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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from to
Commission file number 0-11535
CITY NATIONAL BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2434751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Broad Street, 07102
Newark, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (973) 624-0865
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common stock, par value $10 per share
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 22, 2000 was approximately $1,555,450.
There were 120,130 shares of common stock outstanding at March 22, 2000.
Documents incorporated by reference:
Certain portions of the definitive Proxy Statement for the 1998 Annual Meeting
of shareholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A are incorporated herein by reference in Part III.
CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents
Page
PART I
Item 1. Business..............................................................3
Item 2. Properties............................................................4
Item 3. Legal Proceedings.....................................................5
Item 4. Submission of Matters to a Vote of Security Holders...................5
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters...............................................................5
Item 6. Selected Financial Data...............................................6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................7 - 14
Item 8. Financial Statements and Supplementary Data.....................15 - 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................30
PART III
Item 10. Directors and Executive Officers of Registrant.......................30
Item 11. Executive Compensation...............................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management.......30
Item 13. Certain Relationships and Related Transactions.......................30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......30
Signatures....................................................................32
Part I
Item 1...Business
Description of business
City National Bancshares Corporation (the "Corporation" or "CNBC") is a New
Jersey corporation incorporated on January 10, 1983. At December 31, 1999, CNBC
had consolidated total assets of $171.5 million, total deposits of $139.8
million and stockholders' equity of $9 million. Its only subsidiary is City
National Bank of New Jersey (the "Bank" or "CNB"), a nationally chartered
commercial bank which commenced operations on June 11, 1973. CNB has one
subsidiary, City National Investments, Inc., an investment company which holds,
maintains and manages investment assets for CNB.
CNB is a national banking association chartered in 1973 under the laws of the
United States of America. CNB is minority owned and controlled 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 three offices located in northern New Jersey. Deposit
services include savings and checking accounts, certificates of deposit and
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.
CNB specializes in providing credit and deposit services to businesses and
individuals located within urban areas in New Jersey, particularly in the Newark
area.
The Bank does not have a trust department.
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 saving 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 that segment 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.
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.
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 a "Satisfactory" CRA rating
in its most recent examination.
Government policies
The earnings of the Corporation are affected not only by economic conditions,
but also by the monetary and fiscal policies of the United States and its
agencies, especially the Federal Reserve Board. The actions of the Federal
Reserve Board influence the overall levels of bank loans, investments and
deposits and also affect the interest rates charged on loans or paid on
deposits. The monetary policies of the Federal Reserve Board have had a
significant affect on the operating results of commercial banks in the past and
are expected to do so in the future. The nature and impact of future changes in
monetary and fiscal policies on the earnings of the Corporation cannot be
determined.
Employees
On December 31, 1999, CNBC and its subsidiary had 69 full-time equivalent
employees. Management considers relations with employees to be satisfactory.
Item 2. Properties
The corporate headquarters and main office as well as the operations and data
processing center of CNBC and CNB are located in Newark, New Jersey in a
building owned by CNB. The Bank leases its Hackensack office from the Resolution
Trust Corporation, for which no rent is payable for five years, until 1999, at
which time the Bank will have the opportunity to purchase the property. The Bank
owns the property where two of its other branch offices are located, and a third
branch office is located in leased space.
Item 3. Legal proceedings
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders and certain affiliates of such entity
for fraud and other damages. CNB alleges, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. The defendants have responded alleging CNB records regarding
these transactions are in error and that CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified. This litigation is in the
midst of discovery. The likelihood of CNB's success in this litigation and its
ability to recover any amount for which it obtains judgment is uncertain. CNB
has filed appropriate proofs of loss under various insurance policies, including
CNB's fidelity bond. It is also too early to determine the amount CNB will
ultimately recover, if any, under these insurance policies.
Item 4. Submission of matters to a vote of security holders During the fourth
quarter of 1999, there were no matters submitted to stockholders for a vote.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
The Corporation's common stock, when publicly traded, is traded
over-the-counter. The common stock is not listed on any exchange and is not
quoted on the National Association of Securities Dealers' Automated Quotation
System. The last customer trade effected by a market maker was unsolicited and
occurred on November 2, 1990. No price quotations are currently published for
the common stock, nor is any market maker executing trades. No price quotations
were published during 1999.
Item 6. Selected Financial Data
At March 22, 1999, the Corporation had 1,953 common stockholders of record.
On April 16, 1999, the Corporation paid a cash dividend of $1.80 per share to
stockholders of record on March 31, 1999. 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, Raul L. Oseguera, Vice President, Stockholder Relations, 900 Broad
Street, Newark, New Jersey, 07102.
Transfer Agent
First City Transfer Company
P.O. Box 170
Iselin, New Jersey 08830
Five-Year Summary
Dollars in thousands,
except per share data 1999 1998 1997 1996 1995
- ----------------------------- --------- --------- --------- --------- ---------
Year-end Balance Sheet data:
Total assets ................ $172,496 $164,901 $138,868 $134,951 $114,410
Gross loans ................. 82,446 71,440 56,947 57,128 44,739
Reserve for loan losses ..... 1,975 1,415 825 750 650
Investment securities ....... 68,475 3,966 62,360 60,863 55,103
Total deposits .............. 139,837 137,943 119,717 115,854 100,889
Long-term debt .............. 16,225 15,749 3,749 1,749 1,749
Stockholders' equity ........ 9,026 10,123 10,032 8,287 6,896
- ----------------------------- -------- -------- -------- -------- --------
Income Statement data:
Interest income ............. $ 10,615 $ 9,555 $ 9,571 $ 9,034 $ 7,470
Interest expense ............ 5,276 4,598 4,330 3,802 2,829
- ----------------------------- -------- -------- -------- -------- --------
Net interest income ......... 5,339 4,957 5,241 5,232 4,641
Provision for loan losses ... 906 1,016 159 91 486
- ----------------------------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses . 4,433 3,941 5,082 5,141 4,155
Other operating income ...... 1,492 1,297 1,199 1,147 1,363
Other operating expenses .... 5,330 4,999 4,630 4,839 4,245
- ----------------------------- -------- -------- -------- -------- --------
Income before income tax
expense ................... 595 239 1,651 1,449 1,273
Income tax expense .......... 193 13 582 504 471
- ----------------------------- -------- -------- -------- -------- --------
Net income .................. $ 402 $ 226 $ 1,069 $ 945 $ 802
- ----------------------------- -------- -------- -------- -------- --------
Per common share data:
Net income per basic share .. $ 2.48 $ 1.25 $ 8.98 $ 8.31 $ 7.22
Net income per diluted share 2.34 1.22 8.11 7.51 6.51
Book value .................. 66.73 72.54 74.34 66.23 62.05
Dividends ................... 1.80 1.75 1.50 1.35 1.25
Basic average number of common
shares outstanding ........ 118,902 115,189 114,141 113,498 111,141
Diluted average number of common
shares outstanding ........ 131,402 129,039 127,991 127,348 124,991
Number of common shares
outstanding at year-end ... 119,571 118,221 114,141 114,141 111,141
Financial ratios:
Return on average assets .... .25% .16% .78% .71% .72%
Return on average common
equity ................... 3.49 1.51 13.05 13.19 12.71
Stockholders' equity as a
percentage of total assets 5.23 6.14 7.22 6.14 6.03
Dividend payout ratio ...... 72.58 140.00 16.70 16.25 17.31
- ---------------------------- -------- -------- -------- -------- --------
Management's discussion and analysis of financial condition and results of
operations Performance summary 1999 net income rose to $402,000 compared to
$226,000 in 1998 due primarily to a $382,000 increase in net interest income.
Related earnings per common share on a diluted basis increased to $2.34 from
$1.22.
Total assets rose 15.8% to $172.5 million at 1999 year-end from $149 million a
year earlier, after excluding a nonrecurring $15.9 million municipal savings
deposit at December 31, 1998. Most of the asset growth occurred in loans, which
grew 15.4%, and led to the increase in net interest income.
Investments
The investment securities available for sale ("AFS") portfolio rose 9.9%, to
$35.5 million at December 31, 1999 from $32.3 million a year earlier, while the
related gross unrealized loss increased to $1.2 million from an unrealized gain
of $40,000, due to the increase in interest rates.
The major change within the portfolio occurred in the mortgaged-backed
portfolio, which rose 30% from the end of 1998 to year-end 1999. $2.5 million of
this growth came from the reinvestment of proceeds from the maturities of
obligations of U.S. government agencies.
The investment securities held to maturity ("HTM") portfolio rose to $33 million
at December 31, 1999 compared to $31.7 million a year earlier. Mortgage-backed
securities declined 45.3% in 1999 due to prepayments.
At December 31, 1999, the Bank held structured notes with total book and related
market values of $2,750,000 and $2,736,000. These structured notes consist of
notes which are indexed to the ten-year U.S. Treasury interest rate.
Accordingly, the value of these securities could fluctuate depending on interest
rate movements. The notes mature in March, 2000.
Also, at December 31, 1999, the Bank held callable U.S. Government agency notes
with a carrying value of $20 million, of which $19 million was included in the
HTM portfolio. These notes are callable at par at various dates from 2000
through March, 2001. These callable securities reflect gross unrealized
depreciation of $1.6 million, or more than half the depreciation in the entire
investment portfolio. Favorable spreads provide compensation for the interest
rate risk inherent in this investment due to the call feature.
Management believes that holding either the structured notes or callable
securities will not have a significant impact upon the financial condition or
operations of the Corporation.
Information pertaining to the average weighted yields of investments in debt
securities at December 31, 1999 is presented below. Maturities of
mortgaged-backed securities included with U.S. Government agencies are based on
the maturity of the final scheduled payment. Such securities, which comprise
most of the balances shown as maturing beyond five years, generally amortize on
a monthly basis and are subject to prepayment.
Investment Securities Available for Sale Maturing After One Maturing After Five
Maturing Within Year But Within Years But Within Maturing After
One Year Five Years Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- ---------
U.S. Treasury securities $ 2,004 5.56% $ 595 5.98% $ - -% $ - -% $ 2,599 5.65%
U.S. Government agencies - - - - - - 594 5.98 594 5.98
Mortgage-backed securities 1,977 6.08 4,127 5.66 123 9.13 19,683 5.96 25,910 5.94
Obligations of state
political and subdivisions(1) - - - - - - 2,280 7.90 2,280 7.90
Other debt securities - - - - 756 7.03 2,914 7.53 3,670 7.43
- ---------------------------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- ---------
Total amortized cost $ 3,981 5.82% $ 4,722 5.70% $ 879 7.32% $25,471 6.31% $35,053 6.20%
- ---------------------------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- ---------
(1) Includes $250,000 of nontax-exempt securities with a 7.60% yield.
Investment Securities Held to Maturity Maturing After One Maturing After Five
Maturing Within Year But Within Years But Within Maturing After
One Year Five Years Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------- --------- --------- --------- ----------- --------- ------- ---------- --------- --------- ----------
U.S. Government agencies(1) $ 2,750 5.17% $ - -% $ 6,190 6.31% $14,264 6.56% $23,204 6.33%
Obligations of state and
political subdivisions 350 6.85 1,962 6.82 - - 1,048 7.77 3,360 7.12
Mortgage-backed securities 898 6.37 1,534 6.00 - - 1,490 7.33 3,922 6.60
Other debt securities - - - - 2,031 7.95 500 9.75 2,531 8.31
- ----------------------------- -------- -------- --------- ---------- --------- --------- --------- --------- ---------- ----------
Total amortized cost $ 3,998 5.59% $ 3,496 6.46% $ 8,221 6.72% $17,302 6.79% $33,017 6.59%
- ----------------------------- -------- -------- --------- ---------- --------- --------- --------- --------- ---------- ----------
(1) Includes $17.5 million of U.S. Government agency securities callable in
2000, all of which mature after five years.
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, 1999. 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 increased to 6.20% at December 31, 1999
from 5.95% at December 31, 1998, while the yield on the HTM portfolio increased
to 6.59% at December 31, 1999 from 6.14% at December 31, 1998. 72.7% of the
total portfolio matures after ten years, compared to 56.4% in 1998.
Consolidated Average Balance Sheet with Related Interest and Rates
1999 1998
- -------------------------------------------------- ---------- ------------ -------------- ------ ---------- ---------- -----------
Average Average Average Average
Tax equivalent basis; dollars in thousands Balance Interest Rate Balance Interest Rate
- -------------------------------------------------- ---------- ------------ -------------- ------ ---------- ---------- -----------
Assets
Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell $ 7,981 $ 396 4.97% $ 12,195 $ 653 5.35%
Interest-bearing deposits with banks 1,771 76 4.27 77 4 5.10
Investment securities:
Taxable 1 62,048 3,770 6.08 55,401 3,390 6.12
Tax-exempt 4,526 326 7.19 4,761 342 7.20
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Total investment securities 66,574 4,096 6.15 60,162 3,732 6.20
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Loans 2,3:
Commercial 25,138 1,889 7.51 21,234 1,702 8.01
Real estate 47,650 4,175 8.76 37,224 3,502 9.41
Installment 902 94 10.40 772 78 10.14
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Total loans 73,690 6,158 8.36 59,230 5,282 8.92
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Total interest earning assets 150,016 10,726 7.15 131,664 9,671 7.35
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Noninterest earning assets:
Cash and due from banks 4,451 3,670
Gross unrealized loss on investment
securities available for sale (483) (18)
Reserve for possible loan losses (1,336) (1,104)
Other assets 7,117 6,686
- -------------------------------------------------- ---------- --------------- -------- ---------- ---------- ---------- -----------
Total noninterest earning assets 9,749 9,234
- -------------------------------------------------- ---------- --------------- -------- ---------- ---------- ---------- -----------
Total assets $159,765 $140,898
- -------------------------------------------------- ---------- --------------- -------- ---------- ---------- ---------- -----------
Liabilities and stockholders' equity
Interest bearing liabilities:
Savings deposits 4 $ 40,597 791 1.95 $ 34,619 728 2.10
Time deposits 5 68,950 3,453 5.01 61,887 3,047 4.92
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Total interest bearing deposits 109,547 4,244 3.87 96,506 3,775 3.91
Short-term borrowings 2,789 133 4.76 3,068 159 5.19
Long-term debt 15,989 899 5.62 11,725 664 5.66
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Total interest bearing liabilities 128,325 5,276 4.11 111,299 4,598 4.13
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Noninterest bearing liabilities:
Demand deposits 20,844 18,230
Other liabilities 839 1,302
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Total noninterest bearing liabilities 21,683 19,532
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Stockholders' equity 9,757 10,067
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Total liabilities and stockholders' equity $159,765 $140,898
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Net interest income (tax equivalent basis) 5,450 3.04 5,073 3.21
Tax equivalent basis adjustments 6 (111) (116)
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Net interest income $ 5,339 $ 4,957
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Average rate paid to fund interest earning assets 3.52 3.49
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
Net interest income as a percentage of
interest earning assets (tax equivalent basis) 3.63% 3.85%
- -------------------------------------------------- ---------- --------------- ------------ ------ ---------- ---------- -----------
1 Includes investment securities available for sale and held to maturity at amortized cost
2 Includes nonperforming loans 3 Includes loan fees of $149,000 and $151,000 in 1999 and 1998, respectively
4 Includes noninterest bearing deposits maintained by a state governmental agency of $369,000 in 1999 and $469,000 in 1998
5 Includes noninterest bearing deposits maintained by corporations and U.S. governmental agencies of $1,582,000 in 1999 and
$5,920,000 in 1998
6 The tax equivalent adjustment was computed assuming a 34% statutory federal income tax rate in 1999 and 1998
The table below set forth, on a fully taxable 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
1999 Net Interest Income Increase 1998 Net Interest Income Increase
(Decrease) from 1998 due to (Decrease) from 1997 due to
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
In thousands Volume Rate Total Volume Rate Total
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Interest income
Loans:
Commercial $ 313 $ (126) $ 187 $ 158 $ (116) $ 42
Real estate 981 (308) 673 (43) 31 (12)
Installment 13 3 16 4 1 5
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Total loans 1,307 (431) 876 119 (84) 35
Taxable investment securities 407 (27) 380 (227) (101) (328)
Tax-exempt investment securities (16) - (16) 67 86 153
Federal funds sold and securities
purchased under agreements to resell (225) (32) (257) 224 (10) 214
Other short-term investments - - - (39) - (39)
Interest-bearing deposits with banks 86 (14) 72 1 - 1
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Total interest income 1,559 (504) 1,055 145 (109) 36
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Interest expense
Savings deposits (126) 63 (63) (62) - (62)
Time deposits (347) (59) (406) 432 (218) 214
Short-term borrowings 14 12 26 39 4 43
Long-term debt (241) 6 (235) (482) 19 (463)
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Total interest expense (700) 22 (678) (73) (195) (268)
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Net interest income $ 859 $ (482) $ 377 $ 72 $ (304) $ (232)
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Loans
Loans rose 15.4% to $82.4 million at December 31, 1999 compared to $71.4 million
a year earlier. The increase resulted from a 32.8% increase in the real estate
loan portfolio, most of which was commercial real estate.
Loans held for sale decreased to $405,000 million at December 31, 1999 from $2
million a year earlier. Loans sold totalled $571,000 in 1999 compared to $1.1
million in 1998, while gains on loan sales declined to $21,000 in 1999 from
$64,000 in 1998. Additionally, $2.3 million of loans held for sale were
transferred to the loan portfolio at the lower of cost or fair market value
reflecting management's decision to increase the Bank's residential loan
portfolio.
At December 31, 1999, loans to churches totalled $11 million, representing 13.3%
of total loans outstanding and are included with real estate loans. Management
does not believe that this loan concentration exposes the Corporation to any
unusual degree of risk.
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's primary market area consists of northern New Jersey, particularly
within the Newark area. Although Newark is undergoing a major renovation, the
city continues to experience a high rate of unemployment.
While management believes that its loan portfolio is well secured and able to
withstand a downturn in economic conditions, its effects will be carefully
considered in making credit decisions in 2000.
Maturities and interest sensitivities of loans
Information pertaining to maturities and the sensitivity to changes in interest
rates of loans at December 31, 1999 is presented below.
One Year
Due in One Through Due After
In thousands Year or Less Five Years Five Years Total
- ---------------- ------------- ---------- ---------- -----------
Commercial ................. $ 4,576 $ 6,965 $ 6,146 $17,687
Real estate:
Construction ............. 2,356 -- -- 2,356
Mortgage ................. 2,860 20,607 38,113 61,580
Installment ................ 188 178 457 823
- ---------------------------- ------- ------- ------- -------
Total ...................... $ 9,980 $27,750 $44,716 $82,446
- ---------------------------- ------- ------- ------- -------
Loans at fixed
Interest rates ........... $ 8,622 $12,057 $13,797 $34,476
Loans at variable
Interest rates ........... 1,358 15,693 30,919 47,970
- ---------------------------- ------- ------- ------- -------
Total ...................... $ 9,980 $27,750 $44,716 $82,446
- ---------------------------- ------- ------- ------- -------
Summary of loan loss experience
Changes in the reserve for loan losses are summarized below.
Dollars in thousands 1999 1998
- ------------------------------------------------ ----------- ------------
Balance, January 1 ............................. $ 1,415 $ 825
- ------------------------------------------------ ------- -------
Charge-offs:
Commercial loans ............................. 411 480
Real estate loans ............................ 68 83
Installment loans ............................ 24 16
- ------------------------------------------------ ------- -------
Total .......................................... 503 579
- ------------------------------------------------ ------- -------
Recoveries:
Commercial loans ............................. 137 40
Real estate loans ............................ 4 111
Installment loans ............................ 16 2
- ------------------------------------------------ ------- -------
Total .......................................... 157 153
- ------------------------------------------------ ------- -------
Net charge-offs ................................ (346) (426)
Provision for loan
losses charged to operations ................. 906 1,016
- ------------------------------------------------ ------- -------
Balance, December 31 ........................... $ 1,975 $ 1,415
- ------------------------------------------------ ------- -------
Net charge-offs as a
percentage of average loans .................. .47% .72%
Reserve for loan losses as a
percentage of loans .......................... 2.40 1.98
Reserve for loan losses as a
percentage of nonperforming loans ............ 71.40 78.51
- ------------------------------------------------ ------- -------
The reserve for loan losses is maintained at a level determined by management to
be adequate to provide for inherent losses in the loan portfolio. The reserve is
increased by provisions charged to operations and recoveries of loan
charge-offs. The reserve 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.
A standardized method is used to assess the adequacy of the reserve 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 reserve is maintained at a level considered sufficient to absorb
estimated losses in the loan portfolio, and reserves not allocated to specific
loan categories are considered unallocated and evaluated based on management's
assessment of the portfolio's risk profile.
The reserve represented 2.40% of total loans at December 31, 1999 compared to
1.98% a year earlier. Although the provision for loan losses decreased by
$110,000 in 1999, it remained relatively high in order to maintain the reserve
at a level to provide for the increase in nonaccrual loans.
Allocation of the reserve for loan losses
The reserve 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:
1999 1998
- -------------------- -------------------- ---------------------
Percentage Percentage
of Loan of Loan
Category Category
to Gross to Gross
Dollars in thousands Amount Loans Amount Loans
- ------------------------------ --------- --------- -------- ----------
Commercial ................... $1,492 21.41% $ 990 31.51%
Real estate .................. 386 77.60 408 67.32
Installment .................. 17 .99 15 1.17
Unallocated .................. 80 -- 2 --
- ------------------------------ ------ ------- ------ ------
Total ........................ $1,975 100.00% $1,415 100.00%
- ------------------------------ ------ ------ ------ ------
Most of the reserves at December 31, 1999 and December 31, 1998 were allocated
to the commercial loan portfolio, reflecting the higher levels of nonperforming
commercial loans at both dates. Reserve allocations are subject to change based
on the levels of nonperforming 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 reserve is based
upon management's evaluation of the underlying inherent risk in the loan
portfolio and totalled $80,000 at December 31, 1999 compared to $2,000 a year
earlier.
Nonperforming assets
Information pertaining to nonperforming assets at December 31 is summarized
below:
In thousands 1999 1998
- ------------------------------------ ------------ -------------
Nonperforming loans
Commercial $2,093 $1,148
Real estate 668 647
Installment 5 1
- ------------------------------------ ------------ -------------
Total nonperforming loans 2,766 1,796
Other real estate owned 698 590
- ------------------------------------ ------------ -------------
Total $3,464 $2,386
- ------------------------------------ ------------ -------------
Nonperforming commercial loans at December 31, 1999 includes two loans to one
commercial borrower totalling $1.3 million that were considered total debt
restructurings at December 31, 1998.
OREO is carried net of a $13,000 reserve at December 31, 1999 and $35,000 in
1998.
Deposits
Total deposits rose to $139.8 million at December 31, 1999 from $137.9 million a
year earlier, while average deposits increased 13.7%, to $130.4 million in 1999
from $114.7 million in 1998. Year-end 1998 included a $15.9 million nonrecurring
municipal savings deposit, which was withdrawn shortly after year-end.
Saving deposits declined to $34.7 million at December 31, 1999 from $57.5
million a year earlier due to the aforementioned nonrecurring deposit. Average
savings accounts rose 17.3% in 1999 due to higher Super NOW account balances.
Regular savings and money-market account growth was flat. The average rate paid
on savings accounts declined by 15 basis points.
Time deposits averaged $69 million in 1999, 11.4% more than in 1998, reflecting
an expansion of the Bank's municipal account relationships. The average rate
paid rose nine basis points reflecting the higher costs associated with these
relationships.
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, 1999.
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.
Certain corporations and governmental agencies maintain noninterest-bearing
savings accounts with the Bank as compensation for services performed. At
December 31, 1999, such balances totalled $369,000.
Short-term borrowings
Short-term borrowings rose to $6 million at December 31, 1999 compared to
$18,000 a year earlier due to a higher U.S. Treasury tax and loan note option
account balance. These balances are subject to daily redemption and can
fluctuate significantly. Average short-term borrowings declined to $2.8 million
in 1999 from $3.1 in 1998 because of lower U.S. Treasury tax and loan note
option account balances.
Long-term debt
Long-term debt rose $476,000 in 1999 due to the issuance of a $500,000 capital
note during 1999.
Results of operations - 1999 compared with 1998
Net interest income is the principal source of the Corporation's earnings and
represents the amounts by which the interest and fees earned on loans and other
interest earning assets exceeds the interest paid on the funding sources used to
finance those assets. An analysis of the components of net interest income is
facilitated when the income from tax-exempt investment securities is adjusted to
a taxable equivalent basis, placing tax-exempt assets on a comparable basis with
taxable interest earning assets.
On a fully taxable equivalent ("FTE") basis, net interest income rose 7.8%, to
$5.5 million in 1999 from $5.1 million in 1998, while the related net interest
margin decreased to 3.63% from 3.85%. Average interest earning assets rose 13.9%
in 1999, with most of this growth occurring in loans. The higher interest income
levels were in part offset by increased interest expense resulting from both an
increase in interest bearing liabilities and a higher cost of funds.
Interest income on a FTE basis rose 10.9% in 1999. Most of this increase
resulted from higher income from the loan portfolio. A lower interest rate
environment coupled with competitive pressures resulted in a lower yield during
the year, which declined to 7.15% from 7.35%. Significant fluctuations occurred
within the earning asset categories as proceeds from asset maturities and
payments and deposit growth were allocated to longer-term higher earning assets.
Interest income from Federal funds sold decreased by 39.4%, reflecting a
reduction in the related average asset balance. Interest income from
interest-bearing deposits with banks was higher due to higher volumes.
Income interest on taxable investment securities rose $380,000, or 11.2% in 1999
due to higher asset volume, offset by a slight reduction in the average rate by
four basis points. Tax-exempt income was relatively unchanged as was the average
rate, while the related average asset balance declined slightly.
The percentage increase in interest income from loans resulted from volume
increases in all areas of the portfolio, as the average rate declined by 56
basis points. The commercial loan portfolio averaged 18.4% more in 1999, while
the average real estate loan portfolio rose 28%. The average installment loan
portfolio grew 16.8%, while the average rate also increased, reflecting growth
in a new secured credit card product.
Overall, the yield on earning assets declined 20 basis points, to 7.15% from
7.35% due principally to the lower rate environment.
Interest expense totalled $5.3 million in 1999, an increase of 14.7% from 1998.
This increase resulted primarily from higher interest-bearing deposit levels.
The average rate paid on interest bearing liabilities declined by two basis
points, to 4.11% compared to 4.13%, while the overall cost of funding interest
earning assets rose three basis points. Interest expense on time deposits
increased 13.3% due to a $7.1million increase in average time deposits. The
average rate paid on time deposits rose nine basis points due to the high cost
of municipal deposits.
Interest expense on long-term debt rose $235,000 in 1999 due primarily to higher
levels of FHLB advances and the issuance of a $500,000 capital note, while the
average rate paid declined by four basis points.
Other operating income rose 15% to $1,492,000 in 1999 from $1,297,000 in 1998.
The primary reasons for the increase were higher loan syndication fees, which
rose 20.8% to $308,000 from $255,000, $48,000 in loan referral fees received
during 1999 as a result of a new residential loan referral relationship with a
third-party lender and $52,000 received from the U.S. Treasury Department as an
award for generating loans in certain lower-income areas made under the Bank
Enterprise Award program. These increases were partially offset by lower money
order fees due to the discontinuance of an agency relationship with a customer
of the Bank who sold the Bank's money orders.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for loan losses, totalled $5.3 million in 1999, a 6.6%
increase compared to 1998. Higher salaries were the primary contributing factor
to the increase.
Salary expense rose 6.7% due primarily to normal recurring merit increases, the
operation of a branch opened in May, 1998 for a full year and the addition of
staff. Employee benefits rose 9.7% due to the higher cost of providing employee
health insurance.
Occupancy and equipment expense rose 11.5% due to the expenses of operating the
aforementioned new branch, for a full year, along with increased costs
associated with the acquisition of a building at another branch location which
was previously being leased.
Other expenses rose $73,000, or 4.5% in 1999 due primarily to higher
professional expenses, which increased to $319,000 from $282,000 due primarily
to work performed during 1999 in connection with a legal claim.
Income tax expense as a percentage of pre-tax income was 32.4% in 1999 compared
to 5.4% in 1998. The increase resulted due to a state tax loss in 1998 that did
not recur in 1999.
Liquidity
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
The Bank depends primarily on deposits as a source of funds and also provides
for a portion of its funding needs through short-term borrowings, such as
Federal Funds purchased, securities sold under repurchase agreements and
borrowings under the U.S. Treasury tax and loan note option program. The Bank
also utilizes the Federal Home Loan Bank for longer-term funding purposes.
The major contribution during 1999 from operating activities to the
Corporation's liquidity came from proceeds from sales of loans held for sale
totalling $592,000, while loans originated for sale, amounting to $1.6 million,
represented the primary use of cash.
Net cash used in investing activities was primarily used for the purchase of
investment securities held to maturity, which totalled $21.2 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 $16.8 million.
The primary sources of funds from financing activities resulted from an increase
in deposits and short-term borrowings of $6 million.
Effects of inflation
Inflation, as measured by the CPI, rose to 2.7% in 1999 compared to 1.6% in 1998
and 2% in 1997.
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 financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments' fair values at December 31, 1999. Market risk sensitive instruments
are generally defined as on-and-off balance sheet financial instruments.
Interest Rate Sensitivity Analysis
Expected Maturity
---------- ---------- ---------- --------- ---------- ---------- ----------
Average
Interest Total Fair
In thousands Rate (1) 2000 2001 2002 2003 2004 Thereafter Balance Value
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Interest sensitive assets
Federal funds sold 5.34% $5,400 $ - $ - $ - $ - $ - $ 5,400 $ 5,400
Interest bearing deposits
with banks 4.56 - 2,286 - - - - 2,286 2,211
Investment securities available
for sale:
U.S. Treasury securities 5.11 2,007 - - 595 - - 2,602 2,588
Obligations of U.S. government
agencies 6.00 1,974 - - 1,114 3,013 20,400 26,501 25,627
Obligations of state and
political subdivisions 8.08 - - - - - 2,280 2,280 2,211
Other debt securities 7.72 - - - - 756 2,914 3,670 3,507
Equity securities - - - - - 1,534 1,534 1,525
Investment securities held to
maturity:
Obligations of U.S. government
agencies 6.36 3,648 309 - 605 620 21,944 27,126 25,391
Obligations of state and
political subdivisions 6.53 350 1,562 400- - - 1,048 3,360 3,327
Other debt securities 8.31 - - - - - 2,531 2,531 2,333
Loans net of unearned income:
Commercial 8.34 4,576 1,500 3,200 1,236 1,029 6,146 17,687 16,278
Real estate 8.77 5,216 3,471 3,501 6,893 6,742 38,113 63,936 63,453
Installment 9.81 188 80 80 14 4 457 823 808
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Loans held for sale 8.50 405 - - - - - 405 405
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total interest sensitive assets 7.54% $23,758 $ 9,208 $ 7,181 $ 10,457 $15,192 $97,915 $159,736 $154,658
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Interest sensitive liabilities
Deposits:
SuperNOW accounts 1.68% $11,518 $ - $ - $ - $ - $ - $ 11,518 $ 11,518
Money market accounts 4.02 5,937 - - - - - 5,937 5,937
Regular savings 1.97 - - - - - 17,264 17,264 17,264
Time - less than $100,000 5.45 13,163 371 370 31 14,597 3,320 26,076 24,929
Time - $100,000 or more 5.34 57,526 156 311 106 - 318 58,417 58,303
Short-term borrowings 2.75 6,000 - - - - - 6,000 6,000
Long-term debt 5.62 2,000 150 2,225 300 - 11,074 16,225 15,003
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total interest sensitive
liabilities 4.52% $94,357 $677 $ 2,906 $ 437 $14,597 $31,976 $141,437 $138,954
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
(1) Tax equivalent basis; excludes equity securities.
Various assumptions are used to estimate fair values and expected maturities.
The actual maturities of these instruments could vary substantially if future
prepayments differ from estimated experience.
Capital
The following table presents the consolidated and bank-only capital components
and related ratios as calculated under regulatory accounting practice at
December 31:
Consolidated Bank Only
- ---------------------------------------------------------
December 31, December 31,
Dollars in thousands 1999 1998 1999 1998
- --------------------------- -------- -------- -------- --------
Total stockholders' equity $ 9,026 $10,123 $10,083 $10,597
Net unrealized (gain) loss
on investment securities
available for sale 679 (25) 664 1
Disallowed intangibles (37) (96) (36) (46)
- --------------------------- -------- -------- -------- --------
Tier 1 capital 9,668 10,002 10,711 10,552
- --------------------------- -------- -------- -------- --------
Qualifying long-term debt 2,225 1,749 249 249
Reserve for loan
losses 1,231 1,066 1,222 1,058
- --------------------------- -------- -------- -------- --------
Tier 2 capital 3,456 2,815 1,471 1,307
- --------------------------- -------- -------- -------- --------
Total capital $13,124 $12,817 $12,182 $11,859
- --------------------------- -------- -------- -------- --------
Risk-adjusted assets $97,736 $84,942 $97,038 $84,263
Total assets 172,496 164,901 171,625 163,867
- --------------------------- -------- -------- -------- --------
Risk-based capital ratios:
Tier 1 capital to risk-
adjusted assets 9.89% 11.83% 11.04% 12.52%
Regulatory minimum 4.00 4.00 4.00 4.00
Total capital to risk-
adjusted assets 13.43 15.09 12.55 14.07
Regulatory minimum 8.00 8.00 8.00 8.00
Leverage ratio 5.68 7.02 6.32 7.42
Total stockholders' equity
to total assets 5.23 6.14 5.87 6.47
- --------------------------- -------- -------- -------- --------
Results of operations - 1998 compared with 1997
Net interest income on a FTE basis decreased 4.4%, to $5.1 million in 1998 from
$5.3 million in 1997, while the related net interest margin declined to 3.85%
from 4.13%. Higher interest income levels were more than offset by increased
interest expense resulting from both an increase in interest bearing liabilities
and a higher cost of funds. Related earnings per common share on a diluted basis
decreased to $1.22 from $8.11.
While income from loans rose due to higher commercial loan volume, lower rates
virtually eliminated the year-to-year income increase. The yield on the loan
portfolio declined to 8.92% from 9.08% due to three reductions in the prime
lending rate in 1998 along with the impact of price competition.
Interest income from shorter-term earning assets increased 48.7% due to higher
volume, which averaged 38.3% more in 1998 than in 1997.
Overall, the yield on earning assets declined 15 basis points, to 7.35% from
7.50% due principally to the lower rate environment.
Interest expense on long-term debt rose to $664,000 in 1998 from $201,000 in
1997, due to FHLB advances incurred during 1998, while the average rate paid
declined by 17 basis points. The average rate paid on interest bearing
liabilities rose 21 basis points, to 4.13% compared to 3.92%, while the overall
cost of funding interest earning assets rose 12 basis points.
Other operating income rose 8.2% to $1,297,000 in 1998 from $1,199,000 in 1997.
The primary reasons for the increase were higher service charges, which rose
10.6% and higher income from non-customer transaction charges, which increased
from $18,000 to $89,000. These increases were partially offset by lower money
order fees due to the discontinuance of an agency relationship with a customer
of the Bank who sold the Bank's money orders.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for possible loan losses, totalled $5 million in 1998,
an 8% increase compared to 1997. The primary reasons for the increase were
primarily higher loan collection costs and legal expenses incurred in connection
with the aforementioned overdraft.
Salaries and other employee benefits remained virtually unchanged in 1998, as
did equipment expense. Occupancy expense rose 10.7% due to the expenses of
operating a new branch.
Income tax expense as a percentage of pre-tax income was 5.4% in 1998 compared
to 35.3% in 1997. The decrease resulted due to higher tax exempt income and a
state tax loss in 1998.
Year 2000
The Bank completed its Year 2000 ("Y2K") upgrades to its computer hardware and
software systems, resulting in a smooth transition for its computer systems over
the 1999 year-end. The cost of implementing this Y2K compliance program related
to system modifications was approximately $243,000, most of which were capital
costs.
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
============================
Dollars in thousands, except per share data 1999 1998
===============================================================================
Assets
Cash and due from banks (Note 2) ................... $ 6,209 $ 20,467
Federal funds sold (Note 3) ........................ 5,400 1,500
Interest-bearing deposits with banks ............... 2,286 25
Investment securities available for
sale (Note 4) .................................... 35,458 32,254
Investment securities held to
maturity (Market value of $31,051
in 1999 and $31,580 in 1998) (Note 5) ............ 33,017 31,712
Loans held for sale ................................ 405 2,026
Loans (Note 6) ..................................... 82,446 71,440
Less: Reserve for loan losses (Note 7) ............. 1,975 1,415
--------- ---------
Net loans .......................................... 80,471 70,025
--------- ---------
Premises and equipment (Note 8) .................... 3,709 3,308
Accrued interest receivable ........................ 1,295 1,110
Other real estate owned ............................ 698 590
Other assets (Notes 13 and 14) .................... 3,548 1,884
--------- ---------
Total assets ....................................... $ 172,496 $ 164,901
========= =========
Liabilities and Stockholders' Equity
Deposits: (Notes 2, 4, 5, and 9)
Demand ........................................... $ 20,625 $ 16,919
Savings .......................................... 34,719 57,523
Time ............................................. 84,493 63,501
--------- ---------
Total deposits ..................................... 139,837 137,943
Short-term borrowings (Notes 6 and 10) ............. 6,000 18
Accrued expenses and other liabilities ............. 1,408 1,068
Long-term debt (Note 11) ........................... 16,225 15,749
--------- ---------
Total liabilities .................................. 163,470 154,778
Commitments and contingencies (Note 20)
Stockholders' equity (Notes 16 and 23):
Preferred stock, no par value: Authorized
100,000 shares (Note 15); Series A ,
issued and outstanding 8 shares in 1999
and 1998 ....................................... 200 200
Series B , issued and outstanding 20
shares in 1998 ............................... -- 500
Series C , issued and outstanding 108
shares in 1999 and 1998 ...................... 27 27
Series D , issued and outstanding 3,280
shares in 1999 and 1998 ...................... 820 820
Common stock, par value $10: Authorized
400,000 shares; 120,130 shares issued in
1999 and 118,780 shares issued in 1998,
119,571 shares outstanding in 1999 and
118,821 shares outstanding in 1998 ............. 1,201 1,188
Surplus .......................................... 950 938
Retained earnings ................................ 6,524 6,442
Accumulated other comprehensive (loss) income .... (679) 25
Treasury stock, at cost - 559 shares in
1999 and 1998 .................................. (17) (17)
--------- ---------
Total stockholders' equity ......................... 9,026 10,123
--------- ---------
Total liabilities and stockholders' equity ......... $ 172,496 $ 164,901
========= =========
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Income
Year Ended December 31,
====================================
Dollars in thousands, except per share data 1999 1998 1997
================================================================================
Interest income
Interest and fees on loans ................ $ 6,158 $ 5,282 $ 5,247
Interest on Federal funds sold and
securities purchased under
agreements to resell .................... 396 653 439
Interest on other short-term investments .. -- -- 39
Interest on deposits with banks ........... 76 4 3
Interest and dividends on investment
securities:
Taxable ................................. 3,770 3,390 3,718
Tax-exempt .............................. 215 226 125
--------- --------- ---------
Total interest income ..................... 10,615 9,555 9,571
--------- --------- ---------
Interest expense
Interest on deposits (Note 9) ............. 4,244 3,775 3,927
Interest on short-term borrowings ......... 133 159 202
Interest on long-term debt ................ 899 664 201
--------- --------- ---------
Total interest expense .................... 5,276 4,598 4,330
--------- --------- ---------
Net interest income ....................... 5,339 4,957 5,241
Provision for loan losses (Note 7) ........ 906 1,016 159
--------- --------- ---------
Net interest income after provision
for loan losses ......................... 4,433 3,941 5,082
--------- --------- ---------
Other operating income
Service charges on deposit accounts ....... 660 668 604
Other income (Note 12) .................... 815 642 577
Net gains (losses) on sales of
investment securities (Notes 4 and 5) ... 17 (13) 18
--------- --------- ---------
Total other operating income .............. 1,492 1,297 1,199
--------- --------- ---------
Other operating expenses
Salaries and other employee
benefits (Note 14) ...................... 2,820 2,644 2,615
Occupancy expense (Note 8) ................ 394 356 319
Equipment expense (Note 8) ................ 433 386 382
Other expenses (Note 12) .................. 1,683 1,613 1,314
--------- --------- ---------
Total other operating expenses ............ 5,330 4,999 4,630
--------- --------- ---------
Income before income tax expense .......... 595 239 1,651
Income tax expense (Note 13) .............. 193 13 582
--------- --------- ---------
Net income ................................ $ 402 $ 226 $ 1,069
========= ========= =========
Net income per common share (Note 17)
Basic ..................................... $ 2.48 $ 1.25 $ 8.98
Diluted ................................... 2.34 1.22 8.11
========= ========= =========
Basic average common shares
outstanding ............................. 118,902 115,189 114,141
Diluted average common shares
outstanding ............................. 131,402 129,039 127,991
========= ========= =========
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes
in Stockholders' Equity
Accumulated
Other
Common Preferred Retained Comprehensive Treasury
Dollars in thousands Stock Surplus Stock Earnings (Loss) Income Stock Total
====================================================================================================================================
Balance, December 31, 1996 ...................... $ 1,150 $ 901 $ 727 $ 5,645 $ (111) $ (25) $ 8,287
Comprehensive income:
Net income .................................... -- -- -- 1,069 -- -- 1,069
Unrealized holding gains on securities
arising during the period (net of tax of $45) -- -- -- -- 84 --
Reclassification adjustment for gains
included in net income (net of tax of $(7)) . -- -- -- -- (11) --
--------
Net unrealized holding gains on securities
arising during the period (net of tax of $38) -- -- -- -- 73 -- 73
-------
Total comprehensive income .................... 1,142
Proceeds from issuance of preferred stock ....... -- -- 820 -- -- -- 820
Dividends paid on common stock .................. -- -- -- (173) -- -- (173)
Dividends paid on preferred stock ............... -- -- -- (44) -- -- (44)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1997 ...................... 1,150 901 1,547 6,497 (38) (25) 10,032
Comprehensive income:
Net income .................................... -- -- -- 226 -- -- 226
Unrealized holding gains on securities
arising during the period (net of tax
of $16) ..................................... -- -- -- -- 55 --
Reclassification adjustment for losses
included in net income (net of tax of $5) ... -- -- -- -- 8 --
--------
Net unrealized holding gains on securities
arising during the period (net of tax
of $21) ..................................... -- -- -- -- 63 -- 63
--------
Total comprehensive income .................... 289
Proceeds from issuance of common stock .......... 38 37 -- -- -- 8 83
Dividends paid on common stock .................. -- -- -- (199) -- -- (199)
Dividends paid on preferred stock ............... -- -- -- (82) -- -- (82)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1998 ...................... $ 1,188 $ 938 $ 1,547 $ 6,442 $ 25 $ (17) $ 10,123
Comprehensive income:
Net income .................................... -- -- -- 402 -- -- 402
Unrealized holding losses on securities
arising during the period (net of tax
of $(458) ................................... -- -- -- -- (694) --
Reclassification adjustment for gains
included in net income (net of tax of $(7) .. -- -- -- -- (10) --
--------
Net unrealized holding gains (losses) on
securities arising during the period (net
of tax of $(465) ............................ -- -- -- -- (704) -- (704)
--------
Total comprehensive income (loss) ............. (302)
Redemption of preferred stock ................... -- -- (500) -- -- -- (500)
Proceeds from issuance of common stock .......... 13 12 -- -- -- -- 25
Dividends paid on common stock .................. -- -- -- (213) -- -- (213)
Dividends paid on preferred stock ............... -- -- -- (107) -- -- (107)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1999 ...................... $ 1,201 $ 950 $ 1,047 $ 6,524 $ (679) $ (17) $ 9,026
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended December 31,
========================
In thousands 1999 1998
================================================================================
Operating activities
Net income ............................................. $ 402 $ 226
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization ........................ 420 376
Provision for possible loan losses .................. 906 1,016
Premium amortization on investment securities ........ 69 73
Net (gains) losses on sales and early
redemption of investment securities ................ (17) 13
Gains on sales of loans held for sale ................ (21) (64)
Loans originated for sale .............................. (1,640) (2,307)
Proceeds from sales of loans held for sale ............. 592 1,152
(Increase) decrease in accrued interest receivable ..... (185) 2
Deferred income tax benefit ........................... (514) (409)
Increase in other assets ............................... (1,050) (343)
Increase (decrease) in accrued expenses and
other liabilities .................................... 340 327
-------- --------
Net cash (used in) provided by operating activities .... (698) 62
-------- --------
Investing activities
(Increase) decrease in loans ........................... (8,419) 361
Purchases of loans ..................................... -- (15,665)
(Increase) decrease in interest-bearing
deposits with banks .................................. (2,261) 15
Proceeds from maturities of investment
securities available for sale, including sales,
principal payments and early redemptions ............. 16,791 18,882
Proceeds from maturities of investment securities
held to maturity, including principal payments
and early redemptions ................................ 8,729 18,255
Purchases of investment securities available
for sale ............................................. (21,185) (18,472)
Purchases of investment securities held to maturity .... (10,046) (20,252)
Purchases of premises and equipment .................... (821) (492)
(Increase) decrease in other real estate owned, net .... (5) 180
-------- --------
Net cash used in investing activities .................. (17,217) (17,188)
-------- --------
Financing activities
Increase in deposits ................................... 1,894 18,226
Increase (decrease) in short-term borrowings ........... 5,982 (4,195)
Proceeds from issuance of long-term debt ............... 476 12,000
Proceeds from issuance of common stock ................. 25 83
(Redemptions of) proceeds from issuance of
preferred stock ...................................... (500) --
Dividends paid on preferred stock ...................... (107) (82)
Dividends paid on common stock ......................... (213) (199)
-------- --------
Net cash provided by financing activities .............. 7,557 25,833
-------- --------
Net (decrease) increase in cash and
cash equivalents ..................................... (10,358) 8,707
Cash and cash equivalents at beginning of year ......... 21,967 13,260
-------- --------
Cash and cash equivalents at end of year ............... $ 11,609 $ 21,967
======== ========
Cash paid during the year:
Interest ............................................... $ 5,428 $ 4,173
Income taxes ........................................... 520 539
Supplemental schedule for noncash investing
activities:
Real estate acquired in settlement of loans ............ 103 385
Transfer of loans held for sale to loans ............... 2,292 --
See accompanying 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 subsidiary City National Bank of New
Jersey (the "Bank" or "CNB") conform with generally accepted accounting
principles and to general practice within the banking industry. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities as of the date of the balance sheet and revenues and
expenses for the related periods. Actual results could differ significantly from
those estimates. The following is a summary of the more significant policies and
practices.
Principles of consolidation
The financial statements include the accounts of CNBC and its wholly-owned
subsidiary, CNB. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash and cash equivalents
For purposes of the presentation of the Statement of Cash Flows, Cash and cash
equivalents includes Cash and due from banks and Federal funds sold.
Federal Home Loan Bank of New York
The Bank, as a member of Federal Home Loan Bank of New York "FHLB", is required
to hold shares of capital stock of the FHLB based on a specified formula. The
FHLB stock is carried at cost and is included in investment securities available
for sale.
Investment securities held to maturity and investment securities available for
sale Investment securities are designated as held to maturity or available for
sale at the time of acquisition. Securities that the Corporation has the intent
and ability at the time of purchase to hold until maturity are designated as
held to maturity. Investment securities held to maturity are stated at cost and
adjusted for amortization of premiums and accretion of discount to the earlier
of maturity or call date using the level yield method.
Securities to be held for indefinite periods of time but not intended to be held
until maturity or on a long-term basis are classified as investment securities
available for sale. Securities held for indefinite periods of time include
securities that the Corporation intends to use as part of its interest rate
sensitivity management strategy and that may be sold in response to changes in
interest rates, resultant risk and other factors. Investment securities
available for sale are reported at fair market value, with unrealized gains and
losses, net of deferred tax reported as a component of accumulated other
comprehensive income, which is included in stockholders' equity. Gains and
losses realized from the sales of securities available for sale are determined
using the specific identification method.
The Corporation holds in its investment portfolios mortgage-backed securities.
Such securities are subject to changes in the prepayment rates of the underlying
mortgages, which may affect both the yield and maturity of the securities.
Loans held for sale
Loans held for sale include residential mortgage loans originated with the
intent to sell. Loans held for sale are carried at the lower of aggregate cost
or fair value. During 1999, the Bank transferred $2.3 million in loans held for
sale into the loan portfolio at the lower of cost or fair market 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.
Reserve 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 reserve for loan losses is maintained at a level determined adequate to
provide for losses inherent in the portfolio. The reserve is increased by
provisions charged to operations and recoveries of loans previously charged off
and reduced by loan charge-offs. The reserve 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 reserve for loan losses is adequate. While
management uses available information to determine the adequacy of the reserve,
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 reserve for loan losses.
Such agencies may require the Bank to increase the reserve based on their
judgment of information available to them at the time of their examination.
Bank premises and equipment
Premises and equipment are stated at cost less accumulated depreciation based
upon estimated useful lives of three to 39 years, computed using the
straight-line method. Expenditures for maintenance and repairs are charged to
operations as incurred, while major replacements and improvements are
capitalized. The net asset values of assets retired or disposed of are removed
from the asset accounts and any related gains or losses are included in
operations.
Other real estate owned
Other real estate owned ("OREO") acquired through foreclosure or deed in lieu of
foreclosure is carried at the lower of cost or fair value less estimated cost to
sell, net of a valuation allowance. When a property is acquired, the excess of
the loan balance over the estimated fair value is charged to the reserve for
loan losses. Operating results, including any future writedowns of OREO, rental
income and operating expenses, are included in "Other expenses".
A reserve for OREO has been established through charges to "Other expenses" to
maintain properties at the lower of cost or fair value less estimated cost to
sell.
Core deposit premiums
The premium paid for the acquisition of deposits in connection with the purchase
of a branch office is amortized on an accelerated basis over the ten-year
estimated useful life of the assumed deposit base.
Income taxes
Federal income taxes are based on currently reported income and expense after
the elimination of income which is exempt from Federal income tax.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Such temporary
differences include depreciation and the provision for possible loan losses.
Net income per common share
Basic income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. On a diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of the convertible subordinate
debentures.
Comprehensive income
SFAS No. 130 "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. The required disclosures are included in the Statement of
Changes in Stockholders' Equity.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements in order to conform with the 1999 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 $826,000 in
1999 and $800,000 in 1998.
At December 31, 1998, Cash and due from banks and savings deposits included a
$15.9 million nonrecurring municipal deposit, which was withdrawn on January 4,
1999.
Note 3 Federal funds sold and securities purchased under agreements to resell
Federal funds sold averaged $8 million during 1999 and $11.7 million in 1998,
while the maximum balance outstanding at any month-end during 1999, 1998 and
1997 was $15.4 million, $30.5 million and $7.3 million, respectively. In 1999,
there were no securities purchased under repurchase agreements, while during
1998, securities purchased under agreements to resell averaged $537,000. There
were no such transactions outstanding at any month-end during 1999, 1998 or
1997. The aforementioned repurchase agreements were collateralized by U.S.
Treasury securities held for the benefit of the Bank at the Federal Reserve
Bank.
Note 4 Investment securities available for sale
The amortized cost and market values at December 31 of investment securities
available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
1999 In thousands Cost Gains Losses Value
- ------------------------- -------- --------- --------- --------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 3,193 $25 $ 13 $ 3,205
Obligations of state and
political subdivisions 2,280 - 69 2,211
Other securities:
Mortgage-backed
securities 25,910 10 910 25,010
Other debt securities 3,670 - 163 3,507
Equity securities 1,534 - 9 1,525
- ------------------------- -------- --------- --------- --------
Total $36,587 $35 $1,164 $35,458
- ------------------------- -------- --------- --------- --------
Gross Gross
Amortized Unrealized Unrealized Market
1998 In thousands Cost Gains Losses Value
- ------------------------- -------- --------- --------- --------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 5,605 $ 92 $ - $ 5,697
Obligations of states and
political subdivisions 2,747 84 - 2,831
Other securities:
Mortgage-backed
securities 19,997 63 288 19,772
Other debt securities 2,688 70 14 2,744
Equity securities 1,177 40 7 1,210
- ------------------------- -------- --------- --------- --------
Total $32,214 $ 349 $ 309 $32,254
- ------------------------- -------- --------- --------- --------
The amortized cost and the market values of investments in debt securities
available for sale presented below as of December 31, 1999 are distributed by
contractual maturity, including mortgage-backed securities, which may have
shorter estimated lives as a result of prepayments of the underlying mortgages.
Amortized Market
In thousands Cost Value
- ------------------------------------------- --------- ---------
Due within one year:
U.S. Treasury securities and obligations
of U.S. government agencies $ 2,004 $ 2,000
Mortgage-backed securities 1,977 1,970
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies 595 589
Mortgage-backed securities 4,127 4,089
Due after five years but within ten years:
Mortgage-backed securities 123 124
Other debt securities 756 731
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 594 616
Mortgage-backed securities 19,683 18,827
Obligations of state and political
subdivisions 2,280 2,211
Other debt securities 2,914 2,776
- ------------------------------------------- --------- ---------
Total debt securities 35,053 33,933
Equity securities 1,534 1,525
- ------------------------------------------- --------- ---------
Total $36,587 $35,458
- ------------------------------------------- --------- ---------
Sales of investment securities available for sale totalled $4.9 million in1999,
$3.9 million in 1998 and $3.7 million in 1997, resulting in gross gains of
$133,000, $44,000 and $68,000 and gross losses of $116,000, $57,000 and $50,000
respectively.
Interest and dividends on investment securities available for sale was as
follows:
In thousands 1999 1998 1997
- ------------------------------- ---------- --------- ----------
Taxable $1,977 $ 1,760 $ 1,999
Tax-exempt 104 116 9
- ------------------------------- ---------- --------- ----------
Total $2,081 $ 1,876 $ 2,008
- ------------------------------- ---------- --------- ----------
Investment securities available for sale with an amortized cost of $20,709,000
were pledged to secure public funds at December 31, 1999.
Note 5 Investment securities held to maturity
The book and market values as of December 31 of investment securities held to
maturity were as follows:
Gross Gross
Book Unrealized Unrealized Market
1999 In thousands Value Gains Losses Value
- ----------------------- --------- --------- --------- ---------
U.S. Treasury securities
and obligations of U.S.
government agencies $23,204 $ - $ 1,660 $21,544
Obligations of state and
political subdivisions 3,360 - 33 3,327
- ----------------------- --------- --------- --------- ---------
Other securities:
- ----------------------- --------- --------- --------- ---------
Mortgage-backed 3,922 - 75 3,847
Other debt securities 2,531 - 198 2,333
- ----------------------- --------- --------- --------- ---------
Total $33,017 $ - $1,966 $31,051
- ----------------------- --------- --------- --------- ---------
Gross Gross
Book Unrealized Unrealized Market
1998 In thousands Value Gains Losses Value
----------------------- -------- --------- --------- ---------
U.S. Treasury securities
and obligations of U.S.
government agencies $22,125 $ 56 $ 143 $22,038
Obligations of state and
political subdivisions 2,414 60 - 2,474
Other securities:
Mortgage-backed 7,173 4 109 7,068
----------------------- -------- --------- --------- ---------
Total $31,712 $ 120 $ 252 $31,580
----------------------- ------- --------- --------- ---------
At December 31, 1999, the Corporation held structured notes with a total
amortized cost of $2,750,000 and a related market value of $2,736,000,
reflecting gross unrealized depreciation of $14,000. Comparable amounts as of a
year earlier were $2,750,000, $2,725,000 and $25,000, respectively.
The book value and the market value of investment securities held to maturity
presented below as of December 31, 1999 are distributed by contractual maturity,
including mortgage-backed securities, which may have shorter estimated lives as
a result of prepayments of the underlying mortgages.
Book Market
In thousands Value Value
- ------------------------------------------ ---------- ---------
Due within one year:
U.S. Treasury and obligations of
U.S. government agencies $ 2,750 $ 2,738
Mortgage-backed securities 898 892
Obligations of state and political
subdivisions 350 350
Due after one year but within five years:
Mortgage-backed securities 1,534 1,510
Obligations of state and political
subdivisions 1,962 1,957
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 6,190 5,714
Other debt securities 2,031 1,837
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 14,264 13,092
Mortgage-backed securities 1,490 1,445
Obligations of state and political
subdivisions 1,048 1,020
Other debt securities 500 496
- ------------------------------------------ ---------- ---------
Total $33,017 $31,051
- ------------------------------------------ ---------- ---------
There were no sales of securities held to maturity in 1999 or 1998.
Interest and dividends on investment securities held to maturity was as follows:
In thousands 1999 1998 1997
- ----------------------------- ---------- ----------- ----------
Taxable $1,793 $ 1,630 $1,719
Tax-exempt 111 110 116
- ----------------------------- ---------- ----------- ----------
Total $1,904 $ 1,740 $1,835
- ----------------------------- ---------- ----------- ----------
Investment securities held to maturity with a book value of $16,468,000 were
pledged to secure public funds at December 31, 1999.
Note 6 Loans
Loans, net of unearned discount and net deferred origination fees and costs at
December 31, were as follows:
In thousands 1999 1998
- -------------------------------- --------------- --------------
Commercial $17,687 $22,591
Real estate 64,113 48,274
Installment 823 841
Total loans 82,623 71,706
Less: Unearned income 177 266
- -------------------------------- --------------- --------------
Loans $82,446 $71,440
- -------------------------------- --------------- --------------
Loans guaranteed by the Small Business Administration totalling $1,667,000 were
pledged as collateral for borrowings under a note issued to the U.S. Treasury
Department at December 31, 1999.
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 and troubled debt restructurings were as
follows:
In thousands 1999 1998
- ---------------------------------------- ---------- -----------
Nonaccrual loans $2,539 $ 1,455
Loans with interest or principal 90
days or more past due and still 227 341
accruing
- ---------------------------------------- ---------- -----------
Total nonperforming loans 2,766 1,796
Troubled debt restructurings - 1,261
- ---------------------------------------- ---------- -----------
Total nonperforming loans
and troubled debt restructurings $2,766 $ 3,057
- ---------------------------------------- ---------- -----------
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 1999 1998 1997
- ---------------------------- ----------- ---------- -----------
Interest income foregone $(183) $(81) $ ( 67)
Interest income received 108 104 101
- ---------------------------- ----------- ---------- -----------
$ (75) $ 23 $ 34
- ---------------------------- ----------- ---------- -----------
Nonaccrual loans at December 31, 1999 includes two loans to one commercial
borrower totaling $1.3 million that were considered troubled debt restructurings
at December 31, 1998. These loans are secured by a leasehold mortgage on the
financed property and the borrower's principals have provided joint and several
personal guarantees.
Other than the aforementioned nonaccrual loans, nonperforming assets are
generally well secured by residential and small commercial real estate. It is
the Bank's intent to dispose of all other real estate owned ("OREO") properties
at the earliest possible date at or near current market value.
At December 31, 1999, there were no commitments to lend additional funds to
borrowers for loans that were on nonaccrual or contractually past due in excess
of 90 days and still accruing interest, or to borrowers whose loans have been
restructured. A majority of the Bank's loan portfolio is concentrated in first
mortgage loans to borrowers in northern New Jersey, particularly within the
Newark area. Its borrowers' abilities to repay their obligations are dependent
upon various factors including the borrowers' income, net worth, cash flows
generated by the underlying collateral, the value of the underlying collateral
and priority of the Bank's lien on the related property. Such factors are
dependent upon various economic conditions and individual circumstances beyond
the Bank's control. Accordingly, the Bank may be subject to risk of credit
losses.
Impaired loans totalled $1.3 million at December 31, 1999 and $400,000 at
December 31, 1998, while the related reserves allocated to these loans amounted
to $955,000 and $400,000 respectively. Impaired loans averaged $425,000 in 1999
and $569,000 in 1998.
Note 7 Reserve for loan losses
Transactions in the reserve for loan losses are summarized as follows:
In thousands 1999 1998 1997
- ------------------------------- ---------- --------- ----------
Balance, January 1 $1,415 $ 825 $750
Provision for loan
losses 906 1,016 159
Recoveries of loans
previously charged off 157 153 74
- ------------------------------- ---------- --------- ----------
2,478 1,994 983
Less: Charge-offs 503 579 158
- ------------------------------- ---------- --------- ----------
Balance, December 31 $1,975 $1,415 $825
- ------------------------------- ---------- --------- ----------
Note 8 Premises and equipment
A summary of premises and equipment at December 31 follows:
In thousands 1999 1998
- ---------------------------------------------- -------- -------
Land $ 421 $ 274
Premises 1,397 1,035
Furniture and equipment 2,219 2,007
Building improvements 2,191 2,132
- ---------------------------------------------- -------- -------
Total cost 6,228 5,448
Less: Accumulated depreciation and amortization 2,519 2,140
Total premises and equipment $3,709 $3,308
- ---------------------------------------------- -------- -------
Depreciation and amortization expense charged to operations amounted to
$420,000, $376,000, and $367,000 in 1999, 1998, and 1997, respectively.
Note 9 Deposits
Deposits at December 31 are presented below.
In thousands 1999 1998
- ---------------------------------------- ---------- -----------
Noninterest bearing:
Demand $ 20,625 $ 16,919
Savings 369 469
Time - 1,918
- ---------------------------------------- ---------- -----------
Total noninterest bearing deposits 20,994 19,306
- ---------------------------------------- ---------- -----------
Interest bearing:
- ---------------------------------------- ---------- -----------
Savings 34,350 57,054
Time 84,493 61,583
- ---------------------------------------- ---------- -----------
Total interest bearing deposits 118,843 118,637
- ---------------------------------------- ---------- -----------
Total deposits $139,837 $137,943
- ---------------------------------------- ---------- -----------
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 1999 1998
- ----------------------------------------- ---------- ----------
Three months or less $ 44,223 $ 36,885
Over three months but within six months 11,859 2,339
Over six months but within twelve months 1,556 2,857
Over twelve months 779 841
- ----------------------------------------- ---------- ----------
Total deposits $ 58,417 $ 42,922
- ----------------------------------------- ---------- ----------
Interest expense on certificates of deposits of $100,000 or more was $2,323,000,
$1,974,000 and $2,369,000 in 1999, 1998 and 1997, respectively.
Note 10 Short-term borrowings
Information regarding short-term borrowings at December 31, is presented below.
Average
Interest Average Maximum
Rate on Average Interest Balance
Decem- Decem- Balance Rate at any
ber 31 ber 31 During During Month-
Dollars in thousands Balance Balance the Year the Year End
- -------------------- -------- ------- -------- ------- --------
1999
Federal funds purchased and securities
sold under repurchase
agreements $ - -% $ 77 4.83% $ -
Demand note issued
to the U.S.Treasury 6,000 4.47 2,712 4.76 6,000
- ---------------------- ------- -------- ------- ------- -------
Total $6,000 4.47% $2,789 4.76% $6,000
- ---------------------- ------- -------- ------- ------- -------
1998
Federal funds purchased and securities
sold under repurchase
agreements $ - -% $ 23 5.76% $ -
Demand note issued
to the U.S. Treasury 18 4.12 3,045 5.19 6,000
- ---------------------- ------- -------- ------- ------- -------
Total $ 18 4.12% $3,068 5.19% $6,000
- ---------------------- ------- -------- ------- ------- -------
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 $10,171,000, along with loans guaranteed by the Small
Business Administration totalling $2,154,000.
Note 11 Long-term debt
Long-term debt at December 31 is summarized as follows:
In thousands 1999 1998
- ------------------------------------------ -------- --------
FHLB convertible advances due from
August 28, 2000 through April 7, 2008 $14,000 $14,000
5.25% capital note, due December 28, 2005 1,500 1,500
5.00% capital note, due July 1, 2008 500 -
8.00% mandatory convertible debentures,
due July 1, 2003 225 249
Total $16,225 $15,749
- ------------------------------------------ -------- --------
Interest is payable quarterly on most of the FHLB advances. $12 million of the
advances are callable at various dates from January 1, 2000 to April 7, 2003.
The advances bear interest rates ranging from 5.00% to 5.93% and are secured by
residential mortgages and certain obligations of U.S. Government agencies under
a blanket collateral agreement.
Interest is payable semiannually on January 15 and July 15 on the convertible
debentures. The debentures convert into CNBC common stock upon maturity and are
convertible by the holder at any time on or before the maturity, unless
previously redeemed by the Corporation into CNBC common stock at a conversion
price of $18.00 per share, subject to adjustment upon the occurrence of certain
events, including, among other things, the issuance of common stock as a per
share price of less than $18.00 or the issuance of rights or options to purchase
shares of common stock at a price of less than $18.00 per share.
The debentures are subordinate to all other indebtedness of the Corporation
except for indebtedness which by its terms is equal and not senior in right of
payment to the debentures. The debentures become immediately payable upon the
bankruptcy, insolvency or receivership of the Corporation. In the event of
default as to principal or interest, the Corporation is required upon the
request of the holder, to pay the unpaid principal balance along with any
accrued interest by issuing an amount of common stock at the conversion price in
exchange for the indebtedness, subject to the holder owning not more than 9.9%
of the total number of common shares outstanding when added to the shares
already held by the holder. The unpaid balance of principal, if any, after
conversion upon maturity, or an interest payment default is then payable in cash
upon maturity of the debenture and prior to maturity would continue to accrue
interest at an annual rate of 8% payable semiannually.
Interest is payable semiannually on the capital note due December 28, 2005, on
June 29 and December 29, with principal payments commencing semiannually in
June, 2001. Interest payments on the note due July 1, 2008 are payable
semiannually, on January 1 and July 1, while principal payments of $100,000 are
payable annually, commencing July 1, 2004.
The note agreement includes restrictive covenants including the creation of
liens on Bank assets, the sale of such assets and certain limitations on
investments and dividend payments and requires the maintenance of certain
capital levels and earning performance, asset quality and reserve for possible
loan loss ratios.
Note 12 Other operating income and expenses
The following table presents the major items of other operating income and
expenses:
In thousands 1999 1998 1997
- ------------------------------------- ------- -------- --------
Other operating income
Agency fees on commercial loans $307 $ 255 $ 253
Other operating expenses
Professional fees 319 282 160
Stationery and supplies expense 82 100 88
Data processing 145 144 125
- ------------------------------------- ------- -------- --------
Note 13 Income taxes
The components of income tax expense are as follows:
In thousands 1999 1998 1997
- ----------------------------------------- ------ ------- ------
Current expense
Federal $ 624 $ 399 $ 581
State 83 23 113
- ----------------------------------------- ------ ------- ------
Total current income tax expense 707 422 694
- ----------------------------------------- ------ ------- ------
Deferred
Federal (441) (364) (90)
State (73) (45) (22)
- ----------------------------------------- ------ ------- ------
Total deferred income tax benefit (514) (409) (112)
- ----------------------------------------- ------ ------- ------
Total income tax expense $ 173 $ 13 $ 582
- ---------------------------------------- ------ ------- ------
A reconciliation between income tax expense and the total expected federal
income tax computed by multiplying pre-tax accounting income by the statutory
federal income tax rate is as follows:
In thousands 1999 1998 1997
- ---------------------------------------- ------- ------ -------
Federal income tax at statutory rate $ 202 $ 81 $ 561
Increase (decrease) in income tax
expense resulting from:
State income tax (benefit) expense, net of
federal (expense) benefit 7 (15) 60
Tax-exempt income (63) (66) (43)
Life insurance (18) (13) (15)
Change in valuation allowance - 23 (7)
Other, net 65 3 26
- ---------------------------------------- ------- ------ -------
Total income tax expense $ 193 $ 13 $ 582
- ---------------------------------------- ------- ------ -------
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 1999 1998
- ---------------------------------------- ---------- -----------
Deferred tax assets
Unrealized losses on investment securities
available for sale $ 450 $ -
Reserve for possible loan losses 525 163
Premises and equipment 7 -
Reserve for other real estate owned 5 14
Deferred compensation 131 93
Other 129 34
- ---------------------------------------- ---------- -----------
Total deferred tax assets 1,247 304
Less: Valuation allowance 23 23
- ---------------------------------------- ---------- -----------
Deferred tax asset 1,224 281
- ---------------------------------------- ---------- -----------
Deferred tax liabilities
Unrealized gains on investment securities
available for sale - 15
Premises and equipment - 31
Investment securities held to maturity 3 3
Other 10 -
- ---------------------------------------- ---------- -----------
Deferred tax liability 13 49
- ---------------------------------------- ---------- -----------
Net deferred tax asset $ 1,211 $ 232
- ---------------------------------------- ---------- -----------
The net deferred asset (liability) represents the anticipated federal and state
tax asset to be realized or liability to be incurred in future years upon the
utilization of the underlying tax attributes comprising this balance. Management
believes, based upon estimates of future taxable earnings, that more likely than
not there will be sufficient taxable income in future years to realize the
deferred tax assets, net of deferred valuation allowance, although there can be
no assurance about the level of future earnings.
Note 14 Benefit plans
Savings plan
The Bank maintains an employee savings plan under section 401(k) of the Internal
Revenue Code covering all employees with at least six months of service.
Participants are allowed to make contributions to the plan by salary reduction,
up to 15% of total compensation. The Bank provides matching contributions of 25%
of the first 4% of participant salaries along with a 1% discretionary
contribution, subject to a vesting schedule. Contribution expense amounted to
$52,000 in 1999 and 1998 and $49,000 in 1997.
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 1999, 1998 and 1997 amounted to $100,000 $68,000, and $119,000,
respectively.
Nonqualified benefit plans
During 1997, the Bank established a supplemental executive retirement plan
("SERP"), which provides a post employment supplemental retirement benefit to
certain key executive officers. SERP expense was $41,000 in 1999, $39,000 in
1998 and $26,000 in 1997. The Bank also has a director retirement plan ("DRIP").
DRIP expense was $28,000 in 1999, $17,000 in 1998 and $19,000 in 1997.
Benefits under both plans will be funded through a bank-owned life insurance
policy, the cash surrender value of which is included in "Other assets" and
totalled $1.7 million and $1.5 million at December 31, 1999 and 1998,
respectively. In addition, expenses for both plans along with the expense
related to carrying the policy itself are offset by increases in the cash
surrender value of the policy. Such increases are included in "Other income" and
totalled $94,000 in 1999, $85,000 in 1998 and $72,000 in 1997, while the related
life insurance expense was $36,000 in 1999, $40,000 in 1998 and $28,000 in 1997.
Stock options
No stock options were issued during 1999 or 1998. During 1997, the Corporation
issued 5,700 stock options at an exercise price equal to the fair market value
of the stock on the date of the grant. Under Accounting Principles Board Opinion
No. 25, compensation cost for the stock options is not recognized because the
exercise price of the stock options equaled the market price of the underlying
stock on the date of the grant. Had compensation expense been recorded for stock
options granted as determined under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 123, net income would have been
reduced by $2,000 in 1999, 1998 and 1997, which would have decreased the
reported basic and diluted earnings per share by $.02 in each of these years.
The fair value of the option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 8.75%, expected volatility of 15%, risk-free interest rate of 6% and
estimated option life of three years. The fair value of the options was $1.08
per share. The options vest equally over three years.
Note 15 Preferred stock
The Corporation is authorized to issue noncumulative perpetual preferred stock
in one or more series, with no par value. Shares of preferred stock have
preference over the Corporation's common stock with respect to the payment of
dividends. Different series of preferred stock may have different stated or
liquidation values as well as different rates. Dividends are paid annually.
Set forth below is a summary of the Corporation's preferred stock issued and
outstanding.
Date Dividend Stated Number December 31,
Issued Rate Value of Shares 1999 1998
- ---------- ------ -------- ------- ------- ----------- ----------
Series A 12/96 6.00% $25,000 8 $ 200,000 $ 200,000
Series B 3/96 8.00 25,000 20 - 500,000
Series C 2/96 8.00 250 108 27,000 27,000
Series D 6/97 6.50 250 3,280 820,000 820,000
- ---------- ------ -------- ------- ------- ----------- ----------
$1,047,000 $1,547,000
- ---------- ------ -------- ------- ------- ----------- ----------
Note 16 Restrictions on subsidiary bank dividends
Subject to applicable law, the Board of Directors of the Bank and of the
Corporation may provide for the payment of dividends when it is determined that
dividend payments are appropriate, taking into account factors including net
income, capital requirements, financial condition, alternative investment
options, tax implications, prevailing economic conditions, industry practices,
and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory
limitation on the amount of dividends it may pay to its parent corporation,
CNBC. Prior approval of the Office of the Comptroller of the Currency ("OCC") is
required if the total dividends declared by the Bank in any calendar year
exceeds net profit, as defined, for that year combined with the retained net
profits from the preceding two calendar years.
Under this limitation, $912,000 was available for the payment of dividends to
the parent corporation at December 31, 1999, subject to the restrictive
covenants under long-term debt agreements included in Note 11.
Note 17 Net income per common share
The following table presents the computation of net income per common share.
In thousands, except per share data 1999 1998 1997
- ------------------------------------ -------- -------- --------
Net income $ 402 $ 226 $ 1,069
Dividends paid on preferred stock (107) (82) (44)
- ------------------------------------ -------- -------- --------
Net income applicable to basic
common shares 295 144 1,025
Interest expense on convertible
subordinated debentures, net of
income taxes 12 13 13
- ------------------------------------ -------- -------- --------
Net income applicable to diluted
common shares $ 307 $ 157 $ 1,038
- ------------------------------------ -------- -------- --------
Number of average common shares
Basic 118,902 115,189 114,141
- ------------------------------------ -------- -------- --------
Diluted: 118,902 115,189 114,141
Average common shares outstanding
Average common shares converted from
convertible subordinate debentures 12,500 13,850 13,850
- ------------------------------------ -------- -------- --------
131,402 129,039 127,991
- ------------------------------------ -------- -------- --------
Net income per common share
Basic $ 2.48 $ 1.25 $ 8.98
Diluted 2.34 1.22 8.11
The stock options outstanding are not included as common stock equivalents in
the diluted net income per share calculation because they are antidilutive.
Note 18 Related party transactions
Certain directors of the Corporation and its subsidiary, 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
1999 and 1998. 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
$653,000 and $304,000 at December 31, 1999 and 1998, respectively. The highest
amount of such indebtedness during 1999 was $660,000 and in 1998 amounted to
$336,000. During 1999, $385,000 in new loans were made and paydowns totalled
$36,000.
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, 1999 and 1998.
Cash and short-term investments
These financial instruments have relatively short maturities or no defined
maturities but are payable on demand, with little or no credit risk. For these
instruments, the carrying amounts represent a reasonable estimate of fair value.
Investment securities
Investment securities are reported at their fair values based on quoted market
prices.
Loans
Fair values were estimated for performing loans by discounting the future cash
flows using market discount rates that reflect the credit and interest-rate risk
inherent in the loans. Fair value for significant nonperforming loans was based
on recent external appraisals of collateral securing such loans. If such
appraisals were not available, estimated cash flows were discounted employing a
rate incorporating the risk associated with such cash flows.
Deposit liabilities
The fair values of demand deposits, savings deposits and money market accounts
were the amounts payable on demand at December 31, 1999 and 1998. 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, 1999 and 1998.
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
1999 1998
Carrying Fair Carrying Fair
In thousands Value Value Value Value
- --------------------------- --------- ------- -------- --------
Financial assets
Cash and other short-term
investments $ 11,609 $11,609 $ 21,967 $ 21,967
Interest-bearing deposits
with banks 2,286 2,211 15 13
Investment securities AFS 35,458 35,458 32,254 32,254
Investment securities HTM 33,017 31,051 31,712 31,580
Loans 80,471 78,564 70,025 70,907
Loans held for sale 405 405 2,026 2,026
Financial liabilities
Deposits $139,837 $138,576 $137,943 $138,598
Short-term borrowings 6,000 6,000 18 18
Long-term debt 16,225 15,003 15,749 16,555
- -------------------------- -------- ------- -------- --------
Note 20 Commitments and contingencies
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements will not be materially affected by the outcome of any pending legal
proceedings.
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain others associated with
such entity for fraud, other claims and damages. CNB alleges, among other
things, that at various times during its business relationship with the
defendants, the defendants converted, misappropriated, hypothecated or embezzled
a sum of approximately $805,000 from CNB. The defendants responded alleging
CNB's records regarding certain transactions between CNB and the defendants are
in error and that CNB is liable to the defendants for amounts due as a result of
these errors and for damages allegedly suffered by the defendants as a result of
CNB's collection efforts. The amount of the defendants' counterclaim has not
been quantified. This litigation is in the midst of discovery. The likelihood of
CNB's success in this litigation and its ability to recover any amount for which
it obtains judgment is uncertain. CNB has filed appropriate proofs of loss under
various insurance policies, including CNB's fidelity bond. CNB has also
commenced suit against the insurance carriers in an effort to recover the
amounts claimed by CNB. It is also too early to determine the amount CNB will
ultimately recover, if any, under these insurance policies.
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 31,1999 and 1998 the Bank had mortgage commitments of $9,671,000 and
$7,731,000, unused corporate lines of credit of $34,725,000 and $30,569,000, and
$1,033,000 and $10,000 of other loan commitments, respectively.
The aforementioned commitments and credit lines are made at both fixed and
floating rates of interest based on the Bank's prime lending rate.
Note 22 Parent Company Information
Condensed financial statements of the parent company only are presented below.
Condensed Balance Sheet
December 31,
In thousands 1999 1998
- ------------------------------------------------------- ----------- ------------
Assets
Cash and cash equivalents .............................. $ 60 $ 9
Investment securities held to maturity ................. 100 244
Investment securities available for sale ............... 745 779
Investment in subsidiary ............................... 10,083 10,598
Due from subsidiary .................................... 249 249
Other assets ........................................... 36 20
- -------------------------------------------------------- ------- -------
Total assets ........................................... $11,273 $11,899
- -------------------------------------------------------- ------- -------
Liabilities and stockholders' equity
Other liabilities ...................................... $ 22 $ 27
Long-term debt ......................................... 2,225 1,749
- -------------------------------------------------------- ------- -------
Total liabilities ...................................... 2,247 1,776
Stockholders' equity ................................... 9,026 10,123
- -------------------------------------------------------- ------- -------
Total liabilities and stockholders' equity ............. $11,273 $11,899
- -------------------------------------------------------- ------- -------
Condensed Statement of Income
Year Ended December 31,
- ---------------------------------------------- ------- ------- -------
In thousands 1999 1998 1997
- -------------------------------------------- ------- ------- -------
Income
Interest income ............................ $ 53 $ 52 $ 29
Dividends from subsidiary .................. 260 340 271
Interest from subsidiary ................... 20 20 20
- -------------------------------------------- ------- ------- -------
Total income ............................... 333 412 320
- -------------------------------------------- ------- ------- -------
Expenses
Interest expense ........................... 110 99 99
Other operating expenses ................... 4 4 1
Net gains (losses) on sales of
investment securities .................... 29 (27) --
Income tax benefit ......................... (4) (19) (12)
- -------------------------------------------- ------- ------- -------
Total expenses ............................. 81 111 88
- -------------------------------------------- ------- ------- -------
Income before equity in
undistributed
income of subsidiary ..................... 252 301 232
Equity in undistributed income (loss)
of subsidiary ............................ 150 (75) 837
- -------------------------------------------- ------- ------- -------
Net income ................................. $ 402 $ 226 $ 1,069
- -------------------------------------------- ------- ------- -------
Condensed Statement of Cash Flows
Year Ended December 31,
In thousands 1999 1998 1997
- --------------------------------------- -------- ------- --------
Operating activities
Net income .................................. $ 402 $ 226 $1,069
Adjustments to reconcile net income
to cash used in operating activities:
(Discount accretion) premium
amortization on investment securities ..... (5) 2 --
Net (gains) losses on sales of
investment securities available for sale (29) 27 --
Equity in undistributed (income) loss
of subsidiary ........................... (150) 75 (837)
(Increase) decrease in other assets ......... (16) -- 25
(Decrease) increase in other liabilities .... (5) 18 (1)
----- ----- -----
Net cash provided by operating activities ... 197 348 256
Investing activities
Proceeds from sales of investment
securities available for sale ............. 205 416 --
Proceeds from maturities of investment
securities held to maturity including
principal payments ........................ 221 111 --
Purchases of investment securities
available for sale ........................ (179) (433) (764)
Purchases of investment securities
held to maturity .......................... (74) (256) (100)
----- ----- -----
Net cash used in investing activities ....... 173 (162) (864)
----- ----- -----
Financing activities
Redemption of long-term debt ................ 476 -- --
Proceeds from issuance of common stock ...... 25 83 --
(Redemption of) proceeds from issuance
of preferred stock ........................ (500) -- 820
Dividends paid .............................. (320) (281) (217)
----- ----- -----
Net cash (used in) provided by financing
activities ................................ (319) (198) 603
----- ----- -----
Increase (decrease) in cash and
cash equivalents .......................... 51 (12) (5)
Cash and cash equivalents at
beginning of year ......................... 9 21 26
----- ----- -----
Cash and cash equivalents at
end of year ............................... $ 60 $ 9 $ 21
----- ----- -----
Note 23 Regulatory Capital Requirements
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1999, 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, 1999, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent FDIC
notification categorized the 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 the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
Bank:
In thousands FDIC Requirements
--------------------------------------------------------------
Minimum Capital
For Classification
Bank Actual Adequacy as Well-Capitalized
Amount Ratio Amount Ratio Amount Ratio
- ----------------- ------- ------ ------- ------- ------ -------
December 31, 1999
Leverage (Tier 1)
capital $10,711 6.32% $6,774 4.00% $8,468 5.00%
Risk-based capital:
Tier 1 10,711 11.04 3,882 4.00 5,822 6.00
Total 12,182 12.55 7,763 8.00 9,705 10.00
December 31, 1998
Leverage (Tier 1)
capital $10,552 7.42% $5,687 4.00% $4,213 5.00%
Risk-based capital:
Tier 1 10,552 12.52 3,371 4.00 5,056 6.00
Total 11,859 14.07 6,741 8.00 8,426 10.00
- ------------------ ------ ------ ------ ------- ------ -----
Note 24 Summary of quarterly financial information (unaudited)
1999
- ---------------------------------- -------- -------- ------- --------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
- ---------------------------------- -------- -------- -------- --------
Interest income .................. $ 2,540 $ 2,585 $ 2,641 $ 2,849
Interest expense ................. 1,166 1,209 1,383 1,518
- ---------------------------------- ------- ------- ------- -------
Net interest income .............. 1,374 1,376 1,258 1,331
Provision for
loan losses .................... 43 141 301 421
Net gains on sales
of investment securities ....... 15 -- 1 1
Other operating income ........... 398 355 347 375
Other operating expenses ......... 1,279 1,273 1,310 1,468
- ---------------------------------- ------- ------- ------- -------
Income (loss) before income
tax expense (benefit) .......... 465 317 (5) (182)
Income tax expense (benefit) ..... 159 110 (42) (34)
- ---------------------------------- ------- ------- ------- -------
Net income (loss) ................ $ 306 $ 207 $ 37 $ (148)
- ---------------------------------- ------- ------- ------- -------
Net income (loss) per share-
basic .......................... $ 1.68 $ 1.75 $ .31 $ (1.57)
- ---------------------------------- ------- ------- ------- -------
Net income (loss) per share-
diluted ........................ $ 1.53 $ 1.59 $ .30 $ (1.08)
- ---------------------------------- ------- ------- ------- -------
1998
- ---------------------------------- -------- -------- ------- --------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
- ---------------------------------- -------- -------- -------- --------
Interest income ..................... $ 2,331 $ 2,414 $ 2,409 $ 2,401
Interest expense .................... 1,097 1,165 1,176 1,160
- ------------------------------------- ------- ------- ------- -------
Net interest income ................. 1,234 1,249 1,233 1,241
Provision for
loan losses ....................... 38 459 46 473
Net gains (losses) on sales
of investment securities .......... 8 1 (4) (18)
Other operating income .............. 336 349 314 311
Other operating expenses ............ 1,138 1,293 1,274 1,294
- ------------------------------------- ------- ------- ------- -------
Income (loss) before
income tax expense ................ 402 (153) 223 (233)
Income tax expense
(benefit) ......................... 136 (85) 57 (95)
- ------------------------------------- ------- ------- ------- -------
Net income (loss) ................... $ 266 $ (68) $ 166 $ (138)
- ------------------------------------- ------- ------- ------- -------
Net income (loss) per share-
basic ............................. $ 1.61 $ (.60) $ 1.45 $ (1.17)
- ------------------------------------- ------- ------- ------- -------
Net income (loss) per share-
diluted ........................... $ 1.46 $ (.60) $ 1.32 $ (1.17)
- ------------------------------------- ------- ------- ------- -------
Independent Auditors' Report
The Board of Directors and Stockholders
City National Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of City National
Bancshares Corporation and subsidiary (the Corporation) as of December 31, 1999
and 1998, 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, 1999. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of City National
Bancshares and subsidiary as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLp
March 7, 2000
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure There were no changes in or disagreements with accounts during 1995.
Part III
Item 10. Directors and Executive Officers of the Registrant The information
required is incorporated herein by 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 25, 2000.
Item 11. Executive Compensation
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management The
information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following exhibits are incorporated herein by reference or are annexed to
this Annual Report:
(a) The required financial statements and the related independent auditor's
report are included in Item 8.
(b) The required exhibits are included as follows:
(3)(a) The Corporation's Restated Articles of Incorporation (incorporated herein
by reference to Exhibit (3)(d) of the Corporation's Current Report on Form
8-K dated July 28, 1992).
(3)(b) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's Non-cumulative Perpetual Preferred Stock, Series A
(incorporated herein by reference to Exhibit (3)(b) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995).
(3)(c) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's Non-cumulative Perpetual Preferred Stock, Series B
(incorporated herein by reference to Exhibit (3)(c) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1995).
(3)(d) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's Non-cumulative Perpetual Preferred Stock, Series C
(incorporated herein by reference to Exhibit (3(i) to the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1996).
(3)(e) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's Non-cumulative Perpetual Preferred Stock, Series D
(incorporated herein by reference to Exhibit filed with the Corporation's
current report on Form 10-K dated July 10, 1997).
(3)(f) The amended By-Laws of the Corporation (incorporated herein by reference
to Exhibit (3)(c) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1991).
(4)(a) The Debenture Agreements between the Corporation and its Noteholders
(incorporated herein by reference to Exhibit (4)(a) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1993).
(4)(b) Note Agreement dated December 28, 1995 by and between the Corporation and
the Prudential Foundation (incorporated herein by reference to Exhibit
(4)(b) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
(10)(a) The Employees' Profit Sharing Plan of City National Bank of New Jersey
(incorporated herein by reference to Exhibit (10) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the bank and Louis E.
Prezeau dated May 24, 1997 (incorporated herein by reference to Exhibit 10
to the Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
(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 January 18, 2000.
(10)(p) Asset Purchase and Sale Agreement between the Bank and Carver Federal
Savings Bank dated as of January 26, 1998.
(11) Statement regarding computation of per share earnings. The required
information is included on page 24.
(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,
1999.
(21) Subsidiaries of the registrant. The required information is included on
page 1.
(24) Power of Attorney is located on the signature page.
(27) Financial Data Schedule.
(c) No reports on Form 8-K were filed during the quarter ended December 31,
1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, City National Bancshares Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized:
CITY NATIONAL BANCSHARES CORPORATION
By: /s/ Louis E. Prezeau By: /s/ Edward R. Wright
--------------------------------- --------------------
Louis E. Prezeau Edward R. Wright
President and Chief Chief Financial Officer
Executive Officer and Principal Accounting Officer
Date: March 23, 2000 Date: March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated. The undersigned hereby constitute
and appoint Louis E. Prezeau his true and lawful attorney in fact and agent,
with full power of substitution and resubstitution, to sign any and all
amendments to this report and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorney in fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he or she might or could in person, hereby ratifying and confirming all that
said attorney in fact and agent, may lawfully do or cause to be done by virtue
hereof.
Signature Title Date
/s/ Douglas E. Anderson Director March 23, 2000
- -------------------------
Douglas E. Anderson
/s/ Barbara Bell Director March 23, 2000
- -------------------------
Barbara Bell
/s/ Leon Ewing Director March 23, 2000
- -------------------------
Leon Ewing
/s/ Eugene Giscombe Director March 23, 2000
- ------------------------- Chairperson of the Board
Eugene Giscombe
/s/ Norman Jeffries Director March 23, 2000
- -------------------------
Norman Jeffries
/s/ Louis E. Prezeau Director March 23, 2000
- ------------------------- President and Chief
Louis E. Prezeau Executive Officer
/s/ Lemar C. Whigham Director March 23, 2000
- --------------------------
Lemar C. Whigham