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, 2007, CNBC had consolidated total assets of $449.7 million, total deposits of $394.9 million and stockholders’ equity of $28.9 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. Deposit services include savings, checking, certificates of deposit, money market and retirement accounts. The Bank also provides many forms of small to medium size business financing, including revolving credit, credit lines, term loans and all forms of consumer financing, including auto, home equity and mortgage loans and maintains banking relationships with several major domestic corporations.
The Bank owns a thirty-three percent interest in a leasing company, along with two other minority banks and has small investments in a Haitian financial organization that provides microloan financing to rural Haitian individuals for business purposes and a mutual fund which invests in targeted projects throughout the country that are eligible for Community Reinvestment Act (“CRA”) credit.
Both City National Bancshares Corporation and City National Bank have been designated by the United States Department of the Treasury as community development enterprises (“CDE’s”). This designation means that the Department of Treasury has formally recognized CBNC and CNB for “having a primary purpose of promoting community development” and will facilitate attracting capital by allowing both entities to benefit from the federal government’s New Market Tax Program, as well as from the Bank enterprise Award (“BEA”) program, which provides awards for making investments or opening branch offices in low-income areas within the Bank’s market area.
The Bank has been, and intends to continue to be, a community-oriented financial institution providing financial services and loans for housing and commercial businesses within its market area. The Bank oversees its nine-branch office network from its headquarters located in downtown Newark, New Jersey. The Bank operates three branches (including the headquarters) in Newark, and one each in Hackensack and Paterson, New Jersey. As a result of the acquisitions of two branches from a thrift organization, the Bank also operates a branch in Brooklyn, New York and one in Roosevelt, Long Island. The Bank opened de novo branches in Hempstead, Long Island in 2002 and Manhattan, New York in 2003. The Bank also acquired a branch office in Philadelphia, Pa from another financial institution.
The Bank gathers deposits primarily from the communities and neighborhoods in close proximity to its branches. Although the Bank lends throughout the New York City metropolitan area,
the substantial majority of its real estate loans are secured by properties located in New Jersey. The Bank’s customer base, like that of the urban neighborhoods which it serves, is racially and ethnically diverse and is comprised of mostly low to moderate income households. The Bank has sought to set itself apart from its many competitors by tailoring its products and services to meet the needs of its customers, by emphasizing customer service and convenience and by being actively involved in community affairs in the neighborhoods and communities which it serves. The Bank believes that its commitment to customer and community service has permitted it to build strong customer identification and loyalty, which is essential to the Bank’s ability to compete effectively. The Bank offers various investment products, including mutual funds.
The Bank does not have a trust department. Sales of annuities and mutual funds are offered to customers under a networking agreement with other financial institutions through the Independent Community Bankers of America.
Competition
The market for banking and bank related services is highly competitive. The Bank competes with other providers of financial services such as other bank holding companies, commercial banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressures. Competition is expected to intensify as a consequence of interstate banking laws now in effect or that may be in effect in the future. CNB competes by offering quality products and convenient services at competitive prices. CNB regularly reviews its products and locations and considers various branch acquisition prospects.
Management believes that as New Jersey’s only African-American owned and controlled Bank, it has a unique ability to provide commercial banking services to low and moderate income segments of the minority community.
Supervision and regulation
The banking industry is highly regulated. The following discussion summarizes some of the material provisions of the banking laws and regulations affecting City National Bancshares Corporation and City National Bank of New Jersey.
Governmental policies and legislation
The policies of regulatory authorities, including the Federal Reserve Bank and the Federal Deposit Insurance Corporation, have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. An important function of the Federal Reserve Bank is to regulate national monetary policy by such means as open market dealings in securities, the establishment of the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits.
The efforts of national monetary policy have a significant impact on the business of the Bank, which is measured and managed through its interest rate risk policies.
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30, 2002, added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting. The Sarbanes-Oxley Act provides for, among other things a prohibition on personal loans made or arranged by the issuer
to its directors and executive officers (except for loans made by a bank subject to Regulation O), independence requirements for audit committee members, independence requirements for company auditors, certification of financial statements on SEC Forms 10-K and 10-Q reports by the chief executive officer and the chief financial officer, two-business day filing requirements for insiders filing SEC Form 4s, restrictions on the use of non-GAAP financial measures in press releases and SEC filings, the formation of a public accounting oversight board and various increased criminal penalties for violations of securities laws.
Bank holding company regulations
CNBC is a bank holding company within the meaning of the Bank Holding Company Act (the “Act”) of 1956, and as such, is supervised by the Board of Governors of the Federal Reserve System (the “FRB”).
The Act prohibits CNBC, with certain exceptions, from acquiring ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks. The Act also requires prior approval by the FRB of the acquisition by CNBC of more than five percent of the voting stock of any additional bank. The Act also restricts the types of businesses, activities, and operations in which a bank holding company may engage.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”) enabled bank holding companies to acquire banks in states other than its home state, regardless of applicable state law. The Interstate Banking and Branching Act also authorized banks to merge across state lines, thereby creating interstate branches. Under such legislation, each state had the opportunity to “opt out” of this provision. Furthermore, a state may “opt-in” with respect to de novo branching, thereby permitting a bank to open new branches in a state in which the bank does not already have a branch. Without de novo branching, an out-of-state commercial bank can enter the state only by acquiring an existing bank or branch. The vast majority of states have allowed interstate banking by merger but not authorized de novo branching.
New Jersey enacted legislation to authorize interstate banking and branching and the entry into New Jersey of foreign country banks. New Jersey did not authorize de novo branching into the state. However, under federal law, federal savings banks which meet certain conditions may branch de novo into a state, regardless of state law.
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial Modernization Act of 1999 into law. The Modernization Act will allow bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than currently is permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies. If a bank holding company elects to become a financial holding company, it may file a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals. It also allows insurers and other financial services companies to acquire banks, removes various restrictions that currently apply to bank holding company ownership of securities firms and mutual fund advisory companies and establishes the overall regulatory structure
applicable to bank holding companies that also engage in insurance and securities operations.
The Modernization Act also modifies other current financial laws, including laws related to financial privacy and community reinvestment.
Regulation of bank subsidiary
CNB is subject to the supervision of, and to regular examination by the Office of the Comptroller of the Currency of the United States (the “OCC”).
Various laws and the regulations thereunder applicable to CNB impose restrictions and requirement in many areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of loans and investments, consumer protection and other matters. There are various legal limitations on the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its non-bank subsidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or nonbank subsidiaries of its parent (other than direct subsidiaries of such bank) or, subject to broader exceptions, take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extension of credit permitted by such exceptions.
CNBC is a legal entity separate and distinct from its subsidiary bank. CNBC’s revenues (on a parent company only basis) result from dividends paid to CNBC by its subsidiary. Payment of dividends to CNBC by CNB, without prior regulatory approval, is subject to regulatory limitations. Under the National Bank Act, dividends may be declared only if, after payment thereof, capital would be unimpaired and remaining surplus would equal 100% of capital. Moreover, a national bank may declare, in any one year, dividends only in an amount aggregating not more than the sum of its net profits for such year and its retained net profits for the preceding two years. In addition, the bank regulatory agencies have the authority to prohibit a bank subsidiary from paying dividends or otherwise supplying funds to a bank holding company if the supervising agency determines that such payment would constitute an unsafe or unsound banking practice.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled FDIC-insured depository institution or any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default, or deferred by the FDIC. Further, under FIRREA, the failure to meet capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. In addition, each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized”, and to take
certain mandatory and discretionary supervisory actions based on the capital level of the institution.
The OCC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it has a total risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital ratio of at least 6%, has a Tier 1 leverage ratio of at least 5%, and meets certain other requirements. An institution will be classified as “adequately capitalized” if it has a total risk-based capital ratio of at least 8%, has a Tier 1 risk-based capital ratio of at least 4%, and has Tier 1 leverage ratio of at least 4%. An institution will be classified as “undercapitalized” if it has a total risk-based capital ratio of less than 6%, has a Tier 1 risk-based capital ratio of less than 3%, or has a Tier 1 leverage ratio of less than 3%. An institution will be classified as “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, or a Tier I risk-based capital ratio of less than 3%, or a Tier I leverage ratio of less than 3%. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2%. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination.
Insured institutions are generally prohibited from paying dividends or management fees if after making such payments, the institution would be “undercapitalized”. An “undercapitalized” institution also is required to develop and submit to the appropriate federal banking agency a capital restoration plan, and each company controlling such institution must guarantee the institution’s compliance with such plan.
As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.
Community reinvestment
Under the Community Reinvestment Act (“CRA”), as implemented by OCC regulations, a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a national bank, to
assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. CNB received an “Outstanding” CRA rating in its most recent examination.
Government policies
The earnings of the Corporation are affected not only by economic conditions, but also by the monetary and fiscal policies of the United States and its agencies, especially the Federal Reserve Board. The actions of the Federal Reserve Board influence the overall levels of bank loans, investments and deposits and also affect the interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant affect on the operating results of commercial banks in the past and are expected to do so in the future. The nature and impact of future changes in monetary and fiscal policies on the earnings of the Corporation cannot be determined.
Employees
On December 31, 2007, CNBC and its subsidiaries had 99 full-time equivalent employees. Management considers relations with employees to be satisfactory.
Item 1a.
Item 1a. Risk factors
Shares of CNBC common stock, while publicly traded on the over-the-counter market, are not readily marketable. The last reported over-the-counter trade occurred in 1990. Accordingly, shareholders of the Corporation’s common stock may encounter significant difficulty when attempting to dispose of their shares.
All issues of the Corporation’s preferred stock are restricted and may be transferred or otherwise disposed of only under certain conditions. Accordingly, preferred shareholders may also encounter significant difficulties when attempting to liquidate their stock.
Some of the material risks and uncertainties that management believes affect the Corporation are described below. Additional risks and uncertainties that management is not aware of or that management currently considers insignificant may also impair the Corporation’s business operations. If any of those risks occur, the Corporation’s financial condition and results of operations could be materially and adversely affected.
Changes in interest rates
The Corporation’s earnings and cash flows are largely dependent upon its net interest income. Interest rates are highly sensitive to many factors that are beyond the Corporation’s control, including general economic conditions, competition, and policies of various government and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest received on loans and investment securities and the amount of interest the Corporation pays on deposits and borrowings, but such changes could also affect the Corporation’s ability to originate loans and obtain deposits, the fair value of the Corporation’s financial assets and liabilities, and the average duration of the Corporation’s assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Corporation’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the
interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
Additionally, higher interest rates may be impact the ability of the Bank’s borrowers to repay their loans, possibly requiring an increase in the allowance for loan losses. The Bank’s church borrowers may be more adversely affected given their limited ability to pass on cost increases to congregation members.
Competition
The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. The Corporation competes with other providers of financial services such as other bank holding companies, commercial and savings banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, title agencies, asset managers, insurance companies and a growing list of other local, regional and national institutions which offer financial services. If the Corporation is unable to compete effectively, it will lose market share and income generated from loans, deposits, and other financial products will decline.
Regulation
The Corporation, through its principal subsidiary City National Bank of New Jersey, is subject to extensive federal and state regulations and supervision. Banking regulations are primarily intended to protect depositor’s funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Corporation’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. The Corporation is also subject to a number of federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification.
Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Corporation’s business, financial condition and results of operations. The Corporation’s compliance with certain of these laws will be considered by banking regulators when reviewing bank merger and bank holding company acquisitions.
Changes in economic conditions within the Corporation’s market area
Economic conditions have significantly deteriorated in numerous parts of the United States, including to a lesser extent, the Corporation’s market area. This has led to higher levels of nonperforming loans in the Bank’s portfolio along with illiquidity in certain segments of the Bank’s investment portfolio, conditions which could remain or worsen if economic conditions deteriorate further.
Item 2.
Item 2. Properties
The corporate headquarters and main office as well as the operations and data processing center of CNBC and CNB are located in Newark, New Jersey on property owned by CNB. The Bank has four other branch locations in New Jersey and four in the state of New York. Four of the locations are in leased space while the others are owned by the Bank.
The New Jersey branch offices are located in Newark, which is owned, Hackensack, which is leased and in Paterson, which is also leased. The New York branches are located in Roosevelt
and Hempstead, Long Island, and one in Harlem, New York, which are leased and Brooklyn, New York, which is owned.
In addition to its branch network, the Bank currently maintains four ATM’s at remote sites.
Item 3.
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.
Item 4. Submission of matters to a vote of security holders
During the fourth quarter of 2007 there were no matters submitted to stockholders for a vote.
Part II
Item 5.
Item 5. Market for the registrant’s common equity and related stockholders matters
The Corporation’s common stock, when publicly traded, is traded over-the-counter. The common stock is not listed on any exchange and is not quoted on the National Association of Securities Dealers’ Automated Quotation System. The last customer trade effected by a market maker was unsolicited and occurred on November 2, 1990. No price quotations are currently published for the common stock, nor is any market maker executing trades. No price quotations were published during 2007.
At March 4, 2008 the Corporation had 1,314 common stockholders of record.
On April 20, 2007, the Corporation paid a cash dividend of $3.50 per share to stockholders of record on April 6, 2006. Whether cash dividends on the common stock will be paid in the future depends upon various factors, including the earnings and financial condition of the Bank and the Corporation at the time. Additionally, federal and state laws and regulations contain restrictions on the ability of the Bank and the Corporation to pay dividends.
Form 10-K
The annual report filed with the Securities and Exchange Commission on Form 10-K is available without charge upon written request to City National Bancshares Corporation, Edward R. Wright, Senior Vice President and Chief Financial Officer, 900 Broad Street, Newark, New Jersey, 07102.
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Item 6.
Item 6. Selected Financial Data
Five-Year Summary
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this analysis is to provide information relevant to understanding and assessing the results of operations for each of the past three years and financial condition for each of the past two years for City National Bancshares and its subsidiaries (the “Corporation” or the “Bank”).
Cautionary statement concerning forward-looking statements
This management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s expectations about new and existing programs and products, relationships, opportunities, and market conditions. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to, unanticipated changes in the direction of interest rates, effective income tax rates, loan prepayment assumptions, deposit growth, the direction of the economy in New Jersey and New York, continued levels of loan quality, continued relationships with major customers as well as the effects of general economic conditions and legal and regulatory issues and changes in tax regulations. Actual results may differ materially from such forward-looking statements. The Corporation assumes no obligation for updating any such forward-looking statement at any time.
Executive summary
2007 was a very challenging year for the Corporation and most of the banking industry, which was negatively affected by significant losses incurred on subprime loan holdings. While the Corporation has no direct exposure to these types of loans, interest spreads continued to be restricted by the flat yield curve that existed most of the year. In addition, higher costs resulting from a branch acquisition reduced earnings.
2007 also included some positives. As a result of losses in the subprime market, the Federal Reserve Bank dropped the Federal funds target rate 100 basis points, from 5.25% to 3.50% during the fourth quarter of 2007, resulting in a steepening of the yield curve. This allowed the Corporation to improve its net interest margin, which was 2.97% for the first nine months of 2007 to 3.04% for the entire year.
In March 2007, CNB acquired a branch office in Philadelphia, PA, including $11 million in deposits and $18.7 million in loans, providing the Bank entry into a new market.
Finally, the Corporation received a $500,000 award from the U.S. Treasury’s Community Development Financial Institution (“CDFI”) Fund. The award was based on the Bank’s lending efforts in qualifying lower income communities and is being recorded as yield enhancement on the related loans.
The primary source of the Corporation’s income comes from net interest income, which represents the excess of interest earned on earning assets over the interest paid on interest-bearing liabilities. This income is subject to interest rate risk resulting from changes in interest rates. The most significant component of the Corporation’s interest earning assets is the loan portfolio. In addition to the aforementioned interest rate risk, the portfolio is subject to credit risk.
Cash and due from banks
Cash and due from banks rose to $22.8 million at the end of 2007 from $7.2 million a year earlier due to a large municipal deposit
recorded on the last day of 2007. Average cash and due from banks in 2007 totalled $7.6 million, compared to $7 million a year earlier.
Federal funds sold
Federal funds sold rose to $22 million at the end of 2007 from $5 million at December 31, 2006, while the related average balance increased to $28.2 million from $19 million in 2006. Both increases occurred due to higher municipal account balances not yet reinvested into investment securities.
Interest-bearing deposits with banks
Interest-bearing deposits with banks decreased to $278,000 at December 31, 2007 from $653,000 a year earlier, while the related average balances were $1.4 million in 2007 and $950,000 in 2006. The deposits represent the Bank’s participation in the U.S. Treasury Department’s Community Development Financial Institution (“CDFI”) deposit program. Under this program, the Bank is eligible for awards based on deposits made in other CDFI’s. $39,000 and $42,000 were recorded as interest income from interest-bearing deposits with banks in 2007 and 2006, respectively, representing a yield enhancement on the CDFI deposits. The decline in the year-end balance resulted from maturities of the deposits made under the program.
Investments
The fair market value of the portfolio benefited by the drop in interest rates during the fourth quarter of 2007. Unrealized portfolio losses declined significantly, although certain segments sustained increased losses due to uncertainties in the markets for those securities.
The weighted average life of the overall portfolio at December 31, 2007 was 6.29 years, increasing from 5.63 years at the end of 2006. Average duration in the portfolio also rose to 4.53 years from 4.27 years. Management strategically lengthened the life of the portfolio during 2007 in expectation of the reduction in interest rates while limiting the purchase of callable agency securities to reduce the interest rate risk exposure to embedded options inherent in callable securities.
The investment securities available for sale (“AFS”) portfolio declined to $103.6 million at December 31, 2007 from $116.1 million a year earlier, while the related net unrealized net loss decreased to $623,000 from $978,000 from a year earlier.
The most significant change in the portfolio occurred in the non- mortgage-backed securities (“MBS”) government sponsored entities (“GSE’s”) portfolio, which declined $26 million and (“MBS”), which rose $10.1 million. Both types of securities are used for municipal deposit collateral purposes and are subject to large fluctuations based on collateral requirements.
The investment securities held to maturity (“HTM”) portfolio totaled $53.9 million at December 31, 2007, relatively unchanged from a year earlier.
Information pertaining to the average weighted yields of investments in debt securities at December 31, 2007 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
Investment Securities Held to Maturity
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, 2007. Average yields on tax-exempt obligations of state and political subdivisions have been computed on a fully taxable equivalent basis, using the statutory Federal income tax rate of 34%.
The average yield on the AFS portfolio rose to 5.31% at December 31, 2007 from 5.10% at December 31, 2006, while the yield on the
HTM portfolio rose eleven basis points to 6.01% at December 31, 2007 from 5.90% at December 31, 2006. The higher yields in both portfolios were due to the higher yields earned on newly acquired investments placed in the portfolio during 2007. The average life of the AFS portfolio was 6.04 years at the end of 2007 compared to 4.37 years a year earlier. The average life of the HTM portfolio declined to 6.74 years at the end of 2007 from 8.36 years at the end of 2006.
The following table sets forth the amortized cost and market values of the Corporation’s portfolio for the three years ended December 31:
Investment Securities Available for Sale
Investment Securities Held to Maturity
Consolidated Average Balance Sheet with Related Interest and Rates
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.
Loans
Loans rose 16.8% to $232.8 million at December 31, 2007 from $199.3 million a year earlier with the increase occurring primarily in the commercial real estate portfolio. Included in this increase was the purchase of $11.8 million of loans in conjunction with a branch acquisition.
Loans held for sale totalled $226,000 at December 31, 2007 compared to $609,000 at December 31, 2006, while loans originated for sale totalled $3.3 million in both 2007 and 2006. Sales of these loans, along with the related gains both increased. These loans represent long-term fixed rate residential mortgages which the Corporation does not retain in the portfolio to mitigate its interest rate risk to rising interest rates.
Residential mortgage loans, including home equity loans, represent an insignificant part of the Bank’s lending business. Such loans that have long-term fixed rates are generally sold into the secondary market, although some loans may be retained in the portfolio to balance the Bank’s loan mix and provide collateral for Federal Home Loan Bank borrowings. Consumer loans, including automobile loans, also comprise a relatively small part of the loan portfolio. Most of the Bank’s lending efforts are in northern New Jersey, New York City and Nassau County.
At December 31, 2007, loans to churches totalled $62.4 million, representing 26.8% of total loans outstanding, all of which are secured by real estate, compared to $58.6 million and 29.4% at December 31, 2006. $4.3 million of such loans are on nonaccrual status, of which one is in excess of $600,000.
The Bank generally secures its loans by obtaining primarily first liens on real estate, both residential and commercial, and does virtually no asset-based financing. Without additional side collateral, the Bank generally requires maximum loan-to-value ratios of 70% for loan transactions secured by commercial real estate. The Bank expects to maintain the aforementioned types of lending.
Maturities and interest sensitivities of loans
Information pertaining to contractual maturities without regard to normal amortization and the sensitivity to changes in interest rates of loans at December 31, 2007 is presented below.
The following table reflects the composition of the loan portfolio for the five years ended December 31:
Summary of loan loss experience
Changes in the allowance for loan losses are summarized below.
The allowance for loan losses is a critical accounting policy and is maintained at a level determined by management to be adequate to provide for inherent losses in the loan portfolio. The allowance is increased by provisions charged to operations and recoveries of loan charge-offs. The allowance is based on management’s evaluation of the loan portfolio and several other factors, including past loan loss experience, general business and economic conditions, concentration of credit and the possibility that there may be inherent losses in the portfolio which cannot currently be identified. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change.
A standardized method is used to assess the adequacy of the allowance and to identify the risks inherent in the loan portfolio. This process includes the ongoing assessment of individual borrowers’ financial condition and payment records and gives consideration to areas of exposure such as conditions within the borrowers’ industry, the value of underlying collateral, and the composition of the performing and non-performing loan portfolios.
Specific allocations are identified by loan category and allocated according to prior charge-off history as well as future performance
projections. All loans are graded and incorporated in the process of assessing the adequacy of the reserve. The allowance is maintained at a level considered sufficient to absorb probable losses inherent in the loan portfolio, and allowances not allocated to specific loan categories are considered unallocated and evaluated based on management’s assessment of the portfolio’s risk profile as well as current business and economic conditions in the Bank’s market area.
The allowance represented 1.29% of total loans at December 31, 2007 and 1.20% at December 31, 2006, while the allowance represented 37.67% of total nonperforming loans compared to 40.95% for those years. The decline resulted from the rise in nonperforming loans during 2007. The allowance at the end of 2007 rose to $3 million from $2.4 million a year earlier due to an increase in the provision for loan losses resulting primarily from an increase in nonaccrual loans, along with the growth during 2007 in the loan portfolio.
Allocation of the allowance for loan losses
The allowance for loan losses has been allocated based on management’s estimates of the risk elements within the loan categories set forth below at December 31.
Allowance allocations are subject to change based on the levels of classified loans in each segment of the portfolio. The minimum levels of reserves by internal loan classification are .25% for pass loans, 1% for special mention loans, 5% for substandard loans, 50% for doubtful loans, and 100% for loss loans. These minimum reserve levels have been consistently applied for all reported periods. The unallocated allocation is based upon management’s evaluation of the underlying inherent risk in the loan portfolio that has not been measured on an individual basis. Such evaluation
includes economic and business conditions within the Bank’s market area, portfolio concentrations, credit quality and delinquency trends. An additional factor is the demographics in the Bank’s market area. Because CNB serves primarily low to moderate income communities, in general, the inherent credit risk profile of the loans it makes has a greater degree of risk than if a more economically diverse demographic area were served.
Nonperforming assets
Information pertaining to nonperforming assets at December 31 is summarized below.
Nonperforming assets rose 34.2% to $7,964,000 at the end of 2007 due primarily to higher levels of commercial real estate loans. Nonaccrual commercial loans includes $781,000 of loans guaranteed in part by the Small Business Administration, generally to the extent of 75% of the loan balance. An additional $1,032,000 represents loans to one borrower that are in the process of collection.
Nonaccrual mortgage loans includes $4.3 million of loans to religious organizations, which management believes have been impacted by reductions in tithes and collections from congregation members due to the deterioration in the economy. In the opinion of management, all of those loans appear to be well-secured by real estate collateral.
Deposits
The Bank’s deposit levels may change significantly on a daily basis because deposit accounts maintained by municipalities represent a significant part of the Bank’s deposits and are more volatile than commercial or retail deposits.
These municipal and U.S. Government accounts represent a substantial part of the Bank’s business, tend to have high balance relationships and comprised most of the Bank’s accounts with balances of $100,000 or more at December 31, 2007 and 2006.
While the collateral maintenance requirements associated with the Bank’s municipal and U.S. Government account relationships might limit the ability to readily dispose of investment securities used as such collateral, management does not foresee any need for such disposal, and in the event of the withdrawal of any of these deposits, these securities are readily marketable. The Bank expects to continue seeking municipal account relationships.
Total deposits rose to $394.9 million at December 31, 2007 from $342.4 million a year earlier, while average deposits increased 6.8% to $372.6 million in 2007 from $323.4 million in 2006. The increases in deposits occurred due to higher municipal account balances along with the branch acquisition.
Passbook and statement savings deposits totalled $28.1 million at December 31, 2007 compared to $30.4 million a year earlier, while such savings accounts averaged $29.9 million in 2007 compared to $32.1 million in 2006. The declines, which have been consistent in recent years, resulted from a shift into higher earning deposit products.
Money market deposit accounts rose 30.8% to $106.6 million at December 31, 2007 from $81.5 million a year earlier, while average money market deposits increased 22.1% to $108.5 million in 2007 from $88.9 million in 2006. The increases occurred primarily due to higher levels of municipal deposit account balances.
Interest-bearing demand deposit account balances rose 129.4% at the end of 2007 compared to year-end 2006, while the related average balance was 10% higher in 2007 than in 2006. Higher municipal account balances was the primary factor in these increases as well.
Time deposits declined to $159.3 million at December 31, 2007 from $164.5 million at the end of 2006, while average time deposits were $159.1 million in 2007, 22.1% greater than in 2006. Both changes arose from municipal account balance fluctuations.
Short-term borrowings
Short-term borrowings totalled $1.2 million at December 31, 2007 compared to $400,000 at December 31, 2006, while average short-term borrowings of $537,000 in 2007, were significantly lower than in 2006 due to the lack of short-term borrowing requirements during the summer months of 2007 when certain municipal account balances are normally drawn down.
Most of these balances are comprised of U.S. Treasury, tax and loan note option account balances, which are subject to daily redemption and can fluctuate significantly.
Long-term debt
During 2007, the Corporation repaid $1.5 million in Federal Home Loan Bank advances. Additionally, the Corporation issued $5 million in long-term debt. Long-term debt rose to $19.8 million at December 31, 2007 from $19.6 million a year earlier, while the related average balance was $21.6 million in 2007 compared to $20.6 million in 2006.
Results of operations - 2007 compared with 2006
Net income declined to $1,867,000 in 2007 from $2,468,000 in 2006 due primarily to a $583,000 gain from the sale of a Bank-owned property on which a branch office was located recorded in 2006 that did not recur in 2007 and sharply higher occupancy expenses resulting from the branch acquisition.
Included in both years’ earnings were awards received from the U.S. Treasury’s Community Development Financial Institution (“CDFI”) Fund. The awards were based in part on the Bank’s lending efforts in qualifying lower income communities. Award income attributable to its lending efforts totalled $336,000 in 2007, $64,000 in 2006 and $54,000 in 2005.
The Bank also recorded award income related to time deposits made in other CDFI’s of $39,000 in 2007, $42,000 in 2006 and $20,000 in 2005, respectively. Additionally, additional award income of $- was also recorded in 2007 compared to $22,000 in 2006 and $63,000 in 2005, representing awards received for opening a branch office in a low-income area.
Finally, the Bank recorded award income of $19,000 in 2007 as an offset for approved technology costs. No such income was recorded in 2006 or 2005.
In total, $394,000 of award income was recorded in 2007, while $128,000 was recorded in 2006 and $137,000 was recorded in 2005.
These awards are dependent on the availability of funds in the CDFI Fund as well as the Bank meeting various qualifying standards. Accordingly, there is no assurance that the Bank will continue to receive these awards in the future.
On a fully taxable equivalent (“FTE”) basis, net interest income rose 9.1% to $12.5 million in 2007, while the related net interest margin declined 14 basis points, from 3.18% to 3.04%. Continued compression from the flat yield curve that existed for most of 2007 was the cause of the lower margin while growth of 13.6% in earning assets contributed to the higher net interest income.
A significantly higher cost of funds was the reason for the decline in net interest margin. The yield on interest earning assets rose 33 basis points, from 6.19% to 6.52%, while the cost to fund those assets increased 47 basis points, from 3.01% to 3.48%. Average interest earning assets increased 50.7%, with the loan portfolio providing the greatest increase.
Service charges on deposit accounts rose 15.1% from 2006 due to the implementation of an overdraft protection program.
Other income declined 14.8% in 2007 due primarily to a $583,000 gain recorded in 2006 on the sale of a bank-owned property that did not recur in 2007 and a reduction in the loss from the Bank’s incurred by an unconsolidated leasing subsidiary from $335,000 to $9,000 in 2007.in which the Bank owns a minority interest.
Other operating expenses, which include expenses other than interest, income taxes and the provision for loan losses, totalled $11.4 million in 2007, a 15% increase compared to $10 million in 2006. The acquisition of the branch was the primary cause for the higher expense levels.
Salaries and other employee benefits expense rose 8.9% due to the branch acquisition, along with normal recurring merit increases, higher health insurance costs and an increase in supplemental executive retirement plan expense. The increases were partially offset by the reversal of accrued discretionary 401K plan expense that was never used.
Occupancy expense rose 30.5% due primarily to the branch acquisition.
Equipment expense declined due to lower equipment maintenance costs as the Bank migrated to a check imaging cash letter platform, negating the need for certain equipment.
Other expenses rose 21% in 2007 due primarily to higher consulting fees due to the review of Sarbanes-Oxley financial reporting control procedures, along with increased merchant card charges, which represent credit card fees incurred by customers but absorbed by the Bank and offset by compensating deposit account balances. Marketing expense and amortization of premiums paid for branch acquisitions were also higher.
Income tax expense as a percentage of pre-tax income was 16.6% in 2007 compared to 23.1% in 2006, due to higher levels of tax-exempt income.
Liquidity
The liquidity position of the Corporation is dependent on the successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise primarily to accommodate possible deposit outflows and to meet borrowers’ requests for loans. Such needs can be satisfied by investment and loan maturities and payments, along with the ability to raise short-term funds from external sources.
The Bank depends primarily on deposits as a source of funds and also provides for a portion of its funding needs through short-term
borrowings, such as the Federal Home Loan Bank, Federal Funds purchased, securities sold under repurchase agreements and borrowings under the U.S. Treasury tax and loan note option program. The Bank also utilizes the Federal Home Loan Bank for longer-term funding purposes. During 2007, the Bank pledged most of its commercial real estate portfolio to the Federal Home Loan Bank to be used as collateral for advances or letters of credit. Finally, the Corporation has ready access to the capital markets, having issued $4 million in subordinated debentures in 2004 and $9.3 million in preferred stock during 2005 and 2006.
A significant part of the Bank’s deposit growth is from municipal deposits. These relationships arise due to the Bank’s urban market, leading to municipal deposit relationships. Municipal deposit levels may fluctuate significantly depending on the cash requirements of the municipalities. The Bank has ready sources of available short-term borrowings in the event that the municipalities have unanticipated cash requirements. Such sources include Federal funds lines, FHLB advances and access to the repurchase agreement market, utilizing the collateral for the withdrawn deposits. The Bank expects to continue emphasizing these relationships.
The major contributions during 2007 from operating activities to the Corporation’s liquidity came from the sale of loans held for sale, along with net income.
Net cash used in investing activities during 2007 was primarily used for purchases of investment securities available for sale, which totalled $38.2 million, while sources of cash provided by investing activities were derived primarily from proceeds from maturities, principal payments and early redemptions of investment securities available for sale, amounting to $48.5
The primary source of funds from financing activities resulted from the increase in deposits.
Contractual obligations
The Corporation has various financial obligations, including contractual obligations that may require future cash payments. These obligations are included in Notes 4,5,9,10 and 11 of the Notes to Consolidated Financial Statements.
The Corporation also will have future obligations under supplemental executive and directors’ retirement plans described in Note 14 of the Notes to Consolidated Financial Statements.
Commitments, contingent liabilities, and off-balance sheet arrangements
The following table shows the amounts and expected maturities of significant commitments as of December 31, 2007. Further information on these commitments is included in Note 20 of the Notes to Consolidated Financial Statements.
Commitments to extend credit do not necessarily represent future cash requirements, as these commitments may expire without being drawn on based upon CNB’s historical experience.
Effects of inflation
Inflation, as measured by the consumer price index (“CPI”), including all items for all urban consumers, rose 2.8% in 2007 compared to 3.2% in 2006 and 3.4% in 2005.
The asset and liability structure of the Corporation and subsidiary bank differ from that of an industrial company since its assets and liabilities fluctuate over time based upon monetary policies and changes in interest rates. The growth in earning assets, regardless of the effects of inflation, will increase net income if the Corporation is able to maintain a consistent interest spread between earning assets and supporting liabilities. In an inflationary period, the purchasing power of these net monetary assets necessarily decreases. However, changes in interest rates may have a more significant impact on the Corporation’s performance than inflation. While interest rates are affected by inflation, they do not necessarily move in the same direction, or in the same magnitude as the prices of other goods and services.
The impact of inflation on the future operations of the Corporation should not be viewed without consideration of other financial and economic indicators, as well as historical financial statements and the preceding discussion regarding the Corporation’s liquidity and asset and liability management.
Interest rate sensitivity
The management of interest rate risk is also important to the profitability of the Corporation. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different from that of a supporting interest bearing liability, or when an interest bearing liability matures or when its interest rate changes in a time period different from that of an earning asset that it supports. While the Corporation does not match
specific assets and liabilities, total earning assets and interest bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames.
It is the responsibility of the Asset/Liability Management Committee (“ALCO”) to monitor and oversee the activities of interest rate sensitivity management and the protection of net interest income from fluctuations in interest rates.
Interest sensitivity analysis attempts to measure the responsiveness of net interest income to changes in interest rate levels. The difference between interest sensitive assets and interest sensitive liabilities is referred to as interest sensitive gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending on management’s judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which details the repricing differences for assets and liabilities for given periods. The primary limitation of this analysis is that it is a static (i.e., as of a specific point in time) measurement which does not capture risk that varies nonproportionally with changes in interest rates. Because of this limitation, the Corporation uses a simulation model as its primary method of measuring interest rate risk. This model, because of its dynamic nature, forecasts the effects of different patterns of rate movements on the Corporation’s mix of interest sensitive assets and liabilities.
The following table presents the Corporation’s sensitivity to changes in interest rates, categorized by repricing period. Various assumptions are used to estimate expected maturities. The actual maturities of these instruments could vary substantially if future prepayments differ from estimated experience.
Interest Sensitivity Gap Analysis
The cumulative gap between the Corporation’s interest rate sensitive assets and its interest sensitive liabilities was $32.4 million at December 31, 2007. This means that the Corporation has a “positive gap” position, which theoretically will cause its assets to reprice faster than its liabilities. In a rising interest rate environment, interest income may be expected to rise faster than the interest received on earning assets, thus improving the net interest spread.
If interest rates decreased, the net interest received on earning assets will decline faster than the interest paid on the
Corporation’s liabilities, decreasing the net interest spread. Certain shortcomings are inherent in the method of gap analysis presented below. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while rates on other types of assets and liabilities may lag behind changes in market rates. In the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the table. The ability of borrowers to service debt may decrease in the event
of an interest rate increase. Management considers these factors when reviewing its sensitivity gap position and establishing its ongoing asset/liability strategy.
Because individual interest earning assets and interest bearing liabilities respond differently to changes in prime, more refined results are obtained when a simulation model is used. The Corporation uses a simulation model to analyze earnings sensitivity to movements in interest rates. The simulation model projects earnings based on parallel shifts in interest rates over a twelve-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities, and incorporates various assumptions which management believes to be reasonable.
At December 31, 2007, the most recently prepared model indicates that net interest income would decline 8.1% from base case scenario if interest rates rise 200 basis points and decline .4%% if rates decrease 200 basis points. Additionally, the economic value of equity would decrease 17.6% if rates rose 200 basis points and decline 2.3% if rates declined 200 basis points.
These results are consistent with the Corporation’s interest rate risk strategy to overweight against the risk of a decrease in interest rates.
Capital
The following table presents the consolidated and bank-only capital components and related ratios as calculated under regulatory accounting practice.
On March 17, 2004, City National Bancshares Corporation issued $4 million of preferred capital securities through City National Bank of New Jersey Capital Trust II (“the Trust II”), a special-purpose statutory trust created expressly for the issuance of these securities. Distribution of interest on the securities is payable at the 3-month LIBOR rate plus 2.79%, adjustable quarterly. The quarterly distributions may, at the option of the Trust, be deferred for up to 20 consecutive quarterly periods. The proceeds have been invested in junior subordinated debentures of CNBC, at terms identical to the preferred capital securities. Cash
distributions on the securities are made to the extent interest on the debentures is received by the Trust. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the securities are redeemable. The securities are generally redeemable in whole or in part on or after March 17, 2009, at any interest payment date, at a price equal to 100% of the principal amount plus accrued interest to the date of redemption. The securities must be redeemed by March 17, 2034.
The subsidiary trust is not included with the consolidated financial statements of the Corporation because of the deconsolidation required by Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities”.
Results of operations - 2006 compared with 2005
Net income rose to $2,468,000 in 2006 from to $2,335,000 in 2005 due primarily to a $583,000 gain from the sale of a Bank-owned property on which a branch office was located. The branch was relocated to a major strategic site in the same city. Related net income per share was unchanged from $15.52 declined to $12.54 due to a higher preferred stock dividend.
On a fully taxable equivalent (“FTE”) basis, net interest income rose only 1.5% to $11.4 million in 2006, while the related net interest margin declined 19 basis points, from 3.36% to 3.17%. Compression from the continued flat yield curve was the cause of the minimal growth in net interest income as well as to the lower margin.
A significantly higher cost of funds was the reason for this nominal increase in Interest income on a FTE basis. Because of the higher interest rate environment, the yield on interest earning assets rose 65 basis points, from 5.54% to 6.19%, while the cost to fund those assets increased 83 basis points, from 2.18% to 3.01%. Average interest earning assets increased $25 million, or 7.5%, with the loan portfolio providing the greatest increase.
Interest income from Federal funds sold rose by 23.8%, due to an increase in the related yield from 3.18% to 4.80%, as the average balance declined.
Interest income on taxable investment securities increased $1.3 million in 2006 also due to a higher yield on portfolio investments, as well as increased volume.
Tax-exempt investment income rose 71.7% due to purchases of tax-exempt securities in 2006. The average rate declined due to lower rates on the newly acquired investments.
Interest income on loans rose $2.6 million, or 23.9% due to both higher volume and higher yields. Average commercial loans increased 16.8%, while related interest income was higher due to a higher yield on the portfolio, which rose 94 basis points, from 6.30% to 7.24% and the higher volume. The real estate portfolio, comprised mainly of commercial real estate loans, increased $18.5 million, or 13% in 2006, while the related yield rose to 7.2% in 2006 from 6.62% in 2005, due to increases in the Bank’s prime lending rate.
Interest expense totalled $10.8 million in 2006, an increase of 47.9% from 2005. This increase resulted primarily from the continued higher short-term interest rate environment, which impacted most of the Corporation’s interest bearing liabilities.
The average rate paid on deposits rose by 107 basis points, from 2.23% to 3.30%, mostly due to the higher rates paid on money market deposits and certificates of deposit.
Interest expense on money market deposits increased 62% due to both higher volume and higher rates paid. The average rate paid rose to 4.00% from 2.76% in 2005.
Interest expense on time deposits rose due to both higher volume and higher rates paid. The average rate paid was 113 basis
points higher in 2006, averaging 3.98% compared to 2.85% in 2005.
Interest expense on short-term borrowings rose due to a higher average rate paid.
Interest expense on long-term debt rose due to the higher rates paid on long-term subordinated debentures. The related interest rate increased 82 basis points to 6.33% in 2006 compared to 5.52% in 2005.
Service charges on deposit accounts was unchanged from 2005 due to continued competitive business pressures limiting the Bank’s ability to raise fees to customers to reflect higher costs.
Other income rose 46.9% in 2006 due primarily to the aforementioned gain on the sale of Bank-owned property. Income from non-Bank ATM card activity rose, along with gains from the sale of loans held for sale and earnings from bank-owned life insurance policies. Additionally, the loss from the Bank’s investment in an unconsolidated leasing investee increased to $335,000 from $208,000 in 2005.
Net losses incurred on securities transactions totalled $19,000 in 2006 compared to net losses of $96,000 in 2005 due to investment swap transactions consummated during 2005 to mitigate interest rate risk by selling securities and purchasing other securities with different interest rate characteristics.
Other operating expenses, which include expenses other than interest, income taxes and the provision for loan losses, totalled $10 million in 2006, a 3.3% increase compared to $9.7 million in 2005.
Salaries and other employee benefits expense rose 3.6% due to normal recurring merit increases, higher health insurance costs and an increase in supplemental executive retirement plan expense.
Occupancy expense rose 8.9% due primarily to higher premises rental costs resulting from the relocation of a branch to a more strategic location.
Equipment expense declined due to lower depreciation expense and a decrease in maintenance and repair expense.
Other expenses rose 1.8% in 2006 due primarily to higher consulting fees, along with increased merchant card charges, which represent credit card fees incurred by customers but absorbed by the Bank and offset by compensating deposit account balances, while professional fees and stationery and supplies expense both declined.
Income tax expense as a percentage of pre-tax income was 23.1% in 2006 compared to 27% in 2005, due to higher levels of tax-exempt investment income.
Critical accounting policies and use of estimates
Allowance for loan losses
The calculation of the allowance for loan losses is a critical accounting policy of the Corporation. Provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors including the risk factors inherent in the Bank’s low and moderate income market area, in order to maintain the allowance for loan losses at adequate levels to provide for estimated losses.
Management believes that the primary risks inherent in the loan portfolio are possible increases in interest rates, a deterioration in
the economy, and a decline in real estate market values in the Bank’s market area. Any one or a combination of these events may adversely affect the Bank’s loan portfolio, resulting in increased delinquencies, loan losses and future high levels of provisions. Accordingly, the Bank has provided for loan losses at the current level to address the current risks in our loan portfolio. Management considers it important to maintain the ratio of the allowance for loan losses to total loans at an acceptable level given current economic conditions, interest rates and the composition of the portfolio.
Although management believes that the allowance for loan losses has been maintained at adequate levels to reserve for probable losses inherent in its loan portfolio, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term change.
Asset impairment judgments
Certain assets are carried in the consolidated statements of financial condition at fair value or at the lower of cost or fair value. Valuation allowances are established when necessary to recognize the impairment of such assets that is other than temporary. Analyses are periodically performed to test for impairment. In addition to impairment analyses related to loans, another significant impairment analysis relates to the value of other than temporary declines in the value of the investment portfolio.
The available for sale portfolio is carried at estimated fair value, with any unrealized gains and losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Securities that the Corporation has the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. A periodic review and evaluation of the securities portfolio is performed to determine if the value of any security has declined below its carrying value and whether such decline is other than temporary. If such decline is considered other than temporary, the carrying amount of the security would be reduced to fair market value through a charge to current period operations.
The market values of the investment portfolio are significantly affected by changes in interest rates. In general, as interest rates rise, the market value of fixed-rate securities will decrease, while as interest rates fall, the market value of fixed-rate securities will increase.
The unrealized losses in the available for sale and held to maturity portfolios at December 31, 2007 were caused by increases in market yields subsequent to purchase and were not attributable to credit quality concerns. There were no debt securities past due or securities for which the Corporation currently believes it is not probable that it will collect all amounts due according to the contractual terms of the security. Because the Corporation has the intent and the ability to hold securities with unrealized losses until a market price recovery (which, for debt securities may be until maturity), the Corporation did not consider these securities to be other-than-temporarily impaired at December 31, 2007.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Information regarding this Item appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” - Interest Rate Sensitivity.
Item 8.
Item 8. Financial Statements and Supplementary Data
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes
in Stockholders’ Equity
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
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 and to general practice within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the balance sheet and revenues and expenses for the related periods. Actual results could differ significantly from those estimates. The following is a summary of the more significant policies and practices.
Business
City National Bancshares Corporation (“the Corporation”), primarily through its subsidiary City National Bank of New Jersey (“CNB”), offers a broad range of lending, leasing, depository and related financial services to individual consumers, businesses and governmental units through ten full-service offices located in New Jersey, Philadelphia, PA, New York City and Long Island, New York. CNB competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions, and money market funds actively compete for deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors with respect to one or more services they render.
CNB offers equipment leasing services through its one-third 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.
The Corporation holds in its investment portfolios mortgage-backed securities. Such securities are subject to changes in the prepayment rates of the underlying mortgages, which may affect both the yield and maturity of the securities.
Loans held for sale
Loans held for sale include residential mortgage loans originated with the intent to sell. Loans held for sale are carried at the lower of aggregate cost or fair value.
Loans
Loans are stated at the principal amounts outstanding, net of unearned discount and deferred loan fees. Interest income is accrued as earned, based upon the principal amounts outstanding. Loan origination fees and certain direct loan origination costs, as well as unearned discount, are deferred and recognized over the life of the loan revised for loan prepayments, as an adjustment to the loan’s yield.
Recognition of interest on the accrual method is generally discontinued when a loan contractually becomes 90 days or more past due or a reasonable doubt exists as to the collectibility of the loan, unless such loans are well-secured and in the process of collection. At the time a loan is placed on a nonaccrual status, previously accrued and uncollected interest is generally reversed against interest income in the current period. Interest on such loans, if appropriate, is recognized as income when payments are received. A loan is returned to an accrual status when it is current as to principal and interest and its future collectibility is expected.
The Corporation has defined the population of impaired loans to be all nonaccrual loans of $100,000 or more considered by management to be inadequately secured and subject to risk of loss. Impaired loans of $100,000 or more are individually assessed to determine that the loan’s carrying value does not exceed the fair value of the underlying collateral or the present value of the loan’s expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment such as residential mortgage and installment loans, are specifically excluded from the impaired loan portfolio.
Allowance for loan losses
A substantial portion of the Bank’s loans are secured by real estate in New Jersey, particularly within the Newark area. Accordingly, as with most financial institutions in the market area, the ultimate collectibility of a substantial portion of the Bank’s loan portfolio is susceptible to changes in market conditions.
The allowance for loan losses is maintained at a level determined adequate to provide for losses inherent in the portfolio. The allowance is increased by provisions charged to operations and recoveries of loans previously charged off and reduced by loan charge-offs. Generally, losses on loans are charged against the allowance for loan losses when it is believed that the collection of all or a portion of the principal balance is unlikely and the collateral is not adequate. The allowance is based on management’s evaluation of the loan portfolio considering current economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit and collateral situations.
Management believes that the allowance for loan losses is adequate. While management uses available information to determine the adequacy of the allowance, future additions may be necessary based on changes in economic conditions or subsequent events unforeseen at the time of evaluation.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to increase the allowance based on their judgment of information available to them at the time of their examination.
Bank premises and equipment
Premises and equipment are stated at cost less accumulated depreciation based upon estimated useful lives of three to 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 includes the Bank’s one-third ownership interest in a leasing company. The investment in the unconsolidated investee is carried on the equity method of accounting whereby the carrying value of the investment reflects the Corporation’s initial cost of the investment and the Corporation’s share of the leasing company’s annual net income or loss.
Other real estate owned
Other real estate owned (“OREO”) acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of cost or fair value less estimated cost to sell, net of a valuation allowance. When a property is acquired, the excess of the loan balance over the estimated fair value is charged to the allowance for loan losses. Operating results, including any future writedowns of OREO, rental income and operating expenses, are included in “Other expenses.”
An allowance for OREO 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 for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long Lived Assets.” Amortization totaled $197,000 in 2007 and $120,000 in 2006 and 2005, respectively.
Long-term debt
The Corporation has sold $4 million of trust preferred securities through a wholly-owned statutory business trust. The trust has no independent assets or operations and exists for the sole purpose of issuing trust preferred securities and investing the proceeds thereof in an equivalent amount of junior subordinated debentures issued by the Corporation. The junior subordinate debentures, which are the sole assets of the trusts, are unsecured obligations of the Corporation and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of the Corporation.
On December 10, 2003, the FASB issued FASB Interpretation No. 46R (“FIN 46R”), which replaced FIN 46. FIN 46R clarifies the applications of Accounting Research Bulletin No. 51 “Consolidated Financial Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R required the Corporation to de-consolidate its investments in the trusts recorded as long-term debt.
Income taxes
Federal income taxes are based on currently reported income and expense after the elimination of income which is exempt from Federal income tax.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Such temporary differences include depreciation and the provision for possible loan losses.
Net income per common share
Basic income per common share is calculated by dividing net income less dividends on preferred stock by the weighted average number of common shares outstanding. On a diluted basis, both net income and common shares outstanding are adjusted to assume the conversion of the convertible subordinate debentures, if determined to be dilutive.
Comprehensive income
SFAS No. 130 “Reporting Comprehensive Income,” establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The required disclosures are included in the Statement of Changes in Stockholders’ Equity.
Recent accounting pronouncements
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments - An Amendment of FASB Statements No. 133 and 140.” The new standard provides for, amongst other things, bifurcation and separate fair value accounting for financial instruments with embedded derivatives, including prepayment options embedded in mortgage-backed securities held by the Corporation. On October 25, 2006, the FASB agreed to expose for comment a draft SFAS No. 133 Implementation Issue that would provide a scope exception for certain mortgage-backed securities from the application of the bifurcation rules under SFAS No. 155. Final guidance on the SFAS No. 133 Implementation Issue was issued in 2007. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Corporation’s adoption of SFAS No. 155 did not have a significant impact on its financial condition or results of operations.
In March 2006, the FASB issued No. 156, “Accounting for Servicing of Financial Assets-An Amendment of FASB Statement No. 140.” This standard amends the guidance in SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Among other requirements, SFAS No. 156 clarifies when a servicer should separately recognize servicing assets and servicing liabilities and permits an entity to choose either the “Amortization Method” or “Fair Value Measurement Method” for subsequent measurement of each class of such assets and liabilities. SFAS No. 156 is effective as of the beginning of any entity’s fiscal year, provided the entity has not issued financial statements. The Corporation’s adoption of SFAS No. 156 did not have a significant impact on its financial condition or results of operations.
On July 13, 2006, FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109,” was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted as long as the entity has not yet issued financial statements, including interim financial statements, in the period of adoption. The adoption of FASB Interpretation No. 48 resulted in a charge to retained earnings of $188,000 at January 1, 2007.
On September 15, 2006, the FASB issued, SFAS No. 157, “Fair Value Measurements.” This new standard provides guidance for using fair value to measure assets and liabilities, and clarifies the
principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. SFAS No. 157 applies whenever other standards require, or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation’s adoption of this standard did not have a significant impact on its financial condition or results of operations.
The Emerging Issues Task Force (“EITF”) approved a Consensus, EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” in September 2006, which requires that the deferred compensation or postretirement benefit aspects of an endorsement-type split-dollar life insurance arrangement be recognized as a liability by the employer and that the obligation is not effectively settled by the purchase of a life insurance policy. The liability for future benefits would be recognized based on the substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of the life insurance.
As ratified, EITF 06-4 will be effective for fiscal years beginning after December 15, 2007 with early adoption permitted as of the beginning of an entity’s fiscal year. Entities adopting EITF 06-4 would choose between retroactive application to all prior periods or treating the application of the Consensus as a cumulative-effect adjustment to beginning retained earnings or to other components of equity or net assets in the statement of financial position. At the time the FASB provides final guidance on determining the substance of the benefit provided to employees, the Corporation will decide on whether to amend, discontinue or maintain the benefit in its current form.
In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations.” This standard replaces FASB SFAS No. 141 and provides principles and requirements for how an acquirer (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree; (2) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase; (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of SFAS No. 141(R) shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Corporation does not expect the adoption of SFAS No. 141 (R) to have a significant impact on its financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (an amendment of ARB No. 51). This standard establishes accounting and reporting standards that require (1) the ownership interests in subsidiaries held by parties other than the parent be clearly identified in the consolidated statement of financial position within equity, but separate from the parent’s equity; (2) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified on the face of the consolidated statement of income; (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; (4) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value.
This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling
interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement is effective for fiscal years beginning on or after December 15, 2008. The Corporation does not expect the adoption of SFAS No. 160 to have a significant impact on its financial condition or results of operations.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 155”, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. At the effective date, an entity may elect the fair value option for eligible items that exist at that date and report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. Subsequent to the effective date, unrealized gains and losses on items for which the fair value option has been elected are to be reported in earnings. If the fair value option is elected for any available for sale or held to maturity securities at the effective date, cumulative unrealized gains and losses at that date are included in the cumulative-effect adjustment and those securities are to be reported as trading securities under SFAS No. 115, but the accounting for a transfer to the trading category under SFAS No. 115 does not apply.
Electing the fair value option for an existing held to maturity security will not call into question the intent of an entity to hold other debt securities to maturity in the future. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that chose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value and does not eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption was permitted; however, the Corporation did not early adopt SFAS No.159 and, therefore, adopted the standard as of January 1, 2008. Upon adoption, the Corporation did not elect the fair value option for eligible items that existed as of January 1, 2008.
Reclassifications
Certain reclassifications have been made to the 2006 and 2005 consolidated financial statements in order to conform with the 2007 presentation.
Note 2 Cash and due from banks
The Bank is required to maintain a reserve balance with the Federal Reserve Bank based primarily on deposit levels. These reserve balances averaged $1,511,000 in 2007 and $1,608,000 in 2006.
Note 3 Federal funds sold and securities purchased under agreements to resell
Federal funds sold averaged $28.2 million during 2007 and $19.6 million in 2006, while the maximum balance outstanding at any month-end during 2007, 2006 and 2005 was $79.5 million, $45 million and $39.1 million, respectively. There were no securities purchased under repurchase agreements in 2007, 2006 or 2005.
Note 4 Investment securities available for sale
The amortized cost and market values at December 31 of investment securities available for sale were as follows:
The amortized cost and the market values of investments in debt
securities available for sale as of December 31, 2007 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.
Sales of investment securities available for sale resulted in gross gains of $24,000, $- and $32,000 and gross losses of $14,000, $19,000 and $131,000 in 2007, 2006 and 2005 respectively.
Interest and dividends on investment securities available for sale was as follows:
Investment securities available for sale with a carrying value of $86,809,000 were pledged to secure U.S. government and municipal deposits at December 31, 2007.
Investment securities available for sale which have had continuous unrealized losses as of December 31, are set forth below.
The gross unrealized losses set forth above as of December 31, 2007 were attributable primarily to corporate debt securities including seven corporate debt obligations (“CDO’s”) which are comprised of pools of corporate debt, with a carrying value of $7 million and an unrealized loss of $462,000. The market value of these securities has been negatively impacted by losses incurred in the overall CDO market, although the securities in the portfolio are performing and have not been downgraded by the rating agencies.
These securities are included in other debt securities, which also include an investment in the Student Loan Marketing Association (“SLMA”) with a carrying value of $1 million, which had an unrealized loss of $200,000 at December 31, 2007. The value of SLMA securities has been negatively affected by the failure of a leveraged buyout of SLMA, lower earnings and a change in federal legislation that is expected to reduce future earnings. SLMA’s debt has been downgraded but retains investment grade status.
The total unrealized losses attributable to these eight securities totalled $662,000 at December 31, 2007, representing 44.3% of the total unrealized loss in the AFS portfolio.
Management does not believe that any individual unrealized loss as of December 31, 2007 or 2006 represents an other-than-temporary impairment. The Corporation has the intent and ability to hold these securities for the time necessary to recover the amortized cost, including holding the securities until maturity.
Note 5 Investment securities held to maturity
The book and market values as of December 31 of investment securities held to maturity were as follows:
During 2007, $4 million of callable securities were redeemed by the issuers prior to maturity resulting in gross gains of $1,600, while in 2006 $15,000 of such securities were redeemed resulting in gross gains of $- and $6.7 million were redeemed in 2005 resulting in gross gains of $3,000.
The book value and the market value of investment securities held to maturity as of December 31, 2007 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.
Interest and dividends on investment securities held to maturity was as follows:
Investment securities held to maturity with a carrying value of $24,464,000 were pledged to U.S. government and municipal deposit funds at December 31, 2007.
Investment securities held to maturity which have had continuous unrealized losses are set forth below.
Management does not believe that any individual unrealized loss as of December 31, 2007 or 2006 represents an other-than-temporary impairment. The Corporation has the intent and ability to hold these securities for the time necessary to recover the amortized cost including holding the securities until maturity.
Note 6 Loans
Loans, net of unearned discount and net deferred origination fees and costs at December 31 were as follows:
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:
The effect of nonaccrual loans on income before taxes is presented below.
Nonperforming assets are generally well secured by residential and small commercial real estate properties. It is the Bank’s intent to dispose of all other real estate owned (“OREO”) properties at the earliest possible date at or near current market value.
At December 31, 2007 there were no commitments to lend additional funds to borrowers for loans that were on nonaccrual or contractually past due in excess of 90 days and still accruing interest, or to borrowers whose loans have been restructured. A majority of the Bank’s loan portfolio is concentrated in first mortgage loans to borrowers in northern New Jersey, particularly within the Newark area, which are secured by commercial properties. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income, net worth, cash flows generated by the underlying collateral, the value of the underlying collateral and priority of the Bank’s lien on the related property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank’s control. Accordingly, the Bank may be subject to risk of credit losses.
Impaired loans totaled $1 million at December 31, 2007 while there were no impaired loans at December 31, 2006. The related allocation of the allowance for loan losses amounted to $232,000. The average balance of impaired loans during 2007 and 2006 was $3,000 and $-, respectively. There was no interest income recognized on impaired loans during either 2007 or 2006.
Note 7 Allowance for loan losses
Transactions in the allowance for loan losses are summarized as follows:
Note 8 Premises and equipment
A summary of premises and equipment at December 31 follows:
Depreciation and amortization expense charged to operations amounted to $430,000, $458,000 and $465,000 in 2007, 2006, and 2005 respectively.
Note 9 Deposits
Deposits at December 31 are presented below.
Time deposits issued in amounts of $100,000 or more have the following maturities at December 31:
Interest expense on certificates of deposits of $100,000 or more was $1,728,000, $1,425,000 and $918,000 in 2007, 2006 and 2006, respectively.
Note 10 Short-term borrowings
Information regarding short-term borrowings at December 31, is presented below.
The demand note, which has no stated maturity, issued by the Bank to the U.S. Treasury Department is payable with interest at 25 basis points less than the weekly average of the daily effective Federal Funds rate and is collateralized by various investment securities held at the Federal Reserve Bank of New York with a book value of $6,393,000. There was no balance outstanding under the note at December 31, 2007 and 2006.
The Corporation had short-term borrowing lines totalling $8 million at December 31, 2007 and 2006 with various correspondent banks which were unused at December 31, 2007 and 2006.
Note 11 Long-term debt
Long-term debt at December 31 is summarized as follows:
Interest is payable quarterly on the FHLB advances. The advances bear fixed interest rates ranging from 3.37% to 6.15% and are secured by residential mortgages and certain obligations of U.S. Government agencies under a blanket collateral agreement.
The Corporation had borrowing lines with the Federal Home Loan Bank totaling $57.7 million at December 31, 2007 and $63 million at December 31, 2006, of which $47.5 million and $49 million was used and outstanding at December 31, 2007 and 2006, respectively. These lines may also be utilized for short-term borrowing purposes.
Interest is payable semiannually on the 5.00% capital note with principal payments continuing annually until July 2008.
Interest is payable quarterly on the 6.00% capital note with principal payments commencing annually in December, 2006 and continuing until December, 2010.
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.
In March 2004, City National Bancshares Corporation issued $4 million of subordinated debentures to an unconsolidated subsidiary trust, based on the current three-month LIBOR rate, plus 2.79%. The rate in effect at December 31, 2007 was 8.37%. The debentures are eligible for inclusion in Tier 1 capital for regulatory purposes.
Scheduled repayments on long-term debt are as follows:
Note 12 Other operating income and expenses
The following table presents the major components of other operating income and expenses.
Note 13 Income taxes
The components of income tax expense are as follows:
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:
The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31 are as follows:
The net deferred asset represents the anticipated federal and state tax assets to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. Management believes, based upon estimates of future taxable earnings, that more likely than not there will be sufficient taxable income in future years to realize the deferred tax assets, net of deferred valuation allowance, although there can be no assurance about the level of future earnings.
The Corporation adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement Na. 109, “Accounting for income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. As of January 1, 2007 (the date of adoption), the Corporation had unrecognized tax benefits of $385,000 as a result of tax positions taken during prior periods, all of which would affect the Corporation’s effective tax rate if recognized. Accrued estimated penalties and interest on these tax positions were $42,000 at December 31, 2007. Estimated penalties and interest are included in income tax expense. The Corporation’s tax returns are subject to examination by federal tax authorities for the years 2004 through 2006 and by state authorities also for the years 2004 through 2006. The adoption of FASB Interpretation No. 48 resulted in a charge to retained earnings of $188,000 at January 1, 2007.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Note 14 Benefit plans
Savings plan
The Bank maintains an employee savings plan under section 401(k) of the Internal Revenue Code covering all employees with at least six months of service. Participants are allowed to make contributions to the plan by salary reduction, up to 15% of total compensation. The Bank provides matching contributions of 50% of the first 6% of participant salaries subject to a vesting schedule. Contribution expense amounted to $24,000 in 2007, $94,000 in 2006 and $72,000 in 2005. Unused discretionary contribution accruals were used to fund part of the 2007 savings plan contributions.
Bonus plan
The Bank awards profit sharing bonuses to its officers and employees based on the achievement of certain performance objectives. Bonuses charged to operating expense in 2007, 2006 and 2005 amounted to $269,000, $189,000, and $333,000, respectively.
Nonqualified benefit plans
The Bank maintains a supplemental executive retirement plan (“SERP”), which provides a post-employment supplemental retirement benefit to certain key executive officers. SERP expense was $329,000 in 2007, $317,000 in 2006 and $231,000 in 2005. The Bank also has a director retirement plan (“DRIP”). DRIP expense was $44,000 in 2007, $44,000 in 2006 and $56,000 in 2005.
Benefits under both plans are funded through bank-owned life insurance policies. In addition, expenses for both plans along with the expense related to carrying the policy itself are offset by increases in the cash surrender value of the policies. Such increases are included in “Other income” and totalled $225,000 in 2007, $198,000 in 2006 and $179,000 in 2005, while the related life insurance expense was $36,000 in 2007, $38,000 in 2006 and $46,000 in 2005.
Stock options
No stock options have been issued since 1997 and there were no stock options outstanding at December 31, 2007, 2006 and 2005.
Note 15 Preferred stock
The Corporation is authorized to issue noncumulative perpetual preferred stock in one or more series, with no par value. Shares of preferred stock have preference over the Corporation’s common stock with respect to the payment of dividends and liquidation rights. Different series of preferred stock may have different stated or liquidation values as well as different rates. Dividends are paid annually.
Set forth below is a summary of the Corporation’s preferred stock issued and outstanding.
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.
Note 16 Restrictions on subsidiary bank dividends
Subject to applicable law, the Board of Directors of the Bank and of the Corporation may provide for the payment of dividends when it is determined that dividend payments are appropriate, taking into account factors including net income, capital requirements, financial condition, alternative investment options, tax implications, prevailing economic conditions, industry practices, and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory limitation on the amount of dividends it may pay to its parent corporation, CNBC. Prior approval of the Office of the Comptroller of the Currency (“OCC”) is required if the total dividends declared by the Bank in any calendar year exceeds net profit, as defined, for that year combined with the retained net profits from the preceding two calendar years. Under this limitation, $3,912,000 was available for the payment of dividends to the parent corporation at December 31, 2007.
Note 17 Net income per common share
The following table presents the computation of net income per common share.
Note 18 Related party transactions
Certain directors, including organizations in which they are officers or have significant ownership, were customers of, and had other transactions with the Bank in the ordinary course of business during 2007 and 2006. Such transactions were on substantially the same terms, including interest rates and collateral with respect to loans, as those prevailing at the time of comparable transactions with others. Further, such transactions did not involve more than the normal risk of collectibility and did not include any unfavorable features.
Total loans to the aforementioned individuals and organizations amounted to $3,484,000 and $3,566,000 at December 31, 2007 and 2006, respectively. The highest amount of such indebtedness during 2007 and 2006 was $3,659,000 and $3,566,000, respectively. During 2007, new loans totalled $350,000 and paydowns totalled $432,000. All related party loans were performing as of December 31, 2007.
Note 19 Fair value of financial instruments
The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced liquidation. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information.
Because no quoted market price exists for a significant portion of the Corporation’s financial instruments, the fair values of such financial instruments are derived based on the amount and timing of future cash flows, estimated discount rates, as well as management’s best judgment with respect to current economic
conditions. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values of those financial instruments and should not be interpreted as an estimate of the fair market value of the Corporation taken as a whole. The disclosures do not address the value of recognized and unrecognized nonfinancial assets and liabilities or the value of future anticipated business. In addition, tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.
The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 2007 and 2006.
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.
Loans
Fair values were estimated for performing loans by discounting the future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loans. Fair value for significant nonperforming loans was based on recent external appraisals of collateral securing such loans. If such appraisals were not available, estimated cash flows were discounted employing a rate incorporating the risk associated with such cash flows.
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, 2007 and 2006. The fair value of time deposits was based on the discounted value of contractual cash flows. The discount rate was estimated utilizing the rates currently offered for deposits of similar remaining maturities.
Short-term borrowings
For such short-term borrowings, the carrying amount was considered to be a reasonable estimate of fair value.
Long-term debt
The fair value of long-term debt was estimated based on rates currently available to the Corporation for debt with similar terms and remaining maturities.
Commitments to extend credit and letters of credit
The estimated fair value of financial instruments with off-balance sheet risk is not significant at December 31, 2007 and 2006.
The following table presents the carrying amounts and fair values of financial instruments at December 31.
Note 20 Commitments and contingencies
In the normal course of business, the Corporation or its subsidiary may, from time to time, be party to various legal proceedings relating to the conduct of its business. In the opinion of management, the consolidated financial statements will not be materially affected by the outcome of any pending legal proceedings.
At December 31, 2007 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 2008 through 2012 are $553,000, $540,000, $264,000, $250,000, and $226,000 respectively. Payments due thereafter total $553,000.
Rental expense under the leases amount to $486,000, $255,000 and $202,000 during 2007, 2006 and 2005 respectively.
Note 21 Financial instruments with off-balance sheet risk
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, commitments to extend, standby letters of credit, and could involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management’s credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support borrowing arrangements and extend for up to one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Accordingly, collateral is generally required to support the commitment.
At December 31, 2007 and 2006 the Bank had mortgage commitments of $39,451,000 and $41,193,000, unused commercial lines of credit of $39,703,000 and $46,003,000, and $2,004,000 and $832,000 of other loan commitments, respectively. There were $139,000 of financial standby letters of credit outstanding at December 31, 2007 and $122,000 outstanding at December 31, 2006.
The aforementioned commitments and credit lines are made at both fixed and floating rates of interest based on the Bank’s prime lending rate.
Note 22 Parent company information
Condensed financial statements of the parent company only are presented below.
Condensed Balance Sheet
Condensed Statement of Income
Condensed Statement of Cash Flows
Note 23 Regulatory capital requirements
FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2007, the Bank was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total average assets of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-adjusted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized bank. Such actions could have a direct material effect on such bank’s financial statements. The regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, a bank is considered well-capitalized if it has a leverage capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the FDIC about capital components, risk adjustments and other factors.
Management believes that, as of December 31, 2007 both City National Bancshares and City National Bank meet all capital adequacy requirements to which it is subject. Further, the most recent FDIC notification categorized City National Bank as a well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that notification that management believes have changed City National Bank’s capital classification.
The following is a summary of City National Bank’s actual capital amounts and ratios as of December 31, 2007 and 2006, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized Bank:
The Corporation was required to deconsolidate its investment in the subsidiary trust formed in connection with the issuance of trust preferred securities in 2004. In July 2003, the Board of Governors of the Federal Reserve System instructed bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes. As of December 31, 2007, assuming the Corporation was not allowed to include the trust preferred securities issued by the subsidiary trusts in Tier 1 capital, the Corporation would remain “well capitalized.”
The deconsolidation of the subsidiary trust results in the Corporation reporting on its balance sheet the subordinated debentures that have been issued from City National Bancshares to the subsidiary trust.
Note 24 Summary of quarterly financial information
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 25. Cumulative adjustment to retained earnings under SEC Staff Accounting Bulletin No. 108
In September 2006, the SEC issued SAB No. 108, which was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements.
As a result of the adoption of SAB No. 108, the Corporation recognized a reduction in other liabilities and an increase in retained earnings of $335,000 as an adjustment of the beginning of the year opening balances for these accounts. The adjustment represented an overaccrual of income tax expense which occurred over several years prior to 2005. Management has concluded that these adjustments are immaterial to prior years’ consolidated financial statements and therefore has elected, as permitted under the transition provisions of SAB No. 108, to reflect the effect of this adjustment as a cumulative effect adjustment to opening retained earnings as of January 1, 2006.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
City National Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of City National Bancshares Corporation and subsidiary (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of City National Bancshares Corporation and subsidiary as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Short Hills, New Jersey
March 28, 2008
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements with accountants during 2007.
Item 9A
Item 9A Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
Management of the Corporation, including the Chief Executive Officer and the Chief Financial Officer, have conducted an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Corporation’s disclosure controls and procedures were effective in ensuring that all material information relating to the Corporation, including all consolidated subsidiaries, required to be filed in this report has been made known to them in a timely manner.
(b)
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the principal executive officer and the principal financial officer, management has conducted an evaluation of the effectiveness of the Corporation’s control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the evaluation under the framework, management has concluded that the internal control over financial reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to temporary rules of the Securities Exchange Commission that permit the Corporation to provide only management’s report in this annual report.
(c)
Changes in Internal Control Over Financial Reporting.
There have not been any changes in the Company’s internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required is incorporated herein by reference to the material responsive to such item in the Corporation’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2008.
Item 11.
Item 11. Executive Compensation
The information required is incorporated herein by reference to the material responsive to such item in the Corporation’s Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required is incorporated herein by reference to the material responsive to such item in the Corporation’s Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required is incorporated herein by reference to the material responsive to such item in the Corporation’s Proxy Statement.
Part IV
Item 14.
Item 14. Principal Accountant Fees and Services
The information required is incorporated herein by reference to the material responsive to such item in the Corporation’s Proxy Statement.
Item 15.
Item 15. Exhibits and Financial Statement Schedules
The following exhibits are incorporated herein by reference or are annexed to this Annual Report:
(a)
The following documents are filed ad part of this report:
(b)
The required exhibits are included as follows:
(3)(a)
The Corporation’s Restated Articles of Incorporation (incorporated herein by reference to Exhibit (3)(d) of the Corporation’s Current Report on Form 8-K dated July 28, 1992).
(3)(b)
Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit (3)(b) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1995).
(3)(c)
Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series B (incorporated herein by reference to Exhibit (3)(c) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1995).
(3)(d)
Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series C (incorporated herein by reference to Exhibit (3(i) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1996).
(3)(e)
Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series D (incorporated herein by reference to Exhibit filed with the Corporation’s current report on Form 10-K dated July 10, 1997).
(3)(f)
Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series E (incorporated by reference to Exhibit (3)(i) to the Corporation’s Current Report on Form 8-K filed on March 4, 2005).
(3)(g)
Amendment to the Corporation’s Articles of Incorporation establishing the Corporation’s MultiMode Series F Non-cummulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit (3)(f) of the Corporation’s Quartely Report on Form10-Q filed on September 30, 2005).
(3)(h)
The Amendment to the By-Laws of the Corporation (incorporated herein by reference to Exhibit (3)(c) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1991).
(3)(i)
The By-Laws of the Corporation (incorporated herein by reference to Exhibit (3)(b) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1988).
(4)(a)
The Debenture Agreements between the Corporation and its Noteholders (incorporated herein by reference to Exhibit (4)(a) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1993).
(4)(b)
Indenture dated July 11, 2002 between the Corporation and Wilmington Trust Company (incorporated herein by reference to Exhibit 4(c) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
(10)(a)
The Employees’ Profit Sharing Plan of City National Bank of New Jersey (incorporated herein by reference to Exhibit (10) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1988).
(10)(b)
The Employment Agreement among the Corporation, the Bank and Louis E. Prezeau dated May 26, 2006 (incorporated herein by reference to Exhibit 10.1 of the Corporation’s Current Report on Form 8-K dated December 4, 2006).
(10)(c)
Lease and option Agreement dated May 6, 1995 by and between the RTC and City National Bank of New Jersey (incorporated herein by reference to Exhibit (10)(d) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1995).
(10)(d)
Amended and Restated Asset Purchase and Sale Agreement between the Bank and Carver Federal Savings Bank dated as of February 27, 2001 (incorporated by reference to Exhibit 10(d) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000).
(10)(e)
Secured Promissory Note of the Corporation dated December 28, 2001 payable to National Community Investment Fund in the principal amount of $1,000,000, (incorporated by reference to Exhibit 10(e) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001).
(10)(f)
Loan Agreement dated December 28, 2001 by and between the Corporation and National Community Investment Fund (incorporated by reference to Exhibit 10(f) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001).
(10)(g)
Pledge Agreement dated December 28, 2001 by and between the Corporation and National Community Investment Fund (incorporated by reference to Exhibit (g) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001).
(10)(h)
Asset Purchase and Sale Agreement between the Bank and Carver Federal Savings Bank dated as of January 26, 1998 (incorporated by reference to Exhibit 10(h) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1998).
(10)(i)
Promissory Note dated May 6, 2002 payable to United Negro College Fund, Inc., in the principal amount of $200,000 (incorporated by reference to Exhibit 10(i) to the Corporation’s Quarterly Report on Form 10-Q for quarter ended March 31, 2002).
(10)(j)
Guarantee Agreement dated July 11, 2002 from the Corporation in favor of Wilmington Trust Company, as trustee for holders of securities issued by City National Bank of New Jersey Capital Trust 1 (incorporated by reference to Exhibit 10(j) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
(10(k)
Amended and Restated Declaration of Trust of City National Bank of New Jersey Capital Trust I, dated July 11, 2002 (incorporated by reference to Exhibit 10(k) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
(10)(l)
Purchase and Assumption Agreement dated as of March 31, 2004 by and between Prudential Savings Bank, F.S.B., The Prudential Bank and Trust Company and the Bank. (incorporated by reference to Exhibit 10(l) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
(10)(m)
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 by reference to Exhibit 10(m) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
(10)(n)
Purchase Agreement dated September 27, 2005 by and between Sandler O’Neil & Partners, L.P., and the Corporation with respect to issue and sale of 7,000 shares of the Corporation’s MultiMode Series F Noncummulative Redeemable Preferred Stock (incorporated by reference to Exhibit 10(n) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
(10)(o)
Credit Agreement dated February 21, 2007 by and between The Prudential Insurance Company of America and the Corporation with respect to a $5,000,000 loan to the Corporation (incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated February 23, 2007).
(10)(p)
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 (p) to the Corporation’s Current Report on Form 8-K dated March 14, 2007).
(11)
Statement regarding computation of per share earnings. The required information is included on page 28.
(12)
Ratios have been computed using the average daily balances of the respective asset, liability and stockholders’ equity accounts.
(13)
Annual Report to security holders for the fiscal year ended December 31, 2007.
(21)
Subsidiaries of the registrant. The required information is included on page 3.
(31)
Certificate of Periodic Report (302).
(32)
Certificate of Periodic Report (906).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, City National Bancshares Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
CITY NATIONAL BANCSHARES CORPORATION
By:
/s/ Louis E. Prezeau
By:
/s/ Edward R. Wright
Louis E. Prezeau
Edward R. Wright
President and Chief
Chief Financial Officer
Executive Officer
and Principal Accounting Officer
Date:
March 29, 2008
Date:
March 29, 2008
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.