Attached files
file | filename |
---|---|
EX-32 - EX-32 - CITY NATIONAL BANCSHARES CORP | y91505exv32.htm |
EX-99 - EX-99 - CITY NATIONAL BANCSHARES CORP | y91505exv99.htm |
EX-31 - EX-31 - CITY NATIONAL BANCSHARES CORP | y91505exv31.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
|
December 31, 2010 | |
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from |
to |
Commission file number
|
0-11535 | |
City National Bancshares Corporation
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
New Jersey
|
22-2434751 | |
State or other jurisdiction of
|
(I.R.S. Employer | |
incorporation or organization
|
Identification No.) |
900 Broad Street Newark, New Jersey 07102
(Address of principal executive offices) | (Zip Code) |
Registrants 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.
oYes xNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
oYes xNo
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.
xYes oNo
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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). oYes oNo
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
registrants 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 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 x Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
oYes xNo
The aggregate market value of voting stock held by nonaffiliates of the Registrant as of May 27,
2011 was approximately $3,005,000.
There were 131,326 shares of common stock outstanding at May 27, 2011.
CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents
Table of Contents
II
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
$387.2 million, total deposits of $338.6 million and stockholders equity of $22.9 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 words we, our and us refer to City National Bancshares Corporation and its wholly owned
subsidiaries, unless we indicate otherwise.
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
individuals in rural Haiti 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 (CDEs). 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 governments 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 Banks 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 eight-branch office network from its headquarters located
in downtown Newark, New Jersey. The Bank operates three branches (including the headquarters) in
Newark, along with one in Paterson, New Jersey. As a result of the acquisitions of two branches
from a thrift organization, the Bank also operates a branch in Brooklyn, New York and one in
Roosevelt, Long Island. The Bank opened de novo branches in Hempstead, Long Island in 2002 and
Manhattan, New York in 2003. The Bank gathers deposits primarily from the communities and
neighborhoods in close proximity to its branches and has extensive deposit relationships with
municipalities in the communities where the Bank does business.
The Banks 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 Banks 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 Banks 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 Jerseys 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, 2010, the Bank employed 89 full-time equivalent employees compared to 103
employees a year earlier due to the closing of two branches in 2010. 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.
On July 21, 2010 the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the Dodd-Frank Act). This new law will significantly change the current bank regulatory
structure and affect the lending, deposit, investment, trading and operating activities
1
Table of Contents
of financial institutions and their holding companies. The Dodd-Frank Act requires various federal
agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous
studies and reports for Congress. The federal agencies are given significant discretion in drafting
the implementing rules and regulations, and consequently, many of the details and much of the
impacts of the Dodd-Frank Act may not be known for many months or years.
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to
supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad
rule-making authority for a wide range of consumer protection laws that apply to all banks and
savings institutions, including the authority to prohibit unfair, deceptive or abusive acts and
practices. The Consumer Financial Protection Bureau has examination and enforcement authority over
all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will
continue to be examined for compliance with the consumer laws by their primary bank regulators. The
Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national
banks and federal savings associations, and gives state attorneys general the ability to enforce
federal consumer protection laws.
The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank
and savings and loan holding companies that are no less than those applicable to banks, which will
exclude certain instruments that previously have been eligible for inclusion by bank holding
companies as Tier 1 capital, such as trust preferred securities.
Effective one year after the date of enactment is a provision of the Dodd-Frank Act that eliminates
the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have
interest bearing checking accounts. Depending on competitive responses, this significant change to
existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation deposit
insurance assessments. Assessments will now be based on the average consolidated total assets less
tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also
permanently increases the maximum amount of deposit insurance for banks, savings institutions and
credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing
transaction accounts have unlimited deposit insurance through December 31, 2012. The legislation
also increases the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to
1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on
depository institutions with less than $10 billion in assets.
The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote
on executive compensation and so-called golden parachute payments, and authorizes the Securities
and Exchange Commission to promulgate rules that allow stockholders to nominate their own
candidates using a companys proxy materials. It also provides that the listing standards of the
national securities exchanges shall require listed companies to implement and disclose clawback
policies mandating the recovery of incentive compensation paid to executive officers in connection
with accounting restatements. The legislation also directs the Federal Reserve Board to promulgate
rules prohibiting excessive compensation paid to bank holding company executives.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be
written implementing rules and regulations will have on community banks. However, it is expected
that at a minimum they will increase our operating and compliance costs and could increase our
interest expense.
Bank holding company regulations
CNBC is a bank holding company within the meaning of the Bank Holding Company 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 (the Modernization Act)into law. The Modernization Act will allow bank holding companies
meeting management, capital and Community Reinvestment Act (CRA) 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. CNBCs 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
2
Table of Contents
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 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, 2010 since the aforementioned net profit was a loss of $16.4 million, of which $8.8
million represents a valuation allowance against deferred tax assets at 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 OCCs regulations implementing these provisions of FDICIA provide that an institution will be
classified as well capitalized if it has a total risk-based capital ratio of at least 10%, has a
Tier 1 risk-based capital ratio of at least 6%, has a Tier 1 leverage ratio of at least 5%, and
meets certain other requirements. An institution will be classified as adequately capitalized
if it has a total risk-based capital ratio of at least 8%, has a Tier 1 risk-based capital ratio
of at least 4%, and has Tier 1 leverage ratio of at least 4%. An institution will be classified
as undercapitalized if it has a total risk-based capital ratio of less than 6%, has a Tier 1
risk-based capital ratio of less than 3%, or has a Tier 1 leverage ratio of less than 3%. An
institution will be classified as significantly undercapitalized if it has a total risk-based
capital ratio of less than 6%, or a Tier I risk-based capital ratio of less than 3%, or a Tier I
leverage ratio of less than 3%. An institution will be classified as critically
undercapitalized if it has a tangible equity to total assets ratio that is equal to or less than
2%. An insured depository institution may be deemed to be in a lower capitalization category if
it receives an unsatisfactory examination.
Insured institutions are generally prohibited from paying dividends or management fees if after
making such payments, the institution would be undercapitalized. An undercapitalized
institution also is required to develop and submit to the appropriate federal banking agency a
capital restoration plan, and each company controlling such institution must guarantee the
institutions 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.
Consent Order
The Bank was subject to a Formal Agreement with the OCC entered into on June 29, 2009 (the Formal
Agreement). The Formal Agreement required, among other things, the enhancement and implementation
of certain programs to reduce the Banks credit risk, along with the development of a capital and
profit plan, the development of a contingency funding plan and the correction of deficiencies in
the Banks loan administration. The Bank failed to comply with certain provisions of the Formal
Agreement and failed to comply with the higher leverage ratio of 8% required to be maintained.
Due to the Banks condition, the OCC has required that the Board of Directors of the Bank (the
Bank Board) sign a formal enforcement action with the OCC, which mandates specific actions by the
Bank to address certain findings from the OCCs examination and to address the Banks current
financial condition. The Bank entered into a Consent Order (Order or Consent Order) with the
OCC on December 22, 2010, which contains a list of requirements. The Order supersedes and replaces
the Formal Agreement. The Order also contains restrictions on future extensions of credit and
requires the development of various programs and procedures to improve the Banks asset quality as
well as routine reporting on the Banks progress toward compliance with the Order to the Bank Board
and the OCC. As a result of the Order, the Bank may not be deemed well-capitalized. The
description of the Consent Order is only a summary and is qualified in its entirety by the Order
which is attached as Exhibit 10(w) hereto.
Specifically, the Order imposes the following requirements on the Bank:
within five (5) days of the Order, the Bank Board must appoint a Compliance Committee to be
comprised of at least three directors, none of whom may be an employee, former employee or
controlling shareholder of the Bank or any of its affiliates, to monitor and coordinate the Banks
adherence to the Order.
within ninety (90) days of the Order, the Bank Board must develop and submit to the OCC for
review a written strategic plan covering at least a three-year period, establishing objectives for
the overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet
activities, liability structure, capital adequacy, reduction in the volume of nonperforming assets,
product line development, and market segments that the Bank intends to promote or develop, together
with strategies to achieve those objectives.
by March 31, 2011, and thereafter the Bank must maintain total capital at least equal to 13%
of risk-weighted assets and Tier 1 capital at least equal to 9% of adjusted total assets; this
requirement means that the Bank may not be considered well-capitalized as otherwise defined in
applicable regulations.
within ninety (90) days of the Order, the Bank Board must submit to the OCC a written capital
plan for the Bank covering at least a three-year period, including specific plans for the
achievement and maintenance of adequate capital, projections for growth and capital requirements,
based upon a detailed analysis of the Banks assets, liabilities, earnings, fixed assets and
off-balance sheet activities; identification of the primary sources from which the Bank will
maintain an appropriate capital structure to meet the Banks future needs, as set forth in the
strategic plan; specific plans detailing how the Bank will comply with restrictions or requirements
set forth in the Order and with the restrictions against brokered deposits in 12 C.F.R. § 337.6;
contingency plans that identify alternative methods to strengthen
3
Table of Contents
capital, should the primary source(s) not be available; and a prohibition on the payment of
director fees unless the Bank is in compliance with the minimum capital ratios previously
identified in the prior paragraph or express written authorization is provided by the OCC.
the Bank is restricted on the payment of dividends.
to ensure the Bank has competent management in place at all times, including: within 90 days
of the Order the Bank Board shall provide to the OCC qualified and capable candidates for the
positions of President, Senior Credit Officer, Consumer Compliance Officer and Bank Secrecy
Officer; within 90 days of the date of the Order, the Bank Board (with the exception of Bank
executive officers) shall prepare a written assessment of the Banks executive officers to perform
present and anticipated duties; prior to appointment of any individual to an executive position
provide notice to the OCC, who shall have the power to veto such appointment; and the Bank Board
shall at least annually perform a written performance appraisal for each Bank executive officer.
within sixty (60) days of the Order, the Bank Board shall develop and the Bank shall
implement, and thereafter ensure compliance with, a written credit policy to ensure the Banks
compliance with written programs to improve the Banks loan portfolio management.
within ninety (90) days of the Order the Bank Board shall develop, implement and thereafter
ensure Bank adherence to a written program to improve the Banks loan portfolio management,
including: requiring that extensions of credit are granted, by renewal or otherwise, to any
borrower only after obtaining, performing, and documenting a global analysis of current and
satisfactory credit information; requiring that existing extensions of credit structured as single
pay notes are revised upon maturity to conform to the Banks revised loan policy; ensuring
satisfactory and perfected collateral documentation; tracking and analyzing credit, collateral, and
policy exceptions; providing for accurate risk ratings consistent with the classification standards
contained in the Comptrollers Handbook on Rating Credit Risk; providing for identification,
measurement, monitoring, and control of concentrations of credit; ensuring compliance with Call
Report instructions, the Banks lending policies, and laws, rules, and regulations pertaining to
the Banks lending function; ensuring the accuracy of internal management information systems; and
providing adequate training of Bank personnel performing credit analyses in cash flow analysis,
particularly analysis using information from tax returns, and implement processes to ensure that
additional training is provided as needed.
within sixty (60) days of the Order, the Bank Board must establish a written performance
appraisal and salary administration process for loan officers that adequately consider performance
relative to job descriptions, policy compliance, documentation standards, accuracy in credit
grading, and other loan administration matters.
the Bank must implement and maintain an effective, independent, and on-going loan review
program to review, at least quarterly, the Banks loan and lease portfolios, to assure the timely
identification and categorization of problem credits.
the Bank is also required to implement and adhere to a written program for the maintenance of
an adequate Allowance for Loan and Lease Losses, providing for review of the allowance by the Bank
Board at least quarterly.
within sixty (60) days of the Order, the Bank Board shall adopt and the Bank (subject to Bank
Board review and ongoing monitoring) shall implement and thereafter ensure adherence to a written
program designed to protect the Banks interest in those assets criticized in the most recent
Report of Examination (ROE) by the OCC, in any subsequent ROE, by any internal or external loan
review, or in any list provided to management by the National Bank Examiners during any examination
as doubtful, substandard, or special mention.
within one hundred twenty (120) days of the Order, the Bank Board must revise and maintain a
comprehensive liquidity risk management program, which assesses, on an ongoing basis, the Banks
current and projected funding needs, and ensures that sufficient funds or access to funds exist to
meet those needs, which program includes effective methods to achieve and maintain sufficient
liquidity and to measure and monitor liquidity risk.
within ninety (90) days of the Order, the Bank Board shall identify and propose for
appointment a minimum of two (2) new independent directors that have a background in banking,
credit, accounting, or financial reporting, and such appointment will be subject to veto power of
the OCC.
within ninety (90) days of the Order, the Bank Board shall adopt, implement, and thereafter
ensure adherence to a written consumer compliance program designed to ensure that the Bank is
operating in compliance with all applicable consumer protection laws, rules, and regulations.
within ninety (90) days of the Order, the Bank Board shall develop, implement, and thereafter
ensure Bank adherence to a written program of policies and procedures to provide for compliance
with the Bank Secrecy Act, as amended (31 U.S.C. §§ 5311 et seq.), the regulations promulgated
thereunder and regulations of the Office of Foreign Assets Control (OFAC), 31 C.F.R. Chapter V,
as amended (collective referred to as the Bank Secrecy Act or BSA) and for the appropriate
identification and monitoring of transactions that pose greater than normal risk for compliance
with the BSA.
within ninety (90) days, of the Order, the Bank Board shall: develop, implement, and
thereafter ensure Bank adherence to an independent, internal audit program sufficient to detect
irregularities and weak practices in the Banks operations; determine the Banks level of
compliance with all applicable laws, rules, and regulations; assess and report the effectiveness of
policies, procedures, controls, and management oversight relating to accounting and financial
reporting; evaluate the Banks adherence to established policies and procedures, with particular
emphasis directed to the Banks adherence to its loan, consumer compliance, and BSA policies and
procedures; evaluate and document the root causes for exceptions; and establish an annual audit
plan using a risk-based approach sufficient to achieve these objectives.
within ninety (90) days of the Order, the Bank Board must develop and implement a
comprehensive compliance audit function to include an independent review of all products and
services offered by the Bank, including without limitation, a risk-based audit program to test for
compliance with consumer protection laws, rules, and regulations that includes an adequate level of
transaction testing; procedures to ensure that exceptions noted in the audit reports are corrected
and responded to by the appropriate Bank personnel; and periodic reporting of the results of the
consumer compliance audit to the Bank Board or a committee thereof.
the Bank Board shall require and the Bank shall immediately take all necessary steps to
correct each violation of law, rule, or regulation cited in any ROE, or brought to the Bank Boards
or Banks attention in writing by management, regulators, auditors, loan review, or other
compliance efforts.
The Order permits the OCC to extend the time periods under the Order upon written request. Any
material failure to comply with the Order could result in further enforcement actions by the OCC.
In addition, if the OCC does not accept the capital plan or the Bank fails to achieve and maintain
the minimum capital levels, the Order specifically states that the OCC may require the Corporation
to sell, merge or liquidate the Bank.
As a result of the Consent Order, we may not accept, renew or roll over any brokered deposit. This
affects our ability to obtain funding. In addition we may not solicit deposits by offering an
effective yield that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in such institutions normal market area or in the market
area in which such deposits are being solicited.
As of March 31, 2011, the Bank believes it has timely complied with the requirements of the Consent
Order as of such date with the exception of the capital ratio requirement.
Agreement with Federal Reserve Bank of New York
4
Table of Contents
On December 14, 2010, the Corporation entered into a written agreement (the FRNBY Agreement) with
the Federal Reserve Bank of New York (FRBNY). The following is only a summary of the agreement
and is qualified in its entirety by the copy of the agreement attached hereto as Exhibit 10(x)
hereto. Pursuant to the agreement, the Corporations board of directors is to take appropriate
steps to utilize fully the Corporations financial and managerial resources to serve as a source of
strength to the Bank, including causing the Bank to comply with the Formal Agreement (now
superseded) and any other supervisory action taken by the OCC, such as the Order.
In the agreement, the Corporation agreed that it would not declare or pay any dividends without
prior written approval of the FRBNY and the Director of the Division of Banking Supervision and
Regulation of the Board of Governors of the Federal Reserve System (the Banking Director). It
further agreed that it would not take dividends or any other form of payment representing a
reduction in capital from the Bank without the FRBNYs prior written approval. The agreement also
provides that neither the Corporation nor its nonbank subsidiary will make any distributions of
interest, principal or other amounts on subordinated debentures or trust preferred securities
without the prior written approval of the FRBNY and the Banking Director.
The agreement further provides that the Corporation shall not incur, increase or guarantee any debt
without FRBNY approval. In addition, the Corporation must obtain the prior approval of the FRBNY
for the repurchase or redemption of its shares of stock.
The agreement further provides that in appointing any new director or senior executive officer or
changing the responsibilities of any senior executive officer so that the officer would assume a
different senior position, the Corporation must notify the Board of Governors of the Federal
Reserve System and such board or the FRBNY or the OCC, who may veto such appointment or change.
The agreement further provides that the Corporation is restricted in making certain severance and
indemnification payments.
The failure of the Corporation to comply with the FRNBY Agreement could have severe adverse
consequences on the Bank and the Corporation.
Community reinvestment
Under the 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
institutions 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 associations record of meeting
the credit needs of its community and to take such record into account in its evaluation of
certain applications by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. CNB received a Satisfactory CRA rating in its most recent
examination.
Government policies
The earnings of the Corporation are affected not only by economic conditions, but also by the
monetary and fiscal policies of the United States and its agencies, especially the Federal Reserve
Board. The actions of the Federal Reserve Board influence the overall levels of bank loans,
investments and deposits and also affect the interest rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve Board have had a significant affect on the operating
results of commercial banks in the past and are expected to do so in the future. The nature and
impact of future changes in monetary and fiscal policies on the earnings of the Corporation cannot
be determined.
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.
The FDICs Transaction Account Guarantee Program (TAG), one of two components of the Temporary
Liquidity Guarantee Program (TLG Program), provides full federal deposit insurance coverage for
non-interest bearing transaction deposit accounts regardless of dollar amount. CNB has elected to
participate in this program.
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 institutions 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 $2.3
million was recorded as a prepaid asset, in assessments as of December 31, 2010. The payment
applicable to 2011 through 2012 will be charged to expense with quarterly amortization charges
based on deposit levels.
Basel III
In December 2010, the Basel Committee released its final framework for strengthening international
capital and liquidity regulation, now officially identified by the Basel Committee as Basel III.
Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank
holding companies and their bank subsidiaries to maintain substantially more capital, with a
greater emphasis on common equity.
The Basel III final capital framework, among other things, (i) introduces as a new capital measure
Common Equity Tier 1 (CET1), (ii) specifies that Tier 1 capital consists of CET1 and
Additional Tier 1 capital instruments meeting specified requirements, (iii) defines CET1 narrowly
by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the
other components of capital and (iv) expands the scope of the adjustments as compared to existing
regulations.
When fully phased in on January 1, 2019, Basel III requires banks to maintain (i) as a newly
adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%,
plus a 2.5% capital conservation buffer (which is added to the 4.5% CET1 ratio as that buffer is
phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least
7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the
capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is
phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full
implementation), (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to
risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the
8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total
capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international
standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance
sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter
of the month-end ratios for the quarter).
Basel III also provides for a countercyclical capital buffer, generally to be imposed when
national regulators determine that excess aggregate
5
Table of Contents
credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to
the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially
resulting in total buffers of between 2.5% and 5%). The aforementioned capital conservation buffer
is designed to absorb losses during periods of economic stress. Banking institutions with a ratio
of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the
combined capital conservation buffer and countercyclical capital buffer, when the latter is
applied) will face constraints on dividends, equity repurchases and compensation based on the
amount of the shortfall.
The implementation of the Basel III final framework will commence January 1, 2013. On that date,
banking institutions will be required to meet the following minimum capital ratios: 3.5% CET1 to
risk-weighted assets, 4.5% Tier 1 capital to risk-weighted assets, and 8.0% Total capital to
risk-weighted assets.
The Basel III final framework provides for a number of new deductions from and adjustments to CET1.
These include, for example, the requirement that mortgage servicing rights, deferred tax assets
dependent upon future taxable income and significant investments in non-consolidated financial
entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all
such categories in the aggregate exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and
will be phased-in over a five-year period (20% per year). The implementation of the capital
conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year
period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1,
2019).
The U.S. banking agencies have indicated informally that they expect to propose regulations
implementing Basel III in mid-2011 with final adoption of implementing regulations in mid-2012.
Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is
considering further amendments to Basel III, including the imposition of additional capital
surcharges on globally systemically important financial institutions. In addition to Basel III,
Dodd-Frank requires or permits the Federal banking agencies to adopt regulations affecting banking
institutions capital requirements in a number of respects, including potentially more stringent
capital requirements for systemically important financial institutions. Accordingly, the
regulations ultimately applicable to us may be substantially different from the Basel III final
framework as published in December 2010. Requirements to maintain higher levels of capital or to
maintain higher levels of liquid assets could adversely impact our net income and return on equity.
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 also impair the Corporations 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 Corporations Annual Report on Form 10-K for the year ended December 31, 2010.
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 Corporations 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 Corporations common stock may encounter significant difficulty when attempting to dispose
of their shares.
All issues of the Corporations 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 Banks 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 or reductions in municipal budgets.
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 Corporations 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 on the financial performance of the Corporation.
Most of the Banks 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 Banks loan portfolio, results of operations
and future growth potential. A prolonged decline in economic conditions in the Banks market area
could restrict borrowers ability to pay outstanding principal and interest on loans when due, and,
consequently, adversely affect the Banks cash flows and results of operations.
The Banks 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 Banks loans are located
strongly influence the level of the Banks non-performing loans and results of operations. A
continued decline in the New Jersey and New York City metropolitan area real estate markets has
adversely affected collateral values of the Banks 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 require 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.
6
Table of Contents
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 Banks 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 Corporations
financial condition or results of operations
FDIC insurance premiums increased substantially in 2010 and 2009 compared to previous years and may
increase significantly higher due in part to the Consent Order. Numerous bank closings during both
years 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
institutions total assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis
points times the institutions 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 Corporations
results of operations.
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 Consent Order issued by the OCC, liquidity may become
impaired due to restrictions in asset growth and dividend payments. As a result, management has
developed a contingency funding plan which describes alternate sources of liquidity in the event
the Bank experiences unexpected large funding reductions. At December 31, 2010, management
believes that the Corporation has sufficient liquidity based on the detailed liquidity analysis
performed as of that date.
The cash dividend on the Corporations common or preferred stock may be reduced or eliminated.
There was no cash dividend payout per common share for the year ended December 31, 2010 due to
operating losses. While our earnings may improve in the future, other factors, including those
resulting from the economic recession, and the Consent Order may negatively impact future earnings
and the Corporations 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. Finally, CNB is prohibited
from paying dividends without OCC approval.
Since February, 2010, CNBC has 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.
Changes in accounting policies or accounting standards
The Corporations 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 Corporations 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
Corporations 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 Corporations 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
Corporations 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.
7
Table of Contents
Severe weather, acts of terrorism or other external events could significantly impact the business
of the Bank
A significant portion of the Banks 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 Banks 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 Banks 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 Banks business, which, in turn,
could have a material adverse effect on the Corporations financial condition and results of
operations.
Changes in interest rates
The Corporations earnings and cash flows are largely dependent upon its net interest income.
Interest rates are highly sensitive to many factors that are beyond the Corporations 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 Corporations ability to
originate loans and obtain deposits, the fair value of the Corporations financial assets and
liabilities, and the average duration of the Corporations 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 Corporations 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 Banks borrowers to repay their
loans, possibly requiring an increase in the allowance for loan losses. The Banks 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 Banks 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 Consent Order and the Corporation is subject to the FRBNY Agreement
As noted in Item 1, under Business-Consent Order and Business-FRBNY Agreement, the Bank is subject
to a Consent Order which mandates specific actions by the Bank to address certain findings from the
OCCs examination and to address the Banks current financial condition and the Corporation is
subject to the FRBNY Agreement. As of March 31, 2011, the Bank believes it has timely complied
with the requirements of the Consent Order as of such date with the exception of the capital ratio
requirement. We believe we are in compliance with the FRBNY Agreement. If our regulators believe
we failed to comply with the Consent Order or the FRBNY Agreement they could take
additional
regulatory action including forcing the Corporations Board to sell, merge or liquidate the Bank.
The deteriorating financial results and the restrictive requirements of the Consent Order with the
OCC discussed above raise substantial doubt about the Corporations and the Banks ability to
continue as a going concern.
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 three other
branch locations in New Jersey and four in the state of New York. Three of the locations are in
leased space while the others are owned by the Bank.
The New Jersey branch offices are located in Newark, which is owned, and in Paterson, which is
leased. The New York branches are located in Roosevelt, 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 six ATMs at remote sites in New
Jersey and New York State.
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 2010 there were no matters submitted to stockholders for a vote.
Part II
Item 5. Market for the registrants common equity and related stockholders matters
The Corporations 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
2010.
At May 27, 2011, the Corporation had 1,202 common stockholders of record.
On May 1, 2009 the Corporation paid a cash dividend of $3.60 per share to common stockholders of
record on April 22, 2008. No dividends have been paid to common shareholders in 2010, 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, 2011, 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
8
Table of Contents
Registrar and Transfer Company | Cranford, NJ 07016 | |||
10 Commerce Drive |
9
Table of Contents
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the Corporations
consolidated financial statements and the accompanying notes thereto.
Five-Year Summary
Dollars in thousands, except per share data | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Year-end Balance Sheet data |
||||||||||||||||||||
Total assets |
$387,267 | $466,339 | $ | 494,539 | $ | 449,748 | $ | 395,217 | ||||||||||||
Gross loans |
244,955 | 276,242 | 271,906 | 232,824 | 199,284 | |||||||||||||||
Allowance for loan losses |
10,626 | 8,650 | 3,800 | 3,000 | 2,400 | |||||||||||||||
Investment securities |
105,420 | 162,401 | 178,061 | 157,556 | 169,598 | |||||||||||||||
Total deposits |
338,551 | 380,276 | 407,117 | 394,856 | 342,416 | |||||||||||||||
Short-term portion of long-term debt |
- | 5,000 | 5,000 | - | - | |||||||||||||||
Long-term debt |
19,200 | 44,000 | 46,600 | 19,800 | 19,606 | |||||||||||||||
Stockholders equity |
22,896 | 31,013 | 28,092 | 28,872 | 27,762 | |||||||||||||||
Income Statement data |
||||||||||||||||||||
Interest income |
20,234 | 24,174 | 25,902 | 25,978 | 21,649 | |||||||||||||||
Interest expense |
7,407 | 9,495 | 11,309 | 14,233 | 10,848 | |||||||||||||||
Net interest income |
12,827 | 14,679 | 14,593 | 11,745 | 10,801 | |||||||||||||||
Provision for loan losses |
9,487 | 8,105 | 1,586 | 772 | 279 | |||||||||||||||
Net interest
income after provision for loan losses |
3,340 | 6,574 | 13,007 | 10,973 | 10,522 | |||||||||||||||
Other operating income |
5,617 | 3,124 | 279 | 2,694 | 2,724 | |||||||||||||||
Net impairment losses on securities |
- | ( 2,333 | ) | ( 2,688 | ) | - | - | |||||||||||||
Other operating expenses |
16,055 | 13,381 | 12,278 | 11,428 | 10,035 | |||||||||||||||
(Loss) income before income tax expense |
( 7,097 | ) | ( 6,016 | ) | 1,008 | 2,239 | 3,211 | |||||||||||||
Income tax (benefit) expense |
360 | 1,806 | ( | 50 | ) | 372 | 743 | |||||||||||||
Net (loss) income |
$( 7,457 | ) | $( 7,822 | ) | $ | 1,058 | $ | 1,867 | $ | 2,468 | ||||||||||
Per common share data |
||||||||||||||||||||
Net (loss) income per basic share |
$ (60.54) | $ (68.36) | $ | 1.87 | $ | 8.28 | $ | 13.04 | ||||||||||||
Net (loss) income per diluted share |
(60.54) | (68.36) | 1.87 | 8.09 | 12.54 | |||||||||||||||
Book value |
19.96 | 85.50 | 130.10 | 141.04 | 129.88 | |||||||||||||||
Dividends declared |
- | 2.00 | 3.60 | 3.50 | 3.25 | |||||||||||||||
Basic
average number of common shares outstanding |
131,290 | 131,300 | 131,688 | 132,306 | 133,246 | |||||||||||||||
Diluted
average number of common shares outstanding |
131,290 | 131,300 | 131,688 | 148,623 | 143,924 | |||||||||||||||
Number of common shares outstanding at year-end |
131,290 | 131,290 | 131,330 | 131,987 | 132,926 | |||||||||||||||
Financial ratios |
||||||||||||||||||||
Return on average assets |
(1.63)% | (1.53)% | .23% | .44% | .65% | |||||||||||||||
Return on average common equity |
(69.84)% | (36.55) | 1.38 | 6.35 | 10.90 | |||||||||||||||
Stockholders equity as a percentage of total assets |
5.91 | 6.65 | 5.68 | 6.42 | 6.96 | |||||||||||||||
Common dividend payout ratio |
- | - | - | 42.22 | 25.92 | |||||||||||||||
10
Table of Contents
Item 7. Managements 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.
Cautionary statement concerning forward-looking statements
This managements 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 managements 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 Corporations 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 managements 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 managements 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 three elements: (1) specific reserves for individually
impaired credits, (2) reserves for classified, or higher risk rated, loans, (3) reserves for
non-classified loans and (4) unallocated reserves. Other than the specific reserves, the
calculation of the allowance takes into consideration numerous risk factors both internal and
external to the Corporation, including changes in loan portfolio volume, the composition and
concentrations of credit, new market initiatives, migration to loss analysis and the amount and
velocity of loan charge-offs, among other factors.
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 loans 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
borrowers 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 Corporations 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 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 losses remains an estimate that is subject to significant judgment and short-term change.
11
Table of Contents
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 investments book value is greater than fair value, the
severity of the investments 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, InvestmentsDebt 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, 2010, City National Bank was in compliance with its
ownership requirement and held $1 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-NYs most recent Presidents 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, 2010, it was determined by management that the Banks 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 entitys 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 Corporations operating
results.
Executive summary
2010 continued to be an extremely challenging year as the Corporation recorded another substantial
loss due to continuing asset quality deterioration. Related credit quality costs rose as well,
along with costs associated with complying with the terms of the Consent Order. We also expect to
record a significant loss in 2011, although asset quality is expected to improve in the second half
of the year. However, loan charge-offs may rise as credits that are currently nonperforming move
through the remediation and collection process, which should top out in mid-2011, since almost all
new lending was stopped in 2010. Additionally, earnings will continue to be negatively impacted by
the remediation costs associated with complying with the Order.
We took several steps to mitigate our losses, most significantly the closing of two unprofitable
branches and the discontinuance of our supplemental executive and directors retirement plans.
In 2010, we received $1.6 million of awards from the CDFI Fund. The awards were based on the
Banks lending efforts in qualifying lower income communities and $600,000 is being recorded as
yield enhancement on the related loans. The remaining $1 million was recorded as award income due
to the sale of the related loan.
In 2009, the Corporation received a $700,000 award from the U.S. Treasurys Community Development
Financial Institution (CDFI) Fund. The award was based on the Banks lending efforts in
qualifying lower income communities and is being recorded as yield enhancement on the related
loans.
The primary source of the Corporations 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 Corporations 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.
12
Table of Contents
Cash and due from banks
Cash and due from banks rose from $6.8 million at the end of 2009 to $7.2 million at the end of
2010, while average cash and due from banks was $8.1 million in both 2010 and 2009.
Federal funds sold
Federal funds sold increased from $5.5 million at the end of 2009 to $13.5 million at December 31,
2010, while the related average balance declined from $34.6 million in 2009 to $29.5 million in
2010. The higher year-end balance was due to a higher liquidity position while the decrease in
the average balance resulted primarily from the investment of the proceeds from a large temporary
municipal market account balance that during the first half of 2009.
Interest-bearing deposits with banks
Interest-bearing deposits with banks increased from $609,000 at December 31, 2009 to $3.3 million
a year later, while the related average balances were $1.5 million in both 2010 and 2009. The
deposits represent the Banks participation in the CDFI deposit program. Under this program, the
Bank is eligible for awards based on deposits made in other CDFIs. $42,000 was recorded as
interest income from interest-bearing deposits with banks in 2009, representing a yield
enhancement on the CDFI deposits, while $24,000 of such income was recorded in 2010.
Investments
The available for sale (AFS) portfolio decreased to $105.4 million at December 31, 2010 from $122
million a year earlier due primarily to two large sales. In the second quarter of 2010, $13.8
million of tax-exempt securities were sold and reinvested primarily into mortgage-backed securities
(MBS) and U.S. government agencies as the Corporation did not expect to benefit from tax-exempt
income status. Additionally, during the 2010 fourth quarter, $46.1 million of securities were sold
with a concurrent payoff of $26.5 of Federal Home Loan Bank advances, with the balance of the
proceeds reinvested into MBS and U.S. government agencies.
The related pre-tax unrealized loss was $173,000 at the end of 2010 compared to an unrealized gain
of $926,000 at the end of 2009 primarily due to the securities sales, which resulted in net gains
of $2.1 million.
Included in the AFS portfolio are two collateralized debt obligations (CDOs) that are comprised
of pools of trust preferred securities issued primarily by banks that have a book value of $1
million and a market value of $548,000. The unrealized loss of $488,000 is included in Other
Comprehensive Income (OCI). $499,000 of this loss pertains to one CDO which continues to be fully
performing and has substantial excess collateral coverage in the
tranche we own. 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. No impairment losses have been recorded on either of
the CDOs.
Additionally, the available for sale portfolio includes three corporate debt securities with a
carrying value of $2.9 million that have an unrealized loss of $289,000, down from $438,000 at the
end of 2009. Both investments continue to perform and remain investment grade.
Finally, the Bank owns six single-issue trust preferred securities issued by individual financial
institutions with a carrying value of $4.4 million and an unrealized loss of $1 million, compared
to an unrealized loss of $1.2 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, 2010.
Management does not believe that any individual unrealized losses as of December 31, 2010 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.
All acquisitions during 2010 consisted of MBS and securities issued by government sponsored
entities (GSEs). Both types of securities are used for municipal deposit collateral purposes.
The Bank transferred its entire held to maturity (HTM) portfolio to AFS in March 2010. This
transfer was made in conjunction with the deleveraging program to reduce total asset levels in
order to improve capital ratios, and improve liquidity by allowing for the disposition of
securities, if necessary. In December, 2010, we sold securities with a book value of $46.1
million, recognizing a gain of $1.4 million and concurrently paid off $26.5 million in Federal Home
Loan Bank advances, incurring a prepayment penalty of $694,000. We also reinvested $28 million
into new securities, resulting in a reduction in total assets of approximately $26.5 million.
Information pertaining to the amortized costs and average weighted yields of investments in debt
securities at December 31, 2010 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 |
$ | - | - | % | $ | 71 | 1.85 | % | $ | 93 | 1.77 | % | $ | 3,225 | 3.81 | % | $ | 3,389 | 3.71 | % | ||||||||||||||||||||
Obligations of U.S. govern-
ment sponsored
entities |
118 | 7.47 | 1,069 | 3.83 | 5,831 | 3.65 | 8,429 | 2.74 | 15,447 | 3.51 | ||||||||||||||||||||||||||||||
Obligations of state and
political and subdivisions |
- | - | 1,879 | 5.55 | 3,986 | 5.65 | 3,739 | 7.09 | 9,604 | 6.19 | ||||||||||||||||||||||||||||||
Mortgage-backed securities |
49 | 3.60 | 627 | 4.29 | 502 | 4.02 | 64,859 | 4.24 | 66,037 | 4.23 | ||||||||||||||||||||||||||||||
Other debt securities |
- | - | 1,000 | 4.00 | - | - | 7,358 | 2.78 | 8,358 | 2.93 | ||||||||||||||||||||||||||||||
Total amortized cost |
$ | 167 | 6.33 | % | $ | 4,646 | 4.59 | % | $ | 10,412 | 4.42 | % | $ | 87,610 | 4.08 | % | $ | 102,835 | 4.14 | % | ||||||||||||||||||||
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, 2010. 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 4.14% at December 31, 2010 from 4.59% at
December 31, 2009, The reduced yield was due to the lower yields earned on newly
13
Table of Contents
acquired investments placed in the portfolio during 2010 along with the sale of securities during
the year that had relatively high yields. The weighted average life of the AFS portfolio was 6.58
years at the end of 2010 compared to 5.09 years a year earlier
due to the purchase of longer-term
securities to replace the securities that were sold.
The following table sets forth the amortized cost and market values of the Corporations portfolio
for the three years ended December 31:
2010 | 2009 | 2008 | ||||||||||||||||||||||
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 |
$ 3,389 | $ 3,429 | $ 12,518 | $ 12,700 | $ 4,009 | $ 3,957 | ||||||||||||||||||
Obligations of U.S. government sponsored entities |
15,447 | 15,280 | 17,289 | 17,324 | 19,157 | 19,012 | ||||||||||||||||||
Obligations of state and political subdivisions |
9,604 | 9,513 | 546 | 553 | 548 | 552 | ||||||||||||||||||
Mortgage-backed securities |
66,037 | 67,905 | 74,417 | 77,138 | 88,356 | 90,630 | ||||||||||||||||||
Other debt securities |
8,358 | 6,556 | 12,269 | 10,268 | 11,645 | 7,798 | ||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||
Marketable securities |
748 | 727 | 713 | 695 | 678 | 638 | ||||||||||||||||||
Nonmarketable securities |
115 | 115 | 115 | 115 | 115 | 115 | ||||||||||||||||||
Federal Reserve Bank and Federal Home Loan Bank stock |
1,895 | 1,895 | 3,213 | 3,213 | 2,889 | 2,889 | ||||||||||||||||||
Total |
$105,593 | $105,420 | $121,080 | $122,006 | $127,397 | $125,591 | ||||||||||||||||||
2010 | 2009 | 2008 | ||||||||||||||||||||||
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 | ||||||||||||||||||
Mortgage-backed securities |
- | - | 7,877 | 8,186 | 12,089 | 12,358 | ||||||||||||||||||
Obligations of state and political subdivisions |
- | - | 27,979 | 29,042 | 31,629 | 32,222 | ||||||||||||||||||
Other debt securities |
- | - | 495 | 502 | 1,496 | 1,437 | ||||||||||||||||||
Total |
$ - | $ - | $ 40,395 | $ 41,782 | $ 53,714 | $54,537 | ||||||||||||||||||
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 Corporations 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.
14
Table of Contents
Consolidated Average Balance Sheet with Related Interest and Rates
2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
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 |
$ | 29,493 | $ | 42 | .14 | % | $ | 34,625 | $ | 54 | .16 | % | $ | 10,647 | $ | 217 | 2.04 | % | ||||||||||||||||||
Interest-bearing deposits with banks1 |
1,539 | 29 | 1.88 | 1,494 | 50 | 3.33 | 1,008 | 24 | 2.41 | |||||||||||||||||||||||||||
Investment
securities2: |
||||||||||||||||||||||||||||||||||||
Taxable |
122,985 | 5,269 | 4.28 | 139,984 | 6,668 | 4.76 | 145,963 | 7,404 | 5.07 | |||||||||||||||||||||||||||
Tax-exempt |
18,824 | 1,130 | 6.01 | 31,457 | 1,903 | 6.05 | 32,123 | 1,955 | 6.08 | |||||||||||||||||||||||||||
Total investment securities |
141,809 | 6,399 | 4.51 | 171,441 | 8,571 | 5.00 | 178,086 | 9,359 | 5.25 | |||||||||||||||||||||||||||
Loans 3, 4,6 |
||||||||||||||||||||||||||||||||||||
Commercial |
49,180 | 2,607 | 5.30 | 53,198 | 3,094 | 5.82 | 44,929 | 2,832 | 6.28 | |||||||||||||||||||||||||||
Real estate |
211,123 | 11,457 | 5.42 | 223,992 | 12,960 | 5.79 | 206,289 | 14,026 | 6.80 | |||||||||||||||||||||||||||
Installment |
1,425 | 84 | 5.90 | 1,463 | 92 | 6.29 | 1,434 | 109 | 7.57 | |||||||||||||||||||||||||||
Total loans |
261,728 | 14,148 | 5.41 | 278,653 | 16,146 | 5.79 | 252,652 | 16,967 | 6.71 | |||||||||||||||||||||||||||
Total interest earning assets |
434,569 | 20,618 | 4.74 | 486,213 | 24,821 | 5.10 | 442,393 | 26,567 | 6.00 | |||||||||||||||||||||||||||
Noninterest earning assets: |
||||||||||||||||||||||||||||||||||||
Cash and due from banks |
8,129 | 8,147 | 8,605 | |||||||||||||||||||||||||||||||||
Net unrealized gain (loss) on investment
securities available for sale |
2,864 | (1,681 | ) | (2,850 | ) | |||||||||||||||||||||||||||||||
Allowance for loan losses |
(8,607) | (4,717 | ) | (3,231 | ) | |||||||||||||||||||||||||||||||
Other assets |
20,628 | 21,700 | 16,708 | |||||||||||||||||||||||||||||||||
Total noninterest earning assets |
23,014 | 23,449 | 19,232 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 457,584 | $ | 509,662 | $ | 461,625 | ||||||||||||||||||||||||||||||
Liabilities and stockholders equity |
||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
$60,546 | $ | 286 | .47 | $53,321 | $ | 393 | .74 | $46,320 | $ | 456 | .99 | ||||||||||||||||||||||||
Money market deposits |
65,639 | 584 | .89 | 107,336 | 1,092 | 1.02 | 98,804 | 2,107 | 2.13 | |||||||||||||||||||||||||||
Savings deposits |
24,166 | 124 | .51 | 24,859 | 128 | .52 | 26,608 | 138 | .52 | |||||||||||||||||||||||||||
Time deposits |
187,450 | 4,721 | 2.52 | 197,211 | 6,057 | 3.07 | 177,503 | 7,005 | 3.95 | |||||||||||||||||||||||||||
Total interest bearing deposits |
337,801 | 5,715 | 1.69 | 382,727 | 7,670 | 2.00 | 349,235 | 9,706 | 2.78 | |||||||||||||||||||||||||||
Short-term borrowings |
89 | 1 | .52 | 606 | 3 | .50 | 2,751 | 59 | 2.17 | |||||||||||||||||||||||||||
Long-term debt |
46,901 | 1,691 | 3.61 | 50,074 | 1,822 | 3.64 | 38,299 | 1,544 | 4.03 | |||||||||||||||||||||||||||
Total interest bearing liabilities |
384,791 | 7,407 | 1.93 | 433,407 | 9,495 | 2.19 | 390,285 | 11,309 | 2.90 | |||||||||||||||||||||||||||
Noninterest bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
35,033 | 34,509 | 38,149 | |||||||||||||||||||||||||||||||||
Other liabilities |
6,382 | 6,898 | 5,082 | |||||||||||||||||||||||||||||||||
Total noninterest bearing liabilities |
41,415 | 41,407 | 43,231 | |||||||||||||||||||||||||||||||||
Stockholders equity |
31,378 | 34,848 | 28,109 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 457,584 | $ | 509,662 | $ | 461,625 | ||||||||||||||||||||||||||||||
Net interest income (tax equivalent basis) |
13,211 | 2.81 | 15,326 | 2.91 | 15,258 | 3.10 | ||||||||||||||||||||||||||||||
Tax
equivalent basis adjustment 5 |
(384 | ) | (647 | ) | (665 | ) | ||||||||||||||||||||||||||||||
Net interest income7 |
$ | 12,827 | $ | 14,679 | $ | 14,593 | ||||||||||||||||||||||||||||||
Average rate paid to fund interest earning
Assets |
1.70 | 1.95 | 2.56 | |||||||||||||||||||||||||||||||||
Net interest income as a percentage of
interest earning assets (tax equivalent
basis) |
3.04 | % | 3.15 | % | 3.44 | % | ||||||||||||||||||||||||||||||
1 | Includes $24,000 in 2010, $42,000 in 2009 and $- in 2008, representing income received under
the U.S. Treasury Departments 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 $ $213,000 $421,000 and $413,000 in 2010, 2009 and 2008 respectively. |
|
5 | The tax equivalent adjustment was computed assuming a 34% statutory federal income tax rate in
2010, 2009 and 2008. |
|
6 | Includes $321,000 in 2010, $387,000 in 2009 and $421,000 in 2008 representing income received
under the U.S. Treasury Departments Bank Enterprise Award loan program. |
|
7 | The total yield enhancements on the interest bearing deposits with banks and loans increased
net interest income by eight basis points in 2010 and nine basis points in 2009 and 2008,
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.
15
Table of Contents
2010 Net Interest Income Increase | 2009 Net Interest Income Increase | |||||||||||||||||||||||
(Decrease) from 2009 due to: | (Decrease) from 2008 due to: | |||||||||||||||||||||||
In thousands | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest income |
||||||||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Commercial |
$ | ( 233 | ) | $ | ( 254 | ) | $ | (487 | ) | $ | 519 | $ | ( 257 | ) | $ | 262 | ||||||||
Real estate |
( 745 | ) | ( 758 | ) | (1,503 | ) | 1,204 | (2,270 | ) | (1,066 | ) | |||||||||||||
Installment |
(2 | ) | ( 6 | ) | ( 8 | ) | (1 | ) | ( 16 | ) | ( 17 | ) | ||||||||||||
Total loans |
( 980 | ) | (1,018 | ) | (1,998 | ) | 1,722 | (2,543 | ) | ( 821 | ) | |||||||||||||
Taxable investment securities |
( 809 | ) | ( 590 | ) | (1,399 | ) | ( 303 | ) | ( 433 | ) | ( 736 | ) | ||||||||||||
Tax-exempt investment securities |
( 764 | ) | ( 9 | ) | ( 773 | ) | ( 40 | ) | ( 12 | ) | ( 52 | ) | ||||||||||||
Federal funds sold and securities
purchased under agreements to resell |
( 8 | ) | ( 4 | ) | ( 12 | ) | 489 | ( 652 | ) | ( 163 | ) | |||||||||||||
Interest-bearing deposits with banks |
2 | ( 23 | ) | ( 21 | ) | 12 | 14 | 26 | ||||||||||||||||
Total interest income |
(2,559 | ) | (1,644 | ) | (4,203 | ) | 1,880 | (3,626 | ) | (1,746 | ) | |||||||||||||
Interest expense |
||||||||||||||||||||||||
Demand deposits |
( 53 | ) | 160 | 107 | ( 69 | ) | 132 | 63 | ||||||||||||||||
Savings deposits |
4 | - | 4 | 9 | 1 | 10 | ||||||||||||||||||
Money market deposits |
425 | 83 | 508 | ( 182 | ) | 1,197 | 1,015 | |||||||||||||||||
Time deposits |
300 | 1,036 | 1,336 | ( 778 | ) | 1,726 | 948 | |||||||||||||||||
Short-term borrowings |
2 | - | 2 | 46 | 10 | 56 | ||||||||||||||||||
Long-term debt |
115 | 16 | 131 | ( 475 | ) | 197 | (278 | ) | ||||||||||||||||
Total interest expense |
793 | 1,295 | 2,088 | (1,449 | ) | 3,263 | 1,814 | |||||||||||||||||
Net interest income |
$ | (1,766 | ) | $ | (349 | ) | $(2,115 | ) | $ | 431 | $ | ( 363 | ) | $ | 68 | |||||||||
Loans
Loans declined to $245 million at December 31, 2010 from $276.2 million at December 31, 2009, while
average loans in 2010 decreased to $261.7 million from $278.7 in 2009. The decline resulted
primarily from paydowns and principal payments, along with charge-offs totaling $7.5 million. The
Bank is presently originating very few loans, which are primarily to existing customers.
Additionally, the Bank closed its residential lending department and expects to originate few
loans, if any, for the foreseeable future.
At December 31, 2010, 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 Banks nonperforming loans. Loans to
churches totaled $62.8 million at December 31, 2010,
representing 25.6% of total loans outstanding,
all of which were secured by real estate, compared to $72.1 million and 26.1% at December 31, 2009.
Participations with the third-party lender totaled $17.6 million, of which $13.1 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.
There were no loans held for sale at December 31, 2010 compared to $190,000 at December 31, nor
where any such loans originated during 2010 compared to $31,000 in 2009 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
Banks lending portfolio. Consumer loans, including automobile
loans, also comprise a relatively
small part of the portfolio. Most of the Banks 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. 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, 2010 is presented below.
Due from | ||||||||||||||||
One Year | ||||||||||||||||
Due in One | Through | Due After | ||||||||||||||
In thousands | Year or Less | Five Years | Five Years | Total | ||||||||||||
Commercial |
$ | 8,399 | $ | 18,703 | $ | 11,053 | $ | 38,155 | ||||||||
Real estate: |
||||||||||||||||
Construction |
27,195 | 508 | - | 27,703 | ||||||||||||
Mortgage |
14,190 | 22,874 | 141,315 | 178,379 | ||||||||||||
Installment |
382 | 272 | 64 | 718 | ||||||||||||
Total |
$ | 50,166 | $ | 42,357 | $ | 152,432 | $ | 244,955 | ||||||||
Loans at fixed
interest rates |
$ 8,463 | $ | 30,623 | $ | 24,364 | $ | 63,450 | |||||||||
Loans at variable
interest rates |
41,703 | 11,734 | 128,068 | 181,505 | ||||||||||||
Total |
$ | 50,166 | $ | 42,357 | $ | 152,432 | $ | 244,955 | ||||||||
The Bank currently has $50.2 million in loans scheduled to mature in 2011, which includes
$35.9 million in loans that are on nonaccrual status at December 31, 2010. 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..
16
Table of Contents
The following table reflects the composition of the loan portfolio for the five years ended
December 31:
In thousands | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Commercial |
$ | 38,225 | $ | 53,820 | $ | 44,366 | $ | 44,504 | $ | 32,572 | ||||||||||
Real estate |
206,072 | 221,601 | 226,546 | 187,447 | 165,828 | |||||||||||||||
Installment |
718 | 926 | 1,153 | 1,061 | 1,176 | |||||||||||||||
Total loans |
245,015 | 276,347 | 272,065 | 233,012 | 199,576 | |||||||||||||||
Less: Unearned income |
60 | 105 | 159 | 188 | 292 | |||||||||||||||
Loans |
$ | 244,955 | $ | 276,242 | $ | 271,906 | $ | 232,824 | $ | 199,284 | ||||||||||
Summary of loan loss experience
Changes in the allowance for loan losses are summarized below.
Dollars in thousands | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Balance, January 1 |
$8,650 | $3,800 | $3,000 | $2,400 | $2,165 | |||||||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial loans |
2,676 | 1,703 | 651 | 118 | 108 | |||||||||||||||
Real estate loans |
4,836 | 1,537 | 118 | 22 | 2 | |||||||||||||||
Installment loans |
48 | 30 | 23 | 66 | 39 | |||||||||||||||
Total |
7,560 | 3,270 | 792 | 206 | 149 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial loans |
46 | - | 5 | 2 | 87 | |||||||||||||||
Real estate loans |
- | 15 | - | 2 | - | |||||||||||||||
Installment loans |
3 | - | 1 | 30 | 18 | |||||||||||||||
Total |
49 | 15 | 6 | 34 | 105 | |||||||||||||||
Net (charge-offs) recoveries |
(7,511 | ) | (3,255 | ) | (786 | ) | (172 | ) | (44 | ) | ||||||||||
Provision for loan
losses charged to operations |
9,487 | 8,105 | 1,586 | 772 | 279 | |||||||||||||||
Balance, December 31 |
$10,626 | $8,650 | $3,800 | $3,000 | $2,400 | |||||||||||||||
Net charge-offs as a
percentage of average loans |
2.87 | % | 1.17 | % | .31 | % | .08 | % | .03 | % | ||||||||||
Allowance for loan losses as a
percentage of loans |
4.34 | 3.13 | 1.40 | 1.29 | 1.20 | |||||||||||||||
Allowance for loan losses as a
percentage of nonperforming loans |
27.77 | 48.35 | 44.13 | 37.67 | 40.45 | |||||||||||||||
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 managements 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 changes.
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 obligors 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 borrowers ability to
repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic
conditions affecting the borrowers 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 loans 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 loans 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 Banks loss experience and may be adjusted for significant changes in the current loan
portfolio quality that, in managements judgment, affect the collectability of the portfolio as of
the evaluation date.
The allowance contains reserves identified as unallocated to cover inherent losses in the loan
portfolio which have not been otherwise reviewed or measured on an individual basis. Such reserves
include managements evaluation of the regional economy, loan portfolio volumes, the composition
and concentrations of credit, credit quality and delinquency trends. These reserves reflect
managements 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.
On a quarterly basis, management performs an evaluation of the methodology in calculating the
allowance, resulting in revisions to the loss factors for various types of loans.
17
Table of Contents
The allowance represented 4.34% of total loans at December 31, 2010 compared to 3.13% at December
31, 2009, while the allowance represented 27.77% of total nonperforming loans at December 31, 2010
compared to 48.35% at the end of 2009 due to the substantial increase in nonperforming loans. The
allowance at September 30, 2010 rose to $9.3 million from $8.7 million at December 31, 2009 due to
higher allowance requirements to cover charge-offs and the continued deterioration in the
portfolio.
The allowance represented 4.34% of total loans at December 31, 2010 and 3.13% at December 31,
2009, while the allowance
represented 27.77% of total nonperforming loans at December 31, 2010
compared to 48.35% for the prior year. The allowance at the end of 2010 rose to $10.6 million
from $8.6 million a year earlier due to an increase in the provision for loan losses resulting
primarily to an increase in nonperforming commercial mortgage loans, the continued deterioration
in loan quality and an increase in loss factors.
Allocation of the allowance for loan losses
The allowance for loan losses has been allocated based on managements estimates of the risk
elements within the loan categories set forth below at December 31.
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||||||||||||||||||||||||
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 |
$ | 2,769 | 15.70 | % | $ | 1,352 | 15.60 | % | $ | 1,102 | 15.22 | % | $1,098 | 19.11 | % | $ | 730 | 16.32 | % | ||||||||||||||||||||||
Real estate |
7,297 | 84.01 | 7,095 | 84.11 | 2,306 | 84.00 | 1,709 | 80.43 | 1,427 | 83.09 | |||||||||||||||||||||||||||||||
Installment |
57 | .29 | 19 | .29 | 6 | .78 | 91 | .46 | 21 | .49 | |||||||||||||||||||||||||||||||
Unallocated |
503 | - | 184 | - | 386 | - | 102 | - | 222 | - | |||||||||||||||||||||||||||||||
Total |
$ | 10,626 | 100.00 | % | $ | 8,650 | 100.00 | % | $ | 3,800 | 100.00 | % | $3,000 | 100.00 | % | $ | 2,400 | 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. 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. 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 | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Loans past due 90 days or more and
still accruing: |
||||||||||||||||||||
Commercial |
$ | 1,415 | $ | 555 | $ | - | $ | 43 | $ | - | ||||||||||
Real estate |
928 | 1,012 | 376 | 377 | 1,254 | |||||||||||||||
Installment |
- | - | 8 | 18 | 5 | |||||||||||||||
Loans past due 90 days or more and
still accruing |
2,343 | 1,567 | 384 | 438 | 1,259 | |||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||
Commercial |
1,436 | 1,237 | 1,864 | 1,996 | 797 | |||||||||||||||
Real estate |
34,480 | 15,080 | 6,356 | 5,485 | 3,899 | |||||||||||||||
Installment |
- | 6 | 7 | 45 | 38 | |||||||||||||||
Total nonaccrual loans |
35,916 | 16,323 | 8,227 | 7,526 | 4,734 | |||||||||||||||
Total nonperforming loans |
38,259 | 17,890 | 8,611 | 7,964 | 5,993 | |||||||||||||||
Other real estate owned |
1,997 | 2,352 | 1,547 | - | - | |||||||||||||||
Total |
$ | 40,256 | $ | 20,242 | $ | 10,158 | $ | 7,964 | $ | 5,993 | ||||||||||
Nonperforming assets rose to $40.3 million at the end of 2010 due primarily to higher
levels of nonaccruing commercial real estate loans. The commercial real estate portfolio
continues to be stressed by the effects of the economic recession in the Banks trade area, which
has been affected later than the rest of the country and is expected to recover later as well.
The deterioration in credit quality in the overall portfolio since the end of 2009 has occurred
primarily in two segments of the loan portfolio, comprised of loans acquired from a third-party
non-bank lender located in New York City and loans made to churches. Both categories are
considered commercial real estate loans.
Included in the portfolio are loans to churches totaling $62.8 million and loans acquired from the
third-party lender totaling $17.6 million. Nonaccrual loans includes $10.1 million of loans to
religious organizations, which management believes have been impacted by reductions in tithes and
collections from congregation members due to the weak economy, and
$12.3 million of loans acquired
from the third-party non-bank lender. Church loans located in the State of New York may require
significantly longer collection periods because approval is required by the State of New York
before the underlying property may be encumbered. Nonaccrual loans to churches located in New York
totaled $243,000 at December 31, 2010.
Impaired loans totaled $34.8 million at December 31, 2010, up from $11.1 million at December 31,
2009. The related allocation of the allowance for loan losses amounted to $1.5 million due to a
shortfall in collateral values. Impaired loans totaling $30.2 million had no specific reserves at
December 31, 2010 due to the net realizable value of the underlying collateral exceeding the
carrying value of the loan. Impaired loan charge-offs totaled $4.2 million during 2010.
Included in impaired loans are loans to churches totaling $4.6 million with a related allowance of
$-. Additionally, impaired loans
18
Table of Contents
includes $13.1 million of construction loan participations acquired from the third-party lender
with a related allowance of $1.1 million
Troubled debt restructured loans (TDRs) totaled $2.9 million, with no related allowance at
December 31, 2010 and included four borrowers. TDRs to one borrower amounting to $869,000 are
accruing. The remainder are on nonaccrual status due to delinquent payments. All TDRs are
included in the balance of impaired loans.
The average balance of impaired loans in 2010 was $24.2 million, compared to $8.5 million in 2009.
All of the impaired loans are secured by commercial real estate properties.
Other assets
Other assets rose $1 million at the end of 2010 compared to a year earlier, with the increase
resulting primarily from higher prepaid expenses.
Other real estate owned
Other real estate owned (OREO) was lower due to the disposition of foreclosed properties,
although balances are expected to rise substantially as nonaccrual loans move through the
foreclosure process.
Deposits
The Banks deposit levels may change significantly on a daily basis because deposit accounts
maintained by municipalities represent a significant part of the Banks deposits and are more
volatile than commercial or retail deposits.
These municipal and U.S. Government accounts represent a substantial part of the Banks business,
tend to have high balance relationships and comprised most of the Banks accounts with balances of
$250,000 or more at December 31, 2010 and 2009. 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. Prior to 2010, we also held short-term municipal investment time deposits but no longer
offer such accounts.
While the collateral maintenance requirements associated with the Banks 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 $338.6 million at December 31, 2010 from $380.3 million a year earlier,
while average deposits decreased to $372.8 million in 2010 from $417.2 million in 2009. Both
reductions resulted from the deleveraging program, with the most significant decline occurring in
municipal time deposits. Brokered deposits declined slightly, from $52.2 million at the end of
2009 to $49.7 million a year later. Brokered deposit levels are expected to decline during 2011
due to maturity runoff, as the Bank is precluded from issuing such deposits under the Consent
Order. We closed two branches during 2010 resulting in a minimal deposit loss as the deposits
were rolled into other existing branches.
Passbook and statement savings deposits totaled $23 million at December 31, 2010 compared to $24.7
million a year earlier, while such savings accounts averaged $24.2 million in 2010 compared to
$24.9 million in 2009. The declines resulted primarily from closings of decedents accounts.
Money market deposit accounts declined to $61.9 million at December 31, 2010 from $73.3 million a
year earlier, while average money market deposits decreased to $65.6 million in 2010 from $107.3
million in 2009.
Interest-bearing demand deposit account balances fell to $45.7 million at the end of 2010 compared
to $51.8 million at year-end 2009, while the related average balance of $60.5 million was slightly
lower in 2010 than the average of $53.3 million in 2009.
Time deposits declined to $172.8 million at December 31, 2010 from $201.1 million at the end of
2009, while average time deposits were $187.4 million in 2010, compared to an average of $197.2
million in 2009.
Short-term borrowings
There were no short-term borrowings at December 31, 2010 compared to $100,000 at December 31,
2009, while average short-term borrowings of $88,000 in 2010 were significantly lower than the
2009 average of $606,000. Both declines were due to higher balance sheet liquidity throughout the
year, precluding the need for short-term borrowings.
Long-term debt
Long-term debt decreased to $19.2 million at December 31, 2010 from $44 million a year earlier,
while the related average balance was $46.9 million in 2010 compared to $50.1 million in 2009.
The decline resulted from a prepayment of $26.5 million of Federal Home Loan Bank advances in
December, 2010 in conjunction with a deleveraging program.
Results of operations 2010 compared with 2009
The Corporation recorded a net loss of $7.5 million in 2010 compared to a loss of $7.8 million a
year earlier, due primarily to a lack of OTTI losses in 2010, higher award income and increased
gains on sales of investment securities, offset in part by a higher loan loss provision and
increased credit costs and expenses incurred to remediate the Consent Order.
Included in both years earnings were awards received from the CDFI Fund. The awards were based
on the Banks lending efforts in qualifying lower income communities. Award income attributable
to its lending efforts and recorded as yield enhancements totaled $321,000 in 2010, $386,000 in
2009 and $421,000 in 2008 in addition to $1 million of such income included in Other income that
was not considered a yield enhancement. The Bank also recorded award income related to time
deposits made in other CDFIs of $24,000 in 2010, $42,000 in 2009 and $- in 2008.
Finally, the Bank recorded award income of $71,000 in 2009 and, $18,000 in 2008 as a recovery of
approved information technology-related costs. No such income was recorded in 2010.
In total, $1.6 million of award income was recorded in 2010, while $499,000 was recorded in 2009
and $439,000 was recorded in 2008.
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: 2010 - $1.6 million, 2009 - $700,000, 2008
- $1.2 million, 2007 - $542,000 and 2006 -
$340,000. The Corporation expects to continue to apply for these awards.
On a fully taxable equivalent (FTE) basis, net interest income of $13.2 million in 2010 declined
from $15.3 million in 2009, while the related net interest margin declined eleven basis points,
from 3.15% to 3.04%.
The reduced net interest margin occurred due largely to lost earnings on nonaccrual loans and to
the average rate earned on
19
Table of Contents
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.
Interest income on a FTE basis declined from $24.8 million in 2009 to $20.6 million in 2010 due
both to a reduction in the average rate earned and a decline in earning asset levels. The yield on
interest earning assets fell 36 basis points, from 5.10% to 4.74%. Average balance reductions
occurred in almost all earning asset categories and rates declined in all asset categories.
Interest income from Federal funds sold was lower in 2010 primarily due to a decline in volume.
The low yield resulted from the Federal Reserve Banks Federal Open Market Committees ongoing
decision to leave the Federal funds target rate at a range of 0% to .25%.
Interest income on taxable investment securities decreased in 2010 due to a lower average rate,
which declined from 4.76% to 4.28%, as well as a lower average balance. Tax-exempt investment
income declined substantially due primarily to a sale of tax-exempt securities that were no longer
needed because of net operating losses.
Interest income on loans declined due to a lower average rate earned, which decreased from 5.79% to
5.41% and reduced loan volume. The lower yield was caused by the low interest rate environment
along with the foregone income from nonaccrual loans.
Interest expense declined in 2010, as the average rate paid to fund interest-earning assets
decreased from 1.95% to 1.70%. This decline was due to the lower rates paid on all
interest-bearing liabilities. The most significant reduction occurred in interest expense on time
deposits, which declined 22.1% in 2010. Almost all interest-bearing liabilities had volume
reductions,
Service charges on deposit accounts declined 10.6% in 2010 from 2009 due primarily to a reduction
in overdraft fees resulting largely from federal opt-out rules implemented in 2010.
Agency fees declined in 2010 as they have done in recent years due to elimination by large
companies of the programs that generate this source of income.
Other income was up in 2010 due to a $1 million CDFI Fund award recorded that was not considered a
yield enhancement because the related loans were sold. This increase was offset in part by lower
income from off-site ATMs due to the elimination of several of such ATMs.
Other operating expenses, which include expenses other than interest, income taxes and the
provision for loan losses, totaled $16.1 million in 2010, a 20% increase compared to $13.4 million
in 2009, driven primarily by higher management consulting fees, a $694,000 prepayment penalty on
the prepayment of Federal Home Loan Bank advances and $696,000 of charges related to the closing
of two branch offices, including the charge-off of $468,000 of core deposit intangible.
Salaries and other employee benefits expense was essentially unchanged in 2010 although head count
declined from 103 full-time equivalent employees at the end of 2009 to 89 a year later due to
branch closings. These reductions were partially offset by higher health insurance costs.
Occupancy expense rose 23.8% in 2010 due to increased rent expense on leased branches that were
closed prior to lease expiration and higher property taxes, while equipment expense declined due
to the elimination of several service contracts.
Management consulting fees rose 100.1% in 2010 due to the retention of consultants to assist in
complying with the terms of the Consent Order, along with the outsourcing of the internal audit
and compliance functions.
OREO expense declined due to lower foreclosed property writedowns in 2010. Amortization expense
was higher due to the aforementioned branch closing charge and the Federal Home Loan Bank
prepayment penalty resulted from the early advance payoffs.
Other expenses were up 21.4% in 2010 due primarily to higher appraisal fees and personnel agency
costs.
Income tax expense in 2010 was limited to state tax expense as federal income tax benefits were
restricted by valuation allowances, which rose to $8.8 million at December 31, 2010 compared to
$4.7 million at the end of 2009. These deferred benefits will not be recovered until the
Corporation can demonstrate the ability to generate future taxable income.
Liquidity
The liquidity position of the Corporation is dependent on the successful management of its assets
and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs
arise primarily to accommodate possible deposit outflows and to meet borrowers requests for loans.
Such needs can be satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
Continued asset quality deterioration and operating losses could create significant stress on
sources of liquidity, including limiting access to funding sources and requiring higher discounts
on collateral used for borrowings. Accordingly, the Corporation has implemented a contingency
funding plan, currently in use, which provides detailed procedures to be instituted in the event of
a liquidity crisis.
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 (FHLB), 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 Banks deposit base is from municipal deposits, which comprised $105.8
million, or 31.2% of total deposits at December 31, 2010, compared to $140.2 million, or 36.9% of
total deposits at December 31, 2009. These relationships arise due to the Banks urban market,
leading to municipal deposit relationships. $42.5 million of investment securities were pledged as
collateral for these deposits along with $36.7 million in Federal Home Loan Bank letters of
credit, all of which require collateralization. As a result of the large size of these individual
deposit relationships, these municipalities represent a volatile source of liquidity.
Illiquidity in certain segments of the investment portfolio may limit the Corporations 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
20
Table of Contents
deposits. In certain instances, however, these lines may be reduced or not available in the event
of a significant decline in the Banks credit quality or capital levels.
As a result of the loss incurred, there were no significant sources of funds during 2010 from
operating activities.
Net cash provided by investing activities during 2010 was derived primarily from proceeds from
sales of investment securities available for sale, amounting to $70.7, while the primary uses of
cash were for purchases of investment securities available for sale, which amounted to $56.5
million, largely with the proceeds from the aforementioned sale.
There were no significant sources of cash provided by financing activities, while the most
significant uses of funds was an outflow of $42 million of deposits and a prepayment of $26.5
million of Federal Home Loan Bank advances, both resulting from the deleveraging program.
As a result of the aforementioned Consent Order, 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 5,6,10,11 and 12 of the
Notes to Consolidated Financial Statements.
The Corporation also will have future obligations under supplemental executive and directors
retirement plans described in Note 15 of the Notes to Consolidated Financial Statements.
Commitments, contingent liabilities, and off-balance sheet arrangements
The following table shows the amounts and expected maturities of significant commitments as of
December 31, 2010. Further information on these commitments is included in Note 22 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 |
$ | 3,986 | $ | - | $ | - | $ | 3,986 | ||||||||
Commercial mortgages |
22,577 | - | - | 22,577 | ||||||||||||
Credit cards |
- | - | 1,026 | 1,026 | ||||||||||||
Residential
mortgages |
- | - | - | - | ||||||||||||
Home equity
and other revolving lines of credit |
509 | - | - | 509 | ||||||||||||
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 CNBs historical experience.
Effects of inflation
Inflation, as measured by the consumer price index (CPI), including all items for all urban
consumers, rose 1.5% in 2010 compared to 2.7% in 2009 and 3.8% in 2009.
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 Corporations 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 Corporations 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 as well as to monitor liquidity.
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 managements
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 Corporations mix of interest sensitive assets and liabilities.
The following table presents the Corporations 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.
21
Table of Contents
Interest Sensitivity Gap Analysis
December 31, 2010 | ||||||||||||||||||||
One Year | One Year | Three Years | More than | |||||||||||||||||
to | to | |||||||||||||||||||
In thousands | Or Less | Three Years | Five Years | Five Years | Total | |||||||||||||||
Interest earning assets: |
||||||||||||||||||||
Federal funds sold and securities
purchased under agreements
to resell |
$ | 13,550 | $ | - | $ | - | $ | - | $ | 13,550 | ||||||||||
Interest-bearing deposits with
banks |
2,689 | 600 | - | 3,289 | ||||||||||||||||
Investment securities |
24,641 | 19,353 | 14,721 | 46,705 | 105,420 | |||||||||||||||
Loans |
111,943 | 74,845 | 35,696 | 22,471 | 244,955 | |||||||||||||||
152,823 | 94,798 | 50,417 | 69,176 | 367,214 | ||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Savings |
130,663 | - | - | 130,663 | ||||||||||||||||
Time |
102,387 | 41,576 | 26,331 | 2,462 | 172,756 | |||||||||||||||
Short-term borrowings |
- | - | - | - | - | |||||||||||||||
Long-term debt |
- | - | - | 19,200 | 19,200 | |||||||||||||||
233,050 | 41,576 | 26,331 | 21,662 | 322,619 | ||||||||||||||||
Interest sensitivity gap: |
||||||||||||||||||||
Period gap |
$ | ( 80,227) | $53,222 | $ | 24,086 | $ | 47,514 | $ | 44,595 | |||||||||||
Cumulative gap |
( 80,227) | (27,005 | ) | ( 2,919 | ) | 44,595 | - | |||||||||||||
The cumulative gap between the Corporations interest rate sensitive assets and its
interest sensitive liabilities was $44.6 million at December 31, 2010 compared to $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. Additionally, interest
sensitive assets and liabilities reprice at different speeds than yield curve changes. Based on
the above model, which reflects a static interest rate environment and does not take into
consideration that repricing may occur at different speeds, 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 Corporations 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, 2010, the most recently prepared model indicates that net interest income would
decline 3.39% from base case scenario if interest rates rise 200
basis points and decline 13.49% if
rates decrease 200 basis points. Additionally, the economic value of equity would decrease 24.04%
if rates rise 200 basis points and decrease 12.31% 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.
22
Table of Contents
Consolidated | Bank Only | |||||||||||||||
December 31, | December 31, | |||||||||||||||
Dollars in thousands | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Total stockholders equity |
$ | 22,896 | $ | 31,013 | $ | 31,798 | $ | 35,539 | ||||||||
Net unrealized loss (gain)
on investment securities
available for sale |
126 | ( 533) | 126 | ( 533 | ) | |||||||||||
Net unrealized loss on
equity securities available
for sale |
( 13) | ( 11) | ( 13) | ( 11 | ) | |||||||||||
Disallowed intangibles |
( 136) | ( 744) | (136) | (744 | ) | |||||||||||
Disallowed deferred tax
assets |
- | - | - | - | ||||||||||||
Qualifying trust preferred
securities |
4,000 | 4,000 | - | - | ||||||||||||
Tier 1 capital |
26,873 | 33,725 | 31,775 | 34,251 | ||||||||||||
Qualifying long-term debt |
5,200 | 5,200 | - | 5,000 | ||||||||||||
Allowance for loan
losses |
3,555 | 4,013 | 3,552 | 4,011 | ||||||||||||
Other |
80 | 80 | 80 | 80 | ||||||||||||
Tier 2 capital |
8,835 | 9,293 | 3,632 | 9,091 | ||||||||||||
Total capital |
$ | 35,708 | $ | 43,018 | $ | 35,407 | $ | 43,342 | ||||||||
Risk-weighted assets |
$ | 283,701 | $ | 322,838 | $ | 283,487 | $ | 322,606 | ||||||||
Average total assets |
426,797 | 484,362 | 426,569 | 484,107 | ||||||||||||
Risk-based capital ratios: |
||||||||||||||||
Tier 1 capital to risk-adjusted assets
Actual |
9.47% | 10.45% | 11.21% | 10.62% | ||||||||||||
Minimum considered to
be well-capitalized |
6.00 | 6.00 | 6.00 | 6.00 | ||||||||||||
Minimum considered to
be well-capitalized
under OCC
requirements |
N/A | N/A | 10.00 | 10.00 | ||||||||||||
Total capital to risk-adjusted assets
Actual |
12.59 | 13.32 | 12.49 | 13.43 | ||||||||||||
Minimum considered to
be well-capitalized |
10.00 | 10.00 | 10.00 | 10.00 | ||||||||||||
Minimum considered to
be well-capitalized
under OCC
requirements |
N/A | N/A | 12.00 | 12.00 | ||||||||||||
Leverage ratio |
||||||||||||||||
Actual |
6.30 | 6.96 | 7.45 | 7.08 | ||||||||||||
Minimum considered to
be well-capitalized |
5.00 | 5.00 | 5.00 | 5.00 | ||||||||||||
Minimum considered to
be well-capitalized
under OCC
requirements |
N/A | N/A | 8.00 | 8.00 | ||||||||||||
Capital ratios for the parent holding company were lower at December 31, 2010 due to
continued losses incurred by the subsidiary bank, while Bank ratios generally rose due to the $5
million subordinated note from the holding company to the Bank that was converted to common equity
in November 2010.
The Bank was subject to the Formal Agreement with the OCC which required, among other things,
the enhancement and implementation of certain programs to reduce the Banks credit risk, along with
the development of a capital and profit plan, the development of a contingency funding plan and the
correction of deficiencies in the Banks loan administration. The Bank failed to comply with
certain provisions of the Formal Agreement; and failed to comply with the higher leverage ratio of
8% required to be maintained.
Due to the Banks condition, the OCC has required that the Bank enter into the Consent Order of
December 22, 2010 with the OCC, which contains a list of requirements. The Order supersedes and
replaces the Formal Agreement. The Consent Order is summarized in Item 1. The Consent Order among
other things requires that by March 31, 2011, and thereafter, the Bank must maintain total capital
at least equal to 13% of risk-weighted assets and Tier 1 capital at
least equal to 9% of adjusted
total assets. This requirement means that the Bank is not considered well-capitalized as
otherwise defined in applicable regulations.
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 CDFI Fund. The awards were based
on the Banks 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 CDFIs 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 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.
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 Banks Federal Open Market Committees 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 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
23
Table of Contents
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.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Information regarding this Item appears under Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations - Interest Rate Sensitivity.
24
Table of Contents
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
December 31, | ||||||||
Dollars in thousands, except per share data | 2010 | 2009 | ||||||
Assets |
||||||||
Cash and due from banks (Note 3) |
$ | 7,228 | $ | 6,808 | ||||
Federal funds sold (Note 4) |
13,550 | 5,500 | ||||||
Interest-bearing deposits with banks |
3,289 | 609 | ||||||
Investment securities available for sale (Note 5) |
105,420 | 122,006 | ||||||
Investment securities held to maturity (Market value of
$41,782 at December 31, 2009) (Note 6) |
- | 40,395 | ||||||
Loans held for sale |
- | 190 | ||||||
Loans (Note 7) |
244,955 | 276,242 | ||||||
Less: Allowance for loan losses (Note 8) |
10,626 | 8,650 | ||||||
Net loans |
234,329 | 267,592 | ||||||
- | - | |||||||
Premises and equipment (Note 9) |
2,974 | 2,949 | ||||||
Accrued interest receivable |
1,933 | 2,546 | ||||||
Bank-owned life insurance |
5,730 | 5,537 | ||||||
Other real estate owned |
1,997 | 2,352 | ||||||
Other assets (Notes 14 and 15) |
10,817 | 9,855 | ||||||
Total assets |
$ | 387,267 | $ | 466,339 | ||||
Liabilities and Stockholders Equity |
||||||||
Deposits: (Notes 5, 6, and 10) |
||||||||
Demand |
35,132 | $ | 29,304 | |||||
Savings |
130,663 | 149,853 | ||||||
Time |
172,756 | 201,119 | ||||||
Total deposits |
338,551 | 380,276 | ||||||
Accrued expenses and other liabilities |
6,620 | 5,950 | ||||||
Short-term portion of long-term debt (Note 12) |
5,000 | 5,000 | ||||||
Short-term borrowings (Note 11) |
- | 100 | ||||||
Long-term debt (Note 12) |
14,200 | 44,000 | ||||||
Total liabilities |
364,371 | 435,326 | ||||||
Commitments and contingencies (Note 22) |
||||||||
Stockholders equity (Notes 16, 17 and 25): |
||||||||
Preferred stock, no par value: Authorized 100,000 shares (Note 16); |
||||||||
Series A , issued and outstanding 8 shares in 2010 and 2009 |
200 | 200 | ||||||
Series C , issued and outstanding 108 shares in 2010 and 2009 |
27 | 27 | ||||||
Series D , issued and outstanding 3,280 shares in 2010 and 2009 |
820 | 820 | ||||||
Preferred stock, no par value, perpetual noncumulative: Authorized 200 shares; |
||||||||
Series E, issued and outstanding 49 shares in 2010 and 2009 |
2,450 | 2,450 | ||||||
Preferred stock, no par value, perpetual noncumulative: Authorized 7,000
shares; |
||||||||
Series F, issued and outstanding 7,000 shares in 2010 and 2009 |
6,790 | 6,790 | ||||||
Preferred stock, no par value, perpetual noncumulative: Authorized 9,439
shares; |
||||||||
Series G, issued and outstanding 9,439 shares in 2010 and 2009 |
9,990 | 9,499 | ||||||
Common stock, par value $10: Authorized 400,000 shares; |
||||||||
134,530 shares issued in 2010 and 2009 |
||||||||
131,290 shares outstanding in 2010 and 2009 |
1,345 | 1,345 | ||||||
Surplus |
1,115 | 1,115 | ||||||
Retained earnings |
514 | 8,462 | ||||||
Accumulated other comprehensive (loss ) income |
(127 | ) | 533 | |||||
Treasury stock, at cost - 3,240 common shares in 2010 and 2009 |
(228 | ) | (228 | ) | ||||
Total stockholders equity |
22,896 | 31,013 | ||||||
Total liabilities and stockholders equity |
387,267 | $ | 466,339 | |||||
See accompanying notes to consolidated financial statements.
25
Table of Contents
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Year Ended December 31, | ||||||||||||
Dollars in thousands, except per share data | 2010 | 2009 | 2008 | |||||||||
Interest income |
||||||||||||
Interest and fees on loans |
14,148 | $ | 16,146 | $ | 16,967 | |||||||
Interest on Federal funds sold |
42 | 54 | 217 | |||||||||
Interest on deposits with banks |
29 | 50 | 24 | |||||||||
Interest and dividends on investment securities: |
||||||||||||
Taxable |
5,269 | 6,668 | 7,404 | |||||||||
Tax-exempt |
746 | 1,256 | 1,290 | |||||||||
Total interest income |
20,234 | 24,174 | 25,902 | |||||||||
Interest expense |
||||||||||||
Interest on deposits (Note 10) |
5,715 | 7,670 | 9,706 | |||||||||
Interest on short-term borrowings |
1 | 3 | 59 | |||||||||
Interest on long-term debt |
1,691 | 1,822 | 1,544 | |||||||||
Total interest expense |
7,407 | 9,495 | 11,309 | |||||||||
Net interest income |
12,827 | 14,679 | 14,593 | |||||||||
Provision for loan losses (Note 8) |
9,487 | 8,105 | 1,586 | |||||||||
Net interest income after provision
for loan losses |
3,340 | 6,574 | 13,007 | |||||||||
Other operating income |
||||||||||||
Service charges on deposit accounts |
1,319 | 1,476 | 1,443 | |||||||||
ATM fees |
360 | 482 | 428 | |||||||||
Award income |
1,100 | 71 | 18 | |||||||||
Earnings from cash surrender value of bank-owned life insurance |
257 | 252 | 248 | |||||||||
Other income (Note 13) |
501 | 832 | 874 | |||||||||
Net gains (losses) on securities transactions (Notes 5 and 6) |
2,080 | 11 | (44 | ) | ||||||||
Other than temporary impairment losses on securities |
- | (19 | ) | (3,478 | ) | |||||||
Portion of loss recognized in other comprehensive income, before tax |
- | (2,314 | ) | 790 | ||||||||
Net impairment losses on securities recognized in earnings |
- | (2,333 | ) | (2,688 | ) | |||||||
Total other operating income |
5,617 | 791 | 279 | |||||||||
Other operating expenses |
||||||||||||
Salaries and other employee benefits (Note 15) |
5,822 | 5,800 | 6,205 | |||||||||
Occupancy expense (Note 9) |
1,641 | 1,326 | 1,304 | |||||||||
Equipment expense (Note 9) |
557 | 648 | 651 | |||||||||
Professional fees |
837 | 432 | 342 | |||||||||
Management consulting fees |
1,369 | 683 | 212 | |||||||||
Marketing expense |
325 | 361 | 471 | |||||||||
FDIC insurance expense |
1,095 | 1,082 | 429 | |||||||||
Data processing expense |
352 | 361 | 471 | |||||||||
Other real estate owned expense |
146 | 558 | - | |||||||||
Amortization of intangible assets |
566 | 194 | 213 | |||||||||
Federal Home Loan Bank advance prepayment penalty |
694 | - | - | |||||||||
Other expenses (Note 13) |
2,650 | 1,936 | 1,980 | |||||||||
Total other operating expenses |
16,054 | 13,381 | 12,278 | |||||||||
(Loss) income before income taxes |
(7,097 | ) | (6,016 | ) | 1,008 | |||||||
Income tax expense (benefit) (Note 14) |
360 | 1,806 | (50 | ) | ||||||||
Net (loss) income |
$ | (7,457 | ) | $ | (7,822 | ) | $ | 1,058 | ||||
Net (loss) income per common share (Note 18) |
||||||||||||
Basic |
$ | (60.54 | ) | $ | (68.36 | ) | $ | 1.87 | ||||
Diluted |
(60.54 | ) | (68.36 | ) | 1.87 | |||||||
Basic average common shares outstanding |
131,290 | 131,300 | 131,688 | |||||||||
Diluted average common shares outstanding |
131,290 | 131,300 | 131,688 | |||||||||
Cash dividends declared per common share |
$ | - | $ | 2.00 | $ | 3.60 | ||||||
See accompanying notes to consolidated financial statements.
26
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, 2008 |
$ | 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 other 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 loss |
||||||||||||||||||||||||||||
Unrealized holding gains on securities
arising during the period (net of tax of $(2,574)) |
- | - | - | - | 4,997 | - | 4,997 | |||||||||||||||||||||
Reclassification adjustment for losses
included in net income (net of tax of $485) |
- | - | - | - | (2,333 | ) | - | (2,333 | ) | |||||||||||||||||||
Total other comprehensive loss |
(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 | |||||||||||||
Net loss |
- | - | - | (7,457 | ) | - | - | (7,457 | ) | |||||||||||||||||||
Other comprehensive loss |
||||||||||||||||||||||||||||
Unrealized holding losses on securities
arising during the period (net of tax of $82) |
- | - | - | - | (177 | ) | - | (177 | ) | |||||||||||||||||||
Transfer of held to maturity securities to
available for sale at market value (net of
tax of $459) |
- | - | - | - | 890 | - | 890 | |||||||||||||||||||||
Reclassification adjustment for gains
included in net income (net of tax of $707) |
- | - | - | - | (1,373 | ) | - | (1,373 | ) | |||||||||||||||||||
Total other comprehensive loss |
(8,117 | ) | ||||||||||||||||||||||||||
Dividends accrued on preferred stock |
- | - | 491 | (491 | ) | - | - | - | ||||||||||||||||||||
Balance, December 31, 2010 |
$ | 1,345 | $ | 1,115 | $ | 20,277 | $ | 514 | $ | (127 | ) | $ | (228 | ) | $ | 22,896 | ||||||||||||
See accompanying notes to consolidated financial statements.
27
Table of Contents
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year Ended December 31, | ||||||||||||
In thousands | 2010 | 2009 | 2008 | |||||||||
Operating activities |
||||||||||||
Net (loss) income |
$ | (7,457 | ) | $ | (7,822 | ) | $ | 1,058 | ||||
Adjustments to reconcile net (loss) income to net cash from operating activities: |
||||||||||||
Depreciation and amortization |
404 | 432 | 495 | |||||||||
Provision for loan losses |
9,487 | 8,105 | 1,586 | |||||||||
Premium amortization (discount accretion) of investment securities |
211 | 17 | (65 | ) | ||||||||
Amortization of intangible assets |
566 | 194 | 213 | |||||||||
Net (gains) losses on sales and early redemptions of investment securities |
(2,080 | ) | (12 | ) | 44 | |||||||
Net impairment losses on investment securities |
- | 2,333 | 2,688 | |||||||||
Net losses (gains) on sales of loans held for sale |
(6 | ) | 10 | (18 | ) | |||||||
Net losses and writedowns of other real estate owned |
43 | 427 | - | |||||||||
Loans originated for sale |
- | (312 | ) | (1,001 | ) | |||||||
Proceeds from sales and principal payments from loans held for sale |
196 | 273 | 978 | |||||||||
Decrease (increase) in accrued interest receivable |
613 | 250 | (124 | ) | ||||||||
Deferred taxes |
845 | 2,372 | (814 | ) | ||||||||
Net increase in bank-owned life insurance |
(193 | ) | (192 | ) | (197 | ) | ||||||
Increase in other assets |
(1,935 | ) | (6,103 | ) | (625 | ) | ||||||
Increase in accrued expenses and other liabilities |
670 | 70 | 777 | |||||||||
Net cash provided by operating activities |
1,364 | 42 | 4,995 | |||||||||
Investing activities |
||||||||||||
Decrease (increase) in loans, net |
23,532 | (8,993 | ) | (41,415 | ) | |||||||
(Increase) decrease in interest bearing deposits with banks |
(2,680 | ) | 117 | (448 | ) | |||||||
Proceeds from maturities of investment securities available for
sale, including principal repayments and early redemptions |
42,300 | 27,100 | 21,774 | |||||||||
Proceeds from maturities of investment securities held to
maturity, including principal repayments and early redemptions |
1,247 | 15,574 | 10,964 | |||||||||
Proceeds from sales of investment securities available for sale |
70,718 | 189 | 5,179 | |||||||||
Purchases of investment securities available for sale |
(56,513 | ) | (22,096 | ) | (50,849 | ) | ||||||
Purchases of investment securities held to maturity |
- | (2,462 | ) | (12,274 | ) | |||||||
Purchases of bank-owned life insurance, net |
- | - | (220 | ) | ||||||||
Proceeds from sales of other real estate owned |
556 | 275 | - | |||||||||
Purchases of premises and equipment |
(429 | ) | (139 | ) | (136 | ) | ||||||
Net cash provided by (used in) investing activities |
78,731 | 9,565 | (67,425 | ) | ||||||||
Financing activities |
||||||||||||
(Decrease) increase in deposits |
(41,725 | ) | (26,841 | ) | 12,261 | |||||||
(Decrease) increase in short-term borrowings |
(100 | ) | (1,750 | ) | 700 | |||||||
(Decrease) increase in long-term debt |
(29,800 | ) | (2,600 | ) | 31,800 | |||||||
Proceeds from issuance of preferred stock |
- | 9,439 | - | |||||||||
Purchases of treasury stock |
- | (3 | ) | (51 | ) | |||||||
Dividends paid on preferred stock |
- | (1,094 | ) | (812 | ) | |||||||
Dividends paid on common stock |
- | (263 | ) | (474 | ) | |||||||
Net cash (used in) provided by financing activities |
(71,625 | ) | (23,112 | ) | 43,424 | |||||||
Net increase (decrease) in cash and cash equivalents |
8,470 | (13,505 | ) | (19,006 | ) | |||||||
Cash and cash equivalents at beginning of year |
12,308 | 25,813 | 44,819 | |||||||||
Cash and cash equivalents at end of year |
$ | 20,778 | $ | 12,308 | $ | 25,813 | ||||||
Cash paid during the year |
||||||||||||
Interest |
$ | 7,432 | $ | 9,864 | $ | 11,728 | ||||||
Income taxes |
59 | 1,279 | 1,582 | |||||||||
Non-cash transactions |
||||||||||||
Transfer of investments from held to maturity to available for sale |
39,144 | 183 | 1,500 | |||||||||
Transfer of loans to other real estate owned |
244 | 1,508 | 1,547 | |||||||||
Transfer of loans held for sale to loans |
- | 106 | - |
See accompanying notes to consolidated financial statements.
28
Table of Contents
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. Additionally, significant judgment is required to determine the future realization of
deferred tax assets and whether a valuation allowance may be required. The following is a summary
of the more significant policies and practices.
Business
City National Bancshares Corporation primarily through its subsidiary City National Bank of New
Jersey, offers a broad range of lending, leasing, depository and related financial services to
individual consumers, businesses and governmental units through eight full-service offices located
in New Jersey, 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 securitys
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, InvestmentsDebt 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 securitys 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.
The Bank transferred its entire HTM portfolio to AFS in March 2010. This transfer was made in
conjunction with a deleveraging program to reduce total asset levels and improve capital ratios.
As a result, purchases of securities may not be classified as HTM for the next two years.
29
Table of Contents
Loans held for sale
Loans held for sale include residential mortgage loans originated with the intent to sell. Loans held for sale are carried at the lower of aggregate cost or fair value.
Loans held for sale include residential mortgage loans originated with the intent to sell. Loans held for sale are carried at the lower of aggregate cost or fair value.
Loans
Loans are stated at the principal amounts outstanding, net of unearned discount and deferred loan fees. Interest income is accrued as earned, based upon the principal amounts outstanding. Loan origination fees and certain direct loan origination costs, as well as unearned discount, are deferred and recognized over the life of the loan revised for loan prepayments, as an adjustment to the loans yield.
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 loans 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 loans
carrying value does not exceed the fair value of the underlying collateral or the present value of
the loans 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 loans 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 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 Banks 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 obligors 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 borrowers ability to repay amounts
owed, collateral deficiencies, the relative risk grade of the loan and economic conditions
affecting the borrowers 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
loans underlying collateral resulting in an immediate charge-off to the allowance, excluding any
consideration for personal guarantees that may be pursued in the Banks collection process. If
repayment is based upon future expected cash flows, the present value of the expected future cash
flows discounted at the loans 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
managements 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 managements 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 Banks 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.
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 Banks 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 Corporations initial cost of the investment and the Corporations share of the leasing companys annual net income or loss.
Other assets include the Banks 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 Corporations initial cost of the investment and the Corporations share of the leasing companys annual net income or loss.
Other real estate owned
30
Table of Contents
OREO acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of cost or
fair value less estimated cost to sell, net of a valuation allowance. When a property is acquired,
the excess of the loan balance over the estimated fair value is charged to the allowance for loan
losses. Operating results, including any future writedowns of OREO, rental income and operating
expenses, are included in Other expenses.
An allowance for OREO 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 $566,000 in 2010, $194,000 in 2009 and $213,000 in 2008. 2010 included accelerated amortization of $468,000 of core deposit intangibles of two closed branches.
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 $566,000 in 2010, $194,000 in 2009 and $213,000 in 2008. 2010 included accelerated amortization of $468,000 of core deposit intangibles of two closed branches.
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.
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.
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.
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 (loss) 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 (loss) and its components are included in the consolidated statements of changes in shareholders equity.
Other comprehensive income (loss) 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 (loss) and its components are included in the consolidated statements of changes in shareholders equity.
Recent accounting pronouncements
ASC 810, Consolidation, replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly effect the entitys economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The pronouncement was effective January 1, 2010, and did not have a significant effect on the Corporations consolidated financial statements.
ASC 810, Consolidation, replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly effect the entitys economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The pronouncement was effective January 1, 2010, and did not have a significant effect on the Corporations consolidated financial statements.
In May 2009, the Financial Accounting Standards Board (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 adoption of this pronouncement did not have a material
impact on the Corporations financial condition, results of operations or financial statement
disclosures.
In June 2009, the FASB issued ASC 860, an amendment to the accounting and disclosure requirements
for transfers of financial assets. The guidance defines the term participating interest to
establish specific conditions for reporting a transfer of a portion of a financial asset as a sale.
If the transfer does not meet those conditions, a transferor should account for the transfer as a
sale only if it transfers an entire financial asset or a group of entire financial assets and
surrenders control over the entire transferred asset(s). The guidance requires that a transferor
recognize and initially measure at fair value all assets obtained (including a transferors
beneficial interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. This Statement is effective as of the beginning of each reporting entitys
first annual reporting period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods thereafter. The
adoption of ASC 860 did not have a material impact on the Corporations financial condition,
results of operations or financial statement disclosures.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06 to improve disclosures
about fair value measurements. This guidance requires new disclosures on transfers into and out of
Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies
existing fair value disclosures relating to the level of disaggregation and inputs and valuation
techniques used to measure fair value. It is effective for the first reporting period (including
interim periods) beginning after December 15, 2009, except for the requirement to provide the Level
3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be
effective for fiscal years beginning after December 15, 2010. The adoption of this pronouncement
did not have a material impact on the Corporations financial condition, results of operations or
financial statement disclosures.
In February 2010, the FASB issued ASU 2010-09, which amended the subsequent events pronouncement
issued in May 2009. The amendment removed the requirement to disclose the date through
31
Table of Contents
which subsequent events have been evaluated. This pronouncement became effective immediately upon
issuance and is to be applied prospectively. The adoption of this pronouncement did not have a
material impact on the Corporations financial condition, results of operations or financial
statement disclosures.
In April 2010, the FASB issued ASU 2010-18, which states that modifications of loans that are
accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the
pool even if the modification of those loans would otherwise be considered a troubled debt
restructuring. An entity will continue to be required to consider whether the pool of assets in
which the loan is included is impaired if expected cash flows for the pool change. The amendments
do not affect the accounting for loans under the scope of ASC 310-30 that are not accounted for
within pools. Loans accounted for individually under ASC 310-30 continue to be subject to the
troubled debt restructuring accounting provisions within ASC 310-40,
Receivables - Troubled Debt
Restructurings by Creditors. The amendments were effective for modifications of loans accounted
for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or
after July 15, 2010. The adoption of this pronouncement did not have a material impact on the
Corporations financial condition, results of operations or financial statement disclosures.
In July 2010, the FASB issued ASU 2010-20 to provide financial statement users with greater
transparency about an entitys allowance for credit losses and the credit quality of its financing
receivables. The objective of the ASU is to provide disclosures that assist financial statement
users in their evaluation of (1) the nature of an entitys credit risk associated with its
financing receivables, (2) how the entity analyzes and assesses that risk in arriving at the
allowance for credit losses and (3) the changes in the allowance for credit losses and the reasons
for those changes. Disclosures provided to meet the objective above should be provided on a
disaggregated basis. The disclosures as of the end of a reporting period are effective for interim
and annual reporting periods ending on or after December 15, 2010. The disclosures about activity
that occurs during a reporting period are effective for interim and annual reporting periods
beginning on or after December 15, 2010. The Corporation does not expect that the adoption of this
pronouncement will have a material impact on the Corporations financial condition or results of
operations.
Reclassifications
Certain reclassifications have been made to the 2009 and 2008 consolidated financial statements in order to conform with the 2010 presentation.
Certain reclassifications have been made to the 2009 and 2008 consolidated financial statements in order to conform with the 2010 presentation.
Note 2. Going Concern/Regulatory Compliance
The consolidated financial statements of the Corporation as of and for the year ended December
31, 2010 have been prepared on a going concern basis, which contemplates the realization of assets
and the discharge of liabilities in the normal course of business for the foreseeable future.
The Bank was subject to a Formal Agreement with the OCC entered into on June 29, 2009 (the Formal
Agreement). The Formal Agreement required, among other things, the enhancement and implementation
of certain programs to reduce the Banks credit risk, along with the development of a capital and
profit plan, the development of a contingency funding plan and the correction of deficiencies in
the Banks loan administration. The Bank failed to comply with certain provisions of the Formal
Agreement; and failed to comply with the higher leverage ratio of 8%, required to be maintained.
Due to the Banks condition, the OCC has required that the Board of Directors of the Bank (the
Bank Board) sign a formal enforcement action with the OCC, which mandates specific actions by the
Bank to address certain findings from the OCCs examination and to address the Banks current
financial condition. The Bank entered into a Consent Order (Order or Consent Order) with the
OCC on December 22, 2010, which contains a list of requirements. The Order supersedes and replaces
the Formal Agreement. The Order also contains restrictions on future extensions of credit and
requires the development of various programs and procedures to improve the Banks asset quality as
well as routine reporting on the Banks progress toward compliance with the Order to the Bank Board
and the OCC. As a result of the Order, the Bank may not be deemed well-capitalized. The
description of the Consent Order is only a summary.
Specifically, the Order imposes the following requirements, on the Bank:
within five (5) days of the Order, the Bank Board must appoint a Compliance Committee to be
comprised of at least three directors, none of whom may be an employee, former employee or
controlling shareholder of the Bank or any of its affiliates, to monitor and coordinate the Banks
adherence to the Order.
within ninety (90) days of the Order, the Bank Board must develop and submit to the OCC for
review a written strategic plan covering at least a three-year period, establishing objectives for
the overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet
activities, liability structure, capital adequacy, reduction in the volume of nonperforming assets,
product line development, and market segments that the Bank intends to promote or develop, together
with strategies to achieve those objectives.
by March 31, 2011, and thereafter the Bank must maintain total capital at least equal to 13%
of risk-weighted assets and Tier 1 capital at least equal to 9% of adjusted total assets; this
requirement means that the Bank may not be considered well-capitalized as otherwise defined in
applicable regulations.
within ninety (90) days of the Order, the Bank Board must submit to the OCC a written
capital plan for the Bank covering at least a three-year period, including specific plans for the
achievement and maintenance of adequate capital, projections for growth and capital requirements,
based upon a detailed analysis of the Banks assets, liabilities, earnings, fixed assets and
off-balance sheet activities; identification of the primary sources from which the Bank will
maintain an appropriate capital structure to meet the Banks future needs, as set forth in the
strategic plan; specific plans detailing how the Bank will comply with restrictions or requirements
set forth in the Order and with the restrictions against brokered deposits in 12 C.F.R. § 337.6;
contingency plans that identify alternative methods to strengthen capital, should the primary
source(s) not be available; and a prohibition on the payment of director fees unless the Bank is in
compliance with the minimum capital ratios previously identified in the prior paragraph or express
written authorization is provided by the OCC.
the Bank is restricted on the payment of dividends.
to ensure the Bank has competent management in place at all times, including: within 90 days
of the Order the Bank Board shall provide to the OCC qualified and capable candidates for the
positions of President, Senior Credit Officer, Consumer Compliance Officer and Bank Secrecy
Officer; within 90 days of the date of the Order, the Bank Board (with the exception of Bank
executive officers) shall prepare a written assessment of the Banks executive officers to perform
present and anticipated duties; prior to appointment of any individual to an executive position
provide notice to the OCC, who shall have the power to veto such appointment; and the Bank Board
shall at least annually perform a written performance appraisal for each Bank executive officer.
within sixty (60) days of the Order, the Bank Board shall develop and the Bank shall
implement, and thereafter ensure compliance with, a written credit policy to ensure the Banks
compliance with written programs to improve the Banks loan portfolio management.
32
Table of Contents
within ninety (90) days of the Order the Bank Board shall develop, implement and thereafter
ensure Bank adherence to a written program to improve the Banks loan portfolio management,
including: requiring that extensions of credit are granted, by renewal or otherwise, to any
borrower only after obtaining, performing, and documenting a global analysis of current and
satisfactory credit information; requiring that existing extensions of credit structured as single
pay notes are revised upon maturity to conform to the Banks revised loan policy; ensuring
satisfactory and perfected collateral documentation; tracking and analyzing credit, collateral, and
policy exceptions; providing for accurate risk ratings consistent with the classification standards
contained in the Comptrollers Handbook on Rating Credit Risk; providing for identification,
measurement, monitoring, and control of concentrations of credit; ensuring compliance with Call
Report instructions, the Banks lending policies, and laws, rules, and regulations pertaining to
the Banks lending function; ensuring the accuracy of internal management information systems; and
providing adequate training of Bank personnel performing credit analyses in cash flow analysis,
particularly analysis using information from tax returns, and implement processes to ensure that
additional training is provided as needed.
within sixty (60) days of the Order, the Bank Board must establish a written performance
appraisal and salary administration process for loan officers that adequately consider performance
relative to job descriptions, policy compliance, documentation standards, accuracy in credit
grading, and other loan administration matters.
the Bank must implement and maintain an effective, independent, and on-going loan review
program to review, at least quarterly, the Banks loan and lease portfolios, to assure the timely
identification and categorization of problem credits.
the Bank is also required to implement and adhere to a written program for the maintenance
of an adequate Allowance for Loan and Lease Losses, providing for review of the allowance by the
Bank Board at least quarterly.
Within sixty (60) days of the Order, the Bank Board shall adopt and the Bank (subject to
Bank Board review and ongoing monitoring) shall implement and thereafter ensure adherence to a
written program designed to protect the Banks interest in those assets criticized in the most
recent Report of Examination (ROE) by the OCC, in any subsequent ROE, by any internal or external
loan review, or in any list provided to management by the National Bank Examiners during any
examination as doubtful, substandard, or special mention.
within one hundred twenty (120) days of the Order, the Bank Board must revise and maintain a
comprehensive liquidity risk management program, which assesses, on an ongoing basis, the Banks
current and projected funding needs, and ensures that sufficient funds or access to funds exist to
meet those needs, which program includes effective methods to achieve and maintain sufficient
liquidity and to measure and monitor liquidity risk.
within ninety (90) days of the Order, the Bank Board shall identify and propose for
appointment a minimum of two (2) new independent directors that have a background in banking,
credit, accounting, or financial reporting, and such appointment will be subject to veto power of
the OCC.
within ninety (90) days of the Order, the Bank Board shall adopt, implement, and thereafter
ensure adherence to a written consumer compliance program designed to ensure that the Bank is
operating in compliance with all applicable consumer protection laws, rules, and regulations.
within ninety (90) days of the Order, the Bank Board shall develop, implement, and
thereafter ensure Bank adherence to a written program of policies and procedures to provide for
compliance with the Bank Secrecy Act, as amended (31 U.S.C.
§§ 5311 et seq.), the regulations
promulgated thereunder and regulations of the Office of Foreign Assets Control (OFAC), 31 C.F.R.
Chapter V, as amended (collectively referred to as the Bank Secrecy Act or BSA) and for the
appropriate identification and monitoring of transactions that pose greater than normal risk for
compliance with the BSA.
within ninety (90) days, of the Order, the Bank Board shall: develop, implement, and
thereafter ensure Bank adherence to an independent, internal audit program sufficient to detect
irregularities and weak practices in the Banks operations; determine the Banks level of
compliance with all applicable laws, rules, and regulations; assess and report the effectiveness of
policies, procedures, controls, and management oversight relating to accounting and financial
reporting; evaluate the Banks adherence to established policies and procedures, with particular
emphasis directed to the Banks adherence to its loan, consumer compliance, and BSA policies and
procedures; evaluate and document the root causes for exceptions; and establish an annual audit
plan using a risk-based approach sufficient to achieve these objectives.
within ninety (90) days of the Order, the Bank Board must develop and implement a
comprehensive compliance audit function to include an independent review of all products and
services offered by the Bank, including without limitation, a risk-based audit program to test for
compliance with consumer protection laws, rules, and regulations that includes an adequate level of
transaction testing; procedures to ensure that exceptions noted in the audit reports are corrected
and responded to by the appropriate Bank personnel; and periodic reporting of the results of the
consumer compliance audit to the Bank Board or a committee thereof.
the Bank Board shall require and the Bank shall immediately take all necessary steps to
correct each violation of law, rule, or regulation cited in any ROE, or brought to the Bank Boards
or Banks attention in writing by management, regulators, auditors, loan review, or other
compliance efforts.
The Order permits the OCC to extend the time periods under the Order upon written request. Any
material failure to comply with the Order could result in further enforcement actions by the OCC.
In addition, if the OCC does not accept the capital plan or the Bank fails to achieve and maintain
the minimum capital levels, the Order specifically states that the OCC may require the Corporation
to sell, merge or liquidate the Bank.
As a result of the Consent Order, the Bank may not accept, renew or roll over any brokered deposit.
This affects the Banks ability to obtain funding. In addition the Bank may not solicit deposits
by offering an effective yield that exceeds by more than 75 basis points the prevailing effective
yields on insured deposits of comparable maturity in such institutions normal market area or in
the market area in which such deposits are being solicited.
As of March 31, 2011, when considering deadline extensions granted, the Corporation believes it has
timely complied with the requirements of the Consent Order as of such date with the exception of
the capital ratio requirements. Please see Note 25 for actual capital ratios as of December 31,
2010.
On December 14, 2010, the Corporation entered into a written agreement (the FRNBY Agreement) with
the Federal Reserve Bank of New York (FRBNY). The following is only a summary of the FRBNY
Agreement. Pursuant to the FRBNY Agreement, the Corporations board of directors is to take
appropriate steps to utilize fully the Corporations financial and managerial resources to serve as
a source of strength to the Bank, including causing the Bank to comply with the Formal Agreement
(now superseded) and any other supervisory action taken by the OCC, such as the Order.
In the FRBNY Agreement, the Corporation agreed that it would not declare or pay any dividends
without prior written approval of the
33
Table of Contents
FRBNY and the Director of the Division of Banking Supervision and Regulation of the Board of
Governors of the Federal Reserve System (the Banking Director). It further agreed that it would
not take dividends or any other form of payment representing a reduction in capital from the Bank
without the FRBNYs prior written approval. The FRBNY Agreement also provides that neither the
Corporation nor its nonbank subsidiary will make any distributions of interest, principal or other
amounts on subordinated debentures or trust preferred securities without the prior written approval
of the FRBNY and the Banking Director.
The FRBNY Agreement further provides that the Corporation shall not incur, increase or guarantee
any debt without FRBNY approval. In addition, the Corporation must obtain the prior approval of the
FRBNY for the repurchase or redemption of its shares of stock.
The FRBNY Agreement further provides that in appointing any new director or senior executive
officer or changing the responsibilities of any senior executive officer so that the officer would
assume a different senior position, the Corporation must notify the Board of Governors of the
Federal Reserve System and such board or the FRBNY or the OCC, may veto such appointment or change.
The FRBNY Agreement further provides that the Corporation is restricted in making certain severance
and indemnification payments.
The failure of the Corporation to comply with the FRBNY Agreement could have severe adverse
consequences on the Bank and the Corporation.
The Corporation recorded a net loss of $7.5 million in 2010 and a net loss of $7.8 million in 2009
primarily due to significant increases in the provision for loan losses and higher costs for
consultants retained to achieve compliance with the provisions of the Formal Agreement and Consent
Order. The decrease in real estate values and instability in the market, as well as other
macroeconomic factors, such as unemployment, have contributed to a decrease in credit quality and
increased provisioning. While the Bank and Corporation are implementing steps to improve their
financial performance, there can be no assurance they will be successful. These deteriorating
financial results and the failure of the Bank to comply with the OCCs higher mandated capital
ratios under the Consent Order, and the actions that the OCC may take as a result thereof, raise
substantial doubt about the Corporations and the Banks ability to continue as going concerns.
Management developed a plan, with the assistance of consultants, to address the compliance matters
raised by the OCC and the ability to maintain future financial viability and submitted the plan to
the OCC for approval. In order to meet the minimum capital ratios required by the Consent Order,
the terms of the plan include raising capital. However, there can be no assurances that such plan
will be approved or can be achieved.
Note 3 Cash and due from banks
The Bank is required to maintain a reserve balance with the Federal Reserve Bank based
primarily on deposit levels. These reserve balances averaged $2.5 million in 2010 and $1.9 million
in 2009.
Note 4 Federal funds sold
Federal funds sold averaged $29.5 million during 2010 and $34.6 million in 2009, while the maximum
balance outstanding at any month-end during 2010, 2009 and 2008 was $49.8 million, $70.5 million
and $23.8 million, respectively.
Note 5 Investment securities available for sale
The amortized cost and fair values at December 31 of investment securities available for sale were
as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
2010 In thousands | Cost | Gains | Losses | Value | ||||||||||||
U.S. Treasury securities
and obligations of U.S.
government agencies |
$ | 3,389 | $ | 64 | $ | 24 | $ | 3,429 | ||||||||
Obligations of U.S.
government sponsored
entities |
15,447 | 100 | 267 | 15,280 | ||||||||||||
Obligations of state and
political subdivisions |
9,604 | 194 | 285 | 9,513 | ||||||||||||
Mortgage-backed
securities |
66,037 | 1,892 | 24 | 67,905 | ||||||||||||
Other debt securities |
8,358 | 37 | 1,839 | 6,556 | ||||||||||||
Equity securities: |
||||||||||||||||
Marketable securities |
748 | - | 21 | 727 | ||||||||||||
Nonmarketable
securities |
115 | - | - | 115 | ||||||||||||
Federal Reserve Bank
and Federal Home
Loan Bank stock |
1,895 | - | - | 1,895 | ||||||||||||
Total |
$ | 105,593 | $ | 2,287 | $ | 2,460 | $ | 105,420 | ||||||||
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 | ||||||||
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.
34
Table of Contents
Amortized | Fair | |||||||
In thousands | Cost | Value | ||||||
Due within one year: |
||||||||
Obligations of U.S. government sponsored entities |
$ | 118 | $ | 119 | ||||
Mortgage-backed securities |
49 | 50 | ||||||
Due after one year but within five years: |
||||||||
U.S. Treasury securities and obligations of U.S. government agencies |
71 | 71 | ||||||
Obligations of U.S. government sponsored entities |
1,069 | 1,083 | ||||||
Obligations of state and political subdivisions |
1,879 | 1,992 | ||||||
Mortgage-backed securities |
627 | 657 | ||||||
Other debt securities |
1,000 | 929 | ||||||
Due after five years but within ten years: |
||||||||
U.S. Treasury securities and obligations of U.S. government agencies |
93 | 92 | ||||||
Obligations of U.S. government sponsored entities |
5,831 | 5,736 | ||||||
Obligations of state and political subdivisions |
3,986 | 3,970 | ||||||
Mortgage-backed securities |
502 | 520 | ||||||
Due after ten years: |
||||||||
U.S. Treasury securities and obligations of U.S. government agencies |
3,225 | 3,266 | ||||||
Obligations of U.S. government sponsored entities |
8,429 | 8,342 | ||||||
Obligations of state and political subdivisions |
3,739 | 3,551 | ||||||
Mortgage-backed securities |
64,859 | 66,678 | ||||||
Other debt securities |
7,358 | 5,627 | ||||||
Total debt securities |
102,835 | 102,683 | ||||||
Equity securities |
2,758 | 2,737 | ||||||
Total |
$ | 105,593 | $ | 105,420 | ||||
Sales of investment securities available for sale resulted in gross losses of $92,000, $1,000
and $49,000 and gross gains of $2.2 million, $1,000 and $- in 2010, 2009 and 2008,
respectively. Additionally, impairment charges of $2.3 million were recorded during 2009
while none were recorded in 2010. These charges resulted from the determination that the
unrealized losses in two 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 | 2010 | 2009 | 2008 | |||||||||
Taxable |
$ | 5,112 | $ | 5,732 | $ | 6,001 | ||||||
Tax-exempt |
470 | 68 | 20 | |||||||||
Total |
$ | 5,582 | $ | 5,800 | $ | 6,021 | ||||||
Investment securities available for sale with a carrying value of $81 million were pledged to
secure U.S. government and municipal deposits and Federal Home Loan Bank borrowings at December 31,
2010.
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 | ||||||||||||||||||||||
2010 In thousands | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
U.S. Treasury securities and
obligations of U.S. government agencies |
$ | 1,054 | $ | 23 | $ | 162 | $ | 1 | $ | 1,216 | $ | 24 | ||||||||||||
Obligations of U.S. Government sponsored entities |
6,733 | 254 | 2,080 | 13 | 8,813 | 267 | ||||||||||||||||||
Mortgaged-backed securities |
6,219 | 24 | - | - | 6,219 | 24 | ||||||||||||||||||
Obligations of state and political subdivisions |
5,147 | 285 | - | - | 5,147 | 285 | ||||||||||||||||||
Other debt securities |
- | - | 5,050 | 1,839 | 5,050 | 1,839 | ||||||||||||||||||
Equity securities |
- | - | 727 | 21 | 727 | 21 | ||||||||||||||||||
Total |
$ | 19,153 | $ | 586 | $ | 8,019 | $ | 1,874 | $ | 27,172 | $ | 2,460 | ||||||||||||
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 | ||||||||||||
The gross unrealized losses set forth above as of December 31, 2010 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.
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 (loss). 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
35
Table of Contents
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 | ||||||||
For the Year | Months | |||||||
Ended | Beginning | |||||||
December 31, | April 1, | |||||||
In thousands | 2010 | 2009 | ||||||
Beginning balance |
$ | 2,489 | $ | 288 | ||||
Add: |
||||||||
Initial credit |
||||||||
Impairments |
- | 944 | ||||||
Additional credit impairments |
- | 1,257 | ||||||
Deduct: |
||||||||
Dispositions |
(2,489 | ) | - | |||||
Balance, December 31 |
$ | - | $ | 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 CDOs 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. Both CDOs
were sold in 2010.
The Bank also owns a CDO with a carrying value of $996,000 and market value of $499,000 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 six single-issue trust preferred securities with a carrying value of
$4.4 million and a market value of $3.4 million. Finally, the Bank also owns three corporate
securities with a carrying value of $2.9 million and a market value of $2.6 million that are rated
below investment grade. All values are as of December 31, 2010. None of these securities is
considered impaired as they are all fully performing and are expected to continue 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. 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
Corporations 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
Corporations 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).
Managements assertion regarding its intent not to sell or that it is not more likely than not that
the Corporation will be required to sell 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 managements 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, 2010, 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, 2010.
Note 6 Investment securities held to maturity
The Bank transferred its entire HTM portfolio to AFS in March 2010. This transfer was made in
conjunction with a deleveraging program to reduce total asset levels and improve capital ratios.
As a result, purchases of securities may not be classified as HTM for the next two years.
The amortized cost and fair values as of December 31, 2009 of investment securities held to
maturity were as follows:
36
Table of Contents
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
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 | ||||||||
Interest and dividends on investment securities held to maturity were as follows:
In thousands | 2010 | 2009 | 2008 | |||||||||
Taxable |
$ | 157 | $ | 936 | $ | 1,403 | ||||||
Tax-exempt |
276 | 1,188 | 1,270 | |||||||||
Total |
$ | 433 | $ | 2,124 | $ | 2,673 | ||||||
Investment securities held to maturity at December 31, 2009 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 | ||||||||||||
Note 7 Loans
Loans, net of unearned discount and net deferred origination fees and costs at December 31 were as
follows:
In thousands | 2010 | 2009 | ||||||
Commercial |
$ | 38,225 | $ | 53,820 | ||||
Real estate |
206,072 | 221,601 | ||||||
Installment |
718 | 926 | ||||||
Total loans |
245,015 | 276,347 | ||||||
Less: Unearned income |
60 | 105 | ||||||
Loans |
$ | 244,955 | $ | 276,242 | ||||
The Corporation categorizes loans into risk categories based on relevant information about
the ability of borrowers to service their debt such as: current financial information, historical
payment experience, credit documentation, public information and current economic trends, among
other factors. For non-homogeneous loans, such as commercial and commercial real estate loans the
Corporation analyzes the loans individually by classifying the loans as to credit risk and assesses
the probability of collection for each type of class.. The Corporation uses the following
definitions for risk ratings:
Pass Pass assets are well protected by the current net worth and paying capacity of the obligor
(or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying
collateral in a timely manner.
Special Mention A special mention asset has potential weaknesses that deserve managements close
attention. If left uncorrected, these potential weaknesses may result
in deterioration of the
repayment prospects for the asset or in the institutions credit position at some future date.
Special mention assets are not adversely classified and do not expose an institution to sufficient
risk to warrant adverse classification.
Substandard A substandard asset is inadequately protected by the current sound worth and paying
capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a
well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are
characterized by the distinct possibility that we will sustain some loss if the deficiencies are
not corrected.
Doubtful An asset classified doubtful has all the weaknesses inherent in one classified
substandard with the added characteristic that the weaknesses make collection or liquidation in
full highly questionable and improbable on the basis of currently known facts, conditions, and
values.
Loss An asset or portion thereof, classified loss is considered uncollectible and of such little
value that its continuance on the institutions books as an asset, without establishment of a
specific valuation allowance or charge-off, is not warranted. This classification does not
necessarily mean that an asset has no recovery or salvage value; but rather, there is significant
doubt about whether, how much, or when the recovery will occur. As such, it is not practical or
desirable to defer the write-off.
As of December 31, 2010, and based on the most recent analysis performed, the risk category of
loans by class of loans is as follows:
37
Table of Contents
Special | ||||||||||||||||||||||||
In thousands | Pass | Mention | Substandard | Doubtful | Loss | Total | ||||||||||||||||||
Commercial loans |
$ | 35,776 | $ | 916 | $ | 1,384 | $ | 149 | $ | - | $ | 38,225 | ||||||||||||
Real estate loans |
||||||||||||||||||||||||
Church |
38,785 | 8,893 | 15,106 | - | - | 62,784 | ||||||||||||||||||
Construction - other than third-party originated |
1,879 | 598 | 10,593 | 579 | - | 13,649 | ||||||||||||||||||
Construction
third-party originated |
- | - | 9,514 | 4,017 | - | 13,531 | ||||||||||||||||||
Multifamily |
||||||||||||||||||||||||
11,742 | 1,578 | 1,240 | 273 | - | 14,833 | |||||||||||||||||||
Other |
46,544 | 5,064 | 20,973 | 1,202 | - | 73,783 | ||||||||||||||||||
Residential |
24,286 | - | 2,714 | 492 | - | 27,492 | ||||||||||||||||||
Installment |
696 | 16 | 1 | 5 | - | 718 | ||||||||||||||||||
$ | 159,708 | $ | 17,065 | $ | 61,525 | $ | 6,717 | $ | - | $ | 245,015 | |||||||||||||
The following table presents the aging of the recorded investment in past due loans as of
December 31, 2010.
In thousands | 0-30 Days | 30-60 Days | 60-90 Days | More than 90 Days |
Total Past Due |
Current | Total | |||||||||||||||||||||
Commercial loans |
$ | 3,251 | $ | 1,336 | $ | 1,449 | $ | 2,308 | $ | 8,344 | $ | 29,881 | $ | 38,225 | ||||||||||||||
Real estate loans |
||||||||||||||||||||||||||||
Church |
339 | 13,096 | 7,630 | 4,909 | 25,974 | 36,810 | 62,784 | |||||||||||||||||||||
Construction - other than third-party originated |
4,025 | - | - | 8,057 | 12,082 | 1,567 | 13,649 | |||||||||||||||||||||
Construction third-party originated |
454 | 1,531 | 530 | 9,253 | 11,768 | 1,763 | 13,531 | |||||||||||||||||||||
Mulifamily |
- | 2,608 | 1,248 | 273 | 4,129 | 10,704 | 14,833 | |||||||||||||||||||||
Other |
2,837 | 2,109 | 4,861 | 6,375 | 16,182 | 57,601 | 73,783 | |||||||||||||||||||||
Residential |
564 | 809 | 118 | 2,333 | 3,824 | 23,668 | 27,492 | |||||||||||||||||||||
Installment |
31 | 17 | - | 6 | 54 | 664 | 718 | |||||||||||||||||||||
$ | 11,501 | $ | 21,506 | $ | 15,836 | $ | 33,514 | $ | 82,357 | $ | 162,658 | $ | 245,015 | |||||||||||||||
The following table presents the recorded investment in impaired loans as of December
31, 2010 by class of loans:
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
In thousands | Investment | Balance | Allowance | |||||||||
Commercial loans |
$ | 10 | $ | 10 | $ | - | ||||||
Real estate loans |
||||||||||||
Church |
5,460 | 5,624 | - | |||||||||
Construction - other than
third-party originated |
6,689 | 7,067 | 242 | |||||||||
Construction
third-party
originated |
13,078 | 16,315 | 1,123 | |||||||||
Multifamily |
273 | 824 | - | |||||||||
Other |
7,024 | 7,798 | 102 | |||||||||
Residential |
2,227 | 2,394 | 35 | |||||||||
Installment |
- | - | - | |||||||||
$ | 34,761 | $ | 40,032 | $ | 1,502 | |||||||
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 | 2010 | 2009 | ||||||
Nonaccrual loans |
$ | 35,916 | $ | 16,323 | ||||
Loans with interest or principal 90 days or more past due and still accruing |
2,343 | 1,567 | ||||||
Total nonperforming loans |
$ | 38,259 | $ | 17,890 | ||||
The effect of nonaccrual loans on income before taxes is presented below.
In thousands | 2010 | 2009 | 2008 | |||||||||
Interest income foregone |
$ | (1,723 | ) | $ | (785 | ) | $ | (692 | ) | |||
Interest income received |
119 | 188 | 467 | |||||||||
$ | (1,604 | ) | $ | (597 | ) | $ | (225 | ) | ||||
Nonperforming assets are generally secured by residential and small commercial real estate
properties, except for church loans, which are generally secured by the church buildings.
At December 31, 2010 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 Banks 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 Banks lien on the related property. Such factors are
dependent upon various economic conditions and individual circumstances beyond the Banks control.
Accordingly, the Bank may be subject to risk of credit losses.
Impaired loans totaled $34.8 million at December 31, 2010 compared to $11.1 million at December 31,
2009. Charge-offs of impaired loans during 2010 totaled $4.2 million. The related allocation of
the allowance for loan losses amounted to $1.5 and $550,000 at December 31, 2010 and 2009, respectively. $30.2 million of impaired loans have
no allowance allocated to them as sufficient collateral exists. The average balance of impaired
loans during 2010 was $24.2 million and amounted to $8.5 million in 2009. There was no interest
income recognized on impaired loans during either 2010 or 2009. At
38
Table of Contents
December
31, 2010 there were $2.9 million of troubled debt restructured loans with no related allowance
compared to $5.2 million and $760,000 at December 31, 2009. The decline in TDRs resulted from
charge-offs.
Note 8 Allowance for loan losses
The allowance for loan losses represents managements 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 three elements: (1) specific reserves for individually
impaired credits, (2) reserves for classified, or higher risk rated, loans, (3) reserves for
non-classified loans and (4) unallocated reserves. Other than the specific reserves, the
calculation of the allowance takes into consideration numerous risk factors both internal and
external to the Corporation, including changes in loan portfolio volume, the composition and
concentrations of credit, new market initiatives, migration to loss analysis and the amount and
velocity of loan charge-offs, among other factors.
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 loans 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
borrowers 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 Corporations financial results.
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.
The allowance contains reserves identified as unallocated to cover inherent losses in the loan
portfolio which have not been otherwise reviewed or measured on an individual basis. Such reserves
include managements evaluation of the regional economy, loan portfolio volumes, the composition
and concentrations of credit, credit quality and delinquency trends. These reserves reflect
managements 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.
Although management believes that the allowance for loan losses has been maintained at adequate
levels to reserve for probable losses inherent in its loan portfolio, additions may be necessary
if future economic and other conditions differ substantially from the current operating
environment. Although management uses the best information available, the level of the allowance
for loan losses remains an estimate that is subject to significant judgment and short-term change.
Transactions in the allowance for loan losses are summarized as follows:
In thousands | 2010 | 2009 | 2008 | |||||||||
Balance, January 1 |
$ | 8,650 | $ | 3,800 | $ | 3,000 | ||||||
Provision for loan
losses |
9,487 | 8,105 | 1,586 | |||||||||
Recoveries of loans previously
charged off |
49 | 15 | 6 | |||||||||
18,186 | 11,920 | 4,592 | ||||||||||
Less: Charge-offs |
7,560 | 3,270 | 792 | |||||||||
Balance, December 31 |
$ | 10,626 | $ | 8,650 | $ | 3,800 | ||||||
The following tables present the allowance for loan losses by portfolio segment along with the
related recorded investment in loans based on impairment method as of December 31, 2010.
Individually | Collectively | Total | ||||||||||
In thousands | Evaluated | Evaluated | Allowance | |||||||||
Commercial loans |
$ | - | $ 2,770 | $ 2,770 | ||||||||
Real estate loans |
||||||||||||
Church |
- | 1,559 | 1,559 | |||||||||
Construction - other than
third-party originated |
242 | 220 | 462 | |||||||||
Construction third-party
Originated |
1,123 | 452 | 1,575 | |||||||||
Multifamily |
- | 633 | 633 | |||||||||
Other |
102 | 2,231 | 2,333 | |||||||||
Residential |
35 | 701 | 736 | |||||||||
Installment |
- | 55 | 55 | |||||||||
Unallocated |
- | 503 | 503 | |||||||||
$ 1,502 | $ 9,124 | $10,626 | ||||||||||
Total | ||||||||||||
Individually | Collectively | Recorded | ||||||||||
In thousands | Evaluated | Evaluated | Investment | |||||||||
Commercial loans |
$10 | $ 38,215 | $ 38,225 | |||||||||
Real estate loans |
||||||||||||
Church |
5,460 | 57,324 | 62,784 | |||||||||
Construction - other than
third-party originated |
6,689 | 6,960 | 13,649 | |||||||||
Construction third-party
originated |
13,078 | 453 | 13,531 | |||||||||
Multifamily |
273 | 14,560 | 14,833 | |||||||||
Other |
7,024 | 66,759 | 73,783 | |||||||||
Residential |
2,227 | 25,265 | 27,492 | |||||||||
Installment |
- | 718 | 718 | |||||||||
$ 34,761 | $ 210,254 | $245,015 | ||||||||||
Note 9 Premises and equipment
A summary of premises and equipment at December 31 follows:
39
Table of Contents
In thousands | 2010 | 2009 | ||||||
Land |
$ | 329 | $ | 329 | ||||
Premises |
1,520 | 1,520 | ||||||
Furniture and equipment |
4,436 | 4,326 | ||||||
Leasehold improvements |
3,563 | 3,368 | ||||||
Total cost |
9,848 | 9,543 | ||||||
Less: Accumulated depreciation and amortization |
6,874 | 6,594 | ||||||
Total premises and equipment |
$ | 2,974 | $ | 2,949 | ||||
Depreciation and amortization expense charged to operations amounted to $404,000, $432,000
and $495,000 in 2010, 2009, and 2008 respectively.
Note 10 Deposits
Deposits at December 31 are presented below.
In thousands | 2010 | 2009 | ||||||
Noninterest bearing demand |
$ | 35,132 | $ | 29,304 | ||||
Interest bearing: |
||||||||
Demand |
45,707 | 51,839 | ||||||
Savings |
23,009 | 24,728 | ||||||
Money market |
61,947 | 73,286 | ||||||
Time |
172,756 | 201,119 | ||||||
Total interest bearing deposits |
303,419 | 350,972 | ||||||
Total deposits |
$ | 338,551 | $ | 380,276 | ||||
Time deposits issued in amounts of $100,000 or more have the following maturities at December
31:
In thousands | 2010 | 2009 | ||||||
Three months or less |
$ | 41,276 | $ | 53,599 | ||||
Over three months but within six months |
18,580 | 32,947 | ||||||
Over six months but within twelve months |
13,937 | 16,209 | ||||||
Over twelve months |
38,067 | 30,649 | ||||||
Total deposits |
$ | 111,860 | $ | 133,404 | ||||
Interest expense on certificates of deposits of $100,000 or more was $2,577,000, $2,171,000
and $3,426,000 in 2010, 2009 and 2008, respectively.
Note 11 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 | |||||||||||||||
2010 |
||||||||||||||||||||
Federal funds
purchased |
$ | - | - | % | $ | 33 | .89 | % | $ | - | ||||||||||
Securities sold under
repurchase
agreements |
- | - | 56 | .31 | 1,718 | |||||||||||||||
Total |
$ | - | - | % | $ | 89 | .52 | % | $ | 5,438 | ||||||||||
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 | ||||||||||
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 $580,000. There was no balance outstanding under the
note at December 31, 2010 and 2009.
The
Corporation had a short-term borrowing line of $3 million at December 31, 2010 and 2009
with a correspondent bank which was unused at December 31, 2010 and 2009.
Note 12 Long-term debt
Long-term debt at December 31 is summarized as follows:
In thousands | 2010 | 2009 | ||||||
FHLB convertible advances due from
March 4, 2010 through August 6, 2018 |
$ | 10,000 | $ | 39,700 | ||||
6.00% capital note, due December 28, 2010 |
- | 100 | ||||||
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 |
19,200 | 49,000 | ||||||
Less: Short-term portion of long-term debt |
5,000 | 5,000 | ||||||
Total |
$ | 14,200 | $ | 44,000 | ||||
Interest is payable quarterly on the FHLB advance. The advance bears a fixed interest rate
of 6.15% and is secured by 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 $60.4 million at
December 31, 2010 and $79.1 million at December 31, 2009, of which $48.3 million and $77 million
was used and outstanding at December 31, 2010 and 2009, respectively. These lines may be utilized
for long-term or short-term borrowing purposes. Loans and investment securities totaling $60.4
million were held by the FHLB as collateral for their available lines and advances, as well as
$36.7 million of municipal letters of credit.
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.
On November 3, 2010, the Corporation entered into a First Amendment to Credit Agreement (the
Amendment) with The Prudential Insurance Company of America (Prudential) amending and modifying
that certain Credit Agreement by and between the Corporation and Prudential, dated as of February
21, 2007 (the Credit Agreement).
The purpose of the Amendment was to: (a) modify the use of proceeds provisions of the Credit
Agreement governing Prudentials $5,000,000 unsecured term loan to the Corporation so that the
Corporation could convert its $5,000,000 subordinated loan to the Bank into equity of the Bank that
will be treated by the OCC as Tier I regulatory capital; (b) waive certain events of default
resulting from the Banks entry into the Formal Agreement with the OCC and failure to meet certain
other material obligations, including deferral of dividends to its Series F and G Preferred
stockholders and deferral of certain obligations to holders of debentures related to its trust
preferred securities; (c) waive any default interest that may have accrued during the pendency of
such events of default; and (d) amend and restate the financial covenants of the Credit Agreement.
On November 30, 2010, upon receipt of OCC approval the subordinated loan was converted into equity,
thereby increasing the Banks Tier 1 leverage capital. However, as a result of the Consent Order
entered into on December 22, 2010 and the failure to achieve certain capital ratios
40
Table of Contents
required by the
OCC, the Corporation was once again in default under this loan and is attempting to obtain a waiver
from the lender. As a result of the default, the loan has been reclassified to short-term portion
of long-term debt on the accompanying Consolidated Balance Sheets.
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, 2010 was 3.09%.
The quarterly distributions may, at the option of the Trust, be deferred for up to twenty
consecutive quarterly periods. If the interest is deferred for more than twenty quarters, then
there is an event of default. In that event, and if the trustee, or more than 25% of the holders
of the outstanding debt securities, declare the entire principal balance and outstanding interest
to be immediately due and payable, then such amounts are to be paid to the trustee, along with
amounts for trustee and other advisor expenses The proceeds have been invested in junior
subordinated debentures of CNBC, at terms identical to the preferred capital securities. Cash
distributions on the securities are made to the extent interest on the debentures is received by
the Trust. In the event of certain changes or amendments to regulatory requirements or federal tax
rules, the securities are redeemable. The securities are generally redeemable in whole or in part
on or after March 17, 2009, at any interest payment date, at a price equal to 100% of the principal
amount plus accrued interest to the date of redemption. The securities must be redeemed by March
17, 2034.
The subsidiary 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 | |||
2011 |
$ | 5,000 | ||
2012 |
- | |||
2013 |
- | |||
2014 |
- | |||
2015 |
- | |||
Thereafter |
14,200 | |||
Total |
$ | 19,200 | ||
Note 13 Other operating income and expenses
The following table presents the major components of other operating income and expenses.
In thousands | 2010 | 2009 | 2008 | |||||||||
Other income |
||||||||||||
Undistributed gain from
unconsolidated investee |
$ | 130 | $ | 202 | $ | 185 | ||||||
Miscellaneous other income |
371 | 630 | 689 | |||||||||
Total other income |
$ | 501 | $ | 832 | $ | 874 | ||||||
Other expenses |
||||||||||||
Appraisal fees |
$ | 191 | $ | 35 | $ | 4 | ||||||
Directors fees |
172 | 140 | 113 | |||||||||
Correspondent bank fees |
142 | 146 | 121 | |||||||||
Forgery loss |
300 | - | - | |||||||||
Miscellaneous other expenses |
1,845 | 1,615 | 1,742 | |||||||||
Total other expenses |
$ | 2,650 | $ | 1,936 | $ | 1,980 | ||||||
Note 14 Income taxes
The components of income tax expense are as follows:
In thousands | 2010 | 2009 | 2008 | |||||||||
Current expense (benefit) |
||||||||||||
Federal |
$ | (681 | ) | $ | (595 | ) | $ | 755 | ||||
State |
196 | 29 | 251 | |||||||||
(485 | ) | (566 | ) | 1,006 | ||||||||
Deferred expense (benefit) |
||||||||||||
Federal and state |
845 | 2,372 | (1,056 | ) | ||||||||
Total income tax expense (benefit) |
$ | 360 | $ | 1,806 | $(50 | ) | ||||||
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 | 2010 | 2009 | 2008 | |||||||||
Federal income tax at statutory rate |
$ | (2,413 | ) | $ | (2,046 | ) | $ | 343 | ||||
Increase (decrease) in income tax
expense resulting from: |
||||||||||||
State income tax (benefit) expense,
net of
federal benefit |
(362 | ) | 517 | 60 | ||||||||
Tax-exempt income |
(318 | ) | (450 | ) | (462 | ) | ||||||
Carryback claims |
(328 | ) | - | - | ||||||||
Bank-owned life insurance |
(65 | ) | (65 | ) | (66 | ) | ||||||
Increase in valuation allowance |
3,800 | 3,505 | 423 | |||||||||
Decrease in FIN 48 |
- | - | (363 | ) | ||||||||
Other, net |
46 | 345 | 15 | |||||||||
Total income tax expense (benefit) |
$ | 360 | $ | 1,806 | $ | (50 | ) | |||||
The tax effects of temporary differences that give rise to deferred tax assets and
liabilities at December 31 are as follows:
In thousands | 2010 | 2009 | ||||||
Deferred tax assets |
||||||||
Allowance for loan losses |
$ | 3,106 | $ | 3,071 | ||||
NOL carryforward |
2,556 | - | ||||||
AMT tax credit carryforward |
565 | - | ||||||
Investment securities |
792 | 982 | ||||||
Premises and equipment |
385 | 297 | ||||||
Deposit intangible |
206 | 207 | ||||||
Deferred compensation |
1,075 | 1,072 | ||||||
Deferred income |
482 | 46 | ||||||
Nonaccrual loan interest |
238 | 89 | ||||||
Capital loss carryforward |
967 | - | ||||||
Other assets |
60 | 154 | ||||||
Total deferred tax asset |
10,432 | 5,918 | ||||||
Deferred tax liabilities |
||||||||
Unrealized losses on investment
securities available for sale |
63 | 393 | ||||||
Investment in partnership |
1,128 | - | ||||||
Deferred income accretion |
426 | - | ||||||
Total deferred tax liabilities |
1,617 | 393 | ||||||
Deferred tax asset |
8,815 | 5,525 | ||||||
Valuation allowance |
8,815 | 4,680 | ||||||
Net deferred tax asset |
$ | - | $ | 845 | ||||
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 2010, the
valuation allowance was increased by $4 million because the Corporation continues to be 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 Corporations tax returns are subject to examination by
federal tax authorities for the years 2007 through 2009 and by state authorities also for the years
2006 through 2009.
A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows:
In thousands | 2010 | 2009 | ||||||
Balance at January 1 |
$ | - | $ | 112 |
41
Table of Contents
Additions based on tax positions related to
the current year |
44 | - | ||||||
Additions for tax positions of prior years |
- | - | ||||||
Reductions for tax positions of prior years |
- | (112) | ||||||
Balance at December 31 |
$ | 44 | $ | - | ||||
The increase in the unrecognized tax position relates to a tax matter that the Corporation is
currently investigating.
Note 15 Benefit plans
Savings plan
The Bank maintains an employee savings plan under section 401(k) of the Internal Revenue Code
covering all employees with at least six months of service. Participants are allowed to make
contributions to the plan by salary reduction, up to 15% of total compensation. The Bank provides
matching contributions of 50% of the first 6% of participant salaries subject to a vesting
schedule. Contribution expense amounted to $78,000 in 2010, $23,000 in 2009 and $94,000 in 2008.
During 2009, the Bank reversed the discretionary contributions that are periodically credited to
participants accounts.
Bonus plan
The Bank awards profit sharing bonuses to its officers and employees based on the achievement of
certain performance objectives. Bonuses charged (credited) to operating expenses in 2010, 2009 and
2008 amounted to $(85,000), $(103,000), and $311,000, respectively. The credits in 2010 and 2009
resulted from decisions to permanently not pay bonuses previously accrued.
Nonqualified benefit plans
The Bank maintained a supplemental executive retirement plan (SERP), which provides a
post-employment supplemental retirement benefit to certain key executive officers. SERP expense
was $(40,000) in 2010, $66,000 in 2009 and $231,000 in 2008. The credit in 2010 resulted from the
reversal of accrued benefits to a participant who left the Bank during 2010 and was not entitled to
the benefits accrued.
The Bank also had a director retirement plan (DRIP). DRIP expense was $47,000 in 2010, $86,000
in 2009 and $2,000 in 2008. Benefits under both plans were frozen as of June 30, 2010 upon
termination of the plans.
Benefit costs 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 $257,000 in 2010, $252,000 in 2009 and $248,000 in 2008, while the related life
insurance expense was $64,000 in 2010, $59,000 in 2009 and $54,000 in 2008.
Stock options
No stock options have been issued since 1997 and there were no stock options outstanding at
December 31, 2010, 2009 and 2008.
Note 16 Preferred stock
The Corporation is authorized to issue noncumulative perpetual preferred stock in one or more
series, with no par value. Shares of preferred stock have preference over the Corporations 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 Corporations preferred stock issued and outstanding.
Year | Dividend | Stated | Number | December 31, | ||||||||||||||||||||
Issued | Rate | Value | of Shares | 2010 | 2009 | |||||||||||||||||||
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 | 9,990,000 | 9,499,000 | ||||||||||||||||||
$ | 20,277,000 | $ | 19,786,000 | |||||||||||||||||||||
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.
In 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 Corporations participation in the Treasurys TARP Capital Purchase
Program. In addition, the Corporation in 2010 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. There were no dividend payments
made on preferred stock during 2010, although such dividends have been accrued because they are
cumulative.
On May 1, 2009 the Corporation paid a cash dividend of $2.00 per share to common stockholders,
while no dividend was paid to common shareholders in 2010. The Corporation is currently unable to
determine when dividend payments may be resumed and does not expect to pay a common stock dividend
in 2011. Whether cash dividends 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.
Note 17 Restrictions on subsidiary bank dividends
Subject to applicable law, the Board of Directors of the Bank and of the Corporation may provide
for the payment of dividends when it is determined that dividend payments are appropriate, taking
into account factors including net income, capital requirements, financial condition, alternative
investment options, tax implications, prevailing economic conditions, industry practices, and other
factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory limitation on the amount
of dividends it may pay to its parent corporation, CNBC. Prior approval of the OCC is required if
42
Table of Contents
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, although
currently such approval is required to declare any dividend. Based upon this limitation, no funds
were available for the payment of dividends to the parent corporation at December 31, 2010. In
addition, pursuant to the December 14, 2010 agreement with the Federal Reserve Bank of New York,
neither the Corporation nor the Bank may pay any dividends without the approval of the Federal
Reserve Bank of New York and the Director of the Division of Banking Supervision and Regulation of
the Board of Governors; and the Consent Order with the OCC further restricts the payment of
dividends without the consent of the OCC.
Note 18 Net income per common share
The following table presents the computation of net income per common share.
In thousands, except per share data | 2010 | 2009 | 2008 | |||||||||
Net (loss) income |
$ | ( 7,457 | ) | $ | (7,822 | ) | $ | 1,058 | ||||
Dividends on preferred stock |
( 491 | ) | (1,154 | ) | (812 | ) | ||||||
Net (loss)income applicable to basic
common shares |
( 7,948 | ) | (8,976 | ) | 246 | |||||||
Dividends applicable to convertible
preferred stock |
147 | 147 | 147 | |||||||||
Net (loss) income applicable to
diluted common shares |
$ | ( 7,801 | ) | $(8,829 | ) | $ | 393 | |||||
Number of average common shares |
||||||||||||
Basic |
131,290 | 131,290 | 131,688 | |||||||||
Diluted: |
||||||||||||
Average common shares outstanding |
131,290 | 131,290 | 131,688 | |||||||||
Average potential dilutive common
shares |
16,317 | 16,317 | 16,317 | |||||||||
147,607 | 147,607 | 148,005 | ||||||||||
Net income per common share |
||||||||||||
Basic |
$(60.54 | ) | $(68.36 | ) | $1.87 | |||||||
Diluted |
(60.54 | ) | (68.36 | ) | 1.87 |
Note 19 Related party transactions
Certain directors, including organizations in which they are officers or have significant
ownership, were customers of, and had other transactions with the Bank in the ordinary course of
business during 2010 and 2009. 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 $4.5 million and $3.3
million at December 31, 2010 and 2009, respectively. The highest amount of such indebtedness
during 2010 and 2009 was $4.5 million and $3.4 million, respectively. During 2010, there were $1.5
million of new loans and paydowns totaled $317,000. All related party loans were performing as of
December 31, 2010.
Note 20 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, 2010 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 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.
2010
(Dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Investment securities
available for sale |
$ | 105,420 | $ | 3,429 | $ | 102,492 | $ | 499 | ||||||||
Loans held for sale |
- | - | - | - | ||||||||||||
Total assets |
$ | 105,420 | $ | 3,429 | $ | 102,492 | $ | 499 | ||||||||
Total liabilities |
$ | - | $ | - | $ | - | $ | - | ||||||||
2009 | ||||||||||||||||
(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 |
$ | - | $ | - | $ | - | $ | - | ||||||||
The fair value of Level 3 investments of $499,000 at December 31, 2010 was slightly less than
the related fair value of $692,000 at December 31, 2009. Most of the reduction was attributable to
a decline in value of a collateralized debt obligation (CDO).
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 bonds 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 Managements 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, 2010, the Corporation had impaired loans with outstanding principal balances of
$34.8 million. The Corporation recorded impairment charges of $4.2 million for the year ended
December 31, 2010, utilizing Level 3 inputs. Additionally, during 2010, the Corporation
transferred loans with a principal balance and an estimated fair value, less costs to sell, of
$244,000 to other real estate owned. 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 21 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 Corporations financial
instruments, the fair values of
such
43
Table of Contents
financial instruments are derived based on the amount and
timing of future cash flows, estimated discount rates, as well as managements 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, 2010 and 2009.
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 bonds 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, 2010 and 2009. 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 Banks deposit base. Management believes that the Banks core deposit
relationships provide a relatively stable, low-cost funding source that has a substantial value
separate from the deposit balances.
Short-term borrowings
For such short-term borrowings, the carrying amount was considered to be a reasonable estimate of
fair value.
Long-term debt
The fair value of long-term debt was estimated based on rates currently available to the
Corporation for debt with similar terms and remaining maturities.
Commitments to extend credit and letters of credit
The estimated fair value of financial instruments with off-balance sheet risk is not significant at
December 31, 2010 and 2009.
The following table presents the carrying amounts and fair values of financial instruments at
December 31.
2010 | 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
In thousands | Value | Value | Value | Value | ||||||||||||
Financial assets |
||||||||||||||||
Cash and other short-term Investments |
$20,778 | $20,778 | $12,308 | $12,308 | ||||||||||||
Interest-bearing deposits
with banks |
3,289 | 3,289 | 609 | 607 | ||||||||||||
Investment securities AFS |
105,420 | 105,420 | 122,006 | 122,006 | ||||||||||||
Investment securities HTM |
- | - | 40,395 | 41,782 | ||||||||||||
Loans |
244,955 | 239,242 | 276,242 | 270,054 | ||||||||||||
Loans held for sale |
- | - | 190 | 190 | ||||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
338,551 | 331,434 | 380,276 | 369,758 | ||||||||||||
Short-term borrowings |
- | - | 100 | 100 | ||||||||||||
Long-term debt |
19,200 | 19,631 | 49,000 | 49,664 | ||||||||||||
Note 22 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, 2010 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 2011 through 2015 are
$357,000, $339,000, $323,000, $331,000, and $50,000 respectively.
Rental expense under the leases amount to $817,000, $587,000 and $568,000 during 2010, 2009 and
2008 respectively. 2010 included a $115,000 settlement payment for the early termination of a
leased property that was never occupied and an $85,000 charge for early termination of lease
agreements of two closed branches.
Note 23 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 Banks 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 customers creditworthiness on a
case-by-case basis, and the amount of collateral or other security obtained is based on
managements credit evaluation of the customer.
44
Table of Contents
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, 2010 and 2009 the Bank had available mortgage commitments of $23.1 million and
$18.9 million, unused commercial lines of credit of $4 million and $19.9 million, and $1 million
and $1.1 million of other loan commitments, respectively. There was $34,000 of financial standby
letters of credit outstanding at both December 31, 2010 and December 31, 2009.
Note 24 Parent company information
Condensed financial statements of the parent company only are presented below.
Condensed Balance Sheet
December 31, | ||||||||
In thousands | 2010 | 2009 | ||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 33 | $ | - | ||||
Investment in subsidiary |
32,180 | 35,708 | ||||||
Due from subsidiary |
826 | 5,000 | ||||||
Other assets |
5 | 193 | ||||||
Total assets |
$ | 33,044 | $ | 40,901 | ||||
Liabilities and stockholders equity |
||||||||
Other liabilities |
$ | 824 | $ | 464 | ||||
Notes payable |
5,200 | 5,300 | ||||||
Subordinated debt |
4,124 | 4,124 | ||||||
Total liabilities |
10,148 | 9,888 | ||||||
Stockholders equity |
22,896 | 31,013 | ||||||
Total liabilities and stockholders equity |
$ | 33,044 | $ | 40,901 | ||||
Condensed Statement of Operations
Year Ended December 31, | ||||||||||||
In thousands | 2010 | 2009 | 2008 | |||||||||
Income |
||||||||||||
Interest income |
$ | - | $ | 1 | $ | 4 | ||||||
Other operating income |
1,100 | 78 | 31 | |||||||||
Dividends from subsidiaries |
- | 687 | 870 | |||||||||
Interest from subsidiaries |
288 | 361 | 579 | |||||||||
Total income |
1,388 | 1,127 | 1,484 | |||||||||
Expenses |
||||||||||||
Interest expense |
406 | 439 | 542 | |||||||||
Other operating expenses |
2 | 3 | 3 | |||||||||
Income tax expense |
358 | 15 | 21 | |||||||||
Total expenses |
766 | 457 | 566 | |||||||||
Income before equity in undis- tributed (loss) income of subsidiaries |
622 | 670 | 918 | |||||||||
Equity in undistributed (loss) income of subsidiaries |
(8,079 | ) | (8,492 | ) | 140 | |||||||
Net (loss) income |
$ | (7,457 | ) | $ | (7,822 | ) | $ | 1,058 | ||||
Condensed Statement of Cash Flows
Year Ended December 31, | ||||||||||||
In thousands | 2010 | 2009 | 2008 | |||||||||
Operating activities |
||||||||||||
Net (loss) income |
$ | (7,457 | ) | $ | (7,822 | ) | $ | 1,058 | ||||
Adjustments to reconcile net income to cash used in operating activities: |
||||||||||||
Equity in undistributed loss (income) of
subsidiaries |
8,079 | 8,492 | (140) | |||||||||
Decrease (increase) in other assets |
188 | 306 | (149) | |||||||||
Increase (decrease) in other liabilities |
360 | (77 | ) | 460 | ||||||||
Net cash provided by operating activities |
1,170 | 899 | 1,229 | |||||||||
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 |
(4,721 | ) | (8,925 | ) | (3,739) | |||||||
Decrease in loans to subsidiaries |
4,174 | 75 | 4,075 | |||||||||
Net cash provided by (used in) investing activities |
(547 | ) | (8,850 | ) | 336 | |||||||
Financing activities |
||||||||||||
Decrease in subordinated debt |
- | - | - | |||||||||
Decrease in notes payable |
(100 | ) | (100 | ) | (200) | |||||||
Proceeds from issuance of preferred stock |
- | 9,439 | - | |||||||||
Purchases of treasury stock |
- | (3 | ) | (51) | ||||||||
Dividends paid |
(490 | ) | (1,417 | ) | (1,286) | |||||||
Net cash (used in) provided by financing
activities |
(590 | ) | 7,919 | (1,537) | ||||||||
Increase (decrease) in cash and cash equivalents |
33 | (32 | ) | 28 | ||||||||
Cash and cash equivalents at beginning of year |
- | 32 | 4 | |||||||||
Cash and cash equivalents at end of year |
$ | 33 | $ | - | $ | 32 | ||||||
Note 25 Regulatory capital requirements
FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the
regulations in effect at December 31, 2010, 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 banks 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 was subject to the Formal Agreement with the OCC which required, among other things,
the enhancement and implementation of certain programs to reduce the Banks credit risk, along with
the development of a capital and profit plan, the development of a contingency funding plan and the
correction of deficiencies in the Banks loan administration. The Bank failed to comply with
certain
45
Table of Contents
provisions of the Formal Agreement; and failed to comply with the higher leverage ratio of 8%,
required to be maintained.
Due to the Banks condition, the OCC has required that the Bank enter into the Consent Order
of December 22, 2010 with the OCC, which contains a list of requirements. The Consent Order
supersedes and replaces the Formal Agreement. The Consent Order is summarized in Note 2. The
Consent Order among other things requires that by March 31, 2011, and thereafter, the Bank must
maintain total capital at least equal to 13% of risk-weighted assets and Tier 1 capital at least
equal to 9% of adjusted total assets. This requirement means that the Bank is not considered
well-capitalized as otherwise defined in applicable regulations
The following is a summary of City National Banks actual capital amounts and ratios as of December
31, 2010 and 2009, compared to the FDIC minimum capital adequacy requirements and the FDIC
requirements for classification as a well-capitalized Bank:
In thousands | FDIC Requirements | |||||||||||||||||||||||
Minimum Capital For Classification |
||||||||||||||||||||||||
Bank Actual | Adequacy | Well-Capitalized | ||||||||||||||||||||||
Amount Ratio | Amount Ratio | Amount Ratio | ||||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Leverage (Tier 1) capital |
$ | 31,775 | 7.45 | % | $ | 17,061 | 4.00 | % | $ | 21,326 | 5.00 | % | ||||||||||||
Risk-based capital: |
||||||||||||||||||||||||
Tier 1 |
31,775 | 11.21 | 11,339 | 4.00 | 17,009 | 6.00 | ||||||||||||||||||
Total |
35,407 | 12.49 | 22,679 | 8.00 | 28,349 | 10.00 | ||||||||||||||||||
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 | ||||||||||||||||||
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.
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.
Note 26 Summary of quarterly financial information
(unaudited) | 2010 | |||||||||||||||
Dollars in thousands, | First | Second | Third | Fourth | ||||||||||||
except per share data | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Interest income |
$5,522 | $5,273 | $4,864 | $4,575 | ||||||||||||
Interest expense |
1,998 | 1,895 | 1,839 | 1,675 | ||||||||||||
Net interest income |
3,524 | 3,378 | 3,025 | 2,900 | ||||||||||||
Provision for loan losses |
1,381 | 1,010 | 2,825 | 4,271 | ||||||||||||
Net gains on secu- rities transactions |
1 | 528 | 137 | 1,414 | ||||||||||||
Other operating income |
690 | 1,644 | 577 | 626 | ||||||||||||
Other operating expenses |
3,523 | 3,665 | 4,184 | 4,683 | ||||||||||||
Income (loss) before income tax expense |
( 689 | ) | 875 | (3,270 | ) | (4,013 | ) | |||||||||
Income tax expense (benefit) |
15 | 53 | 74 | 218 | ||||||||||||
Net income (loss) |
$( 704 | ) | $ 822 | $(3,344 | ) | $(4,231 | ) | |||||||||
Net income (loss) per share- basic |
$(6.72 | ) | $ 5.32 | $(26.43 | ) | $(33.17 | ) | |||||||||
Net income (loss) per share- diluted |
$(6.72 | ) | $ 5.32 | $(26.43 | ) | $(33.17 | ) | |||||||||
(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 secu- rities 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 | ) | |||||
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 27. Subsequent events
In February 2011, City National Bancshares Corporation deferred the payment of its regular
quarterly cash dividend of $117,987 on its Series G fixed-rate cumulative perpetual preferred stock
issued to the U.S. Treasury in connection with the Corporations participation in the Treasurys
TARP Capital Purchase Program.
In addition, the Corporation deferred its regularly scheduled quarterly interest payment of $31,162
on its junior subordinated debentures issued by the City National Bank of New Jersey Capital
Statutory Trust II.
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. Accordingly, dividends on the
remaining series of preferred stock that were payable in February 2011 were not paid.
46
Table of Contents
In April 2011, we closed a branch location in Hempstead, NY, merging the deposits into its nearby
Roosevelt, NY branch. The transaction is not expected to have a material effect on the operations
of the Corporation.
On April 1, 2011 Louis E. Prezeau retired as President and CEO of the holding company and the Bank.
His duties were concurrently assumed by Preston D. Pinkett III.
47
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 (the Company) as of December 31, 2010 and 2009, 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, 2010. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards 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 consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. 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, 2010 and 2009, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2010 in conformity with U.S. generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in note 2 to the consolidated financial statements,
the Company has suffered recurring losses from operations and has entered into a consent order with
the Office of the Comptroller of the Currency that raise substantial doubt about its ability to
continue as a going concern. Managements plans in regard to these matters are also described in
note 2. The consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ KPMG LLP
Short Hills, New Jersey
May 27, 2011
May 27, 2011
48
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 2010.
Item 9A Controls and Procedures
(a) Disclosure Controls and Procedures. The Corporations management, with the
participation of the Corporations Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Corporations disclosure controls and procedures (as such term
is defined on Rules 13a 13(e) and 15(d) 15(e) under the Exchange Act) as of the end of the
period covered by this Report. The Corporations disclosure controls and procedures are designed to
provide reasonable assurance that information is recorded, processed, summarized and reported
accurately and on a timely basis in the Corporations periodic reports filed with the SEC. Based
upon such evaluation, the Corporations Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Corporations disclosure controls and procedures
are effective to provide reasonable assurance. Notwithstanding the foregoing, a control system, no
matter how well designed and operated, can provide only reasonable, not absolute assurance that it
will detect or uncover failures within the Corporation to disclose material information otherwise
require to be set forth in the Corporations periodic reports.
(b) Changes in Internal Controls over Financial Reporting. There were no changes in our
internal controls over financial reporting during the fourth fiscal quarter of 2010 that have
materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting, except that we continued to implement the changes mandated by the Consent
Order with the OCC.
(c) | Managements 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 Corporations 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, 2010. |
This annual report does not include an attestation report of the Corporations registered public
accounting firm regarding internal control over financial reporting. Managements report was
not subject to attestation by the Corporations registered public accounting firm pursuant to
temporary rules of the Securities Exchange Commission that permit the Corporation to provide
only managements report in this annual report. |
Item 9B. Other Information
(a) Defaults Upon Senior Securities
Since the first quarter of 2010, City National Bancshares Corporation has deferred the payment of its regular quarterly cash dividends in the amount of $117,987 on its Series G fixed-rate cumulative perpetual preferred stock issued to the U.S. Treasury in connection with the Corporations participation in the Treasurys TARP Capital Purchase Program. As of the end of 2010, an aggregate of $471,950 in its Series G dividends had been deferred. The Corporation has also deferred its regularly scheduled quarterly interest payments on its junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory Trust II (the Trust), as permitted by the terms of such debentures. As of the last day of 2010, a total of $127,481 in interest under such debentures were deferred.
Since the first quarter of 2010, City National Bancshares Corporation has deferred the payment of its regular quarterly cash dividends in the amount of $117,987 on its Series G fixed-rate cumulative perpetual preferred stock issued to the U.S. Treasury in connection with the Corporations participation in the Treasurys TARP Capital Purchase Program. As of the end of 2010, an aggregate of $471,950 in its Series G dividends had been deferred. The Corporation has also deferred its regularly scheduled quarterly interest payments on its junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory Trust II (the Trust), as permitted by the terms of such debentures. As of the last day of 2010, a total of $127,481 in interest under such debentures were deferred.
In addition, dividends on all other series of the Corporations preferred stock were deferred in
the amounts set forth below, as payments of such dividends are not permitted while the Series G
Preferred is outstanding, without the consent of the holder of the Series G Preferred.
Series | Total Deferred through December 31,2010 | |||||||
A |
$ | 12,000 | ||||||
C |
2,160 | |||||||
D |
53,300 | |||||||
E |
- | 147,000 | ||||||
F |
597,275 |
(b) Departure of Executive Officer
As reported in Item 11 below, on November 30, 2010, the employment of Stanley Weeks, the Executive Vice President and Chief Credit Officer of the Bank terminated. He received a severance payment of $11,923.
As reported in Item 11 below, on November 30, 2010, the employment of Stanley Weeks, the Executive Vice President and Chief Credit Officer of the Bank terminated. He received a severance payment of $11,923.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Director | Term | Principal Occupations | ||||||
Name of Director | Age | Since | Ends | |||||
Alfonso L. Carney, Jr. |
62 | 2010 | 2011 | Board member, Port Authority of New York and New Jersey; Principal,
Rockwood Partners, LLC (providers of medical and legal consulting services) |
||||
Barbara Bell Coleman |
60 | 1995 | 2013 | President, BBC Associates, L.L.C. (consulting services) |
||||
Eugene Giscombe |
70 | 1991 | 2011 | President, Giscombe Realty, LLC (real estate brokerage, leasing and management firm); President, 103 East 125th
Street Corporation (real estate holding company) |
||||
Preston D. Pinkett III |
48 | 2010 | 2011 | President and Chief Executive Officer,
City National Bank of New Jersey and City National Bancshares Corporation (effective March 1, 2011) |
49
Table of Contents
Director | Term | Principal Occupations | ||||||
Name of Director | Age | Since | Ends | |||||
Louis E. Prezeau |
68 | 1989 | 2011 | Retired President and Chief Executive Officer,
City National Bank of New Jersey and City National Bancshares Corporation |
||||
Lemar C. Whigham |
67 | 1989 | 2013 | President, L & W Enterprises (vending machine operations) |
||||
H. ONeil Williams |
64 | 2009 | 2012 | Retired Managing Partner, Mitchell & Titus, LLP (CPA Firm) |
Alfonso L. Carney, Jr. has been Chairman of the New York Dormitory Authority which provides
low-cost capital financing and manages public construction projects since May 2009. In addition,
since 2005 Mr. Carney has also been a principal in Rockwood Partners LLC, a medical and legal
consulting firm. For the prior 30 years, he engaged in senior legal and executive positions at
major organizations and their affiliates, including Goldman Sachs, Phillip Morris Companies, and
Kraft Foods. He is an attorney with broad experience in the fields of corporate governance, social
responsibility, compliance, technology and government relations.
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 Banks 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, and a member of TAP TAP LLC, a commercial real estate holding company
also located in New York City. Mr. Giscombes 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. Giscombes extensive
experience in commercial real estate in the Banks market area provides extensive insight into the
management of the Banks commercial real estate loan portfolio. Mr. Giscombe has been Chairman of
our Board of Directors since May 1997.
Preston D. Pinkett, III has been serving as the President and Chief Executive Officer of the Bank
and the Corporation since March 1, 2011. Prior to his employment at the Bank he was a Vice
President at Prudential Financial Corporation since September 2007. Prior to his employment at
Prudential, Mr. Pinkett had been the Senior Vice President at New Jersey Economic Development
Authority (NJEDA) from 2003 to 2007. Mr. Pinkett also serves on the board of University
Ventures, Inc. a specialized small business investment company and serves as Secretary at Montclair
State University and as Vice Chairperson of the Geraldine R. Dodge Foundation. Mr. Pinkett has
developed a strong reputation as a creative, socially-conscious lender in many of the same
communities currently served by the Bank.
Louis E. Prezeau has been the President and Chief Executive Officer of the Corporation and the
Bank, serving in those capacities since 1989 until his retirement, effective March 1, 2011. He
also serves on the boards of the Bank and the Corporation and boards of several nonprofit
organizations located in the Banks market area. Mr. Prezeaus 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 Banks locations, including the main office, are
located. He is also the Chairman and Commissioner of the Parking Authority of the City of Newark,
New Jersey. 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. ONeil 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 our audit committee 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 | |||||||
Edward R. Wright
|
65 | 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 Oseguera
|
45 | 1990 | Senior Vice President, City National Bank of New Jersey, Vice President, City National Bank of New Jersey | |||||||
Preston D. Pinkett, III
|
48 | 2011 | President and Chief Executive Officer, City National Bancshares Corporation and |
50
Table of Contents
City National Bank of New Jersey (effective March 1, 2011) |
Corporate Governance
General
Our business and affairs are managed under the direction of the Board of Directors. Board members
are kept informed of our business by participating in meetings of the Board and its committees and
through discussions with corporate officers. All members also served as members of our subsidiary
bank, City National Bank of New Jersey, during 2010. It is our policy that all directors attend
the annual meeting, absent extenuating circumstances. All members of the Board attended the 2010
annual meeting.
Meetings of the Board of Directors and Committees
During 2010, the Board of Directors held eleven meetings. A quorum was present at all meetings and
no director attended fewer than 75% of the meetings held by the Board and committees of which such
director was a member.
All of our directors are also directors of the Bank. Regular meetings of our and the Banks Boards
of Directors are held monthly. Additional meetings are held when deemed necessary. In addition to
meeting as a group to review our business, certain members of the Board also serve on certain
standing committees of the Banks Board of Directors. These committees, which are described below,
serve similar functions for the Corporation.
Because of the relatively small size of our 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. Messrs. Prezeau
and Pinkett 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 our relationship and
our subsidiaries relationship to the communities they serve, 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, we are 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 our 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 Corporations by-laws,
copies of which are available upon request. We have 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. Carney (committee member
since December 2010), Williams and Whigham currently serve as members of the Committee. Mr.
Williams serves as Chairperson of the Committee. All directors currently on the Audit and
Examining Committee are considered independent under SEC and Nasdaq rules applicable to audit
committees. Mr. Pinkett was initially appointed to the Committee upon becoming a director in 2010,
but resigned from this committee upon becoming employed by the Bank and the Corporation since he
would not have been considered independent under applicable rules referenced above. Mr. Williams
is our audit committee financial expert. The Committee met four times during 2010.
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
Corporations independent registered public accounting firm, including pre-approval of all audit
and non-audit services to be performed by our independent registered public accounting firm (See
Item 14 Principal Accountant Fees and Services). The Audit and Examining Committee acts as an
intermediary between the independent auditor and us and reviews the reports of the independent
auditor. A copy of the charter may be accessed on our website located at www.citynatbank.com by
clicking on the Security & Disclosures link at the bottom of the web site.
The Loan and Discount Committee reviews all (a) loan policy changes, (b) requests for policy
exceptions, and (c) loans approved by management. Messrs. Carney (member since December 2010),
Giscombe, Pinkett (committee member since December 2010), Prezeau, Williams, Whigham and Ms.
Coleman currently serve as members of the Committee. Mr. Giscombe serves as Chairperson of this
Committee. The Committee met 10 times during 2010.
The Investment Committee reviews overall interest rate risk management and all investment policy
changes, along with purchases and sales of investments. Messrs. Carney (committee member since
December 2010), Giscombe, Pinkett (committee member since December 2010), Prezeau, Williams and
Whigham currently serve as members of this Committee. Mr. Prezeau serves as Chairperson of this
Committee. The Committee met four times during 2010.
The Personnel/Director and Management Review Committee oversees personnel matters and reviews
director and executive officer compensation, and serves as the Compensation Committee. Messrs.
Carney (committee member since December 2010), Giscombe (the Chairman of the Board of Directors),
Prezeau (our Chief Executive Officer through March 1, 2011), 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
51
Table of Contents
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 and employee compensation. Such consultant has provided
no other services. The Committee has a charter, which may be accessed on our website located at
www.citynatbank.com by clicking on the Security & Disclosures link at the bottom of the web site.
The executive officers do not play a role in the compensation process, except for the former chief
executive officer, Mr. Prezeau, who, during his tenure in such office, presented information
regarding the other executive officers to the Committee for their consideration. Mr. Prezeau was
not present while the Committee deliberated 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. The Committee met ten times during 2010. See Item 11
Executive Compensation--Compensation Discussion and Analysis for more information regarding the
role of this Committee. in January 2010 this 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 and employee compensation. The consultant did not
perform other services. See Item 11 Executive Compensation--Compensation Discussion and
Analysis-Compensation Consultant for a detailed description of the activities of the consultant.
The Marketing Committee oversees the Banks marketing plan and strategies. Ms. Coleman and Messrs.
Giscombe, Prezeau and Whigham currently serve as members of the Committee. Ms. Coleman serves as
Chairperson of the Committee. The Committee did not meet in 2010.
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
and the Consent Order, dated December 22, 2010, between the OCC and the Bank. All members of the
Board of Directors served on the Committee until December 21, 2010. On December 22, 2010, the
Board of Directors agreed to change the composition of the Compliance Committee to monitor
compliance with the Consent Order and other regulatory matters. This Committee consists of four
Board members, being Ms. Coleman and Messrs. Carney, Pinkett, and Williams. Director Williams
chairs this Committee. The Committee held twenty-two meetings during 2010.
Separation of Roles of Chairman and CEO
Mr. Giscombe serves as the Chairman of our Board of Directors and Mr. Prezeau served as Chief Executive Officer until March 1, 2011 and Mr. Pinkett began service as Chief Executive Officer thereafter. We believe 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 our operations.
Mr. Giscombe serves as the Chairman of our Board of Directors and Mr. Prezeau served as Chief Executive Officer until March 1, 2011 and Mr. Pinkett began service as Chief Executive Officer thereafter. We believe 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 our operations.
Boards Role in Risk Assessment
The Board of Directors is actively involved in oversight of risks that could affect the Corporation and the Bank. This oversight is conducted in part through committees of the Board of Directors, but the full Board of Directors has retained responsibility for general oversight of risks. The Board of Directors satisfies this responsibility through oral and written reports by each committee regarding its considerations and actions, as well as through oral and written reports directly from officers responsible for oversight of particular risks. Further, the Board of Directors oversees risks through the establishment of policies and procedures that are designed to guide daily operations in a manner consistent with applicable laws, regulations and risks acceptable to the Corporation and the Bank.
The Board of Directors is actively involved in oversight of risks that could affect the Corporation and the Bank. This oversight is conducted in part through committees of the Board of Directors, but the full Board of Directors has retained responsibility for general oversight of risks. The Board of Directors satisfies this responsibility through oral and written reports by each committee regarding its considerations and actions, as well as through oral and written reports directly from officers responsible for oversight of particular risks. Further, the Board of Directors oversees risks through the establishment of policies and procedures that are designed to guide daily operations in a manner consistent with applicable laws, regulations and risks acceptable to the Corporation and the Bank.
Code of Ethics and Conduct
The Corporation has adopted a Code of Ethics and Conduct which applies to all our 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.
The Corporation has adopted a Code of Ethics and Conduct which applies to all our 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 our executive officers and directors, and any persons owning ten percent or more of our 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 our executive officers and directors, and any persons owning 10% or more of our common stock complied with all Section 16(a) filing requirements during the year ended December 31, 2010, with the exception that Form 3 was not timely filed with respect to Mr. Carneys election as a director of the Corporation and a Form 4 was not timely filed with respect to his acquisition of 30 shares of stock of the Corporation.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and any persons owning ten percent or more of our 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 our executive officers and directors, and any persons owning 10% or more of our common stock complied with all Section 16(a) filing requirements during the year ended December 31, 2010, with the exception that Form 3 was not timely filed with respect to Mr. Carneys election as a director of the Corporation and a Form 4 was not timely filed with respect to his acquisition of 30 shares of stock of the Corporation.
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 our operating results, the individuals 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. The Committee monitors the results of the annual advisory say-on-pay proposal and incorporates such results as one of many factors considered in connection with the discharge of its responsibilities, although no such factor is assigned a quantitative weighting. Because a substantial majority (98.1%) of our stockholders approved the compensation program described in our proxy statement in 2010, the Committee did not implement changes to our executive compensation program as a result of the stockholder advisory vote.
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 our operating results, the individuals 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. The Committee monitors the results of the annual advisory say-on-pay proposal and incorporates such results as one of many factors considered in connection with the discharge of its responsibilities, although no such factor is assigned a quantitative weighting. Because a substantial majority (98.1%) of our stockholders approved the compensation program described in our proxy statement in 2010, the Committee did not implement changes to our executive compensation program as a result of the stockholder advisory vote.
52
Table of Contents
Salary
The primary factors that affect executive officers compensation are the responsibilities of the
position, the individuals job performance, our operating results 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 our receipt of TARP funds, Mr. Prezeau, the former 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 our executive officers other than Mr. Pinkett. This
provides benefits upon retirement, death and change of control. This part of our compensation
package encourages executives to remain employed by us for the long term. However, the SERP was
terminated as of June 30, 2010. See Item 11 Executive CompensationSupplemental Executive
Retirement Plan, below.
TARP/CPP Executive Compensation Compliance and Restrictions
As part of our participation in the Capital Purchase Program (CPP) of the Troubled Assets Relief
Program (TARP) and our 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. |
At the time that we entered the CPP, our SEOs understood that these restrictions or requirements
might change and waived any claim against the United States or us and our 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 we received less than $25 million of financial assistance, we are prohibited
from paying or accruing any bonus, retention award, or incentive compensation to our most
highly-compensated employee during the period that we have an outstanding obligation to the
Treasury arising from the financial assistance provided under CPP. This restriction continues until
repayment of the Treasurys 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 we participate in the CPP, our SEOs will not be entitled to any
payments upon departure from us 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 Directors Retirement
Plan (as defined below) with respect to executive officers that are also directors and the SERP.
Compensation Consultant
The Personnel/Director and Management Review Committee, which serves as our compensation 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 and employee compensation.
In that regard, the consultant performed a benchmarking study of senior officer compensation
comparing each officers salary and total cash comparison with a series of databases and peer banks
at the average, median , 60th and 75th percentiles. Also reviewed as part of that study was data
and the practices as to employment contracts, stock awards, and Supplemental Executive Retirement
Plan practices. In addition to the industry databases used for banks in the $300-$500 million asset
range, some 17 peer institutions were chosen as a representative group for comparison purposes. The
peer institutions were chosen on the basis of similar asset size, number of employees,
53
Table of Contents
number of branches, geographical proximity, business make-up and business orientation. The study
showed some senior officer salaries to be competitive with the average while others were below
average.
A similar study was performed for director cash compensation with the findings that director cash
compensation paid at that time was generally below average with that of many institutions of
similar size.
No formal compensation action was taken at the time due to the TARP restrictions and other
regulatory issues facing the bank at the time.
The consultant has also provided some other compensation and benefit services directly to the
Committee relating to officer job descriptions, existing executive and director retirement plans,
and the performance appraisal process. No services were directly performed for management.
Such consultant has provided no other services.
Prezeau Compensation
Mr. Prezeau was party to an employment agreement with the Bank and the Corporation effective May
2006 (the 2006 Agreement) which expired in May 2009. The 2006 Agreement is described below (see
Prezeau Employment AgreementMay 2006-May 2009) and provided, among other things, for bonus,
change of control and severance benefits. In April 2009, prior to the expiration of the 2006
Agreement in connection with our 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. Prezeaus employment agreement expired.
Upon expiration of such agreement until May 18, 2010, the parties operated under the terms of the
2006 Agreement, as modified by such TARP requirements, while a new agreement was negotiated. On
May 18, 2010, the parties entered into a new employment agreement which is described below (see
Prezeau Employment AgreementMay 2010 to Present). As a result, of this new agreement 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 Item
11 Executive Compensation-Supplemental Employee Retirement Plan, Executive
Compensation--Directors Compensation-Directors Retirement Plan, and Prezeau
Compensation--Prezeau Trust Agreement.
Prezeau Employment AgreementMay 2006 to May 2009
Effective as of May 2006, the Bank and the Corporation renewed the 2006 Agreement with Mr. Prezeau
to serve as the President and Chief Executive Officer of both entities. The 2006 Agreement was for
a term of three years. Under the 2006 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 our 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 our common stockholders equity. |
The performance bonus was to be paid in cash or our common stock, 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 2006 Agreement provided that upon the completion of his annual performance review, Mr. Prezeau
may be granted shares of our 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 us or our affiliates, in each case which is
material in amount or in an injury to us or our reputation, continuous or habitual alcohol or drug
abuse, habitual unexcused absence or continuous gross negligence or willful disregard for his
duties required under the 2006 Agreement), Mr. Prezeau shall receive in one lump sum in addition to
all other amounts accrued and payable under this 2006 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 2006 Agreement also provided that if the Corporation and the Bank do not offer to renew the
2006 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 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 2006 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 our Board of Directors prior to such
change in control), 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, we were to continue health benefits for his family members for one year
after death.
54
Table of Contents
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 we must continue health benefits for his family members for one year after death.
Prezeau Employment Agreement May 2010 to Present
On May 18, 2010, the Corporation and Bank entered into a new employment agreement with Mr. Prezeau
(the Agreement) to serve as the President and Chief Executive Officer of both entities. The
Agreement is for a term of one year and will automatically renew for successive one year terms
unless six months notice is given prior to the expiration of the Agreement. Under the Agreement,
Mr. Prezeau is entitled to an annual salary of $268,000, which may be increased annually at the
discretion of the Board.
Upon termination of the Agreement with or without cause, or upon death or disability, Mr. Prezeau
is entitled to receive accrued and unpaid salary and benefits thereunder as of such termination
date. In addition, solely upon (a) death while employed, we must continue health benefits for Mr.
Prezeaus family members for one year after death, and (b) disability, we must provide long term
disability benefits for Mr. Prezeau, including an additional long term disability policy providing
a disability benefit of an amount equal to two-thirds of Mr. Prezeaus annual base salary in effect
at the time of disability.
Mr. Prezeau is 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 a $1,200 per month
car allowance.
Mr. Prezeau retired effective as of March 1, 2011.
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 us. All deferrals of Mr. Prezeaus
salary were deposited by us into a trust (the Trust) established for Mr. Prezeaus 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. Prezeaus 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 us, the Corporation will receive $200,000 of the proceeds of the life insurance policy
and Mr. Prezeaus 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 our right to a portion of the proceeds in the event Mr. Prezeau
dies while he is employed by us, 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.
Pinkett Compensation and Employment Agreement
Effective March 1, 2011, the Bank and the Corporation entered into an employment agreement, as
amended (the Agreement), with Mr. Pinkett to serve as the President and Chief Executive Officer
of both entities. The Agreement is for a term of six months. Under the Agreement, Mr. Pinkett is
to receive a salary of $125,000 in cash and 667 shares of the Corporations common stock, valued at
$37.50 per share.
If the Corporation and the Bank do not offer to renew the Agreement upon its termination for any
reason whatsoever, Mr. Pinkett is entitled to receive only the amount of compensation and benefits
accrued and unpaid at the termination date.
Mr. Pinkett was required to execute a waiver disclaiming any rights to payment of a bonus as well
as any severance or change of control benefits, if any, for as long as the TARP preferred stock is
outstanding.
Mr. Pinkett is also entitled to fringe, medical, health and life insurance benefits comparable to
those received by other full-time Bank employees. Mr. Pinkett is currently not eligible to receive
401(k) benefits from the Corporation.
Messrs. Weeks, Wright and Oseguera
Other named executive officers are not parties to employment agreements with the Corporation.
Messrs. Weeks (prior to termination on November 30, 2010), Wright and Oseguera receive annual
salaries of $155,000, $131,500 and $125,730, and monthly automobile allowances of $333, $500 and
$250, respectively. The Corporation also makes 401(k) contributions on their behalf, although such
contributions ceased with respect to Mr. Weeks upon his termination. 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 us (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 our active
service, the beneficiary of the executive will receive an amount equal to the greater of that part
of the normal retirement benefit accrued by us for the executive as of the date of the executives
death or the projected retirement benefit calculated based on the executives 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 executives employment with us 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
55
Table of Contents
executives 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 executives 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 executives
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 executives employment with us 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 Item 11 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.
We terminated the SERP as of June 30, 2010, at which time all accrued benefits as of such date were
frozen.
Other Benefits and Perquisites
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. |
We also provide automobile allowances to certain executive officers. No individual named executive
officer received a total value of perquisites in excess of $25,000 during 2010. Additional details
on perquisites are provided in the Summary Compensation Table included in this Annual Report on
Form 10-K. We view certain perquisites as being beneficial to the Corporation and the Bank, in
addition to being directly compensatory to the executive officers. In addition, these perquisites,
as a minor expense to the Company and the Bank, provide a useful benefit in our efforts to recruit,
attract and retain top executive talent.
56
Table of Contents
Executive Compensation Tables
Summary Compensation Table
The following table summarizes compensation in 2010 for services to the Corporation and the Bank
paid to the Chief Executive Officers, Chief Financial Officer and to the only other two executive
officers of the Corporation whose compensation exceeded $100,000 (named executive officers).
Change in | ||||||||||||||||||||
Pension Value | ||||||||||||||||||||
and Non- | ||||||||||||||||||||
Qualified | ||||||||||||||||||||
Deferred | ||||||||||||||||||||
Name and | Compensation | All Other | ||||||||||||||||||
Principal Position | Year | Salary | Bonus | Earnings | Compensation | Total | ||||||||||||||
Louis E. Prezeau President and Chief Executive Officer, City National Bancshares Corporation and City National Bank of New Jersey (retired March 1, 2011) |
2008 2009 2010 |
$268,000 $268,000 $268,000 |
$52,500 $ 0 $ 0 |
$122,577(6) $44,247(6) $83,205(6) |
$40,065 (2) $42,404 (2) $49,178 (2) |
$483,142 $354,651 $400,383 |
||||||||||||||
Stanley M. Weeks Executive Vice President and Chief Credit Officer, City National Bank of New Jersey (terminated November 30, 2010) |
2008 2009 2010 |
$155,000 $155,000 $155,596 |
$19,100 $ 0 $ 0 |
$21,652(1) $24,094(1) $0(1) |
$8,674 (3) $8,675 (3) $19,500 (3) |
$204,426 $187,769 $175,096 |
||||||||||||||
Edward R. Wright Senior Vice President and Chief Financial Officer, City National Bancshares Corporation and City National Bank of New Jersey |
2008 2009 2010 |
$131,500 $131,500 $131,500 |
$15,630 $ 0 $ 0 |
$56,912(1) $68,928(1) $36,772(1) |
$9,464 (4) $9,944 (4) $9,944 (4) |
$213,506 $210,37 $178,216 |
||||||||||||||
Raul Oseguera Senior Vice President, City National of Bank New Jersey |
2008 2009 2010 |
$111,500 $111,500 $125,730 |
$17,230 $ 0 $ 0 |
$20,828(1) $22,609(1) $13,759(1) |
$6,875 (5) $6,345 (5) $6,772 (5) |
$156,433 $140,454 $146,261 |
||||||||||||||
(1) | Represents the change in the net present value of benefits during 2010 from the taking
into consideration each executives 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 our profit sharing plan of $7,777, $8,040, and $8,040 in 2008,
2009 and 2010, respectively. Also includes $11,088, $10,164 and $11,988 in 2008, 2009 and
2010 representing Mr. Prezeaus use of a Bank-leased automobile in such years. Includes
Director Fees paid in cash of $18,000, $24,200, and $29,150 in 2008, 2009 and 2010,
respectively. Also includes contributions to a trust created pursuant to a Trust Agreement
(see section below titled Prezeau Trust Agreement) of $3,200, $6,694 and $0 in 2008, 2009
and 2010, respectively, to reimburse the trust for payment of life insurance premiums on the
life of Mr. Prezeau. |
|
(3) | Includes payments made under our profit sharing plan of $3,874, $3,875 and $3,577 in 2008,
2009 and 2010, respectively, and automobile allowance payments of $4,800, $4,800 and $4,000 in
2008, 2009 and 2010, respectively. The 2010 entry includes $11,923 in severance. |
|
(4) | Includes payments made under our profit sharing plan of $3,464, $3,944, and $3,944 in 2008,
2009 and 2010, respectively, and automobile allowance payments of $6,000, $6,000 and $6,000,
in 2008, 2009 and 2010, respectively. |
|
(5) | Includes payments made under our profit sharing plan of $3,875, $3,345, and $3,772 in 2008,
2009 and 2010, respectively, and automobile allowance payments of $3,000, $3,000 and $3,000,
in 2008, 2009 and 2010, respectively. |
|
(6) | Includes Changes in Pension Value of $4,089, $1,716, and $9,991 in 2008, 2009 and 2010,
respectively, from the Directors Retirement Plan, Changes in Pension Value of $118,488,
$24,471 and $73,214 in 2008, 2009 and 2010, respectively, from the SERP and $18,080 of the
above market return from the trust created pursuant to the Trust Agreement in 2009. There was
no above market return for such trust in 2010. The above market return from the trust created
pursuant to the Trust Agreement is not reflected for year 2008. |
57
Table of Contents
Pension Benefits Table
The following table provides information for the named executive officers for the year ended
December 31, 2010
Present Value of | ||||||||||||||||||||||
Plan name | Number of Years of | Accumulated Benefits | Payments During | |||||||||||||||||||
Name | Credited Service | (Accrued 12-31-10) | Last Fiscal Year | |||||||||||||||||||
Louis E. Prezeau(1) |
SERP | 21 | $ | 1,465,000 | $0 | |||||||||||||||||
Louis E. Prezeau(2) |
Directors Retirement Plan |
21 | $ | 64,102 | $0 | |||||||||||||||||
Stanley M. Weeks(3) |
---- | ---- | ---- | $0 | ||||||||||||||||||
Edward R. Wright (4) |
SERP | 16 | $ | 413,229 | $0 | |||||||||||||||||
Raul Oseguera |
SERP | 20 | $ | 93,914 | $0 | |||||||||||||||||
(1) | Mr. Prezeau received a lump sum-payment of $1,465,000 on his retirement date of March 1,
2011. See Item 11 Executive Compensation--Supplemental Employee Retirement Plan. |
|
(2) | Mr. Prezeau is currently eligible for normal retirement under the Directors Retirement Plan.
See Item 11 Executive CompensationDirector Compensation--Directors Retirement Plan. |
|
(3) | Stanley Weeks employment terminated in November 2010 and as of the plan measurement date
used for financial statement reporting purposes he was not eligible for any benefits. |
|
(4) | Mr. Wright is currently eligible for normal retirement under the SERP. See Item 11 Executive
Compensation--Supplemental Employee Retirement Plan. |
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 our
named executive officers (other than Mr. Weeks) if employment with the Bank had been terminated on
December 31, 2010. These payments are considered estimates as they contain certain assumptions
regarding discount rate, vesting, life expectancy and salary. Mr. Weeks employment terminated in
November 2010. He was not entitled to any termination payments as a result of such termination but
received $11,923 in discretionary severance.
SERP Retirement |
||||||||||||||||||||||
Payment | Dismissal Without Cause | Payments Upon a | ||||||||||||||||||||
Name | assuming | (No Change-in-Control) | Change-in-Control(4) | Death | ||||||||||||||||||
Termination | ||||||||||||||||||||||
at 12-31-10 | ||||||||||||||||||||||
Louis E. Prezeau |
$1,539,048(1) | $ | 0 | $ | 1,539,048 | $ | 171,754 | |||||||||||||||
Edward R. Wright |
$450,001(3) | $ | 0 | $450,001 | $ | 450,001 | ||||||||||||||||
Raul Oseguera |
$0(2) | $ | 0 | $ 84,457 | $ | 84,457 | ||||||||||||||||
(1) | Represents a lump sum payment as a result of normal retirement. Mr.
Prezeaus benefit includes a $74,093 lump sum payment from the Directors
Retirement Plan. |
|
(2) | Not entitled to benefits because such benefits were not vested at December 31,
2010. |
|
(3) | Mr. Wright has reached normal retirement age. |
|
(4) | Payments do not give effect to TARPs 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. Prezeaus payment includes $74,093 from the Directors
Retirement Plan. |
58
Table of Contents
Non-Qualified Deferred Compensation Table
The following table lists certain information with respect to the Trust Agreement established with
respect to Mr. Prezeau.
Executive |
Registrant | Aggregate | Aggregate | ||||||||||||||||||||||||
contributions in | contributions in | Aggregate | withdrawals/distributions | balance at 2010 | |||||||||||||||||||||||
2010 | 2010 | earnings in 2010 | in 2010 | year end | |||||||||||||||||||||||
Name | ($) | ($) | ($) | ($) | ($)s | ||||||||||||||||||||||
Louis E. Prezeau |
$0 | $0 | $ | 6,889 | $ | 50,000 | $ | 236,213 | |||||||||||||||||||
Director Compensation
Each of our directors receives an annual retainer of $4,000 (with the exception of Messrs. Carney
and Pinkett with respect to such retainer), 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. Directors are eligible to receive bonuses based on our overall earnings
performance for the previous fiscal year as determined by our chief executive officer.
Directors Retirement Plan
Effective January 1, 1997, we instituted a director retirement plan (Directors 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
directors 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 directors 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 our 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 directors 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 us for such director
as of the date of such directors death or the normal retirement benefit described above.
We may amend or terminate this plan at any time prior to termination of service by the director,
provided that all benefits accrued by us 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.
We terminated the plan as of June 30, 2010, at which time all benefits accrued as of such date
became fully vested.
Director Compensation Table
Annual compensation paid to directors in 2010 is presented in the table below for all directors
other than Mr. Prezeau, whose compensation is reflected in the Summary Compensation Table (see
Item 10 Executive CompensationExecutive Compensation TablesSummary Compensation Table).
Change in Pension Value and | ||||||||||||||||||||||
Fees Earned or | Non-Qualified | |||||||||||||||||||||
Paid in Cash (1) | Deferred Compensation Earnings | All Other | ||||||||||||||||||||
Name | (2) | Compensation | Total | |||||||||||||||||||
Preston D. Pinkett III (3) |
$3,000 | $0 | $0 | $3,000 | ||||||||||||||||||
Alfonso L. Carney, Jr.(3) |
$900 | $0 | $0 | $900 | ||||||||||||||||||
Barbara Bell Coleman |
$30,300 | $4,792 | $0 | $35,092 | ||||||||||||||||||
Eugene Giscombe* |
33,350 | 10,331 | $0 | $43,681 | ||||||||||||||||||
Lemar C. Whigham |
29,150 | 9,991 | $0 | $39,141 | ||||||||||||||||||
H. ONeil Williams |
31,450 | $0 | $0 | $44,297 | ||||||||||||||||||
*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 2010 under the Directors Retirement Plan taking into account the age of each
director, a present value factor, an interest discount factor and time remaining |
59
Table of Contents
until retirement. The pension and director retirement plans were terminated as of June 30,
2010 with the accrued benefits frozen at the levels at that date. |
||
(3) | Messrs. Carney and Pinkett were not eligible to receive the $4,000 annual retainer since
their service on the Board commenced at the end of December 2010. |
Compensation Committee Report
A discussion of the principles, objectives, components, analyses and determinations of the
Personnel/Director and Management Review 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 Committees 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, prior to termination,
encouraged 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 our 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 our 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 review and discussion, we recommend that the section be included in our annual report on
Form 10-K for the year-ended December 31, 2010 and the 2011 proxy statement.
Alfonso L. Carney, Jr.
Barbara Bell Coleman, Chairperson
Eugene Giscombe
Louis E. Prezeau
Lemar C. Whigham
H. ONeil Williams
Date: April 29, 2011
Barbara Bell Coleman, Chairperson
Eugene Giscombe
Louis E. Prezeau
Lemar C. Whigham
H. ONeil Williams
Date: April 29, 2011
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 2010. 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, Ms. Coleman
and Messrs. Carney, Giscombe, Whigham, Williams and Prezeau are members of the Personnel/Director
and Management Review Committee. Mr. Prezeau was our President and CEO until March 1, 2011.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Stock Ownership of Management and Principal Shareholders
The following table presents information about the beneficial ownership of our common stock at
April 1, 2011 by each person who is known by us to beneficially own more than five percent (5%) of
the issued and outstanding common stock, each director and each of our 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 | Percent of | |||||||||||
Name of Beneficial Owner | Owned | Class | ||||||||||
Alfonso L. Carney, Jr., Director
|
30 | * | ||||||||||
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) |
8.1 |
% |
||||||||
Preston D. Pinkett, III, President and CEO c/o City National Bancshares Corporation 900 Broad Street Newark, New Jersey 07102 |
363 | (2) | * | |||||||||
Louis E. Prezeau, Director, Retired President and CEO c/o City National Bancshares Corporation |
23,218 | (3) | 17.7 | % | ||||||||
60
Table of Contents
900 Broad Street Newark, New Jersey 07102
|
||||||||||||
Lemar C. Whigham, Director c/o City National Bancshares Corporation 900 Broad Street Newark, New Jersey 07102 |
9,624 | (4) | 7.3 | % | ||||||||
H. ONeil Williams, Director
|
773 | * | ||||||||||
Raul Oseguera, Senior Vice President
|
750 | * | ||||||||||
Stanley M. Weeks, Former Executive Vice President
|
408 | * | ||||||||||
Edward R. Wright, Senior Vice President and CFO
|
5,000 | 3.8 | % | |||||||||
Directors and named executive officers as a group (10 persons)
|
51,923 | (2) | 39.5 | % | ||||||||
Carolyn M. Whigham, 5% stockholder 580 Dr. Martin Luther King Jr. Blvd., Newark, NJ 07102 |
8,495 | 6.5 | % | |||||||||
(1) | Includes 780 shares held by his wife. |
|
(2) | Includes 222 shares vesting within 60 days of April 1, 2011 |
|
(3) | Includes 2,375 shares held by his sons, 110 shares held by his daughter and 1,402
shares held by his wife. |
|
(4) | 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 and Preston
D. Pinkett, III (upon commencement of service as President and Chief Executive Officer of the
Corporation) are independent within the meaning of the Nasdaq listing standards, the exchange
whose standards we use in determining director independence. 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.
Item 14. Principal Accountant Fees and Services
The accounting firm of KPMG LLP served as the independent registered public accountants for the
Corporation for the year ended December 31, 2010. Services provided included the examination of
the consolidated financial statements and preparation of the tax returns.
The Board has appointed KPMG LLP as the independent registered public accountants for the
Corporation and the Bank for 2011. Stockholder ratification of the appointment is not required
under the laws of the State of New Jersey, but the Board has decided to ascertain the position of
the stockholders on the appointment. The Board may reconsider the appointment if it is not
ratified. The affirmative vote of a majority of the shares voted at an annual meeting to be held
will be required for ratification.
The Corporation incurred the following fees for services provided by KPMG LLP:
2010 | 2009 | |||||||
Audit fees |
$ | 325,000 | $ | 250,000 | ||||
Audit-Related Fees |
0 | 0 | ||||||
Tax fees |
38,000 | 88,000 | ||||||
All Other Fees |
0 | 0 | ||||||
$ | 363,000 | $ | 338,000 | |||||
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 auditors independence. During 2010 and 2009, 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 LLPs independence.
Part IV
61
Table of Contents
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, 2010 and 2009, 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 auditors 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.
62
Table of Contents
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/ Preston D. Pinkett III | By: | /s/ Edward R. Wright | |||
Preston D. Pinkett III President and Chief |
Edward R. Wright Chief Financial Officer |
|||||
Executive Officer | and Principal Accounting Officer | |||||
Date:
|
May 27, 2011 | Date: | May 27, 2011 |
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/ Eugene Giscombe
|
Director, | May 27, 2011 | ||
Eugene Giscombe
|
Chairperson of the Board | |||
/s/ Preston D. Pinkett III
|
Director, | May 27, 2011 | ||
Executive Officer | ||||
s/ Barbara Bell Coleman
|
Director | May 27, 2011 | ||
Barbara Bell Coleman |
||||
/s/ Lemar C. Whigham
|
Director | May 27, 2011 | ||
Lemar C. Whigham |
||||
/s/ H. ONeil Williams
|
Director | May 27, 2011 | ||
H. ONeil Williams |
||||
/s/ Alfonso Carney
|
Director | May 27, 2011 | ||
Alfonso Carney |
||||
/s/Louis E. Prezeau
|
Director | May 27, 2011 | ||
Louis E. Prezeau |
63
Table of Contents
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |
(3)(a)
|
The Corporations Restated Articles of Incorporation (incorporated herein by reference to Exhibit (3)(d) of the Corporations Current Report on Form 8-K dated July 28, 1992). | |
(3)(b)
|
Amendments to the Corporations Articles of Incorporation establishing the Corporations Non-cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit (3)(b) of the Corporations Annual Report on Form 10-K for the year ended December 31, 1995). | |
(3)(c)
|
Amendments to the Corporations Articles of Incorporation establishing the Corporations Non-cumulative Perpetual Preferred Stock, Series B (incorporated herein by reference to Exhibit (3)(c) of the Corporations Annual Report on Form 10-K for the year ended December 31, 1995). | |
(3)(d)
|
Amendments to the Corporations Articles of Incorporation establishing the Corporations Non-cumulative Perpetual Preferred Stock, Series C (incorporated herein by reference to Exhibit (3(i) to the Corporations Annual Report on Form 10-K for the year ended December 31, 1996). | |
(3)(e)
|
Amendments to the Corporations Articles of Incorporation establishing the Corporations Non-cumulative Perpetual Preferred Stock, Series D (incorporated herein by reference to Exhibit (3)(i) filed with the Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). | |
(3)(f)
|
Amendments to the Corporations Articles of Incorporation establishing the Corporations Non-cumulative Perpetual Preferred Stock, Series E (incorporated herein by reference to Exhibit (3)(i) filed with the Corporations Quarterly Report on Form 10-Q filed on March 4, 2005). | |
(3)(g)
|
Amendments to the Corporations Articles of Incorporation establishing the Corporations MultiMode Series F Non-cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit (3)(f) to the Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). | |
(3)(h)
|
Amendment to the Corporations Articles of Incorporation establishing the Fixed Rate Cumulative Perpetual Preferred Stock, Series G (incorporated herein by reference to Exhibit 3.1 to the Corporations Current Report on Form 8-K dated April 10, 2009). | |
(3)(i)
|
Amendment to the Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations 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 Corporations Current Report on Form 8-K dated December 4, 2006). |
64
Table of Contents
(10)(c)
|
The Employment Agreement among the Corporation, the Bank and Louis E. Prezeau dated May 10, 2010 (incorporated herein by reference to Exhibit (10.1) to the Corporations Current Report on Form 8-K dated May 18, 2010). | |
(10)(d)
|
Amended and Restated Asset Purchase and Sale Agreement between the Bank and Carver Federal Savings Bank dated as of February 27, 2001 (incorporated by reference to Exhibit 10(d) to the Corporations Annual Report on Form 10-K for the year ended December 31, 2000). | |
(10)(e)
|
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 Corporations Annual Report on Form 10-K for the year ended December 31, 2001). | |
(10)(f)
|
Pledge Agreement dated December 28, 2001 by and between the Corporation and National Community Investment Fund (incorporated by reference to Exhibit (g) to the Corporations Annual Report on Form 10-K for the year ended December 31, 2001). | |
(10)(g)
|
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 Corporations Annual Report on Form 10-K for the year ended December 31, 1998). | |
(10)(h)
|
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 Corporations Quarterly Report on Form 10-Q for quarter ended March 31, 2002). | |
(10)(i)
|
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 Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2004). | |
(10)(j)
|
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 Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2004). | |
(10)(k)
|
Purchase Agreement dated September 27, 2005 by and between Sandler ONeil & Partners, L.P., and the Corporation with respect to issue and sale of 7,000 shares of the Corporations MultiMode Series F Non-cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit (10)(n) to the Corporations Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). | |
(10)(l)
|
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 Corporations Current Report on Form 8-K dated February 23, 2007). | |
(10)(m)
|
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 Corporations Current Report on Form 8-K dated March 14, 2007). | |
(10)(n)
|
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 Corporations Current Report on Form 8-K dated April 10, 2009). |
65
Table of Contents
(10)(o)
|
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 Corporations 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 (incorporated herein by reference to Exhibit 10.3 to the Corporations Current Report on Form 8-K dated April 10, 2009). | |
(10)(q)
|
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 Corporations Current Report on Form 8-K dated April 10, 2009). | |
(10)(r)
|
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 Corporations Current Report on Form 8-K dated April 10, 2009). | |
(10)(s)
|
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 Corporations Current Report on Form 8-K dated June 29, 2009). | |
(10)(t)
|
Form of Directors Retirement Agreement (the Directors 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(u)
|
First Amendment to Credit Agreement, dated as of November 3, 2010, by and among the Corporation, and The Prudential Insurance Company of America (incorporated by reference to Exhibit 10.1 to the Corporations Current Report on Form 8-K dated November 3, 2010. | |
10(v)
|
Consent Order dated December 22, 2010 between the Bank and the OCC (incorporated by reference to Exhibit 10.1 to the Corporations Form 8-K filed on December 29, 2010) | |
10(w)
|
Agreement dated December 14, 2010 between the Corporation and the Federal Reserve Bank of New York (incorporated by reference to Exhibit 10.2 to the Corporations Form 8-K filed on December 29, 2010) | |
10(x)
|
Employment Agreement, effective as of March 1, 2011, by and between the Bank and Preston D. Pinkett III (incorporated by reference to Exhibit 10.1 to the Corporations Form 8-K filed on March 9, 2011). | |
10(y)
|
TARP Waiver, executed by Preston D. Pinkett, III, effective as of March 1, 2011 (incorporated by reference to Exhibit 10.2 to the Corporations Form 8-K filed on March 9, 2011). | |
(11)
|
Statement regarding computation of per share earnings. The required information is included in Note 18. | |
(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). |
66