Total |
$ | 121,080 | $ | 3,523 | $ | 2,597 | $ | 122,006 | ||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| 2008 In thousands | Cost | Gains | Losses | Value | ||||||||||||
U.S. Treasury securities
and obligations of U.S.
government agencies |
$ | 4,009 | $ | 5 | $ | 57 | $ | 3,957 | ||||||||
Obligations of U.S.
government sponsored
entities |
19,157 | 181 | 326 | 19,012 | ||||||||||||
Obligations of state and
political subdivisions |
548 | 4 | — | 552 | ||||||||||||
Mortgage-backed
securities |
88,356 | 2,408 | 134 | 90,630 | ||||||||||||
Other debt securities |
11,645 | 149 | 3,996 | 7,798 | ||||||||||||
Equity securities: |
||||||||||||||||
Marketable securities |
678 | — | 40 | 638 | ||||||||||||
Nonmarketable
securities |
115 | — | — | 115 | ||||||||||||
Federal Reserve Bank
and Federal Home
Loan Bank stock |
2,889 | — | — | 2,889 | ||||||||||||
Total |
$ | 127,397 | $ | 2,747 | $ | 4,553 | $ | 125,591 | ||||||||
The amortized cost and the fair values of investments in debt securities available for sale
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 | Fair | |||||||
| In thousands | Cost | Value | ||||||
Due within one year: |
||||||||
Obligations of U.S. government sponsored
entities |
$ | 3,000 | $ | 3,015 | ||||
Obligations of state and political subdivisions |
546 | 553 | ||||||
Other debt securities |
994 | 1,014 | ||||||
Due after one year but within five years: |
||||||||
Obligations of U.S. government sponsored
entities |
3,025 | 3,102 | ||||||
Mortgage-backed securities |
96 | 97 | ||||||
Other debt securities |
2,452 | 2,314 | ||||||
Due after five years but within ten years: |
||||||||
U.S. Treasury securities and obligations
of U.S. government agencies |
6,220 | 6,321 | ||||||
Obligations of U.S.
government sponsored
entities |
1,295 | 1,353 | ||||||
Mortgage-backed securities |
2,245 | 2,309 | ||||||
Due after ten years: |
||||||||
U.S. Treasury securities and obligations
of U.S. government agencies |
6,299 | 6,380 | ||||||
Obligations of U.S. government sponsored
entities |
9,968 | 9,854 | ||||||
Mortgage-backed securities |
72,076 | 74,731 | ||||||
Other debt securities |
8,823 | 6,940 | ||||||
Total debt securities |
117,039 | 117,983 | ||||||
Equity securities |
4,041 | 4,023 | ||||||
Total |
$ | 121,080 | $ | 122,006 | ||||
Sales of investment securities available for sale resulted in gross losses of $1,000, $49,000
and $14,000 and gross gains of $1,000 $- and $24,000 in 2009, 2008 and 2007, respectively.
Additionally, impairment charges of $2.3 million were recorded during 2009. These charges
resulted from the determination that the unrealized losses in two collateralized debt obligations
(“CDOs”) were other than temporary, based on the expectation that it is probable that all principal
and interest payments will not be received in accordance with the securities’ contractual terms.
Interest and dividends on investment securities available for sale were as follows:
| In thousands | 2009 | 2008 | 2007 | |||||||||
Taxable |
$ | 5,732 | $ | 6,001 | $ | 5,187 | ||||||
Tax-exempt |
68 | 20 | 94 | |||||||||
Total |
$ | 5,800 | $ | 6,021 | $ | 5,281 | ||||||
Investment securities available for sale with a carrying value of $106.9 million were pledged
to secure U.S. government and municipal deposits and Federal Home Loan Bank borrowings at December
31, 2009.
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 Unrealized | Gross Unrealized | Gross Unrealized | ||||||||||||||||||||||
| 2009 In thousands | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
U.S. Treasury securities and obligations
of U.S. government agencies |
$ | 2,050 | $ | 14 | $ | 2,598 | $ | 35 | $ | 4,648 | $ | 49 | ||||||||||||
Obligations of U.S. Government
sponsored entities |
2,822 | 143 | 2,323 | 44 | 5,145 | 187 | ||||||||||||||||||
Mortgaged-backed securities |
4,947 | 73 | 248 | 3 | 5,195 | 76 | ||||||||||||||||||
Other debt securities |
43 | 1 | 4,352 | 2,266 | 4,395 | 2,267 | ||||||||||||||||||
Equity securities |
— | — | 713 | 18 | 713 | 18 | ||||||||||||||||||
Total |
$ | 9,862 | $ | 231 | $ | 10,234 | $ | 2,366 | $ | 20,096 | $ | 2,597 | ||||||||||||
29
Table of Contents
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Gross Unrealized | Gross Unrealized | Gross Unrealized | ||||||||||||||||||||||
| 2008 In thousands | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
U.S. Treasury securities and obligations
of U.S. government agencies |
$ | 2,701 | $ | 53 | $ | 168 | $ | 4 | $ | 2,869 | $ | 57 | ||||||||||||
Obligations of U.S. Government
sponsored entities |
3,891 | 68 | 4,881 | 258 | 8,772 | 326 | ||||||||||||||||||
Mortgaged-backed securities |
5,142 | 65 | 2,760 | 69 | 7,902 | 134 | ||||||||||||||||||
Other debt securities |
2,722 | 274 | 3,829 | 3,722 | 6,551 | 3,996 | ||||||||||||||||||
Equity securities |
— | — | 678 | 40 | 678 | 40 | ||||||||||||||||||
Total |
$ | 14,456 | $ | 460 | $ | 12,316 | $ | 4,093 | $ | 26,772 | $ | 4,553 | ||||||||||||
The gross unrealized losses set forth above as of December 31,
2009 were attributable
primarily to single-issue trust preferred
securities (“TRUPS”) issued by financial institutions, CDOs collateralized primarily by TRUPS
issued by banks and other corporate debt, all of which are included with other debt securities. The
fair value of these securities has been negatively impacted by the lack of liquidity in the overall
TRUPS and corporate debt markets although all issuers continue to perform other than for CDOs for
which impairment charges were recorded.
The following table presents a rollforward of the credit loss component of other-than-temporary
investment losses (“OTTI”) on debt securities for which a non-credit component of OTTI was
recognized in other comprehensive income. The beginning balance represents the credit loss
component for debt securities for which OTTI occurred prior to April 1, 2009. OTTI recognized in
earnings after that date for credit-impaired debt securities is presented as additions in two
components, based upon whether the current period is the first time a debt security was
credit-impaired (initial credit impairment) or is not the first time a debt security was credit
impaired (subsequent credit impairment).
Changes in the credit loss component of credit-impaired debt securities were as follows:
| For the Nine Months | ||||
| In thousands | Ended December 31, 2009 | |||
Beginning balance as of April 1, 2009 |
$ | 288 | ||
Add: Initial other-than-temporary credit
losses |
944 | |||
Additional other-than-temporary credit
losses |
1,257 | |||
Balance, December 31, 2009 |
$ | 2,489 | ||
$2.3 million in OTTI charges were recorded on two CDOs during 2009. This OTTI was related to
credit losses incurred on the aforementioned investments and was determined through discounted cash
flow analysis of expected cash flows from the underlying collateral. Third-party consultants were
used to obtain valuations for the CDO portfolio, including the determination of both the credit and
market components. One consultant analyzes the default prospects of the CDO’s underlying
collateral and performs discounted cash flow analyses, while the other projects default prospects
based generally on historical default rates. Both used discount rates based on what return an
investor would require on a risk-adjusted basis based on current economic conditions. These two
CDOs have a remaining carrying value of $111,000, for which the accrual of interest has been
discontinued. Based on valuations received from third-party consultants, management believes that
these carrying values will eventually be recovered and that no additional impairment exists.
The Bank also owns a CDO with a carrying value of $996,000 on which no impairment losses have been
recorded because it is expected that this security will perform in accordance with its original
terms and that the carrying value is fully recoverable. Additionally, the Bank owns a portfolio of
seven single-issue trust preferred securities with a carrying value of $6.3 million and a market
value of $5.2 million. Finally, the Bank also owns two corporate securities with a carrying value
of $1.9 million that are rated below investment grade. None of these securities is considered
impaired as they are all fully performing.
In April 2009, FASB amended the impairment model for debt securities. The impairment model for
equity securities was not affected. Under the new guidance, an other-than-temporary impairment loss
must be fully recognized in earnings if an investor has the intent to sell the debt security or if
it is more likely than not that the investor will be required to sell the debt security before
recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt
security, it must evaluate the expected cash flows to be received and determine if a credit loss
has occurred. In the event of a credit loss, only the amount of impairment associated with the
credit loss is recognized in earnings. Amounts relating to factors other than credit losses are
recorded in accumulated other comprehensive income. The guidance also requires additional
disclosures regarding the calculation of credit losses as well as factors considered in reaching a
conclusion that an investment is not other-than-temporarily impaired (“OTTI”). The Corporation
adopted the new guidance effective April 1, 2009. The Corporation recorded a $1 million pre-tax
transition adjustment for the non-credit portion of OTTI on securities held at April 1, 2009 that
were previously considered other than temporarily impaired.
Available for sale securities in unrealized loss positions are analyzed as part of the
Corporation’s ongoing assessment of OTTI. When the Corporation intends to sell available-for-sale
securities, the Corporation recognizes an impairment loss equal to the full difference between the
amortized cost basis and fair value of those securities. When the Corporation does not intend to
sell available for sale securities in an unrealized loss position, potential OTTI is considered
based on a variety of factors, including the length of time and extent to which the fair value has
been less than cost; adverse conditions specifically related to the industry, the geographic area
or financial condition of the issuer or the underlying collateral of a security; the payment
structure of the security; changes to the rating of the security by rating agencies; the volatility
of the fair value changes; and changes in fair value of the security after the balance sheet date.
For debt securities, the Corporation estimates cash flows over the remaining lives of the
underlying collateral to assess whether credit losses exist and to determine if any adverse changes
in cash flows have occurred. The Corporation’s cash flow estimates take into account expectations
of relevant market and economic data as of the end of the reporting period.
Other factors considered in determining whether a loss is temporary include the length of time and
the extent to which fair value has been below cost; the severity of the impairment; the cause of
the impairment; the financial condition and near-term prospects of the issuer; activity in the
market of the issuer which may indicate adverse credit conditions; and the forecasted recovery
period using current estimates of volatility in market interest rates (including liquidity and risk
premiums).
Management’s assertion regarding its intent not to sell or that it is not more likely than not that
the Corporation will be required to sell
30
Table of Contents
the security before its anticipated recovery considers a
number of factors, including a quantitative estimate of the expected recovery period (which may
extend to maturity), and management’s intended strategy with respect to the identified security or
portfolio. If management does have the intent to sell or believes it is more likely than not that
the Corporation will be required to sell the security before its anticipated recovery, the gross
unrealized loss is charged directly to earnings in the Consolidated Statements of Income.
As of December 31, 2009, the Corporation does not intend to sell the securities with an unrealized
loss position in accumulated other comprehensive loss (“AOCL”), and it is not more likely than not
that the Corporation will be required to sell these securities before recovery of their amortized
cost basis. The Corporation believes that the securities with an unrealized loss in AOCL are not
other than temporarily impaired as of December 31, 2009.
Note 5 Investment securities held to maturity
The amortized cost and fair values as of December 31 of investment securities held to maturity were
as follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| 2009 In thousands | Cost | Gains | Losses | Value | ||||||||||||
U.S. Treasury
securities
and obligations
of U.S. government
agencies |
$ | 1,585 | $ | 62 | $ | — | $ | 1,647 | ||||||||
Obligations of U.S.
government
sponsored entities |
2,459 | 19 | 73 | 2,405 | ||||||||||||
Obligations of state and
political subdivisions |
27,979 | 1,135 | 72 | 29,042 | ||||||||||||
Mortgage-backed
securities |
7,877 | 309 | — | 8,186 | ||||||||||||
Other debt securities |
495 | 7 | — | 502 | ||||||||||||
Total |
$ | 40,395 | $ | 1,532 | $ | 145 | $ | 41,782 | ||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| 2008 In thousands | Cost | Gains | Losses | Value | ||||||||||||
Obligations of U.S.
government
sponsored entities |
$ | 8,500 | $ | 20 | $ | — | $ | 8,520 | ||||||||
Obligations of state
and
political subdivisions |
31,629 | 814 | 221 | 32,222 | ||||||||||||
Mortgage-backed
securities |
12,089 | 269 | — | 12,358 | ||||||||||||
Other debt securities |
1,496 | — | 59 | 1,437 | ||||||||||||
Total |
$ | 53,714 | $ | 1,103 | $ | 280 | $ | 54,537 | ||||||||
During 2009, $9.7 million of callable securities were redeemed by the issuers prior to
maturity resulting in gross gains of $11,000, while in 2008 $9.6 million of such securities were
redeemed resulting in gross gains of $5,700, and $4 million was redeemed in 2007 resulting in gross
gains of $1,600. Additionally, a security with a market value of $184,000 was transferred to
available for sale after the security was downgraded by a rating agency.
The amortized cost and the fair value of investment securities held to maturity as of December 31,
2009 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 | Fair | |||||||
| In thousands | Cost | Value | ||||||
Due after one year but within five years: |
||||||||
Obligations of state and political
subdivisions |
$ | 8,458 | $ | 9,007 | ||||
Mortgage-backed securities |
163 | 170 | ||||||
Due after five years but within ten years: |
||||||||
Obligations of state and political
subdivisions |
13,712 | 14,198 | ||||||
Due after ten years: |
||||||||
U.S. Treasury securities and obligations
of U.S. government agencies |
1,585 | 1,647 | ||||||
Obligations of U.S. government sponsored
entities |
2,459 | 2,405 | ||||||
Obligations of state and political
subdivisions |
5,809 | 5,837 | ||||||
Mortgage-backed securities |
7,714 | 8,016 | ||||||
Other debt securities |
495 | 502 | ||||||
Total |
$ | 40,395 | $ | 41,782 | ||||
Interest and dividends on investment securities held to maturity were as follows:
| In thousands | 2009 | 2008 | 2007 | |||||||||
Taxable |
$ | 936 | $ | 1,403 | $ | 1,426 | ||||||
Tax-exempt |
1,188 | 1,270 | 1,279 | |||||||||
Total |
$ | 2,124 | $ | 2,673 | $ | 2,705 | ||||||
Investment securities held to maturity with a carrying value of $27.5 million were pledged to
secure U.S. government and municipal deposit funds and Federal Home Loan Bank borrowings at
December 31, 2009.
31
Table of Contents
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 Unrealized | Gross Unrealized | Gross Unrealized | ||||||||||||||||||||||
| 2009 In thousands | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Obligations of state and political
subdivisions |
$ | 2,268 | $ | 22 | $ | 672 | $ | 50 | $ | 2,940 | $ | 72 | ||||||||||||
Obligations of U.S.
government
sponsored entities |
1,351 | 73 | — | — | 1,351 | 73 | ||||||||||||||||||
Total |
$ | 3,619 | $ | 95 | $ | 672 | $ | 50 | $ | 4,291 | $ | 145 | ||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Gross Unrealized | Gross Unrealized | Gross Unrealized | ||||||||||||||||||||||
| 2008 In thousands | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Obligations of state and political
subdivisions |
$ | 4,753 | $ | 146 | $ | 647 | $ | 75 | $ | 5,400 | $ | 221 | ||||||||||||
Other debt securities |
1,437 | 59 | — | — | 1,437 | 59 | ||||||||||||||||||
Total |
$ | 6,190 | $ | 205 | $ | 647 | $ | 75 | $ | 6,837 | $ | 280 | ||||||||||||
As of December 31, 2009, the Corporation does not intend to sell the securities with an
unrealized loss position in accumulated other comprehensive loss (“AOCL”), and it is not more
likely than not that the Corporation will be required to sell these securities before recovery of
their amortized cost basis. The Corporation believes that the securities with an unrealized loss in
AOCL are not other than temporarily impaired as of December 31, 2009.
Note 6 Loans
Loans, net of unearned discount and net deferred origination fees and costs at December 31 were as
follows:
| In thousands | 2009 | 2008 | ||||||
Commercial |
$ | 53,820 | $ | 44,366 | ||||
Real estate |
221,601 | 226,546 | ||||||
Installment |
926 | 1,153 | ||||||
Total loans |
276,347 | 272,065 | ||||||
Less: Unearned income |
105 | 159 | ||||||
Loans |
$ | 276,242 | $ | 271,906 | ||||
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 | 2009 | 2008 | ||||||
Nonaccrual loans |
$ | 16,323 | $ | 8,227 | ||||
Loans with interest or principal 90
days or more past due and still accruing |
1,567 | 384 | ||||||
Total nonperforming loans |
$ | 17,890 | $ | 8,611 | ||||
The effect of nonaccrual loans on income before taxes is presented below.
| In thousands | 2009 | 2008 | 2007 | |||||||||
Interest income foregone |
$ | (785 | ) | $ | (692 | ) | $ | (465 | ) | |||
Interest income received |
188 | 467 | 429 | |||||||||
| $ | (597 | ) | $ | (225 | ) | $ | (36 | ) | ||||
Nonperforming assets are generally secured by residential and small commercial real estate
properties.
At December 31, 2009 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 the New York City metropolitan area and is secured by commercial properties. 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.
Impaired loans totaled $11.1 million at December 31, 2009 compared to $5.8 million at December 31,
2008. Charge-offs of impaired loans during 2009 totaled $1.4 million. The related allocation of
the allowance for loan losses amounted to $550,000 and $310,000. $10.3 million of impaired loans
have no allowance allocated to them as sufficient collateral exists. The average balance of
impaired loans during 2009 was $8.5 million and amounted to $1 million in 2008. There was no
interest income recognized on impaired loans during either 2009 or 2008. At December 31, 2009
there were $5.2 million of troubled debt restructured loans with a related allowance of
approximately $760,000 compared to $2.5 million and $150,000 at December 31, 2008. One TDR of $1.4
million is accruing interest. The remaining TDRs are on nonaccrual status and reflected in the
above table.
Note 7 Allowance for loan losses
Transactions in the allowance for loan losses are summarized as follows:
| In thousands | 2009 | 2008 | 2007 | |||||||||
Balance, January 1 |
$ | 3,800 | $ | 3,000 | $ | 2,400 | ||||||
Provision for loan
losses |
8,105 | 1,586 | 772 | |||||||||
Recoveries of loans previously
charged off |
15 | 6 | 34 | |||||||||
| 11,920 | 4,592 | 3,206 | ||||||||||
Less: Charge-offs |
3,270 | 792 | 206 | |||||||||
Balance, December 31 |
$ | 8,650 | $ | 3,800 | $ | 3,000 | ||||||
Note 8 Premises and equipment
A summary of premises and equipment at December 31 follows:
| In thousands | 2009 | 2008 | ||||||
Land |
$ | 329 | $ | 329 | ||||
Premises |
1,520 | 1,520 | ||||||
Furniture and equipment |
4,326 | 4,238 | ||||||
Leasehold improvements |
3,368 | 3,316 | ||||||
Total cost |
9,543 | 9,403 | ||||||
Less: Accumulated depreciation and amortization |
6,594 | 6,161 | ||||||
Total premises and equipment |
$ | 2,949 | $ | 3,242 | ||||
Depreciation and amortization expense charged to operations amounted to $432,000, $495,000
and $430,000 in 2009, 2008, and 2007 respectively.
32
Table of Contents
Note 9 Deposits
Deposits at December 31 are presented below.
| In thousands | 2009 | 2008 | ||||||
Noninterest bearing demand |
$ | 29,304 | $ | 36,270 | ||||
Interest bearing: |
||||||||
Demand |
51,839 | 39,040 | ||||||
Savings |
24,728 | 24,670 | ||||||
Money market |
73,286 | 119,462 | ||||||
Time |
201,119 | 187,675 | ||||||
Total interest bearing deposits |
350,972 | 370,847 | ||||||
Total deposits |
$ | 380,276 | $ | 407,117 | ||||
Time deposits issued in amounts of $100,000 or more have the following maturities at December
31:
| In thousands | 2009 | 2008 | ||||||
Three months or less |
$ | 53,599 | $ | 47,301 | ||||
Over three months but within six months |
32,947 | 4,893 | ||||||
Over six months but within twelve months |
16,209 | 21,370 | ||||||
Over twelve months |
30,649 | 24,733 | ||||||
Total deposits |
$ | 133,404 | $ | 98,297 | ||||
Interest expense on certificates of deposits of $100,000 or more was $2,171,000, $3,426,000
and $4,446,000 in 2009, 2008 and 2007, respectively.
Note 10 Short-term borrowings
Information regarding short-term borrowings at December 31, is presented below.
| Average | ||||||||||||||||||||
| Interest | Average | Maximum | ||||||||||||||||||
| Rate on | Average | Interest | Balance | |||||||||||||||||
| Decem- | Decem- | Balance | Rate | at any | ||||||||||||||||
| ber 31 | ber 31 | During | During | Month- | ||||||||||||||||
| Dollars in thousands | Balance | Balance | the Year | the Year | End | |||||||||||||||
2009 |
||||||||||||||||||||
Federal funds
purchased |
$ | — | — | % | $ | 518 | .56 | % | $ | 3,720 | ||||||||||
Securities sold under
repurchase
agreements |
100 | .30 | % | 55 | .27 | 2,200 | ||||||||||||||
Demand note issued
to the U.S. Treasury |
— | — | 33 | .05 | 3 | |||||||||||||||
Total |
$ | 100 | .30 | % | $ | 606 | .51 | % | $ | 5,923 | ||||||||||
2008 |
||||||||||||||||||||
Federal funds
purchased |
$ | — | — | % | $ | 2,140 | 2.23 | % | $ | 19,780 | ||||||||||
Securities sold under
repurchase
agreements |
1,850 | .30 | % | 157 | 1.39 | 2,000 | ||||||||||||||
Demand note issued
to the U.S. Treasury |
— | — | 454 | 2.13 | 6,000 | |||||||||||||||
Total |
$ | 1,850 | .30 | % | $ | 2,751 | 2.17 | % | $ | 27,780 | ||||||||||
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 $3.9 million. There was no balance outstanding under
the note at December 31, 2009 and 2008.
The Corporation had short-term borrowing lines of $3 million at December 31, 2009 and $8
million at December 31, 2008 with various correspondent banks which were unused at December 31,
2009 and 2008.
Note 11 Long-term debt
Long-term debt at December 31 is summarized as follows:
| In thousands | 2009 | 2008 | ||||||
FHLB
convertible advances due from March 4, 2010 through August 6, 2018 |
$ | 39,700 | $ | 42,200 | ||||
6.00% capital note, due December 28, 2010 |
100 | 200 | ||||||
8.00% capital note, due May 6, 2017 |
200 | 200 | ||||||
5.00% senior note, due February 21, 2022 |
5,000 | 5,000 | ||||||
Subordinated debt |
4,000 | 4,000 | ||||||
Total |
49,000 | 51,600 | ||||||
Less: Short-term portion of long-term debt |
5,000 | 5,000 | ||||||
Total |
$ | 44,000 | $ | 45,600 | ||||
Interest is payable quarterly on the FHLB advances. The advances bear fixed interest rates
ranging from 2.63% to 6.15% and are secured by residential mortgages and certain obligations of
U.S. Government agencies under a blanket collateral agreement.
The Corporation had borrowing lines with the Federal Home Loan Bank totaling $79.1 million at
December 31, 2009 and $88.6 million at December 31, 2008, of which $77 million and $79.5 million
was used and outstanding at December 31, 2009 and 2008, respectively. These lines may also be
utilized for long-term or short-term borrowing purposes.
Interest is payable quarterly on the 6.00% capital note with principal payments commencing annually
in December, 2006 and continuing until December, 2010.
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 then renewable at the option of the Corporation for
an additional fifteen years at the prevailing rate of interest.
Interest is payable on the 5.00% senior note quarterly for the first ten years. Interest
thereafter is payable quarterly at a fixed rate based on the yield of the ten-year U.S. Treasury
note plus 150 basis points in effect on the tenth anniversary of the note agreement. Quarterly
principal payments of $250,000 commence in the eleventh year of the loan. As an additional
condition for receiving the loan, the Bank is required to contribute $100,000 annually for the
first five years the loan is outstanding to a nonprofit lending institution formed jointly by CNB
and the lender to provide financing to small businesses that would not qualify for bank loans.
The Corporation has been in violation of certain covenants of the loan agreement since December 31,
2008. Although the loan becomes immediately payable as a result of these violations, which are
considered an event of default, the lender has informally indicated that no action will be taken as
a result of these violations.
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 rate in effect at December 31, 2009 was 3.04%.
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.
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The subsidiary trust is not included with the consolidated financial statements of the Corporation
because of the deconsolidation required by accounting standards.
The debentures are eligible for inclusion in Tier 1 capital for regulatory purposes.
Scheduled repayments on long-term debt are as follows:
| In thousands | Amount | |||
2010 |
$ | 3,300 | ||
2011 |
16,000 | |||
2012 |
2,000 | |||
2013 |
8,500 | |||
2014 |
— | |||
Thereafter |
14,200 | |||
Total |
$ | 44,000 | ||
Note 12 Other operating income and expenses
The following table presents the major components of other operating income and expenses.
| In thousands | 2009 | 2008 | 2007 | |||||||||
Other income |
||||||||||||
Income from off-site ATMs |
$ | 482 | $ | 428 | $ | 420 | ||||||
Earnings on cash surrender value of
life insurance |
252 | 248 | 225 | |||||||||
Agency fees on commercial loans |
236 | 318 | 328 | |||||||||
Undistributed gain (loss) from
unconsolidated investee |
202 | 185 | (9 | ) | ||||||||
Miscellaneous other income |
465 | 389 | 388 | |||||||||
Total other income |
$ | 1,637 | $ | 1,568 | $ | 1,352 | ||||||
Other expenses |
||||||||||||
Professional fees |
$ | 432 | $ | 342 | $ | 264 | ||||||
Data processing |
361 | 341 | 396 | |||||||||
Marketing expense |
361 | 471 | 447 | |||||||||
Miscellaneous other expenses |
2,130 | 2,323 | 2,270 | |||||||||
Total other expenses |
$ | 3,284 | $ | 3,477 | $ | 3,377 | ||||||
Note 13 Income taxes
The components of income tax expense are as follows:
| In thousands | 2009 | 2008 | 2007 | |||||||||
Current expense (benefit) |
||||||||||||
Federal |
$ | (595 | ) | $ | 755 | $ | 613 | |||||
State |
29 | 251 | 212 | |||||||||
| (566 | ) | 1,006 | 825 | |||||||||
Deferred expense (benefit) |
||||||||||||
Federal and state |
2,372 | (1,056 | ) | (453 | ) | |||||||
Total income tax expense (benefit) |
$ | 1,806 | $ | ( 50 | ) | $ | 372 | |||||
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 | 2009 | 2008 | 2007 | |||||||||
| | | | | ||||||||||||
Federal income tax at statutory rate |
$ | (2,046 | ) | $ | 343 | $ | 756 | |||||
Increase (decrease) in income tax
expense resulting from: |
||||||||||||
State income tax expense, net of
federal benefit |
517 | 60 | 83 | |||||||||
Tax-exempt income |
(450 | ) | (462 | ) | (485 | ) | ||||||
Bank-owned life insurance |
(65 | ) | (66 | ) | (63 | ) | ||||||
Increase in valuation allowance |
3,505 | 423 | — | |||||||||
Decrease in FIN 48 |
— | (363 | ) | — | ||||||||
Other, net |
345 | 15 | 81 | |||||||||
Total income tax expense (benefit) |
$ | 1,806 | $ | (50 | ) | $ | 372 | |||||
The tax effects of temporary differences that give rise to deferred tax assets and
liabilities at December 31 are as follows:
| In thousands | 2009 | 2008 | ||||||
Deferred tax assets |
||||||||
Unrealized losses on investment
securities available for sale |
$ | — | $ | 1,539 | ||||
Allowance for loan losses |
3,071 | 1,370 | ||||||
Investment securities |
982 | — | ||||||
Premises and equipment |
297 | 453 | ||||||
Deposit intangible |
207 | 6 | ||||||
Deferred compensation |
1,072 | 1,166 | ||||||
Deferred income |
46 | 295 | ||||||
Investment in partnership |
— | 114 | ||||||
Other assets |
243 | 25 | ||||||
Total deferred tax asset |
5,918 | 4,968 | ||||||
Deferred tax liabilities |
||||||||
Unrealized losses on investment
securities available for sale |
393 | — | ||||||
Other |
— | 220 | ||||||
Total deferred tax liabilities |
393 | 220 | ||||||
Deferred tax asset |
$ | 5,525 | $ | 4,748 | ||||
Valuation allowance |
4,680 | 423 | ||||||
Net deferred tax asset |
$ | 845 | $ | 4,325 | ||||
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. If
it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred
tax asset will not be realized, the deferred tax asset must be reduced by a valuation allowance
based on the weight of all available evidence. The allowance should be sufficient to reduce the
deferred tax asset to the amount that is more likely than not to be realized. During 2009, the
valuation allowance was increased by $4.3 million because the Corporation is in a three-year
cumulative loss position.
The Corporation records estimated penalties and interest, if any, related to unrecognized tax
benefits in other operating expense. The Corporation’s tax returns are subject to examination by
federal tax authorities for the years 2006 through 2008 and by state authorities also for the years
2005 through 2008.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| In thousands | 2009 | 2008 | ||||||
Balance at January 1 |
$ | 112 | $ | 427 | ||||
Additions based on tax positions related to the
current year |
— | 48 | ||||||
Additions for tax positions of prior years |
— | — | ||||||
Reductions for tax positions of prior years |
(112 | ) | (363 | ) | ||||
Balance at December 31 |
$ | — | $ | 112 | ||||
The decrease in the unrecognized tax benefits in 2008 relates to the statute expiring in regards to
the resolution of a tax matter, while in 2009, the decrease occurred due to the resolution of a tax
matter.
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 $23,000 in 2009, $94,000 in 2008 and $24,000 in 2007.
During 2009, the Bank reversed the discretionary contributions that are periodically credited to
participants’ accounts. Additionally, unused discretionary contribution accruals were used to fund
part of the 2007 savings plan contributions.
Bonus plan
The Bank awards profit sharing bonuses to its officers and employees based on the achievement of
certain performance
34
Table of Contents
objectives. Bonuses charged (credited) to operating expense in 2009, 2008 and 2007 amounted to
$(103,000), $311,000, and $269,000, respectively. The credit in 2009 resulted from a decision to
not pay bonuses previously accrued.
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 $66,000 in 2009, $231,000 in 2008 and $329,000 in 2007. The Bank also has a director
retirement plan (“DRIP”). DRIP expense was $86,000 in 2009, $2,000 in 2008 and $44,000 in 2007.
The decrease in SERP expense was related to the departure of a plan participant, while the increase
in DRIP expense resulted from additional accrual required as a result of a director’s early
retirement.
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 totaled $252,000 in 2009, $248,000 in 2008 and $225,000 in 2007, while the related life
insurance expense was $59,000 in 2009, $54,000 in 2008 and $36,000 in 2007.
Stock options
No stock options have been issued since 1997 and there were no stock options outstanding at
December 31, 2009, 2008 and 2007.
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.
| Year | Dividend | Stated | Number | December 31, | ||||||||||||||||||||
| Issued | Rate | Value | of Shares | 2009 | 2008 | |||||||||||||||||||
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 | 1,400,000 | ||||||||||||||||||
Series F |
2005 | 8.53 | 7,000,000 | 7,000 | 6,790,000 | 6,790,000 | ||||||||||||||||||
Series E |
2006 | 6.00 | 50,000 | 21 | 1,050,000 | 1,050,000 | ||||||||||||||||||
Series G |
2009 | 5.00 | 9,439,000 | 9,439 | 9,439,000 | — | ||||||||||||||||||
| $ | 19,726,000 | $ | 10,287,000 | |||||||||||||||||||||
Series C & D shares are redeemable at any time at par value, while Series A shares are
redeemable at par value plus a premium payable in the event of a change of control.
Each Series E share is 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.
On April 10, 2009, the Corporation issued 9,439 shares of fixed-rate cumulative perpetual preferred
stock to the U.S. Department of Treasury. These shares pay cumulative dividends at a rate of five
percent per annum until the fifth anniversary of the date of issuance, after which the rate
increases to nine percent per annum. Dividends are paid quarterly in arrears and unpaid dividends
are accrued over the period the preferred shares are outstanding.
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. Based upon this limitation, no funds were available for the
payment of dividends to the parent corporation at December 31, 2009 since the aforementioned net
profit was a loss of $7.8 million.
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 | 2009 | 2008 | 2007 | |||||||||
Net (loss) income |
$ | (7,822 | ) | $ | 1,058 | $ | 1,867 | |||||
Dividends on preferred stock |
(1,154 | ) | (812 | ) | (771 | ) | ||||||
Net (loss)income applicable to basic
common shares |
(8,976 | ) | 246 | 1,096 | ||||||||
Dividends applicable to convertible
preferred stock |
147 | 147 | 106 | |||||||||
Net (loss) income applicable to
diluted common shares |
$ | (8,829 | ) | $ | 393 | $ | 1,202 | |||||
Number of average common shares |
||||||||||||
Basic |
131,300 | 131,688 | 132,306 | |||||||||
Diluted: |
||||||||||||
Average common shares outstanding |
131,300 | 131,688 | 132,306 | |||||||||
Average potential dilutive common
shares |
16,317 | 16,317 | 16,317 | |||||||||
| 147,617 | 148,005 | 148,623 | ||||||||||
Net income per common share |
||||||||||||
Basic |
$ | (68.36 | ) | $ | 1.87 | $ | 8.28 | |||||
Diluted |
(68.36 | ) | 1.87 | 8.09 | ||||||||
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 2009 and 2008. 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
collectability and did not include any unfavorable features.
Total loans to the aforementioned individuals and organizations amounted to $3.3 million and $3.4
million at December 31, 2009 and 2008, respectively. The highest amount of such indebtedness
during 2009 and 2008 was $3.4 million and $3.5 million, respectively. During 2009, there were
$12,000 of new loans and paydowns totaled $75,000. All related party loans were performing as of
December 31, 2009.
Note 19 Fair value measurement of assets and liabilities
The following table represents the assets and liabilities on the Consolidated Balance Sheets at
their fair value at December 31, 2009 by level within the fair value hierarchy. The fair value
hierarchy established by ASC Topic 820, “fair Value Measurements and Disclosures” prioritizes
inputs to valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurement) and the lowest
35
Table of Contents
priority to unobservable inputs (level 3 measurements). The three levels of the fair value
hierarchy are described below.
Level 1
– Unadjusted quoted prices in active markets that are accessible at the measurement date
for identical unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active, or inputs that are observable either
directly or indirectly, for substantially the full term of the assets or liabilities;
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e., supported by little or no market activity).
The following tables present the assets and liabilities that are measured at fair value hierarchy
at December 31, 2009 and 2008, respectively.
| (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Investment securities
available for sale |
$ | 122,006 | $ | 12,700 | $ | 108,804 | $ | 502 | ||||||||
Loans held for sale |
190 | — | — | 190 | ||||||||||||
Total assets |
$ | 122,196 | $ | 12,700 | $ | 108,804 | $ | 692 | ||||||||
Total liabilities |
$ | — | $ | — | $ | — | $ | — | ||||||||
| (Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Investment securities
available for sale |
$ | 125,591 | $ | 1,008 | $ | 123,439 | $ | 1,144 | ||||||||
Loans held for sale |
267 | 267 | — | — | ||||||||||||
Total assets |
$ | 122,858 | $ | 1,275 | $ | 123,439 | $ | 1,144 | ||||||||
Total liabilities |
$ | — | $ | — | $ | — | $ | — | ||||||||
The fair value of Level 3 investments at December 31, 2009 was $642,000 million less than the
related fair value of $1.1 million at December 31, 2008. Most of the reduction was attributable to
impairment charges on two collateralized debt obligations (“CDOs”).
Level 1 securities includes securities issued by the U.S. Treasury Department based upon quoted
market prices. Level 2 securities includes fair value measurements obtained from various sources
including the utilization of matrix pricing, dealer quotes, market spreads, live trading levels,
credit information and the bond’s terms and conditions, among other things. Any investment
security not valued based on the aforementioned criteria are considered Level 3. Level 3 fair
values are determined using unobservable inputs and include corporate debt obligations for which
there are no readily available quoted market values as discussed under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” – Investments. For such securities,
market values have been provided by the trading desk of an investment bank, which compares
characteristics of the securities with those of similar securities and evaluates credit events in
underlying collateral or obtained from an external pricing specialist which utilized a discounted
cash flow model.
At December 31, 2009, the Corporation had impaired loans with outstanding principal balances of
$11.1 million. The Corporation recorded impairment charges of $1.4 million for the year ended
December 31, 2009, utilizing Level 3 inputs. Additionally, during the year ended December 31, 2009
the Corporation transferred loans with a principal balance and an estimated fair value, less costs
to sell, of $1.2 million to other real estate owned. Additional writedowns of $359,000 were
recorded during 2009 related to OREO. Impaired assets are valued utilizing current appraisals
adjusted downward by management, as necessary, for changes in relevant valuation factors subsequent
to the appraisal date.
Note 20 Fair value of financial instruments
The fair value of financial instruments is the amount at which an asset or obligation could be
exchanged in a current transaction between willing parties, other than in a forced liquidation.
Fair value estimates are made at a specific point in time based on the type of financial instrument
and relevant market information.
Because no quoted market price exists for a significant portion of the Corporation’s financial
instruments, the fair values of such financial instruments are derived based on the amount and
timing of future cash flows, estimated discount rates, as well as management’s best judgment with
respect to current economic conditions. Many of these estimates involve uncertainties and matters
of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values of those financial
instruments and should not be interpreted as an estimate of the fair market value of the
Corporation taken as a whole. The disclosures do not address the value of recognized and
unrecognized nonfinancial assets and liabilities or the value of future anticipated business. In
addition, tax implications related to the realization of the unrealized gains and losses could have
a substantial impact on these fair value estimates and have not been incorporated into any of the
estimates.
The following methods and assumptions were used to estimate the fair values of significant
financial instruments at December 31, 2009 and 2008.
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 prices obtained from a nationally
recognized pricing service, where available. Otherwise, fair value measurements are obtained from
various sources including dealer quotes, matrix pricing, market spreads, live trading levels,
credit information and the bond’s terms and conditions, among other things. Management reviews all
prices obtained for reasonableness on a quarterly basis.
Loans
Fair values were estimated for performing loans by discounting the future cash flows using market
discount rates that reflect the credit and interest-rate risk inherent in the loans, reduced by the
allowance for loan losses. This method of estimating fair value does not incorporate the exit
price concept of fair value prescribed by the FASB ASC Topic for Fair Value Measuring and
Disclosure.
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, 2009 and 2008. 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.
These fair values do not include the value of core deposit relationships that comprise a
significant portion of the Bank’s deposit base. Management believes that the Bank’s core deposit
relationships provide a relatively stable, low-cost funding source that has a substantial value
separate from the deposit balances.
Short-term borrowings
36
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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, 2009 and 2008.
The following table presents the carrying amounts and fair values of financial instruments at
December 31.
| 2009 | 2008 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| In thousands | Value | Value | Value | Value | ||||||||||||
Financial assets |
||||||||||||||||
Cash and other short-term
Investments |
$ | 12,308 | $ | 12,308 | $ | 25,813 | $ | 25,813 | ||||||||
Interest-bearing deposits
with banks |
609 | 607 | 726 | 719 | ||||||||||||
Investment securities AFS |
122,006 | 122,006 | 125,591 | 125,591 | ||||||||||||
Investment securities HTM |
40,395 | 41,782 | 53,714 | 54,537 | ||||||||||||
Loans |
276,242 | 270,054 | 271,906 | 259,226 | ||||||||||||
Loans held for sale |
190 | 190 | 267 | 267 | ||||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
380,276 | 369,758 | 407,117 | 396,503 | ||||||||||||
Short-term borrowings |
100 | 100 | 1,850 | 1,850 | ||||||||||||
Long-term debt |
49,000 | 49,664 | 51,600 | 51,692 | ||||||||||||
Note 21 Commitments and contingencies
In the normal course of business, the Corporation or its subsidiary may, from time to time, be
party to various legal proceedings relating to the conduct of its business. In the opinion of
management, the consolidated financial statements will not be materially affected by the outcome of
any pending legal proceedings.
At December 31, 2009 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 cost of living. These leases, most of which have renewal provisions, are considered operating
leases. Minimum rentals under the terms of these leases for the years 2010 through 2014 are
$589,000, $273,000, $246,000, $228,000, and $233,000 respectively. Payments due thereafter total
$34,000.
Rental expense under the leases amount to $587,000, $568,000 and $486,000 during 2009, 2008 and
2007 respectively.
Note 22 Financial instruments with off-balance sheet risk
The Bank is party to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include lines
of credit, commitments to extend, standby letters of credit, and could involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the consolidated financial
statements.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit is represented
by the contractual amounts of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on balance sheet instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a
case-by-case basis, and the amount of collateral or other security obtained is based on
management’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. These guarantees are primarily issued to support
borrowing arrangements and extend for up to one year. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities to customers.
Accordingly, collateral is generally required to support the commitment.
At December 31, 2009 and 2008 the Bank had mortgage commitments of $18.9 million and $35.1 million,
unused commercial lines of credit of $19.9 million and $45 million, and $1.1 million and $2 million
of other loan commitments, respectively. There was $34,000 of financial standby letters of credit
outstanding at December 31, 2009 and December 31, 2008.
Note 23 Parent company information
Condensed financial statements of the parent company only are presented below.
Condensed Balance Sheet
| December 31, | ||||||||
| In thousands | 2009 | 2008 | ||||||
Assets |
||||||||
Cash and cash equivalents |
$ | — | $ | 32 | ||||
Investment in subsidiary |
35,708 | 32,551 | ||||||
Due from subsidiary |
5,000 | 5,075 | ||||||
Other assets |
193 | 499 | ||||||
Total assets |
$ | 40,901 | $ | 38,157 | ||||
Liabilities and stockholders’ equity |
||||||||
Other liabilities |
$ | 464 | $ | 541 | ||||
Notes payable |
5,300 | 5,400 | ||||||
Subordinated debt |
4,124 | 4,124 | ||||||
Total liabilities |
9,888 | 10,065 | ||||||
Stockholders’ equity |
31,013 | 28,092 | ||||||
Total liabilities and stockholders’ equity |
$ | 40,901 | $ | 38,157 | ||||
Condensed Statement of Income
| Year Ended December 31, | ||||||||||||
| In thousands | 2009 | 2008 | 2007 | |||||||||
Income |
||||||||||||
Interest income |
$ | 1 | $ | 4 | $ | 13 | ||||||
Other operating income |
78 | 31 | — | |||||||||
Dividends from subsidiaries |
687 | 870 | 750 | |||||||||
Interest from subsidiaries |
361 | 579 | 835 | |||||||||
Total income |
1,127 | 1,484 | 1,598 | |||||||||
Expenses |
||||||||||||
Interest expense |
439 | 542 | 756 | |||||||||
Other operating expenses |
3 | 3 | 3 | |||||||||
Net losses on securities
transactions |
— | — | — | |||||||||
Income tax expense |
15 | 21 | 36 | |||||||||
Total expenses |
457 | 566 | 795 | |||||||||
Income before equity in undistributed income of
subsidiaries |
670 | 918 | 803 | |||||||||
Equity in undistributed (loss) income
of subsidiaries |
(8,492 | ) | 140 | 1,064 | ||||||||
Net (loss) income |
$ | (7,822 | ) | $ | 1,058 | $ | 1,867 | |||||
37
Table of Contents
Condensed Statement of Cash Flows
| Year Ended December 31, | ||||||||||||
| In thousands | 2009 | 2008 | 2007 | |||||||||
Operating activities |
||||||||||||
Net (loss) income |
$ | (7,822 | ) | $ | 1,058 | $ | 1,867 | |||||
Adjustments to reconcile net income
to cash used in operating activities: |
||||||||||||
Equity in undistributed loss (income) of
subsidiaries |
8,492 | (140 | ) | (1,064 | ) | |||||||
Decrease (increase) in other assets |
306 | (149 | ) | (228 | ) | |||||||
(Decrease) increase in other liabilities |
(77 | ) | 460 | (78 | ) | |||||||
Net cash provided by operating activities |
899 | 1,229 | 497 | |||||||||
Investing activities |
||||||||||||
Proceeds from sales and maturities of
investment securities available for sale
including principal payments |
— | 543 | — | |||||||||
Purchases of investment securities
available for sale |
— | (543 | ) | — | ||||||||
Increase in investment in
subsidiaries |
(8,925 | ) | (3,739 | ) | (1,784 | ) | ||||||
Decrease in loans to
subsidiaries |
75 | 4,075 | 740 | |||||||||
Net cash (used in) provided by investing
activities |
(8,850 | ) | 336 | (1,044 | ) | |||||||
Financing activities |
||||||||||||
Decrease in subordinated debt |
— | — | (3,093 | ) | ||||||||
(Decrease) increase in notes payable |
(100 | ) | (200 | ) | 4,694 | |||||||
Proceeds from issuance of preferred stock |
9,439 | — | — | |||||||||
Purchases of treasury stock |
(3 | ) | (51 | ) | (65 | ) | ||||||
Dividends paid |
(1,417 | ) | (1,286 | ) | (1,235 | ) | ||||||
Net cash provided by (used in) financing
activities |
7,919 | (1,537 | ) | 301 | ||||||||
Increase (decrease) in cash and
cash equivalents |
(32 | ) | 28 | (246 | ) | |||||||
Cash and cash equivalents at
beginning of year |
32 | 4 | 250 | |||||||||
Cash and cash equivalents at
end of year |
$ | — | $ | 32 | $ | 4 | ||||||
Note 24 Regulatory capital requirements
FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the
regulations in effect at December 31, 2009, 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.
The Bank is subject to a Formal Agreement with the Comptroller of the Currency (the “OCC”),
entered into on June 29, 2009. The Agreement is based on the results of the most recent annual
examination of the Bank. The Agreement provides, among other things, the enhancement and
implementation of certain programs to reduce the Bank’s credit risk, along with the development of
a profit plan and capital program, the development of a contingency funding plan and the correction
of deficiencies in its loan administration. The OCC also indicated that the Bank needs to improve
its capital ratios and seek outside capital.
The Agreement may significantly affect the operations of both the Bank and the parent holding
company, particularly in the event that the Bank fails to comply with the provisions of the
Agreement, which may also result in more severe enforcement actions and other restrictions. The
Bank is currently not in compliance with certain provisions of the Agreement; however, management
has taken steps to remedy these noncompliance matters. In addition, because the Bank’s
leverage ratio is less than 8%, management is currently discussing with the OCC the impact of
falling below this threshold. Management expects to achieve an 8% leverage ratio by December 31,
2010.
The following is a summary of City National Bank’s actual capital amounts and ratios as of
December 31, 2009 and 2008, compared to the FDIC minimum capital adequacy requirements and the FDIC
requirements for classification as a well-capitalized Bank:
| FDIC Requirements | ||||||||||||||||||||||||
| Minimum Capital For Classification | ||||||||||||||||||||||||
| Bank Actual | Adequacy | as Well-Capitalized | ||||||||||||||||||||||
| In thousands | Amount Ratio | Amount Ratio | Amount Ratio | |||||||||||||||||||||
December 31, 2009 |
||||||||||||||||||||||||
Leverage (Tier 1)
capital |
$ | 34,251 | 7.08 | % | $ | 19,364 | 4.00 | % | $ | 24,205 | 5.00 | % | ||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 |
34,251 | 10.62 | 12,899 | 4.00 | 19,348 | 6.00 | ||||||||||||||||||
Total |
43,342 | 13.43 | 25,798 | 8.00 | 32,247 | 10.00 | ||||||||||||||||||
December 31, 2008 |
||||||||||||||||||||||||
Leverage (Tier 1)
capital |
$ | 32,500 | 6.61 | % | $ | 13,078 | 4.00 | % | $ | 16,347 | 5.00 | % | ||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 |
32,500 | 9.94 | 13,078 | 4.00 | 19,617 | 6.00 | ||||||||||||||||||
Total |
41,465 | 12.68 | 26,156 | 8.00 | 38,694 | 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 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, 2009, 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 trust results in the Corporation reporting on its balance
sheet the subordinated debentures that have been issued from City National Bancshares to the
subsidiary trust.
38
Table of Contents
Note 25 Summary of quarterly financial information
| (unaudited) | 2009 | |||||||||||||||
| Dollars in thousands, | First | Second | Third | Fourth | ||||||||||||
| except per share data | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Interest income |
$ | 6,061 | $ | 6,036 | $ | 6,193 | $ | 5,884 | ||||||||
Interest expense |
2,554 | 2,407 | 2,391 | 2,143 | ||||||||||||
Net interest income |
3,507 | 3,629 | 3,802 | 3,741 | ||||||||||||
Provision for loan losses |
501 | 436 | 1,674 | 5,494 | ||||||||||||
Net gains (losses) on securities transactions |
— | 10 | 2 | (1 | ) | |||||||||||
Net impairment losses on
securities |
(132 | ) | (1,055 | ) | (1,107 | ) | (39 | ) | ||||||||
Other operating income |
878 | 808 | 759 | 668 | ||||||||||||
Other operating expenses |
3,092 | 3,658 | 3,500 | 3,131 | ||||||||||||
Income (loss) before income
tax expense |
660 | (702 | ) | (1,718 | ) | (4,256 | ) | |||||||||
Income tax expense
(benefit) |
162 | 119 | (1,209 | ) | 2,734 | |||||||||||
Net income (loss) |
$ | 498 | $ | (821 | ) | $ | (509 | ) | $ | (6,990 | ) | |||||
Net income (loss) per
share-basic |
$ | 1.02 | $ | (8.21 | ) | $ | (6.36 | ) | $ | (55.75 | ) | |||||
Net income (loss) per
share-diluted |
$ | 1.02 | $ | (8.21 | ) | $ | (6.36 | ) | $ | (55.75 | ) | |||||
| (unaudited) | 2008 | |||||||||||||||
| Dollars in thousands, | First | Second | Third | Fourth | ||||||||||||
| except per share data | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Interest income |
$ | 6,454 | $ | 6,341 | $ | 6,467 | $ | 6,640 | ||||||||
Interest expense |
3,009 | 2,653 | 2,862 | 2,785 | ||||||||||||
Net interest income |
3,445 | 3,688 | 3,605 | 3,855 | ||||||||||||
Provision for loan losses |
168 | 265 | 189 | 964 | ||||||||||||
Net gains (losses) on securities transactions |
6 | (50 | ) | (1,429 | ) | (1,259 | ) | |||||||||
Other operating income |
673 | 758 | 804 | 776 | ||||||||||||
Other operating expenses |
3,107 | 3,174 | 2,861 | 3,136 | ||||||||||||
Income (loss) before income
tax expense |
849 | 957 | (70 | ) | (728 | ) | ||||||||||
Income tax expense
(benefit) |
184 | 257 | (120 | ) | (371 | ) | ||||||||||
Net income (loss) |
$ | 665 | $ | 700 | $ | 50 | $ | (357 | ) | |||||||
Net income (loss) per
share-basic |
$ | 2.28 | $ | 4.18 | $ | (.75 | ) | $ | (3.84 | ) | ||||||
Net income (loss) per
share-diluted |
$ | 2.28 | $ | 3.72 | $ | (.75 | ) | $ | (3.38 | ) | ||||||
Basic net 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
preferred stock if conversion is deemed dilutive.
Note 26. Subsequent events
In February 2010, City National Bancshares Corporation deferred the payment of its regular
quarterly cash dividend on its Series G fixed-rate cumulative perpetual preferred stock issued to
the U.S. Treasury in connection with the Corporation’s participation in the Treasury’s TARP Capital
Purchase Program.
In addition, the Corporation deferred its regularly scheduled quarterly interest payment on its
junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory
Trust II (the “Trust”).
The Series G preferred stock and the junior subordinated debentures issued in favor of the Trust
provide for cumulative dividends and interest, respectively. Accordingly, the Corporation may not
pay dividends on any of its common or preferred stock until the dividends on Series G preferred
stock and the interest on such debentures are paid-up currently.
Finally, at March 31, 2010 the Bank determined that it no longer had the intent to hold certain
held-to-maturity securities to maturity and therefore transferred the entire held-to-maturity
security portfolio to the available for sale portfolio. As a result of this decision, the Bank has
tainted its ability to maintain a held-to-maturity portfolio. The Bank will no longer maintain a
held to maturity portfolio for two years from the transfer date.
39
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
City National Bancshares Corporation:
City National Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of City National Bancshares
Corporation and subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2009. 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 Corporation and subsidiary as
of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 and Note 4 to the consolidated financial statements, the Company changed its
method of evaluating other-than-temporary impairments of debt securities due to the adoption of new
accounting requirements issued by the Financial Accounting Standards Board, as of April 1, 2009.
/s/ KPMG LLP
Short Hills, New Jersey
May 18, 2010
May 18, 2010
40
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements with accountants during 2009.
Item 9A Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures. | |
| Management of the Corporation, including the Chief Executive Officer and the Chief Financial Officer, have conducted an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Corporation’s disclosure controls and procedures were effective in ensuring that all material information relating to the Corporation, including all consolidated subsidiaries, required to be filed in this report has been made known to them in a timely manner. | ||
| (b) | Management’s Report on Internal Control Over Financial Reporting | |
| Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the principal executive officer and the principal financial officer, management has conducted an evaluation of the effectiveness of the Corporation’s control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the evaluation under the framework, management has concluded that the internal control over financial reporting was effective as of December 31, 2009. | ||
| This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to temporary rules of the Securities Exchange Commission that permit the Corporation to provide only management’s report in this annual report. | ||
| (c) | Changes in Internal Control Over Financial Reporting. | |
| There have not been any changes in the Company’s internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. |
Item 9B. Other Information.
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
| Director | Term | Principal Occupations During Past Five | ||||||||||||
| Name of Director | Age | Since | Ends | Years | ||||||||||
Barbara Bell Coleman
|
59 | 1995 | 2010 | President, BBC Associates, L.L.C. (consulting services) | ||||||||||
Eugene Giscombe
|
69 | 1991 | 2012 | President, Giscombe Realty, LLC (real estate brokerage, leasing and management firm); President, 103 East 125th Street Corporation (real estate holding company) | ||||||||||
Louis E. Prezeau
|
67 | 1989 | 2012 | President and Chief Executive Officer, City National Bank of New Jersey and City National Bancshares Corporation | ||||||||||
Lemar C. Whigham
|
66 | 1989 | 2010 | President, L & W Enterprises (vending machine operations) | ||||||||||
H. O’Neil Williams
|
63 | 2009 | 2012 | Managing Partner, Mitchell & Titus, LLP (CPA Firm) | ||||||||||
41
Barbara Bell Coleman is the President of BBC Associates, LLC, a consultant to corporate and
not-for- profit entities. Ms. Coleman currently serves as a corporate director of Horizon Blue
Cross Blue Shield of New Jersey. Prior to their sale, she was a corporate director of La Petite
Academy, Caesars Entertainment and, until 2007, Hilton Hotels Inc. With extensive service to and
knowledge of not-for-profit entities in the Bank’s market area, coupled with her corporate board
experience where she has honed her knowledge of and served on the Governance, Executive
Compensation and Global Diversity Committees of these entities, Ms. Coleman provides the Bank with
valuable insights and business relationship opportunities.
Eugene Giscombe has been President of Giscombe Realty Group, LLC, a commercial real estate
brokerage, leasing and management firm located in New York City since 1972, as well as President of
103 East 125th Street Corporation, a commercial real estate holding company also located
in New York City since 1979. Mr. Giscombe’s firm has provided real estate services to major banks
and insurance companies for a period of 38 years. Mr. Giscombe currently serves as a director of
the YMCA of Greater New York, North General Hospital, Greater Harlem Nursing Home and formerly
chaired the 125th Street Business Improvement District. Mr. Giscombe has served on
several committees of the Real Estate Board of New York Inc. Mr. Giscombe’s extensive experience
in commercial real estate in the Bank’s market area provides extensive insight into the management
of the Bank’s commercial real estate loan portfolio. Mr. Giscombe is Chairman of our Board of
Directors.
Louis E. Prezeau has been the President and Chief Executive Officer of the Corporation and the
Bank, serving in those capacities since 1989. He also serves on the boards of several boards of
nonprofit organizations located in the Bank’s market area. Mr. Prezeau’s direct experience in
managing the operations and employees of the Bank provides the Board of Directors with insight into
its operations, and his position on the Board of Directors provides a clear and direct channel of
communication from senior management to the full Board and alignment on corporate strategy.
Lemar C. Whigham has been President, owner and manager of L&W Enterprises since May 1992, a company
that places vending machines in small businesses in Newark, New Jersey, where Mr. Whigham has
significant community ties and where three of the Bank’s locations, including the main office, are
located. Mr. Whigham has also been a New Jersey licensed funeral director since 1967. This
knowledge provides him with valuable insights, particularly into portfolio loans and customer
relationships in the Newark area. He is also the son of the founder of the Bank.
H. O’Neil Williams has been a managing partner with the CPA firm of Mitchell & Titus, a member firm
of Ernst & Young Global Limited since 1981. He is a CPA and his extensive accounting background
provides him with extensive insight into the financial aspects of the financial services industry.
Mr. Williams has been designated as the Corporation’s “financial expert.”
Executive Officers
Listed below is certain information concerning the current executive officers of the Corporation.
| In Office | ||||||||||
| Name | Age | Since | Office and Business Experience | |||||||
Louis E. Prezeau
|
67 | 1989 | President and Chief Executive Officer, City National Bancshares Corporation and City National Bank of New Jersey | |||||||
Stanley Weeks
|
53 | 1994 | Executive Vice President, City National Bank of New Jersey; 1984-1994, Vice President, First Fidelity Bank, N.A. | |||||||
Edward R. Wright
|
64 | 1994 | Senior Vice President and Chief Financial Officer, City National Bancshares Corporation and City National Bank of New Jersey; 1978-1994, Executive Vice President and Chief Financial Officer, Rock Financial Corporation | |||||||
Raul L. Oseguera
|
44 | 1990 | Senior Vice President, City National Bank of New Jersey, Vice President, City National Bank of New Jersey | |||||||
42
Table of Contents
Corporate Governance
General
The business and affairs of the Corporation are managed under the direction of the Board of
Directors. Board members are kept informed of the Corporation’s business by participating in
meetings of the Board and its committees and through discussions with corporate officers. All
members also served as members of the Corporation’s subsidiary bank, City National Bank of New
Jersey, during 2009. It is the Corporation’s policy that all directors attend the annual meeting,
absent extenuating circumstances.
Committees
Because of the relatively small size of the Corporation’s Board, there is no standing Nominating
Committee or nominating committee charter. The individual members of the entire Board, exclusive
of interested directors, make the specific recommendations for Board nominees, including the
director nominees herein. Qualifications for prospective directors are reviewed by the entire
Board. Mr. Prezeau would not be considered independent under relevant SEC and Nasdaq rules.
The Board has not formulated specific criteria for nominees, but it considers qualifications that
include, but are not limited to, ability to serve, conflicts of interest, and other relevant
factors. In consideration of the fiduciary requirements of a Board member, and the relationship of
the Corporation and its subsidiaries to the communities it serves, the Committee places emphasis on
character, ethics, financial stability, business acumen, and community involvement among other
criteria it may consider. In addition, as a bank holding company, the Corporation is regulated by
the Federal Reserve Board (“FRB”) and the Bank, as a national banking association, is regulated by
the Office of the Comptroller of the Currency (“OCC”). Directors and director-nominees are subject
to various laws and regulations pertaining to bank holding companies and national banks, including
a minimum stock ownership requirement.
The Board may consider recommendations from shareholders nominated in accordance with the
Corporation’s bylaws by submitting such nominations to the President of the Corporation and the
Bank, the Office of the Comptroller of the Currency and the Federal Reserve. For additional
information regarding the requirements for shareholder nominations of director nominees, see the
Corporation’s by-laws, copies of which are available upon request. The Corporation has not paid a
third party to assist in identifying, evaluating, or otherwise assisting in the nomination process.
The Board of Directors does not have a policy regarding diversity in identifying nominees for
director.
The Audit and Examining Committee reviews significant auditing and accounting matters, the adequacy
of the system of internal controls and examination reports of the internal auditor, regulatory
agencies and independent public accountants. Ms. Coleman and Messrs. Williams and Whigham
currently serve as members of the Committee. Douglas Anderson was a member of this committee until
his resignation on June 29, 2009. Mr. Williams serves as Chairperson of the Committee. All
directors on the Audit and Examining Committee are considered independent, including Mr. Anderson
until his resignation, under SEC and Nasdaq rules applicable to audit committees. Mr. Williams is
our audit committee financial expert.
The Audit and Examining Committee operates pursuant to a charter, which gives the Committee the
authority and responsibility for the appointment, retention, compensation and oversight of the
Corporation’s independent registered public accounting firm, including pre-approval of all audit
and non-audit services to be performed by the Corporation’s independent registered public
accounting firm. The Audit and Examining Committee acts as an intermediary between the Corporation
and the independent auditor and reviews the reports of the independent auditor.
The Loan and Discount Committee reviews all (a) loan policy changes, (b) requests for policy
exceptions, and (c) loans approved by management. Messrs. Giscombe, Prezeau, Williams, Whigham and
Ms. Coleman currently serve as members of the Committee. Mr. Anderson was a member of this
Committee in 2009 until his resignation. Mr. Giscombe serves as Chairperson of this Committee.
The Investment Committee reviews overall interest rate risk management and all investment policy
changes, along with purchases and sales of investments. Messrs. Giscombe, Prezeau, Williams and
Whigham currently serve as members of this Committee. Mr. Anderson was a member of this Committee
in 2009 until his resignation. Mr. Prezeau serves as Chairperson of this Committee.
The Personnel/Director and Management Review Committee oversees personnel matters and reviews
director and executive officer compensation, and serves as the Compensation Committee. Messrs.
Giscombe (the Chairman of the Board of Directors), Prezeau (the Chief Executive Officer of the
Corporation), Williams, Whigham and Ms. Coleman currently serve as members of the Committee. Ms.
Coleman serves as Chairperson of the Committee. This Committee addresses issues related to
attracting, retaining, and measuring employee performance. The Committee recommends to the Board of
Directors the annual salary levels and any bonuses to be paid to all Corporation and Bank executive
officers. The Committee also makes recommendations regarding other compensation related matters.
The Committee has not delegated this authority. The Committee has not historically engaged
consultants, although in January 2010 the Committee engaged the services of an independent
executive compensation consultant, I.F.M. Group, Inc. to assist it in carrying out certain
responsibilities with respect to executive compensation. Such consultant has provided no other
services. The Committee does not have a charter although it will evaluate whether a charter will
be useful in the conduct of its duties in future deliberations. The executive officers do not play
a role in the compensation process, except for the chief executive officer, Mr. Prezeau, who
presents information regarding the other executive officers to the Committee for their
consideration. Mr. Prezeau is not present while the Committee deliberates on his compensation
package or other matters relating to his performance. All members of the Committee are independent
under Nasdaq independence standards with the exception of Mr. Prezeau. See “Executive
Compensation—Compensation Discussion and Analysis” for more information regarding the role of this
Committee.
The Marketing Committee oversees the Bank’s marketing plan and strategies. Ms. Coleman and Messrs.
Giscombe, Prezeau and Whigham currently serve as members of the Committee. Mr. Anderson was a
member of this committee in 2009 until his resignation. Ms. Coleman serves as Chairperson of the
Committee.
The Compliance Committee was formed as a result of the Formal Agreement, dated June 29, 2009
(the “Agreement”), between the OCC and the Bank, to oversee compliance with the terms of the
Agreement. All members of the Board of Directors serve on the Committee.
43
Table of Contents
Separation of Roles of Chairman and CEO
Mr. Giscombe serves as the Chairman of the Corporation’s Board of Directors and Mr. Prezeau serves
as Chief Executive Officer. The Corporation believes the separation of offices is beneficial
because a separate chairman (i) can provide the Chief Executive Officer with guidance and feedback
on his performance; (ii) provides a more effective channel for the Board of Directors to express
its view on management; and (iii) allows the Chairman to focus on stockholder interest and
corporate governance while the Chief Executive Officer manages the Corporation’s operations.
Stockholder Communications to the Board
Stockholders and other interested parties may send written communications to the Board of
Directors, an individual director or the non-management directors as a group by mailing them to the
aforementioned individuals, c/o Assistant Secretary, City National Bank of New Jersey, 900 Broad
Street, Newark, New Jersey, 07102. The envelope containing such communication must contain a clear
notation indicating that the enclosed letter is a “Shareholder-Board Communication” or
“Shareholder-Director Communication” or similar statement that clearly and unmistakably indicates
the communication is intended for the Board of Directors. All communications will be forwarded to
the appropriate party, unless the communication is a personal or similar grievance, an abusive or
inappropriate communication or a communication not related to the duties or responsibilities of the
aforementioned parties, in which case the Assistant Secretary has the authority to disregard the
communication.
Code of Ethics and Conduct
The Corporation has adopted a Code of Ethics and Conduct which applies to all the Corporation’s
officers and employees.
Interested parties may obtain a copy of such Code of Ethics and Conduct, without charge, by written
request to the Corporation c/o Assistant Secretary, City National Bank of New Jersey, 900 Broad
Street, Newark, New Jersey 07102.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Corporation’s
executive officers and directors, and any persons owning ten percent or more of the Corporation’s
common stock, to file in their personal capacities initial statements of beneficial ownership,
statements of changes in beneficial ownership and annual statements of beneficial ownership with
the SEC. Copies of all filed reports are required to be furnished to us pursuant to Section 16(a).
Based solely on the reports received by us and on written representations from reporting persons,
we believe that the Corporation’s executive officers and directors, and any persons owning 10% or
more of the Corporation’s common stock complied with all Section 16(a) filing requirements during
the year ended December 31, 2009.
Item 11. Executive Compensation
Compensation Discussion and Analysis
The Board of Directors, through its Personnel/Director and Management Review Committee, is
responsible for establishing and monitoring compensation levels. The primary factors that affect
compensation are the Corporation’s operating results, the individual’s job performance and peer
group compensation comparisons. The key components of executive compensation are base salary and
annual bonuses, which are performance based, and retirement and welfare benefits, which are
non-performance based.
Salary
The primary factors that affect executive officers’ compensation are the responsibilities of the
position, the individual’s job performance, the operating results of the Corporation and peer group
compensation comparisons. Salary levels are reviewed annually and adjustments are made in the year
following the year being reviewed.
Cash Bonus
Prior to the Corporation’s receipt of TARP funds, the President and CEO was eligible for a bonus.
See “—Prezeau Employment Agreement.” As a recipient of TARP funds that have not been repaid, the
Corporation may no longer pay a bonus to the President and CEO. Cash bonuses for other executive
officers are based on their job performances, the performance of their particular areas of
responsibility and the overall performance of the Corporation compared to budgeted projections.
Non-performance Based Compensation Elements
The Corporation maintains a supplemental employee retirement plan (the “SERP”) implemented by
salary continuation agreements with all of the Corporation’s executive officers. This provides
benefits upon retirement, death and change of control. This part of the Corporation’s compensation
package encourages executives to remain employed by the Corporation for the long term. See
“Executive Compensation—Supplemental Executive Retirement Plan,” below.
TARP/CPP Executive Compensation Compliance and Restrictions
As part of the Corporation’s participation in the Capital Purchase Program (“CPP”) of the Troubled
Assets Relief Program (“TARP”) and the Corporation’s acceptance of a $9.439 million investment
from the U.S. Treasury Department (“Treasury”) in April 2009, we agreed to adhere to several
restrictions relative to compensation for our five senior executive officers (“SEOs”), which
include the executives listed in our Summary Compensation Table below during the time in which the
Treasury holds any equity or debt securities of the Corporation acquired through the CPP. At the
time of our acceptance into the CPP, the restrictions and requirements included:
| • | A provision to recover any bonus or incentive compensation paid to an SEO that was based on financial statements deemed materially inaccurate; | ||
| • | A prohibition on any golden parachute payments to our SEOs; | ||
| • | A prohibition on receiving any tax gross-up from the Corporation or its subsidiaries; | ||
| • | A limitation on the deductibility of compensation to $500,000 (instead of $1,000,000), without exceptions for performance-based compensation; and | ||
| • | A requirement to ensure that our incentive compensation programs are structured to prevent SEOs from taking inappropriate risks that threaten the value of the institution. |
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At the time that the Corporation entered the CPP, our SEOs understood that these restrictions or
requirements might change and waived any claim against the United States or the Corporation and its
subsidiaries for any changes to compensation or benefits that are required to comply with the
regulations issued by the Treasury, as published in the Federal Register on October 20, 2008,
notwithstanding the terms of his/her employment arrangements with the Corporation or its
subsidiaries or other benefit plans, whether or not in writing.
In February 2009, TARP was amended by the American Recovery and Reinvestment Act of 2009
(the “ARRA”). Treasury issued final interim rules on June 15, 2009 to implement the ARRA standards.
Such amendments further restrict our ability to pay executive compensation. Specifically, under
such prohibitions, since the Corporation received less than $25 million of financial assistance,
the Corporation is prohibited from paying or accruing any bonus, retention award, or incentive
compensation to our most highly-compensated employee during the period that the Corporation has an
outstanding obligation to the Treasury arising from the financial assistance provided under CPP.
This restriction continues until repayment of the Treasury’s investment. This restriction also does
not apply to our issuance of restricted stock to our most highly-compensated employee so long as:
(i) the restricted stock does not fully vest during the CPP obligation period; (ii) has a value no
greater than one-third of the total amount of “annual compensation” of the executive receiving the
restricted stock; and (iii) is subject to such other terms as the Treasury determines to be in the
public interest.
In addition, the new legislation expands the prohibition against paying golden parachute payments
by defining a golden parachute payment as any payment to an SEO or any of the next five most highly
compensated employees for departure from the Corporation for any reason, except for payments for
(a) services performed or benefits accrued, (b) death and disability and/or (c) qualified plans.
Accordingly, for as long as the Corporation participates in the CPP, our SEOs will not be entitled
to any payments upon departure from the Corporation other than payments for (i) services performed
or which were accrued at the time of departure, (ii) death and disability at the time of such death
or disability, and/or (c) pursuant to qualified plans at the time of departure. Regulatory
guidance has not yet been issued on the restrictions set forth in the new legislation. Such
guidance, when issued, may change the manner in which such restrictions are applied. The
Corporation believes this would restrict its ability to make change of control payments under the
Director’s Retirement Plan (as defined below) with respect to executive officers that are also
directors and the SERP.
Prezeau Compensation
Mr. Prezeau was party to an employment agreement with the Bank and the Corporation effective May
2006 (the “Agreement”) which expired in May 2009. The Agreement is described below and provides,
among other things, for bonus, change of control and severance benefits. In April 2009, prior to
the expiration of the Agreement in connection with the Corporation’s receipt of TARP funds, Mr.
Prezeau was required to disclaim any rights to payment of a bonus as well as any severance or
change of control benefits for as long as the TARP preferred stock is outstanding (the “Prezeau
TARP Waiver”).
Subsequent to the execution of the Prezeau TARP Waiver, Mr. Prezeau’s employment agreement expired.
The parties are currently negotiating a new employment agreement for Mr. Prezeau on substantially
the same terms as the Agreement, as modified by requirements imposed by TARP, and are currently
operating under the terms of the old Agreement as modified by such TARP requirements. As a result,
he is entitled to his base salary, his monthly automobile allowance, and post-employment health
benefits for himself (for two years), or in the event of his death his family, for one year. Mr.
Prezeau is also entitled to six weeks of annual leave. The Corporation also makes contributions to
a 401(k) plan for Mr. Prezeau and provides him with medical and dental benefits. Mr. Prezeau also
participates in the SERP, the Directors Retirement Plan and a “Rabbi Trust” arrangement. See
“Executive Compensation-Supplemental Employee Retirement Plan“, “Executive Compensation—Director’s
Compensation-Director’s Retirement Plan,” and “Prezeau Compensation—Prezeau Trust Agreement.”
Prezeau Employment Agreement
Effective as of May 2006, the Bank and the Corporation renewed the Agreement with Mr. Prezeau to
serve as the President and Chief Executive Officer of both entities. The Agreement was for a term
of three years. Under the Agreement, Mr. Prezeau was entitled to an annual salary of $268,000,
which may be increased from time to time at the discretion of the Board. Mr. Prezeau also received
a $1,000 per month car allowance. Additionally, Mr. Prezeau was entitled to receive an annual
performance bonus at least equal to:
| Ø | 10% of the amount of earnings, as defined, of the Corporation for each year that exceed 10% but are less than 15% of the amount of the Corporation’s common stockholders’ equity, plus; | ||
| Ø | 20% of the amount of earnings, as defined, of the Corporation for such year that exceeds 15% of the amount of the Corporation’s common stockholders’ equity. |
The performance bonus was to be paid in cash or common stock of the Corporation, at the election of
Mr. Prezeau. Mr. Prezeau disclaimed any rights to a bonus or other incentive compensation pursuant
to the Prezeau TARP Waiver.
The Agreement provided that upon the completion of his annual performance review, Mr. Prezeau may
be granted shares of the Corporation’s common stock or option to purchase such stock at a price to
be determined at the time the stock or option is granted. The agreement further specified that in
the event Mr. Prezeau was terminated without cause (“cause” was defined as breach of fiduciary duty
involving personal honesty, commission of a felony or misdemeanor involving dishonesty of moral
turpitude, commission of embezzlement or fraud against the Corporation or its affiliates, in each
case which is material in amount or in an injury to the Corporation or its reputation, continuous
or habitual alcohol or drug abuse, habitual unexcused absence or continuous gross negligence or
willful disregard for his duties required under the Agreement), Mr. Prezeau shall receive in one
lump sum in addition to all other amounts accrued and payable under this Agreement, an amount equal
to two times his then applicable base salary plus an amount equal to his most recently earned
performance bonus. Mr. Prezeau disclaimed any rights to such severance payments pursuant to the
Prezeau TARP Waiver.
The Agreement also provided that if the Corporation and the Bank do not offer to renew the
Agreement upon its termination under terms satisfactory to Mr. Prezeau, then Mr. Prezeau shall
receive a lump sum amount equal to two times his then applicable base salary plus an
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amount equal to his most recently earned performance bonus. Mr. Prezeau disclaimed any rights to
such severance payments pursuant to the Prezeau TARP Waiver.
Under the Agreement, If Mr. Prezeau terminated his employment due to a “change in control” which is
defined as a change of control that requires approval under the Change in Bank Control Act, 12
U.S.C. Section 1817(j), and which is not approved by the Board of Directors prior to such change in
control) of the Corporation, then Mr. Prezeau was entitled to receive a lump sum amount equal to
two times his then applicable base salary plus an amount equal to his most recently earned
performance bonus. Mr. Prezeau disclaimed any rights to such change of control payments pursuant
to the Prezeau TARP Waiver.
Upon death while employed, the Corporation must continue health benefits for his family members for
one year after death.
Upon termination of the employment agreement in circumstances other than the foregoing, Mr. Prezeau
was entitled to receive accrued and unpaid salary, bonuses and other vested compensation and
benefits thereunder as of such termination date.
Mr. Prezeau was also entitled to fringe, medical, health and life insurance benefits, including
life insurance for an amount of up to three times his base salary then in effect and the use of an
automobile. Upon termination of such agreement, subject to certain exceptions, Mr. Prezeau was
entitled to continue life and health coverage for a period of two (2) years. Upon death while
employed the Corporation must continue health benefits for his family members for one year after
death.
Prezeau Trust Agreement
In the past, Mr. Prezeau has deferred portions of his salary under a deferred compensation
arrangement (often called a “rabbi trust arrangement”) set up by the Corporation. All deferrals of
Mr. Prezeau’s salary were deposited by the Corporation into a trust (the “Trust”) established for
Mr. Prezeau’s benefit pursuant to an irrevocable trust agreement (the “Trust Agreement”). One of
the primary assets held by the Trust is a $500,000 life insurance policy on the life of Mr.
Prezeau. In addition to contributing the deferred portions of Mr. Prezeau’s salary into the Trust,
each year through the end of 2012 the Corporation is required to make contributions to the Trust of
$8,357 to help pay a portion of the premiums on the life insurance policy. If Mr. Prezeau dies
while he is still employed by the Corporation, the Corporation will receive $200,000 of the
proceeds of the life insurance policy and Mr. Prezeau’s estate would be entitled to the balance.
If Mr. Prezeau is not employed with the Corporation at the time of his death, then the Corporation
does not receive any of the life insurance proceeds. Except for the Corporation’s right to a
portion of the proceeds in the event Mr. Prezeau dies while he is employed by the Corporation, Mr.
Prezeau is the sole beneficiary of the trust and is entitled to all assets held in the Trust. All
other proceeds of the Trust are distributed to Mr. Prezeau after termination of his
employment. The assets of the trust are subject to the claims of general creditors of the
Corporation. In 2009, the Corporation contributed $6,694 to pay part of the premiums required to
maintain the life insurance policy, as required under the Trust Agreement.
Messrs. Weeks, Wright and Oseguera
Other named executive officers are not parties to employment agreements with the Corporation.
Messrs. Weeks, Wright and Oseguera receive annual salaries of $155,000, $131,500 and $111,500, and
monthly automobile allowance of $400, $500 and $250, respectively. The Corporation also makes
401(k) contributions on their behalf. They also receive medical and dental benefits and
participate in the SERP.
Supplemental Employee Retirement Plan
Certain executive officers participate in the SERP. Upon reaching normal retirement age of 65
while employed by the Corporation (“normal retirement”), executives will receive a lump sum payment
based on an annual benefit equal to 40% of the annual base salary received by the executive during
the last complete fiscal year of his or her service as an employee (the “normal retirement
benefit”) except in the case of Mr. Prezeau, who will receive 60%. If the executive dies while in
active service to the Corporation, the beneficiary of the executive will receive an amount equal to
the greater of that part of the normal retirement benefit accrued by the Corporation for the
executive as of the date of the executive’s death or the projected retirement benefit calculated
based on the executive’s age and other assumptions regarding increases in base salary. This death
benefit is payable to the beneficiary in equal monthly installments over 15 years.
If the executive’s employment with the Corporation is terminated for any reason (other than death)
between the age of 60 and 65 (“early retirement”), the executive shall receive the same benefit
payable over the same period of time multiplied by a fraction the numerator of which is the
executive’s years of service prior to termination of employment and the denominator of which is the
years of service the executive would have had if the executive’s employment terminated when he was
65.
Upon a change in control of the Corporation (which is defined in the SERP as a change in the
ownership or effective control of the Corporation, as defined in Internal Revenue Code Section
409A) followed at any time during the succeeding 12 months by a cessation in the executive’s
employment for reasons other than death, disability or retirement, the executive shall receive (the
“change of control benefit”) a lump sum payment equal to the present value of the stream of
payments the executive would have received had he qualified for the normal retirement benefit.
If an executive’s employment with the Corporation is terminated for cause (as defined in the SERP)
an executive is not entitled to any benefit under the SERP.
Under the SERP, an executive will receive only one of the normal retirement benefit, the early
retirement benefit or the change of control benefit.
Under TARP, certain payments (that relate to unvested benefits to be received such as a result of a
change of control) under the SERP are prohibited, see “Executive Compensation—TARP/CPP Executive
Compensation Compliance and Restrictions” above. Messrs. Prezeau, Wright, Weeks and Oseguera have
waived any rights to prohibited payments under TARP.
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Other Benefits
Executive officers are eligible to participate (as are all officers and employees who meet service
requirements under the several plans) in other components of the benefit package described below.
| Ø | 401(k) plan; | ||
| Ø | Medical and dental health insurance plans; and | ||
| Ø | Life insurance plans. |
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Executive Compensation Tables
Summary Compensation Table
The following table summarizes compensation in 2009 for services to the Corporation and the Bank
paid to the Chief Executive Officer, Chief Financial Officer and to the only other two executive
officers of the Corporation whose compensation exceeded $100,000.
| Change in | ||||||||||||||||||||||||
| Pension Value | ||||||||||||||||||||||||
| and Non- | ||||||||||||||||||||||||
| Qualified | ||||||||||||||||||||||||
| Deferred | ||||||||||||||||||||||||
| Name and | Compensation | All Other | ||||||||||||||||||||||
| Principal Position | Year | Salary | Bonus | Earnings | Compensation | Total | ||||||||||||||||||
Louis E. Prezeau |
2007 | $ | 268,000 | $ | 82,500 | $ | 263,304 | (6) | $ | 47,422 | (2) | $ | 661,226 | |||||||||||
President and Chief Executive |
2008 | $ | 268,000 | $ | 52,500 | $ | 122,577 | (6) | $ | 40,065 | (2) | $ | 483,142 | |||||||||||
Officer, City National Bancshares |
2009 | $ | 268,000 | $ | 0 | $ | 44,247 | (6) | $ | 42,404 | (2) | $ | 354,651 | |||||||||||
Corporation and City National
Bank of New Jersey |
||||||||||||||||||||||||
Stanley M. Weeks |
2007 | $ | 150,000 | $ | 20,000 | $ | 17,963 | (1) | $ | 8,550 | (3) | $ | 196,513 | |||||||||||
Executive Vice President and Chief |
2008 | $ | 155,000 | $ | 19,100 | $ | 21,652 | (1) | $ | 8,674 | (3) | $ | 204,426 | |||||||||||
Credit Officer, City National Bank of |
2009 | $ | 155,000 | $ | 0 | $ | 24,094 | (1) | $ | 8,675 | (3) | $ | 187,769 | |||||||||||
New Jersey |
||||||||||||||||||||||||
Edward R. Wright |
2007 | $ | 126,500 | $ | 15,030 | $ | 48,191 | (1) | $ | 9,795 | (4) | $ | 199,516 | |||||||||||
Senior Vice President and Chief |
2008 | $ | 131,500 | $ | 15,630 | $ | 56,912 | (1) | $ | 9,464 | (4) | $ | 213,506 | |||||||||||
Financial Officer, City National |
2009 | $ | 131,500 | $ | 0 | $ | 68,928 | (1) | $ | 9,944 | (4) | $ | 210,372 | |||||||||||
Bancshares
Corporation and
City National Bank of New Jersey |
||||||||||||||||||||||||
Raul Oseguera |
2007 | $ | 105,000 | $ | 10,560 | $ | 19,521 | (1) | $ | 6,091 | (5) | $ | 141,172 | |||||||||||
Senior Vice President, City National |
2008 | $ | 111,500 | $ | 17,230 | $ | 20,828 | (1) | $ | 6,875 | (5) | $ | 156,433 | |||||||||||
of Bank New Jersey |
2009 | $ | 111,500 | $ | 0 | $ | 22,609 | (1) | $ | 6,345 | (5) | $ | 140,454 | |||||||||||
| (1) | Represents the change in the net present value of benefits during 2009 from the taking into consideration each executive’s age, an interest rate discount factor and their remaining time until retirement (“Change in Pension Value”) with respect to the SERP. | |
| (2) | Includes payments made under the Corporation’s profit sharing plan of $8,040, $7,777 and $8,040 in 2007, 2008 and 2009, respectively. Also includes $11,088, $11,088 and $10,164 in 2007, 2008, and 2009 representing Mr. Prezeau’s use of a Bank-leased automobile in such years. Includes Director Fees Paid in cash of $18,400, $18,000, and $24,200 in 2007, 2008 and 2009, respectively. Also includes contributions to a trust created pursuant to a Trust Agreement (see section below titled “Prezeau Trust Agreement”) of $9,894, $3,200 and $6,694 in 2007, 2008 and 2009, respectively, to reimburse the trust for payment of life insurance premiums on the life of Mr. Prezeau. | |
| (3) | Includes payments made under the Corporation’s profit sharing plan of $3,750, $3,874 and $3,875 in 2007, 2008 and 2009, respectively, and automobile allowance payments of $4,800, $4,800 and $4,800, in 2007, 2008 and 2009, respectively. | |
| (4) | Includes payments made under the Corporation’s profit sharing plan of $3,795, $3,464 and $3,944, respectively, and automobile allowance payments of $6,000, $6,000 and $6,000, respectively. | |
| (5) | Includes payments made under the Corporation’s profit sharing plan of $3,091, $3,875 and $3,345, respectively, and automobile allowance payments of $3,000, $3,000 and $3,000, respectively. | |
| (6) | Includes Changes in Pension Value of $11,980, $4,089 and $1,716, in 2007, 2008 and 2009, respectively, from the Director’s Retirement Plan, Changes in Pension Value of $763,304, $118,488 and $24,471 in 2007, 2008 and 2009, respectively, from the SERP and $18,080 of the above market return from the trust created pursuant to the Trust Agreement in 2009. The above market return from the trust created pursuant to the Trust Agreement is not reflected for years 2007 and 2008. |
Pension Benefits Table
The following table provides information related to the SERP for the executive officers as of the
year ended December 31, 2009.
| Present Value of | Payments | |||||||
| Number of Years of | Accumulated Benefits | During Last | ||||||
| Name | Plan name | Credited Service | (Accrued 12-31-09) | Fiscal Year | ||||
Louis E. Prezeau(1) |
SERP | 20 | $1,401,732 | $0 | ||||
Louis E. Prezeau(2) |
Director’s Retirement Plan | 20 | $64,102 | $0 | ||||
Stanley M. Weeks |
SERP | 15 | $153,548 | $0 | ||||
Edward R. Wright (1) |
SERP | 15 | $413,229 | $0 | ||||
Raul Oseguera |
SERP | 19 | $93,914 | $0 |
| (1) | Mr. Prezeau and Mr. Wright are currently eligible for normal retirement and early retirement, respectively, under the SERP. See “Executive Compensation—Supplemental Employee Retirement Plan.” | |
| (2) | Mr. Prezeau is currently eligible for normal retirement under the Director’s Retirement Plan. See “Executive Compensation—Director’s Compensation—Director’s Retirement Plan.” |
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Payments Upon Separation of Service and Change of Control
The following table sets forth the severance amounts and benefits that would be paid to each of the
executive officers if employment with the Bank had been terminated on December 31, 2009. These
payments are considered estimates as they contain certain assumptions regarding discount rate,
vesting, life expectancy and salary.
| SERP Retirement | ||||||||||||||||
| Payment | ||||||||||||||||
| assuming | ||||||||||||||||
| Termination | Dismissal Without Cause | Payments Upon a | ||||||||||||||
| Name | at 12-31-09 | (No Change-in-Control) | Change-in-Control(4) | Death | ||||||||||||
Louis E. Prezeau |
$ | 1,401,732 | (1) | $ | 0 | $ | 1,542,604 | $ | 173,921 | |||||||
Stanley M. Weeks |
$ | 0 | (2) | $ | 0 | $ | 443,344 | $ | 99,264 | |||||||
Edward R. Wright |
$ | 52,600 | (3) | $ | 0 | $ | 504,608 | $ | 56,892 | |||||||
Raul Oseguera |
$ | 0 | (2) | $ | 0 | $ | 428,971 | $ | 101,633 | |||||||
| (1) | Represents a lump sum payment as a result of normal retirement. Mr. Prezeau’s benefit includes a $64,102 lump sum payment from the Director’s Retirement Plan. | |
| (2) | Not entitled to benefits because such benefits were not vested at December 31, 2009 | |
| (3) | Represents annual payout over 15 years as a result of early retirement. For total payout, multiply by 15. | |
| (4) | Payments do not give effect to TARP’s elimination of change-in-control payments. All executive officers have executed waivers disclaiming rights to payments prohibited by TARP. All payments represent payments from the SERP. In addition, Mr. Prezeau’s payment includes $334,887 from the Director’s Retirement Plan. |
Non-Qualified Deferred Compensation Table
The following table lists certain information with respect to the Trust Agreement established with
respect Mr. Prezeau.
| Executive | Registrant | Aggregate | Aggregate | |||||||||||||||||
| contributions in | contributions in | Aggregate | withdrawals/distributions | balance at 2009 | ||||||||||||||||
| 2009 | 2009 | earnings in 2009 | in 2009 | year end | ||||||||||||||||
| Name | ($) | ($) | ($)(1) | ($) | ($)(2) | |||||||||||||||
Louis E. Prezeau |
$ | 0 | $ | 6,694 | (2)(3) | $ | 29,918 | (3 | ) | $ | 279,324 | |||||||||
| (1) | $18,080 of the earnings in 2009 are reported as compensation in the Summary Compensation Table contained herein. | |
| (2) | Represents reimbursement by the Corporation to the trust established by the Trust Agreement of amounts paid for life insurance premiums on Mr. Prezeau’s life. | |
| (3) | The Trust used $18,700 of cash value to pay life insurance premiums, of which the Corporation reimbursed the Trust for $6,694. |
Director Compensation
Each director of the Corporation receives an annual retainer of $4,000 and a $600 fee for each
board meeting attended except for the chairperson, who receives $700, and the secretary, who
receives $650. Committee chairpersons receive $350 for each meeting attended other than the
chairperson of the Loan and Discount Committee who receives $400 per meeting. Other committee
members receive $300 for each meeting attended, except for Audit Committee members, who receive
$400 for each meeting attended. Directors are eligible to receive bonuses based on the overall
earnings performance of the Corporation for the previous fiscal year as determined by the chief
executive officer of the Corporation.
Director’s Retirement Plan
Effective January 1, 1997, the Corporation instituted a director retirement plan (“Director’s
Retirement Plan”). Under this plan, a director who attains the age of at least 65 and has
completed five years of service on the Board, shall receive a lump sum benefit equal to 50% of the
aggregate amount of the director’s fees paid to such director during the then last full fiscal year
of the Corporation (the “normal retirement benefit”). If the director ceases service on the Board
prior to attaining the age of 65 but after completing at least five years of service on the Board,
the director shall receive an annual benefit equal to the normal retirement benefit payable over
the same period of time multiplied by a fraction the numerator of which is the director’s years of
service prior to termination of employment and the denominator of which is the years of service the
director would have had the director remained employed until age 65.
Upon a change in control of the Corporation (which is defined in the director retirement plan as
the acquisition by a non-affiliate of the Corporation of 30% or more of the Corporation’s
outstanding common stock which is followed by (a) the termination of a director for any reason, or
(b) the failure of such director to be elected, for whatever reason, for an immediately succeeding
term upon the natural expiration of his/her term) followed by a termination of the director’s
status as a member of the Board for any reason or a failure for whatever reason for the director to
be nominated and elected to an immediately succeeding term, the director shall receive a benefit
equal to the present value (discounted at the rate of 4%) of a theoretical series of 120 monthly
payments, with each payment equal to 1/12 of the normal retirement benefit without regard as to
whether the director otherwise qualified for the normal retirement benefit.
If a director dies while in active service on the Board, the designated beneficiary of such
director shall receive the greater of the normal retirement benefit accrued by the Corporation for
such director as of the date of such director’s death or the normal retirement benefit described
above.
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The Corporation may amend or terminate this plan at any time prior to termination of service by the
director, provided that all benefits accrued by the Corporation as of the date of such termination
or amendment shall be fully vested; and, provided further, that the plan may not be amended or
terminated after a change in control (as defined) unless the director consents thereto.
Director Compensation Table
Annual compensation paid to directors in 2009 is presented in the table below for all directors
other than Mr. Prezeau whose compensation is reflected in the Summary Compensation Table.
| Change in Pension Value and | ||||||||||||||||
| Non-Qualified | ||||||||||||||||
| Fees Earned or | Deferred Compensation Earnings | All Other | ||||||||||||||
| Name | Paid in Cash (1) | (2) | Compensation | Total | ||||||||||||
Douglas Anderson(3) |
$ | 16,050 | $ | 66,016 | $ | 0 | $ | 82,066 | ||||||||
Barbara Bell Coleman |
$ | 25,450 | $ | 4,965 | $ | 0 | $ | 30,415 | ||||||||
Eugene Giscombe* |
$ | 28,100 | $ | 1,957 | $ | 0 | $ | 30,057 | ||||||||
Lemar C. Whigham |
$ | 28,200 | $ | 3,640 | $ | 0 | $ | 31,840 | ||||||||
H. O’Neil Williams |
$ | 25,400 | $ | 0 | $ | 0 | $ | 25,400 | ||||||||
| * | Chairman | |
| (1) | Includes committee meeting fees, attendance fees and annual retainer fees. | |
| (2) | Represents the change in the net present value of pension and director retirement plan benefits during 2009 under the Director’s Retirement Plan taking into account the age of each director, a present value factor, an interest discount factor and time remaining until retirement. | |
| (3) | Douglas Anderson resigned from the Board of Directors in June 29, 2010. Mr. Anderson’s change in pension value includes an additional expense accrual to provide for benefits due upon his early retirement. |
COMPENSATION COMMITTEE REPORT
A discussion of the principles, objectives, components, analyses and determinations of the
Committee with respect to executive compensation is included in the Compensation Discussion and
Analysis above. The Compensation Discussion and Analysis also includes discussion with respect to
the Committee’s review of officer and employee compensation plans and specifically any features
that may encourage employees to take unnecessary and excessive risks. None of the plans identified
is of a nature or magnitude that could reasonably be expected to encourage any employee or
executive to take any unnecessary and/or excessive risk. In fact our supplemental employee
retirement plan encourages employees to stay with the Corporation for the long term. The specific
decisions of the Committee regarding the compensation of the named executive officers are reflected
in the compensation tables and narrative above that follow the Compensation Discussions and
Analysis.
As required by TARP, the Personnel/Director and Management Review Committee certifies that: (a)
it has reviewed with the Corporation’s Senior Risk Officer the SEO incentive compensation
arrangements and has made reasonable efforts to ensure that such arrangements do not encourage
SEOs to take unnecessary and excessive risks that could threaten the value of the Corporation
and its subsidiaries; (b) it has reviewed with the Corporation’s Senior Risk Officer the
employee compensation plans and has made all reasonable efforts to limit any unnecessary risks
these plans pose to the Corporation and its subsidiaries; and (c) it has reviewed the employee
compensation plans to eliminate any features of these plans that would encourage the
manipulation of reported earnings of the Corporation and its subsidiaries to enhance the
compensation of any employee.
We have reviewed and discussed the Compensation Discussion and Analysis with management and, based
upon that discussion, we recommend that the section be included in the Corporation’s annual report
on Form 10-K for the year-ended December 31, 2009 and the 2010 proxy statement.
Eugene Giscombe
Lemar Whigham
Barbara Bell Coleman, Chairperson
Louis E. Prezeau
Date: May 17, 2010
Lemar Whigham
Barbara Bell Coleman, Chairperson
Louis E. Prezeau
Date: May 17, 2010
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Certain members of the Personnel/Director and Management Review Committee or their affiliates,
engaged in loan transactions with the Bank during 2009. All such loans were made in the
ordinary course of business on substantially the same terms including interest rates and
collateral, as those prevailing at the time for comparable loans with others and did not
involve more than the normal risk of collectability or present other unfavorable features. As
noted above Mr. Prezeau is President and CEO and serves on the Personnel/Director and
Management Review Committee, which is the Corporation’s Compensation Committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Released Stockholder Matters
STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
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The following table presents information about the beneficial ownership of the Corporation’s
common stock at May 1, 2010 by each person who is known by the Corporation to beneficially own more
than five percent (5%) of the issued and outstanding common stock, each
director and each of the Corporation’s executive officers for whom individual information is
required to be set forth in this Annual Report on Form 10-K under rules of the Securities and
Exchange Commission, and by directors and all executive officers as a group.
COMMON STOCK
| Number of | ||||||||
| Shares | ||||||||
| Beneficially | ||||||||
| Name of Beneficial Owner | Owned | Percent of Class | ||||||
Barbara Bell Coleman, Director |
1,177 | * | ||||||
Eugene Giscombe, Director c/o City National Bancshares Corporation 900 Broad Street Newark, New Jersey 07102 |
10,580 | (1) | 8.06 | % | ||||
Louis E. Prezeau, Director, President and CEO c/o City National Bancshares Corporation 900 Broad Street Newark, New Jersey 07102 |
23,218 | (2) | 17.68 | % | ||||
Lemar C. Whigham, Director c/o City National Bancshares Corporation 900 Broad Street Newark, New Jersey 07102 |
9,624 | (3) | 7.33 | % | ||||
H. O’Neil Williams, Director |
210 | * | ||||||
Raul Oseguera, Senior Vice President |
750 | * | ||||||
Stanley M. Weeks, Executive Vice President |
408 | * | ||||||
Edward R. Wright, Senior Vice President |
5,000 | 3.81 | % | |||||
Directors and named executive officers as a group (9 persons) |
50,967 | 38.82 | % | |||||
Carolyn M. Whigham, 5% stockholder 580 Dr. Martin Luther King Jr. Blvd., Newark, NJ 07102 |
8,495 | 6.47 | % | |||||
| (1) | Includes 780 shares held by his wife. | |
| (2) | Includes 2,375 shares held by his sons, 110 shares held by his daughter and 1,402 shares held by his wife. | |
| (3) | Includes 1,064 shares held by his wife. | |
| * | Less than 1% |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationship and Related Transactions
The Bank has made loans to its directors and executive officers and their associates, and assuming
continued compliance with generally applicable credit standards, it expects to continue to make
such loans. These loans were made in the ordinary course of business on substantially the same
terms including interest rates and collateral, as those prevailing at the time for comparable loans
with others and did not involve more than the normal risk of collectability or present other
unfavorable features.
The Board, as a whole, reviews related party transactions, but there is no written policy or
procedure with respect thereto and such reviews are conducted on a transaction by transaction
basis. Under the Audit Committee charter, the Audit Committee may also review summary of
directors’ and officers’ related party transactions and potential conflicts of interest.
Director Independence
The Board has determined that all the directors with the exception of Louis E. Prezeau are
“independent” within the meaning of the Nasdaq listing standards. In reviewing the independence of
these directors, the Board considered that transactions with the Bank were made in the ordinary
course of business, including loans that were made in accordance with Federal Reserve Regulation O.
Part IV
Item 14. Principal Accountant Fees and Services
The accounting firm of KPMG LLP is serving as the independent registered public accountants for the
Corporation. Services provided included the examination of the consolidated financial statements
and preparation of the tax returns.
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The Corporation incurred the following fees for services provided by KPMG LLP:
| 2009 | 2008 | |||||||
Audit fees |
$ | 290,000 | $ | 135,000 | ||||
Audit-related Fees |
— | — | ||||||
Tax service fees |
88,000 | 36,550 | ||||||
All other fees |
— | — | ||||||
| $ | 378,000 | $ | 171,550 | |||||
All audit, as well as non-audit, services to be performed by the independent accountants to the
Corporation must be pre-approved by the Audit Committee in order to assure that the provision of
such services does not impair the auditor’s independence. During 2009 and 2008, the Audit
Committee pre-approved all of the services provided by KPMG LLP. The Audit Committee has
considered the provisions of these services by KPMG LLP and has determined that the services are
compatible with maintaining KPMG LLP’s independence.
Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this report: |
(1) Financial Statements: The consolidated balance sheets of City National Bancshares
Corporation, and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of operations, consolidated statements of stockholders’ equity and consolidated
statements of cash flows for each of the years in the three-year period ended December 31, 2009,
together with the related notes and the independent auditor’s report of KPMG LLP.
(2) Financial Statement Schedules: All schedules are omitted as the required information
is inapplicable or the information is presented in the financial statements or related
notes.
(3) Exhibits: A list of the Exhibits as required by Item 601 of Regulation S-K to be filed as
part of this Annual Report on Form 10-K is shown on the “Exhibit Index” filed herewith.
(b) The exhibits listed on the accompanying “Exhibit Index” are incorporated by reference into this
Item 15 of this Annual Report on Form 10-K as if set forth fully herein.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
City National Bancshares Corporation has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized:
CITY NATIONAL BANCSHARES CORPORATION
By:
|
/s/ Louis E. Prezeau
|
By: | /s/ Edward R. Wright
|
|||||
| President and Chief | Chief Financial Officer | |||||||
| Executive Officer | and Principal Accounting Officer | |||||||
Date:
|
April 29, 2010 | Date: | April 29, 2010 |
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/ Barbara Bell Coleman
|
Director | April 29, 2010 | ||
/s/ Eugene Giscombe
|
Director, Chairperson of the Board |
April 29, 2010 | ||
/s/ Louis E. Prezeau
|
Director, President and Chief Executive Officer |
April 29, 2010 | ||
/s/ Lemar C. Whigham
|
Director | April 29, 2010 | ||
/s/ H. O’Neil Williams
|
Director | April 29, 2010 |
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EXHIBIT INDEX
| Exhibit No. | Description of Exhibit | |
(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 (3)(i) filed with the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). | |
(3)(f)
|
Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series E (incorporated herein by reference to Exhibit (3)(i) filed with the Corporation’s Quarterly Report on Form 10-Q filed on March 4, 2005). | |
(3)(g)
|
Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s MultiMode Series F Non-cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit (3)(f) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). | |
(3)(h)
|
Amendment to the Corporation’s Articles of Incorporation establishing the Fixed Rate Cumulative Perpetual Preferred Stock, Series G (incorporated herein by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K dated April 10, 2009). | |
(3)(i)
|
Amendment to the Corporation’s Articles of Incorporation reallocating unissued Series B, Series C and Series E Preferred Stock to unallocated and unissued preferred stock (incorporated herein by reference to Exhibit 3.2 to the Corporation’s Current Report on Form 8-K dated April 10, 2009). | |
(3)(j)
|
The amendment to the By-Laws of the Corporation (incorporated herein by reference to Exhibit (3)(b) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1991). | |
(3)(k)
|
The By-Laws of the Corporation (incorporated herein by reference to Exhibit (3)(b) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1988). | |
(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 26, 2006 (incorporated herein by reference to Exhibit (10.1) to the Corporation’s Current Report on Form 8-K dated December 4, 2006). |
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| Exhibit No. | Description of Exhibit | |
(10)(c)
|
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)(d)
|
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)(e)
|
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)(f)
|
Asset Purchase and Sale Agreement between City National Bank of New Jersey 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)(g)
|
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)(h)
|
Purchase and Assumption Agreement dated as of March 31, 2004, by and among The Prudential Savings Bank, F.S.B., The Prudential Bank and Trust Company and City National Bank of New Jersey (incorporated herein by reference to Exhibit 10(l) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004). | |
(10)(i)
|
Guarantee Agreement dated March 17, 2004 from the Corporation in favor of U.S. Bank, N.A., as trustee for holders of securities issued by City National Bank of New Jersey Capital Statutory Trust II (incorporated herein by reference to Exhibit (10)(m) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004). | |
(10)(j)
|
Purchase Agreement dated September 27, 2005 by and between Sandler O’Neil & Partners, L.P., and the Corporation with respect to issue and sale of 7,000 shares of the Corporation’s MultiMode Series F Non-cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit (10)(n) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). | |
(10)(k)
|
Credit Agreement dated February 21, 2007 by and between The Prudential Insurance Company of America and the Corporation with respect to a $5,000,000 loan to the Corporation (incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated February 23, 2007). | |
(10)(l)
|
Branch Purchase and Assumption Agreement, dated as of November 1, 2006, by and between City National Bank of New Jersey (“CNB”) and Sun National Bank (“Sun”), as amended by Amendment to Branch Purchase and Assumption Agreement, dated as of March 8, 2007, by and between CNB and Sun (incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated March 14, 2007). | |
(10)(m)
|
Letter Agreement, dated April 10, 2009, including the Securities Purchase Agreement - Standard Terms incorporated by reference therein (collectively, the “Purchase Agreement”), between the Corporation and the United States Department of the Treasury (the “Treasury Department”) (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated April 10, 2009). | |
(10)(n)
|
Side Letter Agreement, dated April 10, 2009, between the Corporation and the Treasury Department pertaining to the American Recovery and Reinvestment Act of 2009 (incorporated herein by reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K dated April 10, 2009). |
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| Exhibit No. | Description of Exhibit | |
(10)(o)
|
Side Letter Agreement, dated April 10, 2009, between the Corporation and the Treasury Department pertaining to the amendment of certain provisions of the Purchase Agreement (incorporated herein by reference to Exhibit 10.3 to the Corporation’s Current Report on Form 8-K dated April 10, 2009). | |
(10)(p)
|
Side Letter Agreement, dated April 10, 2009, between the Corporation and the Treasury Department pertaining to the amendment of certain provisions of the Purchase Agreement relating to CDFI Exemption (incorporated herein by reference to Exhibit 10.3 to the Corporation’s Current Report on Form 8-K dated April 10, 2009). | |
(10)(q)
|
Form of Waiver, executed by each of Louis E. Prezeau, Edward R. Wright, Stanley M. Weeks and Raul L. Oseguera (incorporated herein by reference to Exhibit 10.3 to the Corporation’s Current Report on Form 8-K dated April 10, 2009). | |
(10)(r)
|
Agreement, dated June 29, 2009, by and between the City National Bank of New Jersey and the Comptroller of the Currency (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated June 29, 2009). | |
(10)(s)
|
Form of Director’s Retirement Agreement (the “Director’s Retirement Plan”) (incorporated by reference to Exhibit 10(h) to the Form 10-K for the year ended December 31, 1998, filed on March 30, 1999). | |
10(t)
|
Form of Salary Continuation Agreement (“Supplemental Executive Retirement Plan”) amended and restated as of July 10, 2007 (filed herewith). | |
10(u)
|
Irrevocable Trust Agreement between the Corporation, Bank and Pierre Jospitre, as Trustee for benefit of Mr. Prezeau, dated December 30, 1994 (filed herewith)., | |
10(v)
|
First Amendment to Trust Agreement between the Corporation, Bank and Pierre Jospitre, as Trustee for benefit of Mr. Prezeau dated December 30, 1994, 2009 (filed herewith). | |
(11)
|
Statement regarding computation of per share earnings. The required information is included on page 19. | |
(21)
|
Subsidiaries of the registrant. The required information is included on page one. | |
(31)
|
Certifications of Principal Executive Officer and Principal Financial Officer (Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)). | |
(32)
|
Certifications of Principal Executive Officer and Principal Financial Officer under 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)). | |
(99)
|
Certifications of Principal Executive Officer and Principal Financial Officer (TARP Certifications) Pursuant to Section 11(b)(4) of the Emergency Economic Stabilization Act of 2008 (EESA) (filed herewith). |
56