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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, 1995
[ ] 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: (201) 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 15, 1996 was approximately $1,207,962.
There were 111,141 shares of common stock outstanding at March 15, 1996.
Documents incorporated by reference:
Certain portions of the definitive Proxy Statement for the 1996 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.
Page 1 of pages. Exhibit Index appears on page ___________.
CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents
Page
PART I
Item 1. Business..............................................................1
Item 2. Properties............................................................3
Item 3. Legal Proceedings.....................................................3
Item 4. Submission of Matters to a Vote of Security Holders...................3
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.................................................3
Item 6. Selected Financial Data...............................................4
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................5-16
Item 8. Financial Statements and Supplementary Data.......................17-35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................35
PART III
Item 10. Directors and Executive Officers of Registrant.......................35
Item 11. Executive Compensation...............................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management.......35
Item 13. Certain Relationships and Related Transactions.......................35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......36
Signatures....................................................................35
1
Part I
Item 1. Business
City National Bancshares Corporation (the "Corporation" or "CNBC") is a New
Jersey corporation incorporated on January 10, 1983. At December 31, 1995, CNBC
had consolidated total assets of $114.8 million, total deposits of $100.9
million and total stockholders' equity of $7.1 million. Its only subsidiary is
City National Bank of New Jersey (the "Bank" or "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 two 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 business and
individuals located within minority communities within New Jersey, particularly
in the Newark area.
During 1995, the Bank entered into an agreement with NatWest Bank to acquire a
branch office located in Newark, New Jersey. The transaction closed on March 8,
1996.
The Bank has no 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.
Regulatory matters
On January 21, 1992, the Bank entered into a Consent Order with the Office of
the Comptroller of the Currency ("OCC") which replaced and superceded the Cease
and Desist Order issued by the OCC in 1989. The Consent Order contained fewer
articles than the Cease and Desist Order, but required, among other things, that
the Bank continue to implement certain internal procedures and controls in the
areas of lending practices, asset quality and loan loss review and consumer
compliance and prohibited the Bank from declaring or paying any dividends
without prior notification to the OCC.
The Consent Order also required the Bank to achieve by April 30, 1992 a minimum
5% ratio of Tier I (core) capital to total assets. This was achieved by the
required date and as of December 31, 1994, the Bank remained in compliance.
In April 1994, the Bank was advised by the OCC that as a result of the Bank's
substantial compliance with the terms of the Consent Order, such Consent Order
was terminated as of March 30, 1994.
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").
2
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 Bank and Branching Efficiency Act of 1994 (the
"Branching Act") significantly changed interstate banking rules. Pursuant to the
Branching Act, a bank holding company will be able to acquire banks in states
other than its home state beginning September 29, 1995, regardless of applicable
state laws.
The Branching Act also authorizes banks to merge across state lines, thereby
creating interstate branches, beginning June 1, 1997. Under such legislation,
each state has the opportunity either to "opt out" of this provision, thereby
prohibiting interstate branching in such states, or to "opt in" at an earlier
time, thereby allowing interstate branching within that state prior to June 1,
1997. 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 bank can
enter the state only by acquiring an existing bank.
The New Jersey legislature is presently examining whether it will opt-in with
respect to earlier interstate banking and branching, as well as whether it will
authorize de novo branching and the entry into New Jersey of foreign banks.
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.
3
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.
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, 1995, CNBC and its subsidiary had 57 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. In connection with the aforementioned branch acquisition,
the Bank leases its Hackensack office from the Resolution Trust Corporation, for
which no rent is payable for five years, after which the Bank will have the
opportunity to purchase the property.
The main office of the Bank is undergoing a major renovation which will be
completed in 1996.
Item 3. Legal Proceedings
There were no material pending legal proceedings to which CNBC of CNB were a
party.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1995, there were no matters submitted to
stockholders for a vote.
Part II
Item 5. Market For The Registrant's Common Equity and Related Stockholder
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 1995.
At March 11, 1996, the Corporation had 1,925 common stockholders of record.
On May 1, 1995, the Corporation paid a cash dividend of $1.25 per share to
stockholders of record on March 31, 1995. 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.
4
Item 6. Selected Financial Data
=================================================================================================================================
Five-Year Summary
Dollars in thousands, except per share data 1995 1994 (1) 1993 1992 1991
=================================================================================================================================
Year-end Balance Sheet data:
Total assets $114,410 $111,062 $74,786 $61,911 $51,536
Total loans 45,294 26,033 23,659 20,331 17,001
Reserve for possible loan losses 650 625 700 650 750
Investment securities 55,104 53,751 39,193 35,644 31,709
Total deposits 100,889 103,941 64,435 57,853 40,653
Long-term debt 1,749 249 249 249 269
Stockholders' equity 6,896 5,588 4,562 3,356 2,305
=================================================================================================================================
Income Statement data:
Interest income $ 7,470 $ 5,596 $ 4,509 $ 4,430 $ 4,768
Interest expense 2,829 2,068 1,469 1,513 2,143
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,641 3,528 3,040 2,917 2,625
Provision (credit) for possible loan losses 486 (1,464) (23) 30 174
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision (credit)
for possible loan losses 4,155 4,992 3,063 2,887 2,451
Noninterest income 1,363 1,375 898 508 708
Noninterest expense 4,245 3,645 3,019 2,829 2,930
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense, cumulative
effect of accounting change 1,273 2,722 942 566 229
Income tax expense 471 998 168 205 149
- ---------------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
accounting change and extraordinary item 802 1,724 774 361 80
Cumulative effect of accounting change - - 206 - -
Extraordinary item - - - 194 142
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 802 $ 1,724 $ 980 $ 555 $ 222
=================================================================================================================================
(1) Includes the effects of a $1.6 million recovery of a loan that was charged
off in 1989, which is more fully discussed in "Management's discussion and
analysis of financial condition and results of operations."
Per share data:
Income before cumulative effect of
accounting change and extraordinary item $ 7.22 $15.51 $ 7.88 $ 4.16 $ 1.37
Cumulative effect of accounting change and
extraordinary item - - 2.09 2.24 2.42
Net income per primary share 7.22 15.51 9.97 6.40 3.79
Net income per fully diluted share 6.53 13.90 8.86 6.40 3.79
Book value 62.05 50.28 41.05 34.30 35.58
Dividends 1.25 1.00 N/A N/A N/A
Average shares outstanding 111,141 111,141 98,267 86,738 58,673
Number of shares outstanding at year-end 111,141 111,141 111,141 97,841 64,795
Financial ratios:
Net income as a percentage of
average total assets .72% 1.66% 1.20% .81% .39%
Net income as a percentage of
average stockholders' equity 12.71 30.24 25.22 19.02 10.94
Stockholders' equity as a percentage of total assets 6.03 5.03 6.10 5.42 4.47
Dividend payout ratio 17.46 6.45 N/A N/A N/A
5
Item 7. Management's Discussion and Analysis Of Financial Condition and Results
Earnings performance
Net income in 1995 was $802,000 compared to $1,724,000 in 1994, which included
the benefit of a $1.6 million recovery of a loan that was charged off in 1989.
Returns on average stockholders'equity and average assets assets were 12.71% and
.72% in 1995 and 30.24% and 1.66% in 1994. Related earnings per share on a fully
diluted basis fell to $6.53 from $13.90. After giving effect to the
aforementioned nonrecurring recovery and netsecurities gains, operating earnings
increased 16% from $688,000 to $798,000.
The primary reason for the improved performance in operating earnings was an
increase in net interest income, which rose 31.5% compared to 1994. Offsetting
this improvement somewhat were higher costs associated with the operations of a
branch office acquired in May, 1994 from the Resolution Trust Corporation of a
failed savings and loan association, for a full year, a full year of salaries
and benefits attributable to additions to the management team made throughout
1994 in anticipation of future expansion, and the ongoing renovations of the
Bank's executive and main offices, along with the commencement of major
enhancements to the Bank's technology systems to improve customer service and
enhance efficiency.
Net interest income
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 from $3.6
million in 1994 to $4.7 million in 1995, while the related net interest margin
increased from 3.63% to 4.50%. These improvements resulted from a higher level
of interest earning assets, which averaged $104.4 million in 1995 compared to
$97.1 million in 1994. This growth occurred primarily from the use for an entire
year in 1995 of deposit proceeds resulting from the aforementioned branch
acquisition. The higher net interest margin resulted from a shift in the mix of
earning assets to loans from investment securities and short-term assets.
The yield on average interest earning assets rose 140 basis points in 1995 to
7.21% from 5.81% in 1994 due to the aforementioned emphasis on loan volume,
which more than offset the lower interest rate environment that existed during
1995.
Investments
Total investment securities averaged $57 million in 1995 compared to $50.9
million in 1994, an increase of $6.1 million, or 11.9%. Most of this increase
came from the proceeds received from the deposit assumption and were invested in
U.S. Government agency securities and mortgage backed securities.
In September 1994, the Bank transferred certain U.S. Government agency
securities, including structured notes, from the available for sale portfolio to
the held to maturity portfolio. Immediately prior to the transfer, these
securities had a book value of $6,437,000 and a market value of $5,933,000,
resulting in a gross unrealized loss totalling $504,000, or $302,000 net of tax.
This loss was being amortized by increasing the book values of the related
securities over their remaining maturities. At December 31, 1994, the securities
transferred had a book value of $5,967,000, with a related market value of
$5,834,000, including structured notes with book and related market values of
$4,113,000 and $4,025,000, respectively, with an additional gross unrealized
loss included in stockholders' equity of $473,000.
At December 31, 1994, the Bank held structured notes with a book value of
$11,019,000 and a related market value of $10,402,000, reflecting a gross
unrealized loss of $617,000. These notes include the aforementioned transferred
securities, part of which is included in the aforementioned $473,000 loss
included in stockholders' equity.
In December 1995, the Bank transferred $21.8 million of securities from the held
to maturity to the available for sale portfolio in accordance with the
provisions of the FASB Guide to Implementation of Statement No. 115, which
provided a one-time opportunity for banks to restructure the components of their
investment portfolio.
6
At December 31, 1994, the gross unrealized loss on securities included in the
available for sale portfolio totalled $504,000, which at December 31, 1995 was
reduced to $135,000 due primarily to a decrease in interest rates. The held to
maturity portfolio had a gross unrealized loss of $2,460,000 at December 31,
1994 compared to $61,000 a year later. In addition to the lower interest rate
environment, this decrease also resulted from the removal during 1995 of three
structured notes, as discussed below, and the aforementioned transfer in 1995,
both of which allowed the Bank to eliminate a significant portion of the
unrealized loss that was being amortized when the portfolio was
marked-to-market.
After the 1995 transfer, there remained in the held to maturity portfolio one
security that had been transferred from available for sale in 1994. This
investment had a remaining gross unrealized loss included in stockholders'
equity of $112,000 at December 31, 1995.
Included in the 1995 transfer were all the structured notes previously included
in the 1994 transfer. These notes had a book value totalling $3,461,000 and a
related market value of $3,353,000 and a remaining gross unrealized loss
included in stockholders' equity of $224,000 at the time of the transfer.
At December 31, 1995, the structured note portfolio had a book value of
$8,209,000 and related market value of $8,003,000, reflecting a gross unrealized
loss of $206,000. The structured note portfolio consisted of twelve issues at
December 31, 1994, of which two were called during 1995 and one became
unstructured due to reaching its step-up limit. Of the nine remaining issues,
dual-index notes totalled $3,497,000 in book value, step-ups amounted to
$1,962,000 and deleveraged bonds totalled $2,750,000.
The dual-index notes are all indexed to a combination of long and short- term
rates, while the deleveraged notes are indexed to the ten-year Treasury.
Accordingly, the value of these securities could fluctuate depending on interest
rate movements. The step-ups have less interest rate risk since their yields
will increase over their remaining maturities.
Management believes that holding these securities will not have a significant
impact upon the financial condition or operations of the Corporation.
The composition of the investment portfolio between the held to maturity and the
available for sale changed significantly due primarily to the aforementioned
transfer. At December 31, 1994, the available for sale portfolio comprised 7.5%
of the total investment portfolio, while at December 31, 1995 the available for
sale portfolio represented 55.5%.
Information pertaining to the average weighted yields of investments in debt
securities at December 31, 1995 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. Taking into account such
contractual amortization and expected prepayments, a significant amount of
principal reduction on the aforementioned securities will occur within three
years:
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 $3,291 6.37% $ 2,773 6.52% $ - - % $ - - % $ 6,064 6.44%
U.S. Government agencies 997 4.84 11,681 5.48 - - 11,541 6.46 24,219 5.92
- ---------------------------------------------------------------------------------------------------------------------------------
Total book value $4,288 6.01% $14,454 5.68% $ - - % $11,541 6.46% $30,283 6.02%
=================================================================================================================================
7
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 - - $15,589 6.04% $4,204 6.95% $2,165 5.54% $21,958 6.16%
Obligations of states and
political subdivisions - - 558 7.45 1,978 6.76 - - 2,536 6.91
- ---------------------------------------------------------------------------------------------------------------------------------
Total book value $ - - $16,147 6.09% $6,182 6.89% $2,165 5.54% $24,494 6.24%
=================================================================================================================================
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, 1995. Average yields on obligations
of states 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 available for sale portfolio decreased from 6.28% in
1994 to 6.03% in 1995 reflecting the low yield on the short-term investments
transferred from the held to maturity portfolio in 1995, as well as the lower
rates securities purchased in 1995. This transfer also reduced the average
maturity of the portfolio, as maturities within five years comprised 61% of the
portfolio at December 31, 1995 compared to 30% a year earlier, while maturities
longer than ten years comprise 39% at December 31, 1995 compared to 70% a year
earlier.
The yield on the held to maturity portfolio rose from 5.89% in 1994 to 6.24% in
1995, reflecting the purchase during 1995 of higher coupon callable U.S.
Government agency securities. The average portfolio maturity shortened during
1995 as maturities falling within the first five years represented 65.9% of the
total held to maturity portfolio at December 31, 1995 compared to 57.2% a year
earlier.
8
Consolidated Average Balance Sheet with Related Interest and Rates
1995 1994
=================================================================================================================================
Average Average Average Average
Tax equivalent basisdollars in thousands Balance Interest Rate Balance Interest Rate
=================================================================================================================================
Assets
Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell $ 4,948 $ 280 5.65% $18,867 $ 815 4.32%
Other short-term investments 3,334 192 5.75 - - -
Interest-bearing deposits with banks 170 10 6.09 - - -
Investment securities:
Taxable 1 54,468 3269 6.00 48,997 2,503 5.11
Tax-exempt 2,491 171 6.88 1,925 127 6.60
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 56,959 3,440 6.04 50,922 2,630 5.16
- ---------------------------------------------------------------------------------------------------------------------------------
Loans 2,3:
Commercial 14,598 1,202 8.23 15,799 1,037 6.56
Mortgage 24,000 2,365 9.85 10,926 1,106 10.12
Installment 374 40 10.70 593 51 8.60
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 38,972 3,607 9.26 27,318 2,194 8.03
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 104,383 7,529 7.21 97,107 5,639 5.81
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 3,784 4,918
Net unrealized loss on investment securities
available for sale (297) (261)
Reserve for possible loan losses (729) (724)
Other assets 3,904 2,553
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest earning assets 6,662 6,486
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $111,045 $103,593
=================================================================================================================================
Liabilities and stockholders' equity Interest bearing liabilities:
Savings deposits 4 $ 36,818 726 1.97 $ 40,060 785 1.96
Time deposits 5 47,797 1,927 4.03 33,611 1,084 3.23
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 84,615 2,653 3.14 73,671 1,869 2.57
Short-term borrowings 2,780 156 5.63 4,306 179 4.16
Long-term debt 249 20 8.01 249 20 8.03
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 87,644 2,829 3.23 78,226 2,068 2.67
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 15,713 18,654
Other liabilities 1,378 1,012
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest bearing liabilities 17,091 19,666
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 6,310 5,701
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $111,045 $103,593
=================================================================================================================================
Net interest income (tax equivalent basis) 4,700 3.98 3,571 3.14
Tax equivalent basis adjustments 6 59 (43)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,641 $ 3,528
=================================================================================================================================
Average rate paid to fund interest earning assets 2.71 2.18
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income as a percentage of
interest earning assets (tax equivalent basis) 4.50% 3.63%
=================================================================================================================================
1 Includes investment securities available for sale and held to maturity
2 Includes nonperforming loans
3 Includes loan fees of $197,000 and $109,000 in 1995 and 1994, respectively
4 Includes noninterest bearing deposits maintained by a state governmental
agency of $469,000 and $860,000 in 1995 and 1994, respectively
5 Includes noninterest bearing deposits maintained by corporations and U.S.
governmental agencies of $12,756,000 in 1995 and $4,144,000 in 1994
6 The tax equivalent adjustment was computed assuming a 34% statutory federal
income tax rate in 1995 and 1994
9
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.
1995 Net Interest Income Increase 1994 Net Interest Income Increase
(Decrease) from 1994 due to (Decrease) from 1993 due to
In thousands Volume Rate Total Volume Rate Total
=================================================================================================================================
Interest income
Loans:
Commercial $(114) $394 $163 $354 $ (4) $350
Real estate 1,323 (181) 1,142 87 (19) 68
Installment (19) 8 (11) (4) (15) (19)
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 1,190 221 1,411 437 (38) 399
Taxable investment securities 280 486 766 523 (280) 243
Tax-exempt investment securities 37 7 44 157 (36) 121
Federal funds sold and securities
purchased under agreements to resell (601) 66 (535) 109 256 365
Other short-term investments 192 - 192 - - -
Interest-bearing deposits with banks 10 - 10 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,108 780 1,888 1,226 (98) 1,128
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense
Savings deposits 63 (4) 59 (224) 189 (35)
Time deposits (458) (385) (843) (313) (217) (530)
Short-term borrowings (86) 109 23 25 (59) (34)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense (481) (280) (761) (512) (87) (599)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $627 $500 $1,027 $714 $(185) $529
=================================================================================================================================
Loans
Total loans averaged $39 million in 1995 compared to $27.3 million in 1994, an
increase of 46.5%. At December 31, 1995, total loans were $45.7 million, up
75.8% from $26 million at 1994 year-end. The largest increase occurred in
mortgage loans, where average volume in 1995 was $24 million, compared to $10.9
million in 1994, an increase of 120.1%.
This increase occurred as a result of the purchase in January 1995 of $11.5
million in seasoned residential mortgage loans from the Resolution Trust
Corporation. These loans consisted of one-to-four family loans located
throughout central New Jersey. Other than these loans, there was little growth
in the Bank's residential mortgage portfolio, as all its fixed-rate loans are
sold in the secondary market and there was a lesser demand for adjustable-rate
loans during 1995 due to the declining interest rate environment.
Loans originated for sale declined to $4.6 million in 1995 from $6.5 million in
1994. While the Bank originates Small Business Administration-guaranteed
commercial loans for sale, most loans originated for sale represent Housing and
Urban Development ("HUD") - guaranteed residential rehabilitation loans. The HUD
loans are more labor intensive than the conventional residential mortgage loans
that the Bank originated and sold during 1994, but are more profitable. Because
of the emphasis in 1995 on HUD loans, the volume declined, but gains and
commission on loan sales rose by 90.6%. Loans sold decreased, to $4.5 million in
1995 from $6.1 million in 1994. The Bank intends to expand its residential
mortgage lending program by moving into Federal Housing Administration ("FHA")
guaranteed home rehabilitation loans, which are sold to the FHA, as well as
utilizing the benefits of the Federal Home Loan Bank community development
financing programs.
At December 31, 1995, loans to churches totaled $6.3 million, representing
13.78% 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.
10
The Bank's primary market area consists of northern New Jersey, particularly
within the Newark area. The overall unemployment rate in the State of New Jersey
was 7.3% at the end of 1995 compared to a nationwide rate of 5.6%, which was
also the second highest rate of all industrialized states. In addition, several
major companies located in New Jersey have recently announced layoffs, which
will further affect the New Jersey economy.
While management believes that its loan portfolio is well secured and able to
withstand a downturn in economic conditions, its effects are being carefully
considered in making credit decisions in 1996.
Management is unaware of any significant potential problem loans at December 31,
1995. Maturities and interest sensitivities of loans Information pertaining to
maturities and the sensitivity to changes in interest rates of certain loan
categorizes at December 31, 1995 is presented below.
Due After One
Due in One Year Through Due After
In thousands Year or Less Five Years Five Years Total
================================================================
Commercial $ 15,335 $ 937 $ 2,015 $ 18,287
Real estate:
Construction 90 - - 90
Mortgage 2,923 19,013 4,436 26,355
- ----------------------------------------------------------------
Total $ 18,348 $ 19,940 $ 6,451 $ 44,739
================================================================
Loans at fixed
interest rates $ 1,703 $ 2,433 $ 1,734 $ 5,870
Loans at variable
Interest rates 16,645 17,507 4,717 38,872
- ----------------------------------------------------------------
Total $ 18,348 $ 19,940 $ 6,451 $ 44,739
================================================================
Summary of loan loss experience
Changes in the reserve for possible loan losses are summarized below.
Dollars in thousands 1995 1994
==============================================================
Balance, January 1 $625 $700
- --------------------------------------------------------------
Charge-offs:
Commercial loans 382 35
Real estate loans 163 103
Installment loans 14 22
- --------------------------------------------------------------
Total 559 160
- --------------------------------------------------------------
Recoveries:
Commercial loans 26 1,461
Real estate loans 54 48
Installment loans 18 40
- --------------------------------------------------------------
Total 98 1,549
- --------------------------------------------------------------
Net charge-offs (recoveries) 164 (1,389)
Provision (credit) for possible loan
losses charged to operations 486 (1,464)
- --------------------------------------------------------------
Balance, December 31 $650 $625
==============================================================
Net charge-offs (recoveries) as a
percentage of average loans 1.43% (5.34)%
Reserve for possible loan losses as
a percentage of loans 1.45 2.44
Reserve for possible loan losses as
a percentage of nonperforming loans 60.07 183.80
===============================================================
The reserve for possible loan losses is maintained at a level determined by
management to be adequate to provide for potential 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, the
credit conditions of the borrower, the value of the underlying collateral,
business and economic conditions and the possibility that there may be potential
losses in the portfolio which cannot currently be identified.
Charge-offs rose from $160,000 in 1994 to $559,000 in 1995 as a result of the
charge-off, in the fourth quarter of 1995, of a loan that had been performing
until that time where credit quality rapidly eroded to the extent that
management considered the collection of the loan to be doubtful.
11
During 1994, the Bank recovered $1.6 million as an insurance recovery for a loan
that was charged off in 1989. $175,000 was recorded as other income, while
$1,425,000, which represents the total amount of the loan charged off, was
recorded as a recovery to the reserve for possible loan losses.
Allocation of the reserve for possible loan losses
The reserve for possible loan losses has been allocated based on management's
estimates of the risk elements within the loan categories set forth below at
December 31:
1995 1994
===============================================================
Percentage Percentage
of Loan of Loan
Dollars in thousands Amount Category Amount Category
===============================================================
Commercial $ 175 .98% $ 83 .63%
Real estate 448 1.65 384 3.14
Installment 7 1.97 9 1.56
Unallocated 20 - 149 -
- --------------------------------------------------------------
Total $ 650 1.44% $ 625 2.39%
==============================================================
Nonperforming assets
Information pertaining to nonperforming assets at December 31 is summarized
below at December 31:
In thousands 1995 1994
================================================================
Nonperforming loans
Commercial $ 68 $ 17
Real estate 800 314
Installment 2 6
Lease financing receivables - 4
- ----------------------------------------------------------------
Total nonperforming loans 870 341
Other real estate owned 212 307
- ----------------------------------------------------------------
Total $1,082 $ 648
================================================================
The increase in nonperforming loans in 1995 resulted primarily from the addition
of one loan that management considers well-secured by a commercial property.
Deposits
Total deposits decreased from $103.9 million at December 31, 1994 to $100.9
million a year later, due to a decline in demand deposits. The Bank's deposit
levels may change significantly on a daily basis because deposit accounts
maintained by federal and state governmental agencies represent a significant
part of the Bank's deposits and are more volatile than commercial or or retail
deposits.
These municipal and U.S. Government deposits represent a substantial part of the
Bank's business, tend to have high balance relationships and comprise most of
the Bank's accounts with balances of $100,000 or more at December 31, 1995.
While local municipalities use the accounts for operating and short-term
investments purposes, the U.S. Government uses noninterest-bearing certificates
of deposit as compensating balances, representing a form of payment for services
provided. All the foregoing deposits require collateralization with readily
marketable U.S. Government securities. While the Bank issues certificates of
deposit to municipalities in amounts of $100,000 at rates which are competitive
with other institutions and somewhat more costly than other sources of deposits,
the overall cost of certificates of deposit of $100,000 or more is reduced by
the maintenance of the foregoing compensating balance accounts.
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 loss of any
of these deposits, these securities are readily marketable.
Contributing to the decline in demand deposits were new federal tax deposit
regulations which went into effect on December 1, 1994, whereby large companies
began making their deposits directly to the U.S. Treasury Department rather than
through a commercial bank. As a result, at December 31, 1995, balances under
this tax deposit program totalled $89,000 compared to $3 million a year earlier.
To offset the loss of these deposits, the U.S. Treasury Department has deposited
a $9.5 million noninterest bearing time deposits with CNB, which will be repaid
over five years.
12
Average deposits totalled $100.3 million in 1995, an 8.7% increase from $92.3
million in 1994, with almost all the growth occurring in savings and time
deposits. The branch acquisition contributed $14.7 million to the deposit
growth.
Certain corporations and governmental agencies maintain noninterest bearing
savings and time deposit accounts with the Bank as compensation for services
performed. In 1995, such balances averaged $469,000 and $12,756,000,
respectively, contributing 39 basis points to net interest income. In 1994,
these respective balances were $860,000 and $4,144,000, respectively,
contributing 23 basis points.
Short-term borrowings
Average short-term borrowings were lower in 1995 because of the greater
liquidity available from proceeds received with the branch acquisition.
Other operating income
Other operating income was $1.4 million in both 1995 and 1994. There were major
changes within the components, however, as service charges rose $216,000, or
44.8% due to a greater volume of service chargeable transactions. Other income
decreased $213,000, or 26.1%, due primarily to the aforementioned recording in
1994 of $175,000 associated with the loan loss recovery.
Other operating expenses
Other operating expenses, which include expenses other than interest, income
taxes and the provision for possible loan losses, totalled $4.2 million in 1995,
a 16.5% increase compared to 1994. Salaries and other employee benefits
comprised the largest portion of the increase, rising 23.7% from $2 million to
$2.5 million in 1995. The primary reason for the increase in overall operating
expenses was the operation of the acquired branch office for a full year.
Also contributing to the higher salary and benefit costs were the effects of
increased lending and administrative staff and annual merit increases.
Occupancy expense rose $30,000, or 24.4% from 1994 to 1995 due to higher
depreciation expense arising from the completion of the renovations to the
Bank's executive offices
Equipment expense increased $74,000, or 37% from 1994 to 1995 due primarily to
higher costs related to the aforementioned renovations.
Other operating expense was nominally higher in 1995 due primarily to lower
premiums for FDIC insurance coverage as well as the effectiveness of cost
containment measures instituted in early 1995. These reductions partially offset
the increased cost of operating the acquired branch for a full year.
Income tax expense
Income tax expense as a percentage of pre-tax income was 37%, relatively
unchanged from 36.7% in 1994.
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' request 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.
It is the responsibility of senior management to monitor and oversee all
activities relating to liquidity management and the protection of net interest
income from fluctuations in interest rates.
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 major
contribution during 1995 from operating activities to the Corporation's
liquidity came from proceeds from sales of loans originated for sale, amounting
to $4.6 million, while loans originated for sale represented the greatest use
from operating activities, totalling $4.6 million.
The purchase of loans from the Resolution Trust Corporation for $11.5 million
represented the largest use of funds for investing activities, while most of the
cash received from investing activities came from proceeds from maturities of
investment securities, which totalled $10.5 million.
The primary source of funds from financing activities resulted from an increase
in short-term borrowings of $3.7 million, while a reduction in deposits
represented the greatest use for financing activities.
13
Effects of inflation
Inflation, as measured by the CPI, has been relatively steady during recent
years, advancing 2.8% in 1995, 2.7% in 1994 and 1993 and 2.9% in 1992.
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.
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 and variances in the effects of
rate changes on the Corporations' mix of interest-sensitive assets and
liabilities.
14
The following table presents the Corporation's interest rate sensitivity
position at December 31, 1995.
Interest-sensitivity analysis
Interest Sensitivity Period
=================================================================================================================================
Daily Due After Due After Due After
Floating and Three Months Six Months Total One Year or
Due Within but Within But Within Within Noninterest-
In thousands Three Months Six Months One Year One Year sensitive Total
=================================================================================================================================
Interest-earning assets
Federal funds sold $ 6,950 $ - $ - $ 6,950 $ - $ 6,950
Interest-bearing deposits with banks 321 - - 321 - 321
Investment securities 16,937 2,025 6,484 25,446 29,792 55,238
Loans 16,922 1,270 4,849 23,041 22,628 45,669
- ---------------------------------------------------------------------------------------------------------------------------------
Total 41,130 3,295 11,333 55,758 52,420 108,178
- ---------------------------------------------------------------------------------------------------------------------------------
Sources of funds supporting interest-earning assets
Savings deposits (1) 22,812 - - 22,812 14,207 37,019
Time deposits 26,520 9,614 6,630 42,754 8,191 50,945
Short-term borrowings 3,661 - - 3,661 - 3,661
Long-term debt - - - - 1,749 1,749
Noninterest bearing sources - - - - 15,842 15,842
- ---------------------------------------------------------------------------------------------------------------------------------
Total 52,983 9,614 6,630 69,227 40,451 109,678
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive gap (11,853) (6,319) 4,703 (13,469)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitivity gap $(11,853) $(18,172) $(13,469) $(13,469)
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive assets to interest
sensitive liabilities 77:1 .34:1 1.71:1 1.81:1
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive assets
to interest sensitive liabilities .77:1 .71:1 .81:1 .81:1
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-sensitivity gap as a percentage
of total assets (10.33)% (5.51)% 4.01% 11.74%
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitivity gap as a percentage
of total assets (10.33)% (26.17)% 11.74% 11.74%
=================================================================================================================================
(1) Based on historical experience, management has classified passbook and
statement savings accounts as noninterest sensitive
At December 31, 1995, the Corporation had a cumulative one-year gap of $(13.5)
million, representing 11.74% of total assets and a ratio of .81:1. Utilizing the
dynamic simulation model, management believes that this amount would not result
in a significant change in net interest income should interest rates rise or
fall up to 300 basis points, which is the maximum change that management uses to
measure the Corporation's exposure to interest rate risk.
Capital
Capital adequacy is a measure of the amount of capital needed to support asset
growth. Minimum capital levels for banks and bank holding companies are
regulated by capital adequacy guidelines, which establish minimum capital
standards related to the level of assets and off-balance sheet exposures,
adjusted for credit risk. The guidelines categorize assets and off-balance sheet
items into four risk-weightings and require banking institutions to maintain a
minimum ratio of total capital to risk-weighted assets. Total capital consists
of the sum of a core (Tier I) and qualifying supplementary (Tier II) capital
elements. Tier I capital essentially is comprised of tangible stockholders'
equity for common stock and certain perpetual preferred stock, and Tier II
capital includes a portion of the reserve for possible loan losses, certain
qualifying subordinated long-term debt and preferred stock which does not
qualify as Tier I capital. The regulatory minimum for combined Tier I and Tier
II capital is 8% of risk-adjusted assets, with Tier II elements which qualify
for inclusion in total capital being limited to 100% of the total amount of Tier
I elements.
In addition to the risk-adjusted guidelines discussed above, banks and bank
holding companies are subject to certain leverage standards. Under these
guidelines, banks and bank holding companies are required to maintain as a
minimum leverage standard a Tier I capital-to-total assets ratio of 3%. Under
these guidelines, institutions operating at the 3% minimum are expected to have
15
well diversified risk profiles, including no undue interest rate risk, excellent
asset quality, high liquidity and strong earnings. Institutions experiencing
growth or with high levels of risk would be expected to maintain Tier I capital
levels 100 to 200 basis points above the minimum.
The following table presents the consolidated and bank-only capital components
and related ratios at December 31:
Bank
Consolidated Only
========================================================================
Dollars in thousands 1995 1994 1995
========================================================================
Total stockholders' equity $ 6,896 $ 5,588 $ 8,591
Net unrealized loss on investment
securities available for sale 141 587 141
Disallowed intangibles (76) (85) (76)
- ------------------------------------------------------------------------
Tier 1 capital 6,961 6,090 8,656
- ------------------------------------------------------------------------
Qualifying long-term debt 1,749 249 -
Reserve for possible loan losses 516 412 516
- ------------------------------------------------------------------------
Tier 2 capital 2,265 661 563
- ------------------------------------------------------------------------
Total capital $ 9,226 $ 6,751 $ 9,172
========================================================================
Risk-adjusted assets $41,303 $32,997 $41,303
Total assets 114,410 111,062 114,410
- ------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 capital to
risk-adjusted assets 15.86% 18.46% 20.96%
Regulatory minimum 5.00 5.00 5.00
Total capital to risk-adjusted
assets 17.81 20.46 22.21
Regulatory minimum 8.00 8.00 8.00
Leverage ratio 6.27 5.48 7.80
Total stockholders' equity to
total assets 6.03 5.03 7.51
========================================================================
Results of operations - 1994 compared with 1993
Net income for 1994 rose to $1,724,000, or, on a fully diluted basis, $13.90 per
share compared to $568,000 , or $7.03 per share in 1993, due to a $1.6 million
insurance recovery of a loan charged off in 1989. Excluding the recovery along
with net security gains, net earnings from operations were $688,000, compared to
$476,000 in 1993, an increase of 44.5%. Higher net interest income was the
primarily reason for this increase, reflecting greater levels of interest
earning assets resulting from the May, 1994 branch acquisition.
While net interest income was higher, on a fully tax equivalent basis, the
related net interest margin decreased from 3.99% to 3.81% due primarily to a
more rate-sensitive deposit structure at the acquired branch.
Average deposits grew from $72 million in 1993 to $92.3 million in 1994, an
increase of 28%, due to the aforementioned branch acquisition. While proceeds
from the the deposit increase were spread over a number of interest earning
assets, the major growth was in taxable investment securities, which grew from
$39.1 million at December 31, 1993 to $53.7 million a year later.
Loan growth during 1994 was modest, although loans originated for sale rose from
$4.3 million in 1993 to $6.5 million in 1994 as the Bank expanded its
residential lending program under which these loans are sold in the secondary
market.
As a result of generally improved economic conditions in the Bank's market area
as well as improvements in the Bank's asset quality, management reduced the
reserve for possible loan losses from December 31, 1993 to December 31, 1994 by
recording a credit to the related provision of $1,464,000.
Other operating income
Other operating income rose $302,000, from $898,000 to $1.2 million in 1994,
primarily due to $339,000 of income earned from funds committed to loans to be
acquired from the Resolution Trust Corporation in connection with the branch
acquisition. Also contributing to this income were higher service fees earned
for acting as lead bank in a corporate line of credit syndication. Such fees
rose from $42,000 in 1993 to $158,000 in 1994.
Offsetting these increases was a reduction in net gain on sales of investment
securities, which fell from $353,000 in 1993 to $36,000 in 1994.
16
Other operating expenses totalled $3.6 million in 1994, a 20.7% increase
compared to 1993. Salaries comprised the largest portion of the increase, rising
from $1.2 million to $1.6 million in 1994 due to the branch acquisition, annual
merit increases and the added cost of new hires, made primarily in anticipation
of an expansion in the Bank's lending activities.
Occupancy expense declined 19%, from $153,000 in 1993 to $123,000 in 1994 due
primarily to an increase in rental income from a building that was previously
used as a branch office which was subsequently converted to storage with the
remaining space leased to a commercial business.
Furniture and equipment expense declined 17%, from $241,000 in 1993 to $200,000
in 1994 due to a decrease in equipment rental expense resulting from the
purchase of data processing equipment that was being leased. Higher depreciation
expense on the purchased equipment partially offset this reduction.
Other operating expenses rose from $1.1 million in 1993 to $1.3 million in 1994,
a 19% increase. Expenses attributable to the new branch comprised $133,000 of
this increase. The balance occurred from increases in a broad range of expense
categories due primarily to a higher volume of operations, offset in part by
lower legal fees.
Income tax expense as a percentage of pre-tax income increased from 17.8% in
1993 to 36.7% in 1994. This increase was attributable to a decrease in 1993 in
the federal deferred tax valuation allowance along with higher levels of income
subject to state corporate income tax.
17
Item 8. Financial Statements and Supplementary Data
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
Year Ended December 31,
============================
Dollars in thousands, except per share data 1995 1994
====================================================================================================================================
Assets
Cash and due from banks (Note 2) ............................................................... $ 3,344 $ 3,331
Federal funds sold (Note 3) .................................................................... 6,950 23,800
Interest-bearing deposits with banks ........................................................... 321 --
Investment securities available for sale (Note 4) .............................................. 30,609 7,173
Investment securities held to maturity (Market value of $24,434
in 1995 and $44,118 in 1994) (Note 5) ................................................... 24,494 46,578
Loans held for sale (Note 1) ................................................................... 555 470
Loans (Note 6) ................................................................................. 44,739 25,563
Less: Reserve for possible loan losses (Note 7) ................................................ 650 625
-------- --------
Net loans ...................................................................................... 44,089 24,938
-------- --------
Premises and equipment (Note 8) ................................................................ 2,288 1,740
Accrued interest receivable .................................................................... 955 1,149
Other real estate owned ........................................................................ 212 307
Other assets (Note 9) .......................................................................... 593 1,576
-------- --------
Total assets ................................................................................... $114,410 $111,062
======== ========
Liabilities and Stockholders' Equity
Deposits:
Demand .................................................................................. $ 12,925 $ 16,448
Savings ................................................................................. 37,019 39,615
Time .................................................................................... 50,945 47,878
-------- --------
Total deposits (Note 10) ....................................................................... 100,889 103,941
Short-term borrowings (Note 11) ................................................................ 3,661 --
Accrued expenses and other liabilities ......................................................... 1,215 1,284
Long-term debt (Note 12) ....................................................................... 1,749 249
-------- --------
Total liabilities .............................................................................. 107,514 105,474
Commitments and contingencies (Note 21)
Stockholders' equity (Note18):
Preferred stock, no par value: Authorized 100,000 shares;
eight shares issued and outstanding in 1995 ..................................... 200 --
Common stock, par value $10: Authorized 400,000 shares;
outstanding 111,141 shares in 1995 and 1994 ..................................... 1,120 1,120
Surplus ................................................................................. 886 886
Retained earnings ....................................................................... 4,856 4,194
Less:
Net unrealized loss on investment securities available for sale .................. 141 587
Treasury stock, at cost - 839 shares ............................................. 25 25
-------- --------
Total stockholders' equity ..................................................................... 6,896 5,588
-------- --------
Total liabilities and stockholders' equity ..................................................... $114,410 $111,062
======== ========
See accompanying notes to consolidated financial statements.
18
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes
in Stockholders' Equity
Net Unrealized
Gain (Loss) on
Investment
Common Preferred Retained Securities Treasury
Dollars in thousands, except per share data Stock Surplus Stock Earnings Available for Sale Stock Total
===================================================================================================================================
Balance, December 31, 1992 ............................... $ 987 $ 793 $ -- $1,601 $ -- $ (25) $ 3,356
Net income ............................................... -- -- -- 980 -- -- 980
Proceeds from sale of common stock ....................... 133 93 -- -- -- -- 226
------- ------- ------- ------- ------- ------- -------
Balance, December 31, 1993 ............................... 1,120 886 -- 2,581 -- (25) 4,562
Net income ............................................... -- -- -- 1,724 -- -- 1,724
Net unrealized gain on investment securities upon ........ -- -- -- -- 68 -- 68
adoption of a change in accounting principles
Change in unrealized gain (loss) on investment ........... -- -- -- -- (655) -- (655)
securities available for sale
Dividends paid ($1.00 per share) ......................... -- -- -- (111) -- -- (111)
------- ------- ------- ------- ------- ------- -------
Balance, December 31, 1994 ............................... 1,120 886 -- 4,194 (587) (25) 5,588
Net income ............................................... -- -- -- 802 -- -- 802
Proceeds from sale of preferred stock .................... -- -- 200 -- -- -- 200
Change in unrealized gain (loss) on investment ........... -- -- -- -- 446 -- 446
securities available for sale
Dividends paid ($1.25 per share) ......................... -- -- -- (140) -- -- (140)
------- ------- ------- ------- ------- ------- -------
Balance, December 31, 1995 ............................... $1,120 $ 886 $ 200 $4,856 $ (141) $ (25) $ 6,896
======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
19
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Income
Year Ended December 31,
====================================================
Dollars in thousands, except per share data 1995 1994 1993
====================================================================================================================================
Interest income
Interest and fees on loans ................................................. $ 3,607 $ 2,194 $ 1,795
Interest on Federal funds sold and securities
purchased under agreements to resell ............................... 279 815 450
Interest on other short term investments ................................... 192 -- --
Interest on deposits with banks ............................................ 10 -- --
Interest and dividends on investment securities:
Taxable ............................................................ 3,269 2,503 2,260
Tax-exempt ......................................................... 113 84 4
--------- --------- ---------
Total interest income ...................................................... 7,470 5,596 4,509
--------- --------- ---------
Interest expense
Interest on deposits ....................................................... 2,653 1,869 1,304
Interest on short-term borrowings .......................................... 156 179 145
Interest on long-term debt ................................................. 20 20 20
--------- --------- ---------
Total interest expense ..................................................... 2,829 2,068 1,469
--------- --------- ---------
Net interest income ........................................................ 4,641 3,528 3,040
Provision (credit) for possible loan losses (Note 7) ....................... 486 (1,464) (23)
--------- --------- ---------
Net interest income after provision (credit)
for possible loan losses .......................................... 4,155 4,992 3,063
--------- --------- ---------
Other operating income
Service charges on deposit accounts ........................................ 711 484 401
Other income (Note 13) ..................................................... 642 855 144
Net gains on sales of investment securities (Notes 4 and 5) ................ 10 36 353
--------- --------- ---------
Total other operating income ............................................... 1,363 1,375 898
--------- --------- ---------
Other operating expenses
Salaries and other employee benefits (Note 15) ............................. 2,455 1,984 1,501
Occupancy expense (Note 8) ................................................. 153 123 153
Equipment expense (Note 8) ................................................. 274 200 241
Other expenses (Note 13) ................................................... 1,363 1,338 1,124
--------- --------- ---------
Total other operating expenses ............................................. 4,245 3,645 3,019
---------
Income before income tax expense and cumulative
effect of accounting change ........................................ 1,273 2,722 942
Income tax expense (Note 14) ............................................... 471 998 168
--------- --------- ---------
Income before cumulative effect of accounting change ....................... 802 1,724 774
Cumulative effect of accounting change (Note 14) ........................... -- -- 206
--------- --------- ---------
Net income ................................................................. $ 802 $ 1,724 $ 568
========= ========= =========
Net income per share (Note 18) Primary:
Income before cumulative effect of accounting change ....................... $ 7.22 $ 15.51 $ 7.88
Cumulative effect of accounting change ..................................... -- -- 2.09
--------- --------- ---------
Net income per share ....................................................... $ 7.22 $ 15.51 $ 9.97
========= ========= =========
Fully diluted:
Income before cumulative effect of accounting change ....................... $ 6.53 $ 13.90 $ 7.03
Cumulative effect of accounting change ..................................... -- -- 1.83
--------- --------- ---------
Net income per share ....................................................... $ 6.53 $ 13.90 $ 8.86
========= ========= =========
Primary average shares outstanding ......................................... 111,141 111,141 98,267
Fully diluted average shares outstanding ................................... 124,991 124,991 112,117
========= ========= =========
See accompanying notes to consolidated financial statements.
20
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended December 31,
In thousands 1995 1994 1993
====================================================================================================================================
Operating activities
Net income ...................................................................... $ 802 $ 1,724 $ 980
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization ............................................... 191 120 90
Provision (credit) for possible loan losses ................................. 486 (1,464)
Amortization of premium, net of discount accretion
on investment securities ............................................... 151 423 297
Net gains on sales of investment securities ................................. (10) (36) (353)
Gains and commissions on loans held for sale ................................ (122) (64) (32)
Decrease (increase) in accrued interest receivable .............................. 194 (655) (35)
Deferred income tax expense ..................................................... 16 578 12
Decrease in other real estate owned ............................................. 95 -- --
Decrease (increase) in other assets ............................................. 984 (1,314) (89)
(Decrease) increase in accrued expenses and other liabilities .................. (369) 556 76
Premium paid on branch acquisition .............................................. -- (90) --
--------- --------- ---------
Net cash provided by (used in) operating activities ............................. 2,418 (222) 923
--------- --------- ---------
Investing activities
Loans originated for sale ....................................................... (4,594) (6,525) (4,344)
Proceeds from sale of loans held for sale ....................................... 4,631 6,118 4,376
Increase in loans ............................................................... (8,256) -- --
Purchase of loans from Resolution Trust Corporation ............................. (11,479) (2,370)
Increase in interest-bearing deposits with banks ................................ (321) -- --
Proceeds from recoveries of loans previously charged off ........................ 97 1,549 150
Proceeds from sales of investment securities available for sale ................. -- 2,382 10,032
Proceeds from calls of investment securities held to maturity ................... 2,170 -- --
Proceeds from maturities of investment securities available for sale,
including principal payments .............................................. 1,524 3,660 2,729
Proceeds from maturities of investment securities held to maturity,
including principal payments .............................................. 8,957 5,597 15,114
Purchases of investment securities available for sale ........................... (2,745) (10,484) (10,484)
Purchases of investment securities held to maturity ............................. (10,669) (17,315) (20,931)
Purchases of premises and equipment ............................................. (739) (737) (125)
--------- --------- ---------
Net cash used in investing activities ........................................... (21,424) (17,887) (6,840)
--------- --------- ---------
Financing activities
Deposits assumed in branch acquisition .......................................... -- 25,209 --
(Decrease) increase in deposits ................................................. (3,052) 14,297 6,582
Increase (decrease) in short-term borrowings .................................... 3,661 (5,000) 5,000
Proceeds from issuance of long-term debt ........................................ 1,500 -- --
Proceeds from issuance of common stock .......................................... -- -- 226
Proceeds from issuance of preferred stock ....................................... 200 -- --
Dividends paid .................................................................. (140) (111) --
--------- --------- ---------
Net cash provided by financing activities ....................................... 2,169 34,395 11,808
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ............................ (16,837) 16,286 5,891
Cash and cash equivalents at beginning of year .................................. 27,131 10,845 4,954
--------- --------- ---------
Cash and cash equivalents at end of year ........................................ $10,294 $27,131 $10,845
========= ========= =========
Cash paid during the year:
Interest ........................................................................ $ 2,719 $ 1,768 $ 1,442
Income taxes .................................................................... 991 102 5
Supplemental schedule for noncash investing activities:
Real estate acquired in settlement of loans ..................................... 212 307 --
Transfers of investment securities held to maturity
to (from) investment securities available for sale ....................... 21,836 (6,437) 3,998
See accompanying notes to consolidated financial statements.
21
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 and
securities purchased under agreements to resell.
Investment securities held to maturity and investment securities available for
sale
On January 1, 1994, the Corporation adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 addresses the accounting
and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities.
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 to the earlier of maturity or call date and
accretion of discount to maturity.
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
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 reported as a separate component of stockholders' equity, net of deferred
tax. 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 portfolio mortgage-backed securities.
Such securities are subject to changes in the prepayment rates of the underlying
mortgages, which may affect both the yield and maturity of the securities.
Loans held for sale
Loans held for sale include residential mortgage loans originated with the
intent to sell. Loans held for sale are carried at the lower of aggregate cost
or fair value.
Loans
Loans are stated at the principal amounts outstanding, net of unearned discount
and deferred loan fees. Interest income is accrued as earned, based upon the
principal amounts outstanding. Loan origination fees and certain direct loan
origination costs, as well as unearned discount, are deferred and recognized
over the life of the loan revised for loan prepayments, as an adjustment to the
loan's yield. Recognition of interest on the accrual method is generally
discontinued when a loan contractually becomes 90 days or more past due or a
reasonable doubt exists as to the collectibility of the loan, unless such loans
are well-secured and in the process of collection. At the time a loan is placed
on a nonaccrual status, previously accrued and uncollected interest is generally
reversed against interest income in the current period. Interest on such loans,
if appropriate, is recognized as income when payments are received. A loan is
returned to an accrual status when factors indicating doubtful collectibility no
longer exist.
The Bank originates mortgage loans for sale. Premiums received from purchasers
on sales of conventional nonguaranteed one-to-four family mortgage loans are
recorded as income when received.
22
Once the determination to sell a loan has been made, it is transferred to loans
held for sale and carried at the lower of remaining principal balance or market
value.
As of January 1, 1995, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment
of a Loan" and Statement No. 118 "Accounting by Creditors for Impairment of a
Loan Income Recognition and Disclosure". These statements require that impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, at the loans's observable
market price of the fair value of the collateral if the loan is collateral
dependent.
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.
Where impaired loans are carried at the present value of expected future cash
flows, any change in such value is included with the provision for possible loan
losses. There have been no impaired loans recorded during 1995.
Reserve for possible 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 possible loan losses is maintained at a level determined
adequate to provide for potential losses on loans. 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 possible 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 in
subsequently occurring 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 possible 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 3 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 acquired through foreclosure or deed in lieu of
foreclosure is carried at the lower of cost or fair value less estimated cost to
sell. When a property is acquired, the excess of the loan balance over the
estimated fair value is charged to the reserve for possible loan losses.
Operating results of other real estate owned, including rental income and
operating expenses, are included in "Other expenses".
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. Such timing
differences include depreciation and the provision for possible loan losses.
23
The Corporation adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes" as of January 1, 1993.
Under the asset and liability method of SFAS 109, 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.
The Corporation previously provided for income taxes under Accounting Principles
Board Opinion No. 11, which provided for deferred income taxes on all
significant items of income and expenses that are recognized in different
periods for financial reporting and income tax purposes.
The cumulative effect of this change in the method of accounting for income
taxes has been included in the 1993 consolidated statement of income.
Net income per share
Primary income per share is calculated by dividing net income by the weighted
average number of shares outstanding. Shares issuable upon conversion of the
subordinate debentures have been excluded from the computation of primary income
per share as they are not considered to be common stock equivalents. On a fully
diluted basis, both net income and shares outstanding are adjusted to assume the
conversion of the convertible subordinate debentures from the date of issue.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993 consolidated
financial statements in order to conform with the 1995 presentation.
Note 2 Restrictions on cash and due from banks
The Bank is required to maintain a reserve balance with the Federal Reserve Bank
based primarily on deposits levels. These reserve balances averaged $857,000 in
1995 and $1,120,000 in 1994.
Note 3 Federal funds sold and securities purchased under agreements to resell
At December 31, 1995 and 1994, there were no securities purchased under
agreements to resell, while the average balance during 1995 and 1994 was $0 and
$4,779,000, respectively. The maximum balance at any month-end during 1994 was
$15 million.
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 as of December 31 of investment securities
available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
1995 In thousands Cost Gains Losses Value
===============================================================
U.S. Treasury securities
and obligations of U.S.
government agencies$14,670 $ 276 $ 165 $14,781
Other securities:
Mortgage-backed 15,613 93 339 15,367
Equity securities 461 - - 461
- ---------------------------------------------------------------
Total $30,744 $ 369 $ 504 $30,609
===============================================================
Gross Gross
Amortized Unrealized Unrealized Market
1994 In thousands Cost Gains Losses Value
===============================================================
U.S. Treasury
securities $ 2,298 $ - $ 56 $ 2,242
Mortgage-backed
securities 5,379 - 448 4,931
- ---------------------------------------------------------------
Total $ 7,677 $ - $ 504 $ 7,173
===============================================================
At December 31, 1995, the Corporation held structured notes with a total
amortized cost of $4,459,000 and a related market value of $4,330,000,
reflecting gross unrealized depreciation of $129,000. There were no structured
notes in the available for sale portfolio at December 31, 1994. The Corporation
also held structured notes in the held to maturity portfolio at December 31,
1995 and December 31, 1994.
24
The amortized cost and the market values of investments in debt securities
available for sale presented below as of December 31, 1995 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 $ 4,288 $ 4,281
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. Government agencies 7,235 7,211
Mortgage-backed securities 7,219 7,209
Due after ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies 3,147 3,289
Mortgage-backed securities 8,394 8,158
- --------------------------------------------------------------
Total $30,283 $30,148
==============================================================
There were no sales of investment securities available for sale during 1995.
During 1994, proceeds from the sale of investment securities available for sale
were $2,382,000. Gross gains of $36,000 were realized on these sales.
All interest and dividends on investment securities available for sale were
taxable in 1995, 1994 and 1993.
Investment securities available for sale having an amortized cost of $27,948,000
were pledged to secure public funds at December 31, 1995.
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
1995 In thousands Value Gains Losses Value
=================================================================
U.S. Treasury securities
and obligations of U.S.
Government agencies $12,124 $ 184 $ 79 $12,229
Obligations of state and
political subdivisions 2,536 26 18 2,544
Other securities:
Mortgage-backed 9,834 35 208 9,661
- -----------------------------------------------------------------
Total $24,494 $ 245 $ 305 $ 24,434
==================================================================
At December 31, 1995, the Corporation held structured notes with a total
amortized cost of $3,750,000 and a related market value of $3,673,000,
reflecting gross unrealized depreciation of $72,000. Comparable amounts as of a
year earlier were $11,019,000, $10,401,000 and $618,000, respectively.
Gross Gross
Book Unrealized Unrealized Market
1994 In thousands Value Gains Losses Value
==================================================================
U.S. Treasury securities
and obligations of U.S.
Government agencies $23,367 $ 12 $ 948 $22,431
Obligations of state and
political subdivisions 2,216 - 193 2,023
Other securities:
Mortgage-backed 20,725 - 1,331 19,394
Other debt 200 - - 200
Other equity 70 - - 70
- ------------------------------------------------------------------
Total $46,578 $ 12 $ 2,472 $44,118
==================================================================
25
The book value and the market value of investment securities held to maturity
presented below as of December 31, 1995 are distributed by contractual maturity,
including mortgage-backed securities, which have shorter average lives as a
result of prepayment assumptions.
Book Market
In thousands Value Value
===============================================================
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 8,620 $ 8,661
Mortgage-backed securities 6,969 6,978
Obligations of states and political
subdivisions 558 568
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies 3,300 3,365
Mortgage-backed securities 904 890
Obligations of states and political
subdivisions 1,978 1,976
Due after ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies 204 203
Mortgage-backed securities 1,961 1,793
- ---------------------------------------------------------------
Total $24,494 $24,434
===============================================================
There were no sales of securities held to maturity in 1995 or 1994, while
$2,170,000 of investment securities were called prior to maturity during 1995,
resulting in gains of $10,000.
Interest and dividends on investment securities held to maturity was as follows:
In thousands 1995 1994 1993
==============================================================
Taxable $ 2,594 $ 1,795 $ 1,642
Tax-exempt 113 84 4
- --------------------------------------------------------------
Total $ 2,707 $ 1,879 $ 1,646
==============================================================
Investment securities held to maturity having a book value of $16,758,000 were
pledged to secure public funds at December 31, 1995.
Note 6 Loans
Loans, net of unearned discount and net deferred origination fees and costs at
December 31 were as follows:
In thousands 1995 1994
==============================================================
Commercial $18,002 $13,079
Real estate 26,764 12,121
Installment 372 470
- --------------------------------------------------------------
Total loans 45,138 26,670
Less: Unearned income 399 107
- --------------------------------------------------------------
Loans $44,739 $25,563
==============================================================
Loans guaranteed by the Small Business Administration totalling $7,881,000 were
pledged as collateral for future borrowings under a note issued to the U.S.
Treasury Department at December 31, 1995. Such borrowings totalled $3,661,000 at
December 31, 1995.
Nonperforming loans include loans which are contractually past due 90 days or
more or on which interest income is still being accrued, renegotiated loans
whose terms have been modified due to the borrower's financial difficulties and
nonaccrual loans.
At December 31, nonperforming loans were as follows:
In thousands 1995 1994
==============================================================
Nonaccrual loans $ 839 $ 312
Loans with interest or principal 90
days or more past due and still accruing 31 29
- --------------------------------------------------------------
Total nonperforming loans $ 870 $ 341
==============================================================
26
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 1995 1994 1993
==============================================================
Interest income foregone $ 52 $ 68 $ 94
Interest income received (55) (90) (41)
- --------------------------------------------------------------
$ (3) $ (22) $ 53
==============================================================
At December 31, 1995, 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.
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.
The Bank believes its lending policies and procedures adequately minimize the
potential exposure to such risk and that adequate provisions for possible loan
losses are provided for all known and inherent risk.
Note 7 Reserve for possible loan losses
Transactions in the reserve for possible loan losses are summarized as follows:
In thousands 1995 1994 1993
==============================================================
Balance, January 1 $ 625 $ 700 $ 650
Provision (credit) for possible loan
losses 486 (1,464) (23)
Recoveries of loans previously
charged off 98 1,549 150
- --------------------------------------------------------------
1,209 785 777
Less: Charge-offs 559 160 77
- --------------------------------------------------------------
Balance, December 31 $ 650 $ 625 $ 700
==============================================================
Included in 1994 is the $1,425,000 recovery of a loan previously charged off in
1989, along with the related effects on the provision (credit) for possible loan
losses.
Note 8 Premises and equipment
A summary of premises and equipment at December 31 follows:
In thousands 1995 1994
- --------------------------------------------------------------
Land $ 240 $ 240
Premises 733 678
Furniture and equipment 1,091 879
Building improvements 1,341 892
- --------------------------------------------------------------
Total cost 3,405 2,689
Less: Accumulated depreciation
and amortization 1,117 949
- --------------------------------------------------------------
Net book value $2,288 $1,740
- --------------------------------------------------------------
Depreciation and amortization expense charged to operations amounted to
$191,000, $120,000, and $90,000 in 1995, 1994, and 1993, respectively.
Note 9 Other assets
At December 31, 1994, other assets included a $1,305,000 deposit with the
Resolution Trust Corporation representing a deposit on a residential mortgage
loan portfolio that the Bank was negotiating to purchase. The deposit was
applied when the loans were purchased in January, 1995.
27
Note 10 Deposits
Deposits at December 31 are presented below.
In thousands 1995 1994
==============================================================
Noninterest bearing
Demand $ 12,925 $ 16,448
Savings 469 469
Time 11,319 12,898
- --------------------------------------------------------------
Total noninterest bearing deposits 24,713 29,815
- --------------------------------------------------------------
Interest bearing
Savings 36,550 39,146
Time 39,626 34,980
- --------------------------------------------------------------
Total interest bearing deposits 76,176 74,126
- --------------------------------------------------------------
Total deposits $100,889 $103,941
==============================================================
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 1995 1994
==============================================================
Three months or less $20,265 $15,647
Over three months but within six months 3,085 1,008
Over six months but within twelve months 2,557 450
Over twelve months 5,760 9,340
- --------------------------------------------------------------
Total deposits $31,627 $26,445
==============================================================
Interest expense on certificates of deposits of $100,000 or more was $895,000,
$469,000 and $345,000 in 1995, 1994 and 1993, respectively.
Note 11 Short-term borrowings
Information regarding short-term borrowings at December 31 is presented below.
Average Average Maximum
Interest Rate Balance Interest Balance
December 31 December 31 During Rate During at any
Dollars in thousands Balance Balance the Year the Year Month-end
=======================================================================================
1995
Federal funds purchased and securities
sold under repurchase
agreements $ - -% $ 70 4.87% $2,000
Demand note issued
to the U.S. Treasury 3,661 5.37 2,710 5.61 7,541
- ---------------------------------------------------------------------------------------
Total $3,661 5.37% $2,780 5.63% $9,541
=======================================================================================
1994
Federal funds
purchased $ - -% $ 4 4.18% $ -
Demand note issued
to the U.S. Treasury - - 4,302 4.16 5,000
- ---------------------------------------------------------------------------------------
Total $ - - $4,306 4.16% $5,000
=======================================================================================
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 $6,071,000, along with loans guaranteed by the Small
Business Administration totalling $7,881,000.
28
Note 12 Long-term debt
In thousands 1995 1994
==============================================================
5.25% capital note, due December 28, 2005 $1,500 $ -
8.00% mandatory convertible debentures,
due July 1, 2003 249 249
- --------------------------------------------------------------
Total $1,749 $ 249
==============================================================
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 or the issuance of rights or options to purchase
shares of common stock at a price of less than $18 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.
On December 29, 1995, the Corporation issued a $1.5 million capital note to a
subsidiary of a major insurance company, due December 28, 2005. Interest is
payable semiannually on June 30 and December 31, with principal payments
commencing semiannually in June, 2001.
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.
Under the most restrictive covenant, $923,000 was available for the payment of
dividends at December 31, 1995.
Note 13 Other operating income and expenses
The following table presents the major items of other operating income and
expenses:
In thousands 1995 1994 1993
==============================================================
Other operating income
Income from loans purchased from
Resolution Trust Corporation prior
to loan closing $ 198 $ 339 $ -
Unrecorded interest income collected
on loans charged off in 1989 - 175 -
Service fee income 162 158 42
Other operating expenses
Professional fees 181 234 277
FDIC deposit insurance 168 201 161
Stationery and supplies expense 115 147 87
Data processing 115 103 75
==============================================================
Income from loans purchased from the Resolution Trust Corporation ("RTC")
represents income earned from $1.3 million of funds which were committed to
loans acquired from the RTC in January 1995 in connection with a branch
acquisition, as well as interest on the difference between the amount of loans
committed and the aforementioned $1.3 million. This income was recorded because
of the RTC's agreement to compensate the Bank on the entire loan commitment
balance, whether or not the loans were purchased. The amounts were recorded as
other operating income because there were no earning assets for which to record
interest income.
29
Note 14 Income taxes
The components of income tax expense are as follows:
In thousands 1995 1994 1993
==============================================================
Current
Federal $ 571 $ 413 $ 55
State 103 7 1
- --------------------------------------------------------------
Total current income tax expense 674 420 56
- --------------------------------------------------------------
Deferred
Federal (172) 407 148
State (31) 171 (36)
- --------------------------------------------------------------
Total deferred income tax expense (203) 578 112
- --------------------------------------------------------------
Total income tax expense 471 998 168
Deferred tax benefit on unrealized
loss on investment securities
available for sale 105 390 -
- --------------------------------------------------------------
$ 366 $ 608 $ 168
==============================================================
A reconciliation between income tax expense and the total expected federal
income tax is computed by multiplying pre-tax accounting income by the statutory
federal income tax rate is as follows:
In thousands 1995 1994 1993
==============================================================
Federal income tax at statutory
rate $ 433 $ 925 $ 320
Increase (decrease) in income tax
expense resulting from:
State income taxes, net of federal
benefit 48 118 (23)
Tax-exempt income (34) (26) (1)
Life insurance (7) - -
Decrease in federal valuation
allowance (1) - (97)
Other, net 32 (19) (31)
- ---------------------------------------------------------------
Total income tax expense $ 471 $ 998 $ 168
===============================================================
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 1995 1994
===============================================================
Deferred tax assets
Unrealized loss on investment securities
available for sale $ 55 $ 390
State net operating loss carryforward - 13
Reserve for possible loan losses - -
Other 40 26
- ---------------------------------------------------------------
Total deferred tax assets 95 429
Less: Valuation allowance 7 8
- ---------------------------------------------------------------
Deferred tax asset 88 421
- ---------------------------------------------------------------
Deferred tax liabilities
Reserve for possible loan losses 343 537
Premises and equipment 14 20
Investment securities held to maturity 3 4
- --------------------------------------------------------------
Deferred tax liability 360 561
- --------------------------------------------------------------
Net deferred tax (liability) asset $(272) $(140)
==============================================================
The net deferred liability represents the anticipated federal and state tax
liability to be incurred in future years upon the utilization of the underlying
tax attributes comprising this balance. Management believes, based on current
estimates of future taxable earnings, that more likely than not there will be
sufficient taxable income in future years to realize the deferred tax asset.
The valuation allowance amounted to $74,000 at December 31, 1993 and $8,000 at
December 31, 1994 and 1995, decreasing by $1,000 and $66,000 in 1995 and 1994,
respectively.
The valuation allowance at December 31, 1995 is attributable to the state tax
benefit of deductible timing differences.
30
Note 15 Employee benefit plans
In 1994, the Corporation established 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 Corporation provides
matching contributions of 25% of the first 4% of basic participant contribution
along with a 1% discretionary contribution, subject to a vesting schedule.
Contributions to the plan amounted to $36,000 in 1995 and $33,000 in 1994.
The aforementioned plan replaced a noncontributory retirement plan which was
terminated in 1994. Proceeds from the termination were rolled over into the
employee savings plan.
The Corporation awards profit sharing bonuses to its officers and employees
based on the achievement of certain performance objectives. Bonuses charged to
operating expense in 1995, 1994 and 1993 amounted to $119,000, $120,000 and
$70,000, respectively.
Note 16 Preferred stock
On December 28, 1995 the Corporation issued $200,000 of 6% noncumulative
perpetual preferred stock. Dividends are payable annually on February 28.
Note 17 Restrictions on subsidiary bank dividends
Subject to applicable law, the Board of Directors of the Bank and of the
Corporation may provide for the payment of dividends when it is determined that
dividend payments are appropriate, taking into account factors including net
income, capital requirements, financial condition, alternative investment
options, tax implications, prevailing economic conditions, industry practices,
and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory
limitation on the amount of dividends it may pay to CNBC, CNB's sole
stockholder. 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, the Bank could declare dividends in 1996 without prior
OCC approval of up to $2,453,000 plus the Bank's net profit up to the date of
the declaration, subject to the restrictive covenants under long-term debt
agreements included in Note 12.
31
Note 18 Net income per share
The following table summarizes the computation of net income per share.
In thousands, except per share data 1995 1994 1993
================================================================
Net income
Net income applicable to
primary common shares $ 802 $1,724 $ 980
Interest expense on convertible
subordinated debentures,
net of income taxes 13 13 13
- ----------------------------------------------------------------
Net income applicable to fully diluted
common shares $ 815 $1,737 $ 993
================================================================
Number of average shares
Primary 111,141 111,141 98,267
- ----------------------------------------------------------------
Fully diluted:
Average common shares
outstanding 111,141 111,141 98,267
Average convertible subordinate
debentures converted to
common shares 13,850 13,850 13,850
- ----------------------------------------------------------------
124,991 124,991 112,117
================================================================
Net income per share
Income before cumulative effect of
accounting change and
extraordinary item
Primary $ 7.22 $15.51 $ 7.88
Fully diluted 6.53 13.90 7.03
Cumulative effect of accounting change
Primary - - 2.09
Fully diluted - - 1.83
Net income
Primary 7.22 15.51 9.97
Fully diluted 6.53 13.90 8.86
================================================================
Note 19 Related party transactions
Various directors and executive officers 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 1995 and 1994. 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 $366,000 and
$191,000 at December 31, 1995 and 1994, respectively. The highest amount of such
indebtedness during 1995 and 1994 amounted to $375,000 and $191,000,
respectively. During 1995, $191,000 of new loans were made.
Note 20 Fair value of financial instruments
The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair value estimates are made at a specific
point in time based on the type of financial instrument and relevant market
information.
Because no quoted market price exists for a significant portion of the
Corporation's financial instruments, the fair values of such financial
instruments are derived based on the amount and timing of future cash flows,
estimated discount rates, as well as management's best judgment with respect to
current economic conditions. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values
of those financial instruments and should not be interpreted as an estimate of
the fair market value of the Corporation taken as a whole. The disclosures do
not address the value of recognized and unrecognized nonfinancial assets and
liabilities or the value of future anticipated business. In addition, tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates.
32
The following methods and assumptions were used to estimate the fair values of
significant financial instruments at December 31, 1995, the date on which the
Corporation adopted the provision of Statement of Financial Accounting Standards
No. 107 .
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 available for sale are reported at their fair values based
on quoted market prices. The fair values of investment securities held to
maturity were also based upon 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, 1995 and 1994. 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, 1995.
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1995:
Carrying Fair
In thousands Value Value
===============================================================
Financial assets:
Cash and short-term investments $10,615 $10,615
Investment securities available for sale 30,609 30,609
Investment securities held to maturity 24,495 24,434
Loans 44,644 43,064
Financial liabilities:
Deposits $100,889 $ 99,570
Short-term borrowings 3,661 3,661
Long-term debt 1,749 1,107
===============================================================
Note 21 Commitments and contingencies
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements will not be materially affected by the outcome of any pending legal
proceedings.
Note 22 Financial instruments with off-balance sheet risk
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, commitments to extend standby
letters of credit, and could involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the consolidated financial
statements.
33
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 31,1995 the Bank had mortgage commitments of $702,500, unused
corporate lines of credit of $11,600,000 and $1,650,000 of other loan
commitments.
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 23 Parent company information
Condensed financial statements of the parent company only are presented below.
Condensed Balance Sheet
December 31,
==============================================================
In thousands 1995 1994
==============================================================
Assets
Cash and cash equivalents $ 4 $ 4
Investment in subsidiary 8,143 5,833
Due from subsidiary 249 249
Other assets 11 10
- --------------------------------------------------------------
Total assets $8,655 $5,847
==============================================================
Liabilities and stockholders' equity
Other liabilities $ 10 $ 10
Long-term debt 1,749 249
- --------------------------------------------------------------
Total liabilities 1,759 259
Stockholders' equity 6,896 5,588
- --------------------------------------------------------------
Total liabilities and stockholders' equity $8,655 $5,847
==============================================================
Condensed Statement of Income
Year Ended December 31,
==============================================================
In thousands 1995 1994 1993
==============================================================
Income
Dividends from subsidiary $ 141 $ 112 $ -
Interest from subsidiary 20 20 20
- --------------------------------------------------------------
Total income 161 132 20
- --------------------------------------------------------------
Expenses
Interest expense 20 20 20
- --------------------------------------------------------------
Total expense 20 20 20
- --------------------------------------------------------------
Income before equity in undistributed
net income of subsidiary 141 112 -
Equity in undistributed income
of subsidiary 661 1,612 980
- --------------------------------------------------------------
Net income $ 802 $ 1,724 $ 980
==============================================================
34
Condensed Statement of Cash Flows
Year Ended December 31,
=================================================================
In thousands 1995 1994 1993
=================================================================
Operating activities
Net income $ 802 $1,724 $ 980
Adjustments to reconcile net income
to cash from (used in) operating activities:
Equity in undistributed net income
of subsidiary (661) (1,612) (980)
Increase in other assets (1) - (8)
Increase in other liabilities - - 8
- -----------------------------------------------------------------
Net cash from operating activities 140 112 -
- -----------------------------------------------------------------
Investing activities
Capital contribution to subsidiary (1,700) - (226)
- ------------------------------------------------------------------
Net cash applied to investing
activities (1,700) - (226)
- ------------------------------------------------------------------
Financing activities
Proceeds from issuance of
long-term debt 1,500 - -
Proceeds from issuance of common stock - - 226
Proceeds from issuance of preferred
stock 200 - -
Dividends paid (140) (111) -
- -----------------------------------------------------------------
Net cash from (applied to) financing
activities 1,560 (111) 226
- -----------------------------------------------------------------
Increase in cash and cash equivalents - 1 -
Cash and cash equivalents at
beginning of year 4 3 3
- -----------------------------------------------------------------
Cash and cash equivalents at
end of year $ 4 $ 4 $ 3
=================================================================
Note 24 Summary of quarterly financial information (unaudited)
1995
- ------------------------------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
==================================================================
Interest income $1,736 $1,850 $1,911 $1,973
Interest expense 673 681 728 747
- ------------------------------------------------------------------
Net interest income 1,063 1,169 1,183 1,226
Provision (credit) for
possible loan losses 122 (3) 32 335
Net gains (losses) on sales of
investment securities (1) - (1) 12
Other operating income 513 321 250 281
Other operating expenses 981 1,071 1,133 1,060
- ------------------------------------------------------------------
Income before income
tax expense 473 422 267 112
Income tax expense 175 156 90 50
- ------------------------------------------------------------------
Net income $ 298 $ 266 $ 177 $ 62
==================================================================
Net income per share
(primary) $2.68 $2.39 $1.59 $ .56
==================================================================
Net income per share
(fully diluted) $2.41 $2.13 $1.42 $ .57
==================================================================
35
1994
- ------------------------------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
==================================================================
Interest income $1,072 $1,403 $1,562 $1,559
Interest expense 343 487 548 690
- ------------------------------------------------------------------
Net interest income 729 916 1,014 869
Provision (credit) for
possible loan losses (1,463) 5 5 (11)
Net gains (losses) on sales of
investment securities 36 - - -
Other operating income 438 235 162 540
Other operating expenses 770 859 948 1,068
- ------------------------------------------------------------------
Income before income
taxes 1,860 287 223 352
Income tax expense 545 88 90 275
- ------------------------------------------------------------------
Net income $1,315 $ 199 $ 133 $ 77
==================================================================
Net income per share
(primary) $11.83 $ 1.79 $ 1.20 $ .69
==================================================================
Net income per share
(fully diluted) $10.54 $ 1.39 $ .79 $ .29
==================================================================
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure There were no changes in or disagreements with accounts
during 1994.
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 June 8, 1995.
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
Financial statement schedules are omitted because they are not required or are
not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
36
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 are
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 article of incorporation
relating to the Corporation's Non-cumulative Perpetual
Preferred Stock Series A.
(3)(c) Amendments to the Corporation's article of incorporation
relating to the Corporation's Non-cumulative Perpetual
Preferred Stock Series B.
(3)(d) The amended by-laws of the Corporation are 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 are 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.
(10)(a) The Employees' Profit Sharing Plan of City National Bank of
New Jersey is 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 is incorporated herein by reference to
Exhibit (10)(b) of the Corporation's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1993.
(10)(c) Limited Branch Purchase and Assumption Agreement dated May 6,
1994 by and between the RTC and City National Bank of New
Jersey
(10)(d) Lease and Option Agreement dated May 6, 1994 by and between
the RTC and City National Bank of New Jersey
(10)(e) Minority Call Option Agreement dated May 6, 1994 by and
between the RTC and City National Bank of New Jersey
(10)(f) Indemnity Agreement dated May 6, 1994 by and between the RTC
and City National Bank of New Jersey (10)(g) The Order to
Cease and Desist issued by the Office of the Comptroller of
the Currency, dated May 23,
1989, with Stipulation and Consent to Issuance of an Order to
Cease and Desist is incorporated herein by reference to
Exhibit (28)(a) of the Corporation's Annual Report on Form
10-K for the year ended December 31, 1988.
(10)(h) The Capital Plan of City National Bank of New Jersey, dated
May 14, 1991, is incorporated herein by reference to Exhibit
(28)(b) of the Corporation's Current Report on Form 8-K dated
May 6, 1991.
(10)(i) The Amended and Restated Capital Plan, dated April 14, 1992 is
incorporated herein by reference to Exhibit (28)(c) of the
Corporation's Current Report on Form 8-K dated July 1, 1992.
(10)(j) The Consent Order issued by the Office of the Comptroller of
the Currency, dated January 21, 1992 is incorporated herein by
reference to Exhibit (28)(i) of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1991.
(10(k) Purchase and Assumption Agreement dated August 18, 1995 by and
between City National Bank of New Jersey and NatWest Bank N.A.
(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, 1995.
(21) Subsidiaries of the registrant. The required information is
included on page 3.
(c) No reports on Form 8-K were filed during the quarter ended December 31,
1995.
37
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 30, 1996 Date: March 30, 1996
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 21, 1996
Douglas E. Anderson Chairperson of the Board
/s/ Barbara Bell Director, March 21, 1996
Barbara Bell
/s/ Leon Ewing Director March 21, 1996
Leon Ewing
/s/ Eugene Giscombe Director March 21, 1996
Eugene Giscombe
/s/ Norman Jeffries Director March 21, 1996
Norman Jeffries
/s/ Louis E. Prezeau Director, March 21, 1995
Louis E. Prezeau President and Chief
Executive Officer
/s/ Lemar C. Whigham Director March 21, 1995
Lemar C. Whigham