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1
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, 1996
[ ] 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, 1997 was approximately $1,312,440.
There were 114,141 shares of common stock outstanding at March 15, 1997.
Documents incorporated by reference:
Certain portions of the definitive Proxy Statement for the 1997 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 ___________.
2
CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents
Page
PART I
Item 1. Business............................................................3
Item 2. Properties..........................................................4
Item 3. Legal Proceedings...................................................4
Item 4. Submission of Matters to a Vote of Security Holders.................4
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.............................................................4
Item 6. Selected Financial Data.............................................5
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................6 - 13
Item 8. Financial Statements and Supplementary Data...................14 - 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...........................28
PART III
Item 10. Directors and Executive Officers of Registrant.....................28
Item 11. Executive Compensation.............................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management.....28
Item 13. Certain Relationships and Related Transactions.....................28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....29
Signatures..................................................................30
3
Part I
Item 1. Business
Description of business
City National Bancshares Corporation (the "Corporation" or "CNBC") is a New
Jersey corporation incorporated on January 10, 1983. At December 31, 1996, CNBC
had consolidated total assets of $135 million, total deposits of $115.9 million
and stockholders' equity of $8.3 million. Its only subsidiary is City National
Bank of New Jersey (the "Bank" or "CNB"), a nationally chartered commercial bank
which commenced operations on June 11, 1973. CNB has one subsidiary, City
National, Inc., an investment company which holds, maintains and manages
investment assets for CNB.
In 1994, the Bank acquired a branch office from the Resolution Trust
Corporation, assuming deposits of $25.2 million, while in 1996, the Bank
acquired a branch office from another financial institution, assuming deposits
of $7.7 million.
CNB is a national banking association chartered in 1973 under the laws of the
United States of America. CNB is minority owned and controlled and therefore
eligible to participate in certain federal government programs. CNB is a member
of the Federal Reserve Bank, the Federal Home Loan Bank and the Federal Deposit
Insurance Corporation. CNB provides a wide range of retail and commercial
banking services through three offices located in northern New Jersey. Deposit
services include savings and checking accounts, certificates of deposit and
money market and retirement accounts. The Bank also provides many forms of small
to medium size business financing, including revolving credit, credit lines,
term loans and all forms of consumer financing, including auto, home equity and
mortgage loans and maintains banking relationships with several major domestic
corporations.
CNB specializes in providing credit and deposit services to business and
individuals located within urban areas within New Jersey, particularly in the
Newark area.
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.
Bank holding company regulations
CNBC is a bank holding company within the meaning of the Bank Holding Company
Act (the "Act") of 1956, and as such, is supervised by the Board of Governors of
the Federal Reserve System (the "FRB").
The Act prohibits CNBC, with certain exceptions, from acquiring ownership or
control of more than five percent of the voting shares of any company which is
not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to subsidiary banks. The
Act also requires prior approval by the FRB of the acquisition by CNBC of more
than five percent of the voting stock of any additional bank. The Act also
restricts the types of businesses, activities, and operations in which a bank
holding company may engage.
The Riegle-Neal Interstate 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.
4
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.
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.
5
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, 1996, CNBC and its subsidiary had 62 full-time equivalent
employees. Management considers relations with employees to be satisfactory.
Item 2. Properties
Properties
The corporate headquarters and main office as well as the operations and data
processing center of CNBC and CNB are located in Newark, New Jersey in a
building owned by CNB. The Bank leases its Hackensack office from the Resolution
Trust Corporation, for which no rent is payable for five years, after which the
Bank will have the opportunity to purchase the property. The Bank owns the
property where its second branch office is located.
Item 3. Legal proceedings
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
Submission of matters to a vote of security holders
During the fourth quarter of 1996, there were no matters submitted to
stockholders for a vote.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market for common equity and related stockholder matters
The Corporation's common stock, when publicly traded, is traded
over-the-counter. The common stock is not listed on any exchange and is not
quoted on the National Association of Securities Dealers' Automated Quotation
System. The last customer trade effected by a market maker was unsolicited and
occurred on November 2, 1990. No price quotations are currently published for
the common stock , nor is any market maker executing trades. No price quotations
were published during 1996.
At March 3, 1997, the Corporation had 1,916 common stockholders of record.
On May 1, 1996, the Corporation paid a cash dividend of $1.35 per share to
stockholders of record on March 31, 1996. Whether cash dividends on the common
stock will be paid in the future depends upon various factors, including the
earnings and financial condition of the Bank and the Corporation at the time.
Additionally, federal and state laws and regulations contain restrictions on the
ability of the Bank and the Corporation to pay dividends.
Form 10-K
The annual report filed with the Securities and Exchange Commission on Form 10-K
is available without charge upon written request to City National Bancshares
Corporation, Raul L. Oseguera, Assistant Vice President, Stockholder Relations,
900 Broad Street, Newark, New Jersey, 07102.
Transfer Agent
First City Transfer Company
111 Wood Avenue South, Suite 206
Iselin, New Jersey 08830
6
Item 6. Selected Financial Data
Five-Year Summary
Dollars in thousands, except per share data
1996 1995 1994(1) 1993 1992
===============================================================================
Year-end Balance Sheet data:
Total assets .............. $134,951 $114,410 $111,062 $74,786 $61,911
Total loans ................. 57,128 44,739 25,563 23,659 20,331
Reserve for possible
loan losses 750 650 625 700 650
Investment securities ....... 60,863 55,103 53,751 39,193 35,644
Total deposits .............. 115,854 100,889 103,941 64,435 57,853
Long-term debt .............. 1,749 1,749 249 249 249
Stockholders' equity ........ 8,287 6,896 5,588 4,562 3,356
================================================================================
Income Statement data:
Interest income ......... $ 9,034 $ 7,470 $ 5,596 $ 4,509 $ 4,430
Interest expense ....... 3,802 2,829 2,068 1,469 1,513
- --------------------------------------------------------------------------------
Net interest income ..... 5,232 4,641 3,528 3,040 2,917
Provision (credit) for
possible loan losses ... 91 486 (1,464) (23) 30
- --------------------------------------------------------------------------------
Net interest income after provision (credit)
for possible loan losses . 5,141 4,155 4,992 3,063 2,887
Noninterest income ......... 1,147 1,363 1,375 898 508
Noninterest expense ....... 4,839 4,245 3,645 3,019 2,829
Income before income tax expense and cumulative
effect of accounting change1,449 1,273 2,722 942 566
Income tax expense ......... 504 471 998 168 205
- --------------------------------------------------------------------------------
Net income before cumulative effect of
accounting change
and extraordinary item . 945 802 1,724 774 361
Cumulative effect of
accounting change ...... -- -- -- 206 --
Extraordinary item ...... -- -- -- -- 194
- --------------------------------------------------------------------------------
Net income ............. $ 945 $ 802 $ 1,724 $ 980 $ 555
================================================================================
(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 common share data:
Income before cumulative effect of
accounting change
and extraordinary item $ 8.31 $ 7.22 $ 15.51 $ 7.88 $ 4.16
Cumulative effect of
accounting change and
extraordinary item -- -- -- 2.09 2.24
Net income per
primary share ...... 8.31 7.22 15.51 9.97 6.40
Net income per fully
diluted share ........ 7.51 6.51 13.90 8.86 6.40
Book value ......... 66.23 62.05 50.28 41.05 34.30
Dividends .... 1.35 1.25 1.00 N/A N/A
Average number of common shares
outstanding . 113,498 111,141 111,141 98,267 86,738
Number of common shares
outstanding at
year-end .... 114,141 111,141 111,141 111,141 97,841
Financial ratios:
Return on average assets .71% .72% 1.66% 1.20% .81%
Return on average
common equity ...... 13.19 12.71 30.24 25.22 19.02
Stockholders' equity as a percentage of
total assets 6.14 6.03 5.03 6.10 5.42
Dividend payout ratio 16.51 17.46 6.45 N/A N/A
================================================================================
Item 7. Management's discussion and analysis of financial condition and results
of operations
Earnings summary
Net income in 1996 increased $143,000, or 17.8%, to $945,000 compared to
$802,000 in 1995. Returns on average common equity and average assets were
13.19% and .71% in 1996 and 12.71% and .72% in 1995. Related earnings per common
share on a fully diluted basis rose to $7.51 from $6.51.
7
Both 1996 and 1995 included nonrecurring items which affected net income. In the
third quarter of 1996, an assessment of $100,000 was paid to the FDIC
representing the Bank's share of replenishing the Savings Association Insurance
Fund ("SAIF"), for the purchase in 1994 of a failed thrift institute that was
SAIF-insured while the first quarter of 1995 included $198,000 of proceeds
received from the RTC, representing earnings on funds allocated to purchase
loans from the RTC, offset in part by a special addition of $115,000 to the
provision for possible loan losses, to provide a reserve on these loans.
Excluding these items along with net securities gains, earnings from operations
rose $262,000 in 1996, up 35.2% from $744,000 in 1995 to $1,006,000 in 1996.
The primary reason for the improved earnings performance was an increase in net
interest income, which rose 12.7% compared to 1995. Offsetting this improvement
somewhat were higher costs associated with the operations of a branch office
acquired in March, 1996 and the completion of renovations of the Bank's main
office.
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 to $5.2
million in 1996 from $4.6 million in 1995, while the related net interest margin
decreased to 4.26% to 4.50%. This improvement in net interest income resulted
from a higher level of interest earning assets, which averaged $124.5 million in
1996 compared to $104.4 million in 1995. Loan growth comprised most of this
increase. The lower net interest margin reflected a higher cost of deposits
along with a narrower spread on loans.
Interest income on a FTE basis was $9.1 million in 1996, an increase of $1.6
million, or 20.9% compared to 1995. This increase was due primarily to the
higher level of average interest earning assets, which rose 19.3% in 1996. While
there was some increase in shorter-term earning assets due primarily to the
liquid assets acquired in the aforementioned branch acquisition, the major
increase occurred in the loan portfolio, which averaged $53.5 million in 1996
compared to $39 million in 1995, an increase of 37.3%. Average investment
securities grew $3.8 million, or 6.8% in 1996.The average yield on interest
earning assets rose nine basis points to 7.30% in 1996, compared to 7.21% in
1995.
Interest expense was $3.8 million in 1996, an increase of $973,000, or 34.4%
from 1995. This increase resulted primarily from higher interest bearing
liabilities, which averaged $108.2 million in 1996 compared to $87.6 million in
1995, a 23.5% increase. Almost all this increase comes from higher average time
deposit balances, which rose to $66.4 million in 1996 compared to $47.8 million
in 1995, an increase of 39%. This growth occurred entirely in certificates of
deposit of $100,000 or more, reflecting the Bank's expanded relationship with
local municipalities.
A higher cost of funds also contributed to the increased interest expense, as
the average cost of funds rose 35 basis points, from 2.71% in 1995 to 3.06% in
1996, due to the higher cost of the aforementioned municipal deposits.
Additionally, noninterest bearing funds represented 13.1% of interest earning
assets in 1996 compared to 16% in 1995.
Investments
Total investment securities averaged $60.8 million in 1996 compared to $57
million in 1995, an increase of $3.8 million, or 6.9%. Most of this increase
came from the use of proceeds received from the deposit assumption and were
invested in U.S. Government agency securities. The other activity in the
portfolio resulted primarily from the reinvestment of maturity proceeds.
The investment securities available for sale ("AFS") portfolio changed
nominally, from $30.6 million at December 31, 1995 to $31 million a year later,
while the related gross unrealized loss changed slightly, from $135,000 to
$108,000, representing less than .5% of the AFS portfolio's book value at both
dates.
The investment securities held to maturity ("HTM") portfolio rose from $24.5
million at December 31, 1995 to $29.9 million a year later, reflecting the
aforementioned purchases. Related unrealized depreciation was $60,000 and
$349,000, respectively, reflecting depreciation on agency callable securities
purchased in 1996. While these securities return substantially more than related
bullet bonds, their call features affect their marketability.
8
At December 31, 1996, the Bank held seven structured notes with total book and
related market values of $6,227,000 and $6,084,000, reflecting $143,000 of
unrealized depreciation, while a year earlier 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. These structured notes consisted of step-up,
dual-index and deleveraged notes. The dual 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 yield will increase over their remaining
maturities.
In September 1994, the Bank transferred certain securities from the AFS to the
HTM 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 is being
amortized by increasing the book value of the related securities over their
remaining maturities. At December 31, 1996, the remaining security transferred
had a book value of $1,911,000 with a related market value of $2,017,000 and a
related gross unrealized loss included in stockholders' equity of $86,000.
Finally, at December 31, 1996, the Bank held callable U.S. Government agency
notes with a carrying value of $15.9 million, $2 million of which was included
in the AFS portfolio and $13.9 million was included in the HTM portfolio. These
notes are callable at various dates from 1997 through 2008.
Management believes that holding either the structured notes or callable
securities will not have a significant impact upon the financial condition or
operations of the Corporation. Information pertaining to the average weighted
yields of investments in debt securities at December 31, 1996 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:
Dollars in thousands
================================================================================
Investment Securities Available for Sale ...
Maturing Maturing
After One After Five
Maturing Year But Years but Maturing
Within Within Five Within Ten after
One Year Years Years Ten Years Total Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
================================================================================
U.S. Treasury securities
$ -- --% $4,2716 .29%$ -- --% $-- --% $4,271 6.29%
U.S. Government agencies
1,786 5.96 8,567 5.70 418 8.96 15,180 6.41 25,951 6.19
- --------------------------------------------------------------------------------
Total amortized cost
$1,786 5.96%$12,838 5.90 418 8.96% $15,180 6.41%$ 30,222 6.20%
================================================================================
Investment Securities Held to Maturity
Maturing Maturing
After One After Five
Maturing Year But Years but Maturing
Within Within Five Within Ten after
One Year Years Years Ten Years Total Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
================================================================================
Dollars in thousands
U.S. Government agencies
$ -- -- % $13,30 15.91% $11,377 6.82% $2,652 6.09% $27,330 6.31%
Obligations of states and
political subdivisions
-- -- 2,132 6.89 404 7.03 -- -- 2,536 6.91
- --------------------------------------------------------------------------------
Total amortized cost
$ -- -- % $15,433 6.05% $11,781 6.83% $2,652 6.09% $29,866 6.36%
================================================================================
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, 1996. 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%.
9
The average yield on the AFS portfolio increased from 6.02% in 1995 to 6.20% in
1996 , while the yield on the HTM portfolio rose from 6.24% in 1995 to 6.36% in
1996, reflecting higher yields on securities purchased.
Consolidated Average Balance Sheet with Related Interest and Rates
1996 1995
================================================================================
Tax equivalent basis;dollars in thousands
Average Average
Balance Interest Rate Balance Interest Rate
================================================================================
Assets Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell
$ 6,053 $ 317 5.23%$ 4,948 $ 279 5.65%
Other short-term investments
3,996 215 5.37 3,334 192 5.75
Interest-bearing deposits
with banks............ 104 5 5.16 170 10 6.09
Investment securities:
Taxable 1 ........... 58,270 3,577 6.14 54,468 3,269 6.00
Tax-exempt .......... 2,536 176 6.92 2,491 171 6.88
- --------------------------------------------------------------------------------
Total investment securities 60,806 3,753 6.17 56,959 3,440 6.04
- --------------------------------------------------------------------------------
Loans 2,3:
Commercial 20,031 1,642 8.20 14,598 1,202 8.23
Real estate 33,104 3,116 9.42 24,000 2,365 9.85
Installment 388 46 11.85 374 40 10.70
- --------------------------------------------------------------------------------
Total loans 53,523 4,804 8.98 38,972 3,607 9.26
- --------------------------------------------------------------------------------
Total interest earning assets
124,484 9,094 7.30 104,383 7,528 7.21
- --------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 4,065 3,784
Gross unrealized loss on investment
securities available for sale
(164) (297)
Reserve for possible loan losses
(724) (729)
Other assets 4,733 3,904
- --------------------------------------------------------------------------------
Total noninterest earning assets
7,912 6,662
- --------------------------------------------------------------------------------
Total assets $132,396 $111,045
================================================================================
Liabilities and stockholders' equity Interest bearing liabilities:
Savings deposits 4 $36,427 $ 750 2.06 $36,818 $726 1.97
Time deposits 5 66,420 2,764 4.16 47,797 1,927 4.03
- --------------------------------------------------------------------------------
Total interest bearing deposits
102,847 3,514 3.42 84,615 2,653 3.14
Short-term borrowings 3,620 189 5.21 2,780 156 5.63
Long-term debt 1,749 99 5.69 249 20 8.01
- --------------------------------------------------------------------------------
Total interest bearing liabilities
108,216 3,802 3.51 87,644 2,829 3.23
- --------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 14,960 15,713
Other liabilities 1,443 1,378
- --------------------------------------------------------------------------------
Total noninterest bearing liabilities
16,403 17,091
- --------------------------------------------------------------------------------
Stockholders' equity 7,777 6,310
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity
$ 132,396 $ 111,045
================================================================================
Net interest income (tax equivalent basis)
5,292 3.79 4,699 3.98
Tax equivalent basis adjustments(6) (60) (58)
- --------------------------------------------------------------------------------
Net interest income $ 5,232 $ 4,641
================================================================================
Average rate paid to fund interest earning assets
3.06 2.71
- --------------------------------------------------------------------------------
Net interest income as a percentage of
interest earning assets (tax equivalent basis)
4.26% 4.50%
================================================================================
10
1 Includes investment securities available for sale and held to maturity 2
Includes nonperforming loans 3 Includes loan fees of $247,000 and $197,000 in
1996 and 1995, respectively 4 Includes noninterest bearing deposits maintained
by a state governmental
agency of $469,000 in 1996 and 1995
5 Includes noninterest bearing deposits maintained by corporations and U.S.
governmental agencies of $12,522,000 in 1996 and $12,756,000 in 1995
6 The tax equivalent adjustment was computed assuming a 34% statutory federal
income tax rate in 1996 and 1995
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.
================================================================================
1996 Net Interest Income Increase 1995 Net Interest Income Increase
(Decrease) from 1995 due to (Decrease) from 1994 due to
In thousands Volume Rate Total Volume Rate Total
================================================================================
Interest income
Loans:
Commercial $ 457 $ (17) $ 440 $ (114) $ 394 $ 280
Real estate 797 (46) 751 1,323 (179) 1,144
Installment 2 4 6 (19) 8 (11)
- --------------------------------------------------------------------------------
Total loans 1,256 (59) 1,197 1,190 223 1,413
Taxable investment securities
178 130 308 280 486 766
Tax-exempt investment securities
5 - 5 29 - 29
Federal funds sold and securities
purchased under agreements to resell
62 (24) 38 (601) 65 (536)
Other short-term investments
38 (15) 23 192 - 192
Interest-bearing deposits with banks
(4) (1) (5) 10 - 10
- --------------------------------------------------------------------------------
Total interest income
1,535 (31) 1,566 1,100 774 1,874
- --------------------------------------------------------------------------------
Interest expense
Savings deposits 8 (33) (25) 63 (4) 59
Time deposits (751) (85) (836) (458) (385) (843)
Short-term borrowings
(47) 14 (33) (86) 109 23
Long -term debt (120) 41 (79) - - -
- --------------------------------------------------------------------------------
Total interest expense
(910) (63) (973) (481) (280) (761)
- --------------------------------------------------------------------------------
Net interest income
$ 625 $ (32) $ 593 $ 627 $ 500 $ 1,027
================================================================================
Loans
Total loans averaged $53.5 million in 1996 compared to $39 million in 1995, an
increase of 37.2%. At December 31, 1996, total gross loans were $57.1 million,
up 27.7% from $44.7 million at 1995 year-end.
This increase resulted from greater commercial loan growth, as well as increased
residential mortgage volume, which included the purchase of $4 million of
performing residential mortgage loans in connection with the 1996 branch
acquisiyion. These loans consisted of one-to-four family loans located
throughout central New Jersey and were acquired at an average rate lower than
real estate loans already carried thereby reducing the average rate in the real
estate loan portfolio from 9.85% to 9.42%. Other than these loans, there was
little growth in the Bank's residential mortgage portfolio, as most of its
residential mortgage loans originations are sold in the secondary market. Theses
loans represent Housing and Urban Development ("HUD") - guaranteed residential
rehabilitation loans.
Loans originated for sale declined to $3.8 million in 1996 from $4.6 million in
1995, while loans sold decreased to $4 million in 1996 from $4.5 million in
1995. Gains and commissions on loan sales rose from $122,000 in 1995 to $170,000
in 1996.
At December 31, 1996, loans to churches totaled $7 million, representing 12.3%
of total loans outstanding and are included with real estate loans. Management
does not believe that this loan concentration exposes the Corporation to any
unusual degree of risk.
11
The Bank generally secures its loans by obtaining primarily first liens on real
estate, both residential and commercial, and does virtually no asset-based
financing. Without additional side collateral, the Bank generally requires
maximum loan-to-value ratios of 70% for loan transactions secured by commercial
real estate.
The Bank's primary market area consists of northern New Jersey, particularly
within the Newark area. Although Newark is undergoing a major renovation, the
city continues to experience a high rate of unemployment. The overall
unemployment rate in the State of New Jersey was 6.2% at the end of 1996
compared to a nationwide rate of 5.3%.
While management believes that its loan portfolio is well secured and able to
withstand a downturn in economic conditions, its effects will be carefully
considered in making credit decisions in 1997.
Management is unaware of any significant potential problem loans at December 31,
1996. Maturities and interest sensitivities of loans Information pertaining to
maturities and the sensitivity to changes in interest rates of loans at December
31, 1996 is presented below.
Due After One
Due in One Year ThroughDue After
In thousands Year or LessFive Years Five Years Total
================================================================================
Commercial $ 10,518 $ 5,041 $ 4,075 $ 19,634
Real estate:
Construction 144 965 - 1,109
Mortgage 11,128 18,464 6,350 35,942
Installment 171 272 - 443
- --------------------------------------------------------------------------------
Total $21,961 $24,742 $10,425 $57,128
================================================================================
Loans at fixed
interest rates $ 1,856 $ 7,637 $ 10,425 $ 19,918
Loans at variable
Interest rates 20,105 17,105 - 37,210
- --------------------------------------------------------------------------------
Total $ 21,961 $ 24,742 $ 10,425 $ 57,128
================================================================================
Summary of loan loss experience
Changes in the reserve for possible loan losses are summarized below.
Dollars in thousands 1996 1995
================================================================================
Balance, January 1 $ 650 $625
- --------------------------------------------------------------------------------
Charge-offs:
Commercial loans 25 382
Real estate loans 65 163
Installment loans 8 14
- --------------------------------------------------------------------------------
Total 98 559
- --------------------------------------------------------------------------------
Recoveries:
Commercial loans 20 26
Real estate loans 81 54
Installment loans 6 18
- --------------------------------------------------------------------------------
Total 107 98
- --------------------------------------------------------------------------------
Net recoveries (charge-offs) 9 (461)
Provision for possible loan
losses charged to operations 91 486
- --------------------------------------------------------------------------------
Balance, December 31 $750 $650
================================================================================
Net recoveries (charge-offs) as a percentage of average loans .02 % (1.19)%
Reserve for possible loan losses as a percentage of loans 1.31 1.45 Reserve for
possible loan losses as a percentage
of nonperforming loans 70.89 74.71
================================================================================
The reserve for possible loan losses is maintained at a level determined by
management to be adequate to provide for inherent losses in the loan portfolio.
The reserve is increased by provisions charged to operations and recoveries of
loan charge-offs. The reserve is based on management's evaluation of the loan
portfolio and several other factors, including past loan loss experience, the
credit conditions of the borrower, the value of the underlying collateral,
business and economic conditions and the possibility that there may be inherent
losses in the portfolio which cannot currently be identified.
Charge-offs declined from $559,000 in 1995 to $98,000 in 1996 as a result of the
charge-off, in the fourth quarter of 1995, of a commercial loan that had been
performing until then, at which time credit quality rapidly eroded to the extent
that management considered the collection of the loan to be doubtful.
12
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:
1996 1995
================================================================================
Percentage Percentage
of Loan ofLoan
Dollars in thousands Amount Category Amount Category
================================================================================
Commercial $ 250 1.27% $ 175 .98%
Real estate 376 1.00 448 1.65
Installment 12 2.71 7 1.97
Unallocated 112 - 20 -
- --------------------------------------------------------------------------------
Total $ 750 1.31% $ 650 1.44%
================================================================================
Nonperforming assets
Information pertaining to nonperforming assets at December 31 is summarized
below:
In thousands 1996 1995
================================================================================
Nonperforming loans
Commercial $ 437 $ 68
Real estate 617 800
Installment 4 2
- --------------------------------------------------------------------------------
Total nonperforming loans 1,058 870
Other real estate owned 672 212
- --------------------------------------------------------------------------------
Total $1,730 $1,082
================================================================================
The increase in nonperforming loans in 1996 resulted primarily from the addition
of one loan that management considers well-secured by a commercial property.
Deposits
Average deposits rose 17.4%, from $100.3 million in 1995 to $117.8 million in
1996 due to the deposits assumed in the branch acquisition along with higher
levels of municipal time deposits. The Bank's deposit levels may change
significantly on a daily basis because deposit accounts maintained by
municipalities represent a significant part of the Bank's deposits and are more
volatile than commercial or retail deposits.
These municipal and U.S. Government accounts represent a substantial part of the
Bank's business, tend to have high balance relationships and comprised most of
the Bank's accounts with balances of $100,000 or more at December 31, 1996.
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.
Certain corporations and governmental agencies maintain noninterest-bearing
savings and time deposit accounts with the Bank as compensation for services
performed. In 1996, such balances averaged $469,000 and $12,756,000,
respectively, contributing 39 basis points to net interest income.
The average cost of interest-bearing deposits rose from 3.14% in 1995 to 3.42%
in 1996 reflecting the greater proportion of time deposits.
Short-term borrowings
Average short-term borrowings rose 30.2% in 1996 because of higher U.S. Treasury
tax and loan note option account balances. The average rate paid for short-term
borrowings decreased 42 basis points reflecting the lower interest rate
environment during 1996.
Long-term debt
Average long-term debt rose from $249,000 in 1995 to $1,749,000 in 1996 due to
the issuance in December, 1995 of $1.5 million in 5.25% capital notes. As a
result, the average rate paid declined from 8.01% to 5.69% in 1996.
13
Other operating income
Other operating income decreased 15.8% from $1,363,000 in 1995 to $1,147,000 in
1996 due primarily to the aforementioned proceeds received from the RTC in 1995.
Service charges on deposit accounts declined 16.7% in 1996 primarily due to the
loss of a customer whose account incurred significant charges in 1995.
These reductions were partially offset by higher agency fees, which rose 46.9%,
from $162,000 in 1995 to $238,000 in 1996. These fees represent compensation
from large corporations that utilize the Bank to syndicate lines of credit.
Other operating expenses
Other operating expenses, which include expenses other than interest, income
taxes and the provision for possible loan losses, totalled $4.8 million in 1996,
a 14% increase compared to 1995. The primary reasons for the increase were the
branch acquisition along with costs attributable to the renovation of the main
office.
Salaries and other employee benefits increased $173,000, or 6.9% in 1996 due to
merit increase and the branch acquisition.
Occupancy expense rose $136,000, or 88.9% from 1995 to 1996 due to higher
depreciation expense arising from the completion of the renovations to the
Bank's main office as well as the branch acquisition.
Equipment expense increased $135,000, or 49.2% from 1995 to 1996 due primarily
to higher costs related to the aforementioned renovations and acquisition.
Other expenses were higher by $150,000, or 11% in 1996 due primarily to the
nonrecurring $100,000 FDIC SAIF assessment. Also contributing to the increase
was higher marketing expense, which rose from $19,000 in 1995 to $85,000 in 1996
as the Bank instituted a market awareness program.
Income tax expense
Income tax expense as a percentage of pre-tax income was 34.8% compared to 37%
in 1995 due to the operation of an investment subsidiary for a full year in 1996
compared to a partial year in 1995. This subsidiary derives state income tax
benefits from its operations.
Liquidity
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") 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.
Aside from the increase in accrued expenses and other liabilities described in
Note 10 to the Financial Statements, the major contribution during 1996 from
operating activities to the Corporation's liquidity came from net income.
Net cash used in investing activities was primarily the result of the purchase
of investment securities, which totalled $31.2 million, while sources of cash
provided by investing activities were derived primarily from proceeds from
maturities, principal payments and early redemptions of investment securities,
amounting to $25.6 million.
The primary source of funds from financing activities resulted from an increase
in short-term borrowings of $1.5 million and an increase in deposits of $15
million.
Effects of inflation
Inflation, as measured by the CPI, has been relatively steady during recent
years, advancing 2.8% in 1996 and 1995 and 2.7% in 1994.
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.
14
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.
The following table presents the Corporation's interest rate sensitivity
position at December 31, 1996. 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
$ 8,900 $-- $ -- $ 8,900 $ -- $ 8,900
Interest-bearing deposits with banks
74 -- -- 74 -- 74
Investment securities
18,496 1,601 4,980 25,077 35,894 60,971
Gross loans .... 17,073 3,943 6,599 27,615 29,804 57,419
- --------------------------------------------------------------------------------
Total 44,543 5,544 11,579 61,666 65,698 127,364
- --------------------------------------------------------------------------------
Sources of funds supporting interest-earning assets
Savings deposits (1) 19,737 -- -- 19,737 17,790 37,527
Time deposits 27,338 17,903 3,919 49,160 15,468 64,628
Short-term borrowings 5,175 -- -- 5,175 -- 5,175
Long-term debt -- -- -- -- 1,749 1,749
Noninterest bearing
sources -- -- -- -- 18,285 18,285
- --------------------------------------------------------------------------------
Total 52,250 17,903 3,919 74,072 53,292 127,364
- --------------------------------------------------------------------------------
Interest-sensitive gap
(7,707) (12,359) 7,660 (12,406)
- --------------------------------------------------------------------------------
Cumulative interest-sensitivity gap
$(7,707) $(20,066) $(12,406) $(12,406)
- --------------------------------------------------------------------------------
Interest-sensitive assets to interest
sensitive liabilities.85:1 .30:1 2.95:1 .83:1
- --------------------------------------------------------------------------------
Cumulative interest-sensitive assets
to interest sensitive liabilities
.85:1 .71:1 .83:1 .83:1
- --------------------------------------------------------------------------------
Interest-sensitivity gap as a percentage of total assets
(5.71)% (9.16)% 5.68% (9.19)%
- --------------------------------------------------------------------------------
Cumulative interest-sensitivity gap as a percentage
of total assets (5.71)% (14.87)% (9.19)% (9.19)%
================================================================================
(1) Based on historical experience, management has classified passbook and
statement savings accounts as noninterest sensitive
15
At December 31, 1996, the Corporation had a cumulative one-year gap of $(12.4)
million, representing 9.19% of total assets and a ratio of .83:1. 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
The following table presents the consolidated and bank-only capital components
and related ratios as calculated under regulatory accounting practice at
December 31:
Bank
Consolidated Only
================================================================================
December 31, December 31,
Dollars in thousands 1996 1995 1996
================================================================================
Total stockholders' equity $ 8,287 $ 6,896 $ 9,726
Net unrealized loss on investment
securities available for sale 111 141 111
Disallowed intangibles (66) (76) (66)
- --------------------------------------------------------------------------------
Tier 1 capital 8,332 6,961 9,771
- --------------------------------------------------------------------------------
Qualifying long-term debt 1,749 1,749 249
Reserve for possible loan losses 734 516 734
- --------------------------------------------------------------------------------
Tier 2 capital 2,483 2,265 983
- --------------------------------------------------------------------------------
Total capital $ 10,815 $ 9,226 $ 10,754
================================================================================
Risk-adjusted assets $ 58,681 $ 41,303 $ 58,681
Total assets 134,951 114,410 134,951
- --------------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 capital to risk-adjusted assets
14.20% 15.86% 16.65%
Regulatory minimum 4.00 4.00 4.00
Total capital to risk-adjusted assets
18.43 17.81 18.33
Regulatory minimum 8.00 8.00 8.00
Leverage ratio 5.93 6.13 7.01
Total stockholders' equity to total assets
6.14 6.03 7.21
================================================================================
Results of operations - 1995 compared with 1994
Net income for 1995 declined to $802,000, or, on a fully diluted basis, $6.51
per common share compared to $1,724,000 , or $13.90 per common share in 1994,
due to a $1.6 million insurance recovery in 1994 of a loan charged off in 1989.
Excluding the nonrecurring items and net security gains, net earnings from
operations were $798,000 in 1995, compared to $688,000 in 1994, an increase of
16% . Higher net interest income was the primarily reason for this increase. The
related net interest margin rose from 3.63% in 1994 to 4.50% in 1995. Average
deposits grew from $92.3 million in 1994 to $100.3 million in 1995, an increase
of 8.7%, due to the aforementioned branch acquisition.
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 and mortgage-backed securities.
Total loans averaged $39 million in 1995 compared to $27.3 million in 1994, an
increase of 42.9%. At December 31,1995, total loans were $44.7 million, up 71.9%
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.
Loans originated for sale declined to $4.6 million in 1995 from $6.5 million in
1994, while loans sold decreased, to $4.5 million in 1995 from $6.1 million in
1994. However, gains and commissions on loan sales rose by 90.6% due to the
emphasis by the Bank during 1995 on originating residential rehabilitation loans
guaranteed by the Department of Housing and Urban Development ("HUD"), which are
more labor intensive than the conventional residential mortgage loans that the
Bank originated and sold during 1994, but are more profitable.
16
Other operating income was $1.4 million in both 1995 and 1994. There were major
changes within the components, however, as service charges rose $227,000, or
46.9% due to a greater volume of service chargeable transactions. Other income
decreased $213,000, or 24.9% due primarily to the recording in 1994 of $175,000
associated with the aforementioned loan loss recovery.
Other operating expenses 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 renovations of the Bank's main office.
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 as a percentage of pretax income was 37%, relatively
unchanged from 36.7% in 1994.
17
KPMG Peat Marwick LLP
New Jersey Headquarters
150 John F. Kennedy Parkway
Short Hills, NJ 07078
Independent Auditors' Report
The Board of Directors and Stockholders City National Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of City National
Bancshares Corporation and subsidiary (the Corporation) as of December 31, 1996
and 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Corporation
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" as of January i, 1994.
/s/ KPMG Peat Marwick
February 6, 1997
18
Item 8. Financial Statement and Supplementary data
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
Year Ended December 31,
Dollars in thousands, except per share data 1996 1995
Assets
Cash and due from banks (Note 2) $2,767 $3,344
Federal funds sold (Note 3) 8,900 6,950
Interest-bearing deposits with banks 74 321
Investment securities available
for sale (Note 4) 30,997 30,609
Investment securities held to maturity (Market value of $29,517
in 1996 and $24,434 in 1995) (Note 5) 29,866 24,494
Loans held for sale (Note 1) 291 555
Loans (Note 6) 57,128 44,739
Less: Reserve for possible loan
losses (Note 7) 750 650
Net loans 56,378 44,089
Premises and equipment (Note 8) 3,331 2,288
Accrued interest receivable 1,078 955
Other real estate owned 672 212
Other assets 597 593
Total assets $134,951 $114,410
Liabilities and Stockholders' Equity
Deposits: (Notes 4, 5, and 9)
Demand $13,699 $12,925
Savings 37,527 37,019
Time 64,628 50,945
Total deposits 115,854 100,889
Short-term borrowings (Notes 6 and 11) 5,175 3,661
Accrued expenses and other liabilities (Note10) 3,886 1,215
Long-term debt (Note 12) 1,749 1,749
Total liabilities 126,664 107,514
Commitments and contingencies (Note 21)
Stockholders' equity (Note17):
Preferred stock, no par value: Authorized 100,000 727 200
Common stock, par value $10: Authorized 400,000 shares;
115,000 shares issued and 114,141 outstanding in 1996
112,000 shares issued and 111,141 outstand 1,150 1,120
Surplus 901 886
Retained earnings 5,645 4,856
Less:
Net unrealized loss on investment securities 111 141
Treasury stock, at cost - 839 shares 25 25
Total stockholders' equity 8,287 6,896
Total liabilities and stockholders' equity $134,951 $114,410
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 1996 1995 1994
Interest income
Interest and fees on loans $4,804 $3,607 $2,194
Interest on Federal funds sold and securities
purchased under agreements to resell 317 279 815
Interest on other short-term investments 215 192 -
Interest on deposits with banks 5 10 -
Interest and dividends on investment securities:
Taxable 3,577 3,269 2,503
Tax-exempt 116 113 84
Total interest income 9,034 7,470 5,596
Interest expense
Interest on deposits (Note 9) 3,514 2,653 1,869
Interest on short-term borrowings 189 156 179
Interest on long-term debt 99 20 20
Total interest expense 3,802 2,829 2,068
Net interest income 5,232 4,641 3,528
Provision (credit) for possible loan
losses (Note 7) 91 486 (1,464)
Net interest income after provision (credit)
for possible loan losses 5,141 4,155 4,992
Other operating income
Service charges on deposit accounts 592 711 484
Other income (Note 12) 548 642 855
Net gains on sales of investment securities
(Notes 4 and 5) 7 10 36
Total other operating income 1,147 1,363 1,375
Other operating expenses
Salaries and other employee benefits
(Note 15) 2,628 2,455 1,984
Occupancy expense (Note 8) 289 153 123
Equipment expense (Note 8) 409 274 200
Other expenses (Note 13) 1,513 1,363 1,338
Total other operating expenses 4,839 4,245 3,645
Income before income tax expense 1,449 1,273 2,722
Income tax expense (Note 14) 504 471 998
-----------------------------------
Net income $945 $802 $1,724
===================================
Net income per common share (Note 18)
Primary $8.31 $7.22 $15.51
Fully diluted 7.51 6.51 13.90
Primary average common shares outstanding 113,502 111,141 111,141
Fully diluted average common shares
outstanding 127,352 124,991 124,991
See accompanying notes to consolidated financial statements.
20
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes
in Stockholders' Equity
Net Unrealized
Gain (Loss) on
Investment
Common Preferred Retained Securities Treasury
Stock Surplus Stock Earnings AFS Stock Total
Dollars in thousands, except per share data
Balance, December 31, 1993 $1,120 $886 $ - $2,581 $ - $(25) $4,562
Net income - - - 1,724 - - 1,724
Net unrealized loss on investment securities upon
adoption of a change in accounting - - - - 68 - 68
principles
Change in unrealized gain (loss) on investment
securities available for sale - - - - (655) - (655)
Dividends paid on common stock - - - (111) - - (111)
Balance, December 31, 1994 1,120 886 - 4,194 (587) (25) 5,588
Net income - - - 802 - - 802
Proceeds from issuance of preferred stock - - 200 - - - 200
Change in net unrealized loss on investment
securities available for sale - - - - 446 - 446
Dividends paid on common stock - - - (140) - - (140)
Balance, December 31, 1995 1,120 886 200 4,856 (141) (25) 6,896
Net income - - - 945 - - 945
Proceeds from issuance of common stock 30 15 - - - - 45
Proceeds from issuance of preferred stock - - 527 - - 527
Change in net unrealized loss on investment
securities available for sale - - - - 30 - 30
Dividends paid on common stock - - - (154) - - (154)
Dividends paid on preferred stock - - - (2) - - (2)
Balance, December 31, 1996 $1,150 $901 $727 $5,645 $(111) $(25) $8,287
See accompanying notes to consolidated financial statements.
21
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended December 31,
In thousands 1996 1995 1994
-----------------------------------
Operating activities
Net income $945 $802 $1,724
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 339 191 120
Provision (credit) for possible loan losses 91 486 (1,464)
Net (accretion) amortization on
investment securities (15) 151 423
Net gains on sales and early redemptions
of investmen (7) (10) (36)
Gains and commissions on loans held for sale (170) (122) (64)
(Increase) decrease in accrued interest
receivable (123) 194 (655)
Deferred income tax (benefit) expense (53) (203) 578
(Increase) decrease in other assets (4) 984 (1,314)
Decrease in other real estate owned - 95 -
Increase (decrease) in accrued expenses and other
liability 2,702 (150) 556
Premium paid on branch acquisition - - (90)
----------------------------------
Net cash provided by (used in)
operating activity 3,705 2,418 (222)
----------------------------------
Investing activities
Loans originated for sale (3,776) (4,594) (6,525)
Proceeds from sales of loans held for sale 4,210 4,631 6,118
Increase in loans (8,912) (8,256) (2,370)
Purchase of loans in conjunction with branch
acquisitions 4,035) (11,479) -
Decrease (increase) in interest-bearing
deposits with bank 247 (321) -
Proceeds from recoveries of loans previously
charged off 107 97 1,549
Proceeds from maturities of investment securities available for sale,
including principal payments and
early redemptions 20,917 1,524 3,660
Proceeds from maturities of investment securities held to maturity,
including principal payments and early
redemptions 4,643 11,127 5,597
Proceeds from sales of investment securities
available for - - 2,382
Purchases of investment securities
available for sale (21,221) (2,745) (10,246)
Purchases of investment securities
held to maturity (10,025) (10,669) (17,315)
Purchases of premises and equipment (1,382) (739) (737)
---------------------------------
Net cash used in investing activities (19,227) (21,424) (17,887)
---------------------------------
Financing activities
Deposits assumed in branch acquisitions 7,661 - 25,209
Increase (decrease) in deposits 7,304 (3,052) 14,297
Increase in short-term borrowings 1,514 3,661 (5,000)
Proceeds from issuance of long-term debt - 1,500 -
Proceeds from issuance of common stock 45 - -
Proceeds from issuance of preferred stock 527 200 -
Dividends paid (156) (140) (111)
---------------------------------
Net cash provided by financing activities 16,895 2,169 34,395
---------------------------------
Net increase (decrease) in cash and
cash equivalents 1,373 (16,837) 16,286
Cash and cash equivalents at beginning of year 10,294 27,131 10,845
Cash and cash equivalents at end of year $11,667 $10,294 $27,131
Cash paid during the year: =================================
Interest $3,960 $2,719 $1,768
Income taxes 335 991 102
Supplemental schedule for noncash investing activities:
Real estate acquired in settlement of loans 460 212 307
Transfers of investment securities held to maturity
to (from) investment securities
available for sale - 21,836 (6,437)
See accompanying notes to consolidated financial statements.
22
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.
Federal Home Loan Bank of New York
The Bank, as member of Federal Home Loan Bank of New York "FHLB", is required to
hold shares of capital stock of the FHLB based on a specified formula. The FHLB
stock is carried at cost.
Investment securities held to maturity and investment securities available for
sale Investment securities are designated as held to maturity or available for
sale at the time of acquisition. Securities that the Corporation has the intent
and ability at the time of purchase to hold until maturity are designated as
held to maturity. Investment securities held to maturity are stated at cost and
adjusted for amortization of premiums 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 rate
sensitivity management strategy and that may be sold in response to changes in
interest rates, resultant risk and other factors. Investment securities
available for sale are reported at fair market value, with unrealized gains and
losses 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 portfolios mortgage-backed securities.
Such securities are subject to changes in the prepayment rates of the underlying
mortgages, which may affect both the yield and maturity of the securities.
Loans held for sale
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. 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. Loans held for sale include
residential mortgage loans originated with the intent to sell. Loans held for
sale are carried at the lower of aggregate cost or fair value.
Loans
Loans are stated at the principal amounts outstanding, net of unearned discount
and deferred loan fees. Interest income is accrued as earned, based upon the
principal amounts outstanding. Loan origination fees and certain direct loan
origination costs, as well as unearned discount, are deferred and recognized
over the life of the loan revised for loan prepayments, as an adjustment to the
loan's yield. Recognition of interest on the accrual method is generally
discontinued when a loan contractually becomes 90 days or more past due or a
reasonable doubt exists as to the collectibility of the loan, unless such loans
are well-secured and in the process of collection. At the time a loan is placed
on a nonaccrual status, previously accrued and uncollected interest is generally
reversed against interest income in the current period. Interest on such loans,
if appropriate, is recognized as income when payments are received. A loan is
returned to an accrual status when it is current as to principal and interest.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for
Impairment of a Loan" (SFAS 114) and Statement of Financial Accounting Standards
No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosure" (SFAS 118) were adopted prospectively by the Bank on January 1,
1995. These statements address the accounting for impaired loans and specify how
allowances for loan losses related to these impaired loans should be determined.
The adoption of the statements did not affect the level of the overall allowance
for loan losses or the operating results of the Bank. Income recognition and
charge-off policies were not changed as a result of the adoption of SFAS No. 114
and SFAS No. 118.
23
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 were no impaired loans recorded during 1996.
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 including any future writedowns of other real estate owned,
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.
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.
Net income per common share
Primary income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. Common shares issuable upon conversion of the subordinate
debentures have been excluded from the computation of primary income per common
share as they are not considered to be common stock equivalents. On a fully
diluted basis, both net income and common shares outstanding are adjusted to
assume the conversion of the convertible subordinate debentures from the date of
issue.
24
Stock-based compensation
On January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which
permits entities to recognize as expense over a vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in SFAS 123 had been applied.
The Corporation has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS 123 stock
based-compensation as applicable. The Corporation has made no stock-based awards
to employees or directors during 1996 or 1995.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements in order to conform with the 1996 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 $1,028,000
in 1996 and $857,000 in 1995.
Note 3 Federal funds sold and securities purchased under agreements to resell
Federal funds sold averaged $6.0 million during 1996 and $4.9 million in 1995,
while the maximum balance outstanding at any month-end during 1996 and 1995 was
$11.6 million and $10.2 million, respectively. During 1996, securities purchased
under agreements to resell averaged $41,000. There were no such transactions
outstanding at any month-end. During 1995, there were no such transactions. The
aforementioned repurchase agreements were collateralized by U.S. Treasury
securities held for the benefit of the Bank at the Federal Reserve Bank.
Note 4 Investment securities available for sale
The amortized cost and market values at December 31 of investment securities
available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Market
1996 In thousands Cost Gains Losses Value
================================================================================
U.S. Treasury securities
and obligations of U.S. ......
government agencies ............ $11,322 $ 127 $ 81 $11,368
Other securities:
Mortgage-backed .............. 18,900 111 265 18,746
Equity securities ............ 883 -- -- 883
------- ------- ------- -------
Total .......................... $31,105 $ 238 $ 346 $30,997
================================================================================
Gross Gross
Amortized Unrealized Unrealized Market
1995 In thousands Cost Gains Losses Value
================================================================================
U.S. Treasury securities $14,670 $ 276 $ 165 $14,781
Mortgage-backed
securities ........................... 15,613 93 339 15,367
Equity securities ...................... 461 -- -- 461
------- ------- ------- -------
Total .................................. $30,744 $ 369 $ 504 $30,609
================================================================================
At December 31, 1996, the Corporation held structured notes with a total
amortized cost of $3,477,000 and a related market value of $3,424,000,
reflecting gross unrealized depreciation of $53,000.
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. The Corporation also held
structured notes in the held to maturity portfolio at December 31, 1996 and
December 31, 1995
25
The amortized cost and the market values of investments in debt securities
available for sale presented below as of December 31, 1996 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 .................... $ 1,000 $ 985
Mortgage-backed securities ..................... 786 790
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. Government agencies .................... 7,747 7,730
Mortgage-backed securities ....................... 5,091 5,084
Due after five year but within ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies .................... -- --
Mortgage-backed securities ....................... 418 430
Due after ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies .................... 2,575 2,653
Mortgage-backed securities ....................... 12,605 12,442
------- -------
Total .............................................. $30,222 $30,114
===============================================================================
There were no sales of investment securities available for sale during 1996 and
1995, while $1 million of securities were called prior to maturity during 1996,
resulting in no gains or losses.
All interest and dividends on investment securities available for sale was
taxable in 1996, 1995 and 1994.
Investment securities available for sale having an amortized cost of $29,579,000
were pledged to secure public funds at December 31, 1996.
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
1996 In thousands Value Gains Losses Value
================================================================================
U.S. Treasury securities
and obligations of U.S.
Government agencies............... $16,849 $ 131 $ 268 $16,712
Obligations of state and
political subdivisions............ 2,536 14 24 2,526
Other securities:
Mortgage-backed .................. 10,481 13 215 10,279
-------- ------- ------- -------
Total .............................. $29,866 $ 158 $ 507 $29,517
================================================================================
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, 1996, the Corporation held structured notes with a total
amortized cost of $2,750,000 and a related market value of $2,660,000,
reflecting gross unrealized depreciation of $90,000. Comparable amounts as of a
year earlier were $3,750,000, $3,673,000 and $72,000, respectively.
26
The book value and the market value of investment securities held to maturity
presented below as of December 31, 1996 are distributed by contractual maturity,
including mortgage-backed securities, which may have shorter estimated lives as
a result of prepayment of the underlying mortgages.
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 .................... $ 6,860 $ 6,871
Mortgage-backed securities ....................... 6,441 6,393
Obligations of states and
political subdivisions ........................... 2,132 2,123
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies .................... 9,299 9,161
Mortgage-backed securities ....................... 2,078 2,048
Obligations of states and
political subdivisions ........................... 404 403
Due after ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies .................... 690 680
Mortgage-backed securities ....................... 1,962 1,838
------ ------
Total .............................................. $29,866 $29,517
================================================================================
There were no sales of securities held to maturity in 1996 or 1995, while
$2,988,000 of investment securities were called prior to maturity during 1996,
resulting in net gains of $7,000 in 1996 and $10,000 in 1995.
Interest and dividends on investment securities held to maturity was as follows:
In thousands 1996 1995 1994
================================================================================
Taxable ........................ $1,628 $2,594 $1,795
Tax-exempt ..................... 116 113 84
------ ------ ------
Total .......................... $1,744 $2,707 $1,879
================================================================================
Investment securities held to maturity having a book value of $17,638,000 were
pledged to secure public funds at December 31, 1996.
Note 6 Loans
Loans, net of unearned discount and net deferred origination fees and costs at
December 31 were as follows:
In thousands 1996 1995
================================================================================
Commercial ................................. $19,634 $18,002
Real estate ................................ 37,448 26,764
Installment ................................ 443 372
------- -------
Total loans ................................ 57,525 45,138
Less: Unearned income ...................... 397 399
------- -------
Loans ...................................... $57,128 $44,739
================================================================================
Loans guaranteed by the Small Business Administration totalling $5,156,000 were
pledged as collateral for borrowings under a note issued to the U.S. Treasury
Department at December 31, 1996.
Nonperforming loans include loans which are contractually past due 90 days or
more for 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 1996 1995
================================================================================
Nonaccrual loans ..................................... $1,025 $ 839
Loans with interest or principal 90
days or more past due and still accruing ........... 33 31
------- ------
Total nonperforming loans ............................ $1,058 $ 870
================================================================================
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 1996 1995 1994
================================================================================
Interest income foregone ............. $ (61) $ (52) $ (68)
Interest income received ............. 106 55 90
------ ------ ------
$ 45 $ 3 $ 22
================================================================================
27
At December 31, 1996, 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 1996 1995 1994
================================================================================
Balance, January 1 ........................ $ 650 $ 625 $ 700
Provision (credit) for possible loan
losses .................................. 91 486 (1,464)
Recoveries of loans previously
charged off ............................. 107 98 1,549
------- -------- --------
848 1,209 785
Less: Charge-offs ......................... 98 559 160
------- -------- --------
Balance, December 31 ...................... $ 750 $ 650 $ 625
================================================================================
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 1996 1995
- --------------------------------------------------------------------------------
Land ..................................................... $ 274 $ 240
Premises ................................................. 1,035 733
Furniture and equipment .................................. 1,677 1,091
Building improvements .................................... 1,773 1,341
------ ------
Total cost ............................................... 4,759 3,405
Less: Accumulated depreciation and amortization 1,428 1,117
------ ------
Net book value ........................................... $3,331 $2,288
- --------------------------------------------------------------------------------
Depreciation and amortization expense charged to operations amounted to
$339,000, $191,000, and $120,000 in 1996, 1995, and 1994, respectively.
Note 9 Deposits
Deposits at December 31 are presented below.
In thousands 1996 1995
================================================================================
Noninterest bearing
Demand ....................................... 13,699 $ 12,925
Savings ...................................... 469 469
Time ......................................... 12,522 11,319
-------- --------
Total noninterest bearing deposits ............. 26,690 24,713
-------- --------
Interest bearing
Savings ...................................... 37,058 36,550
Time ......................................... 52,106 39,626
-------- --------
Total interest bearing deposits ................ 89,164 76,176
-------- --------
Total deposits ................................. $115,854 $100,889
================================================================================
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 1996 1995
================================================================================
Three months or less ................................. $25,967 $20,265
Over three months but within six months .............. 15,023 3,085
Over six months but within twelve months ............. 2,557 2,557
Over twelve months ................................... 3,943 5,760
------- -------
Total deposits ....................................... $47,490 $31,627
================================================================================
28
Interest expense on certificates of deposits of $100,000 or more was $1,850,000,
$895,000 and $469,000 in 1996, 1995 and 1994, respectively.
Note 10 Accrued expenses and other liabilities
At December 31, 1996, accrued expenses and other liabilities included a noncash
item for $2,876,000 that was inadvertently submitted to the Federal Reserve Bank
for collection in December, 1996 and for which credit was received. The Federal
Reserve Bank has been advised of this item and the Bank anticipates that a claim
will eventually be made.
Note 11 Short-term borrowings
Information regarding short-term borrowings at December 31, is presented below.
Average
Interest Average Maximum
Rate on Average Interest Balance
Decem- Decem- Balance Rate at any
ber 31 ber 31 During During Month-
Dollars in thousands Balance Balance the Year the Year end
================================================================================
1996
Federal funds purchased and
securities sold under repurchase
agreements ........... $ -- --% $ 755 5.51% $ 7,000
Demand note issued
to the U.S. Treasury . 5,175 5.16 2,865 5.13 8,000
------- ------- ------- ------- -------
Total ................. 5,175 5.16$ 3,620 5.21% $15,000
================================================================================
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
================================================================================
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 $5,998,000, along with loans guaranteed by the Small
Business Administration totalling $5,156,000.
Note 12 Long-term debt
In thousands 1996 1995
================================================================================
5.25% capital note, due December 28, 2005 ............ $1,500 $ 1,500
8.00% mandatory convertible debentures,
due July 1, 2003 ................................... 249 249
------- -------
Total ................................................ $1,749 $1,749
================================================================================
Interest is payable semiannually on January 15 and July 15 on the convertible
debentures. The debentures convert into CNBC common stock upon maturity and are
convertible by the holder at any time on or before the maturity, unless
previously redeemed by the Corporation into CNBC common stock at a conversion
price of $18.00 per share, subject to adjustment upon the occurrence of certain
events, including, among other things, the issuance of common stock as a per
share price of less than $18.00 or the issuance of rights or options to purchase
shares of common stock at a price of less than $18.00 per share.
The debentures are subordinate to all other indebtedness of the Corporation
except for indebtedness which by its terms is equal and not senior in right of
payment to the debentures. The debentures become immediately payable upon the
bankruptcy, insolvency or receivership of the Corporation. In the event of
default as to principal or interest, the Corporation is required upon the
request of the holder, to pay the unpaid principal balance along with any
accrued interest by issuing an amount of common stock at the conversion price in
exchange for the indebtedness, subject to the holder owning not more than 9.9%
of the total number of common shares outstanding when added to the shares
already held by the holder. The unpaid balance of principal, if any, after
conversion upon maturity, or an interest payment default is then payable in cash
upon maturity of the debenture and prior to maturity would continue to accrue
interest at an annual rate of 8% payable semiannually.
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 the capital note on June 29 and December 29, with
principal payments commencing semiannually in June, 2001.
29
The note agreement includes restrictive covenants including the creation of
liens on Bank assets, the sale of such assets and certain limitations on
investments and dividend payments and requires the maintenance of certain
capital levels and earning performance, asset quality and reserve for possible
loan loss ratios.
Note 13 Other operating income and expenses
The following table presents the major items of other operating income and
expenses:
In thousands 1996 1995 1994
================================================================================
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 charge income ............................ 217 162 158
Other operating expenses
Professional fees ................................ 211 181 234
FDIC deposit insurance ........................... 141 168 201
Stationery and supplies expense .................. 141 115 147
Data processing .................................. 157 115 103
================================================================================
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.
Note 14 Income taxes
The components of income tax expense are as follows:
In thousands 1996 1995 1994
================================================================================
Current
Federal .............................................. $ 476 $ 571 $ 413
State ................................................ 81 103 7
----- ----- -----
Total current income tax expense ..................... 557 674 420
----- ----- -----
Deferred
Federal .............................................. (45) (172) 407
State ................................................ (8) (31) 171
Total deferred income tax (benefit) expense........... (53) (203) 578
----- ----- -----
Total income tax expense.............................. $ 504 $ 471 $ 998
================================================================================
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 1996 1995 1994
================================================================================
Federal income tax at statutory rate ....... $ 493 $ 433 $ 925
Increase (decrease) in income tax
expense resulting from:
State income taxes, net of federal
benefit ................................ 48 48 118
Tax-exempt income ......................... (39) (34) (28)
Life insurance ............................ (10) (7) --
Other, net ................................ 12 31 (17)
------- ------ ------
Total income tax expense ................... $ 504 $ 471 $ 998
================================================================================
30
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 1996 1995
================================================================================
Deferred tax assets
Unrealized loss on investment securities
available for sale ................................. $ 44 $ 55
Deferred compensation ................................ 31 21
Other ................................................ 25 19
----- -----
Total deferred tax assets ............................ 100 95
Less: Valuation allowance ............................ 7 7
----- -----
Deferred tax asset ................................... 93 88
----- -----
Deferred tax liabilities
Reserve for possible loan losses ..................... 307 343
Premises and equipment ............................... 13 14
Investment securities held to maturity ............... 3 3
----- -----
Deferred tax liability ............................... 323 360
----- -----
Net deferred tax liability ........................... $(230) $(272)
================================================================================
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 net deferred tax asset.
The valuation allowance amounted to $7,000 at December 31, 1996 and 1995. The
valuation allowance at December 31, 1996 and 1995 is attributable to the state
tax benefit of deductible timing differences.
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 salaries
along with a 1% discretionary contribution, subject to a vesting schedule.
Contribution expense amounted to $55,000 in 1996, $36,000 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 1996, 1995 and 1994 amounted to $90,000, $119,000 and
$120,000, respectively.
During 1996, the Corporation established a nonqualified retirement plan for
directors. Benefits funded through a bank-owned life insurance policy. Expenses
incurred under this plan totalled $10.000 while income from the increased cash
surrender value amounted to $3.000.
Note 16 Preferred stock
The Corporation is authorized to issue noncumulative perpetual preferred stock
in one or more series, with no par value. Shares of preferred stock have
preference over the Corporation's common stock with respect to the payment of
dividends. Different series of preferrerd stock may have different stated or
liquidation values as well as different rates. Dividends are paid annually.
Set forth below is a summary of the Corporation's preferred stock outstanding.
Date Dividend Stated Number December 31,
Issued Rate Value of Shares 1996 1995
================================================================================
Series A .. 12/96 6.00% $ 25,000 8 $200,000 $200,000
Series B .. 03/96 8.00 25,000 20 500,000 --
Series C .. 02/96 8.00 250 108 27,000 --
-------- --------
$727,000 $200,000
================================================================================
31
Note 17Restrictions 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 1997 without prior
OCC approval of up to $1,800,000 plus the current year's net profit up to the
date of the declaration, subject to the restrictive covenants under long-term
debt agreements included in Note 12.
Note 18 Net income per common share
The following table summarizes the computation of net income per common share.
In thousands, except per share data 1996 1995 1994
================================================================================
Net income ................................ $ 945 $ 802 $ 1,724
Dividends paid on preferred stock ......... (2) -- --
-------- -------- --------
Net income applicable to
primary common shares ................... 943 802 1,724
Interest expense on convertible
subordinated debentures,
net of income taxes ..................... 13 13 13
-------- -------- --------
Net income applicable to fully diluted
common shares ........................... $ 956 $ 815 $ 1,737
================================================================================
Number of average common shares
Primary ................................... 113,498 111,141 111,141
-------- -------- --------
Fully diluted:
Average common shares
outstanding ........................... 113,498 111,141 111,141
Average convertible subordinate
debentures converted to
common shares ........................ 13,850 13,850 13,850
-------- -------- --------
127,348 124,991 124,991
================================================================================
Net income per common share
Primary ................................... $ 8.31 $ 7.22 $ 15.51
Fully diluted ............................. 7.51 6.51 13.90
================================================================================
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 1996 and 1995. 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
$349,000 and $366,000 at December 31, 1996 and 1995, respectively. The highest
amount of such indebtedness during both 1996 and 1995 amounted to $375,000.
During 1996, $14,000 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.
32
The fair value information provided is indicative of the estimated fair values
of those financial instruments and should not be interpreted as an estimate of
the fair market value of the Corporation taken as a whole. The disclosures do
not address the value of recognized and unrecognized nonfinancial assets and
liabilities or the value of future anticipated business. In addition, tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates.
The following methods and assumptions were used to estimate the fair values of
significant financial instruments at December 31, 1996.
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, 1996 and 1995. 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, 1996 and 1995.
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
1996 1995
================================================================================
Carrying Fair Carrying Fair
In thousands Value Value Value Value
================================================================================
Financial assets
Cash and other short-term
investments .................. $ 11,741 $ 11,741 $ 10,615 $10,615
Investment securities AFS ...... 30,997 30,997 30,609 30,609
Investment securities HTM ...... 29,866 29,517 24,494 24,434
Loans .......................... 56,378 57,368 44,089 42,509
Loan held for sale ............. 291 291 555 555
Financial liabilities
Deposits ....................... $115,854 $115,804 $100,889 $ 99,570
Short-term borrowings .......... 5,175 5,175 3,661 3,661
Long-term debt ................. 1,749 1,634 1,749 1,107
================================================================================
Note 21Commitments 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 31,1996 and 1995 the Bank had mortgage commitments of $3,183,000 and
$703,000, unused corporate lines of credit of $13,200,000 and $11,600,000, and
$1,543,000 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 1996 1995
================================================================================
Assets
Cash and cash equivalents .......................... $ 26 $ 4
Investment in subsidiary ........................... 9,837 8,532
Due from subsidiary ................................ 249 249
Other assets ....................................... 45 11
------- -------
Total assets ....................................... $10,157 $ 8,796
================================================================================
Liabilities and stockholders' equity
Other liabilities .................................. $ 10 $ 10
Long-term debt ..................................... 1,749 1,749
------- -------
Total liabilities .................................. 1,759 1,759
Stockholders' equity ............................... 8,398 7,037
------- -------
Total liabilities and stockholders' equity ......... $10,157 $ 8,796
================================================================================
Condensed Statement of Income
Year Ended December 31,
In thousands 1996 1995 1994
================================================================================
Income
Dividends from subsidiary .................... $ 194 $ 141 $ 112
Interest from subsidiary ..................... 20 20 20
------ ------ ------
Total income ................................. 214 161 132
------ ------ ------
Expenses
Interest expense ............................. 99 20 20
Other operating expenses ..................... 7 -- --
Income tax benefit ........................... (34) -- --
------ ------ ------
Total expense ................................ 72 20 20
------ ------ ------
Income before equity in undistributed
net income of subsidiary ................... 142 141 112
Equity in undistributed income
of subsidiary .............................. 803 661 1,612
------ ------ ------
Net income ................................... $ 945 $ 802 $1,724
================================================================================
34
Condensed Statement of Cash Flows
Year Ended December 31,
- --------------------------------------------------------------------------------
In thousands 1996 1995 1994
================================================================================
Operating activities
Net income ................................... $ 945 $ 802 $ 1,724
Adjustments to reconcile net income
to cash from (used in) operating activities:
Equity in undistributed net income
of subsidiary .......................... (803) (661) (1,612)
Increase in other assets ................. (34) (1) --
------- ------- -------
Net cash from operating activities ........... 108 140 112
------- ------- -------
Investing activities
Capital contribution to subsidiary ........... (500) (1,700) --
------- ------- -------
Net cash applied to investing activities ..... (500) (1,700) --
------- ------- -------
Financing activities
Proceeds from issuance of
long-term debt ............................. -- 1,500 --
Proceeds from issuance of common stock ....... 45 -- --
Proceeds from issuance of preferred
stock ...................................... 527 200 --
Dividends paid ............................... (156) (140) (111)
------- ------- -------
Net cash from (applied to) financing
activities ................................. 416 1,560 (111)
------- ------- -------
Increase in cash and cash equivalents ........ 22 -- 1
Cash and cash equivalents at
beginning of year .......................... 4 4 3
------- ------- -------
Cash and cash equivalents at
end of year ................................ $ 26 $ 4 $ 4
================================================================================
Note 24 Regulatory Capital Requirements
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1996, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total average assets
of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-adjusted
assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized bank. Such actions could have a direct material
effect on such bank's financial statements. The regulations establish a
framework for the classification of banks into five categories:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Generally, a bank is
considered well-capitalized if it has a leverage capital ratio of at least 5.0%
a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by FDIC about capital components, risk
weighings and other factors.
Management believes that, as of December 31, 1996, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent FDIC
notification categorized the Bank as a well-capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
35
The following is a summery of the Bank's actual capital amounts and ratios as of
December 31, 1996 and 1995, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a well-capitalized
Bank:
In thousands FDIC Requirements
================================================================================
Minimum Capital For Classification
Bank Actual Adequacy as Well-Capitalized
----------- ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
December 31, 1996
Leverage (Tier 1).. $9,771 7.01% $5,578 4.00% $ 6,972 5.00%
capital...........
Risk-based capital:
Tier 1 ........... 9,771 16.65 2,347 4.00 3,521 6.00
Total ............ 10,754 18.33 4,694 8.00 5,868 10.00
December 31, 1995
Leverage (Tier 1).. 8,456 7.45 4,540 4.00 5,676 5.00
capital...........
Risk-based capital:
Tier 1 ........... 8,456 20.47 1,652 4.00 2,478 6.00
Total ............ 9,221 22.33 3,304 8.00 4,130 10.00
Note 25 Summary of quarterly financial information (unaudited)
1996
- --------------------------------------------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
================================================================================
Interest income .............. $ 2,057 $ 2,225 $ 2,346 $ 2,406
Interest expense ............. 787 887 1,006 1,122
------- ------- ------- -------
Net interest income .......... 1,270 1,338 1,340 1,284
Provision (credit) for
possible loan losses ....... 10 23 32 26
Net gains (losses) on sales of
investment securities ...... 10 (1) (1) (1)
Other operating income ....... 312 300 240 288
Other operating expenses ..... 1,164 1,164 1,320 1,191
------- ------- ------- -------
Income before income
taxes ...................... 418 450 227 354
Income tax expense ........... 146 157 82 119
------- ------- ------- -------
Net income ................... $272 $ 293 $ 145 $ 235
================================================================================
Net income per share
(primary) .................. $ 2.37 $ 2.55 $ 1.25 $ 2.14
================================================================================
Net income per share
(fully diluted) ............ $ 2.10 $ 2.27 $ 1.12 $ 2.02
================================================================================
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 (4) 32 336
Net gains (losses) on sales of
investment securities ...... -- (1) (1) 12
Other operating income ....... 513 321 249 270
Other operating expenses ..... 981 1,071 1,133 1,060
------- ------- ------- -------
Income before income
tax expense ................ 473 422 266 112
Income tax expense ........... 175 156 90 50
------- ------- ------- -------
Net income ................... $ 298 $ 266 $ 176 $ 62
================================================================================
Net income per share
(primary) .................. $ 2.68 $ 2.39 $ 1.59 $ .56
================================================================================
Net income per share
(fully diluted) ............ $ 2.41 $ 2.14 $ 1.44 $ .52
================================================================================
36
Note 26Recent Accounting Pronouncements
In June, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125). SFAS 125 amends portions of SFAS 115, amends and extends to all servicing
assets and liabilities the accounting standards for mortgage servicing rights
now in SFAS 65, and supersedes SFAS 122. The statement provides consistent
standards for distinguishing transfers of financial assets which are sales from
transfers that are secured borrowings. Those standards are based upon consistent
application of a financial components approach that focuses on control. The
statement also defines accounting treatment for servicing assets and other
retained interest in the assets that are transferred. As issued, SFAS 125 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be applied
prospectively.
In December, 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125", an amendment of FASB Statement
No. 125 which defers for one year the effective date (a) of paragraph 15 of SFAS
No. 125 and (b) for repurchase agreement dollar-roll, securities lending and
similar transactions, of paragraph 9-12 and 237 (b) of SFAS No. 125. The
adoption of these statements is not expected to have a material effect on the
Bank's financial condition or results of operations.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure There were no changes in or disagreements with accounts
during 1995.
Part III
Item 10. Directors and Executive Officers of the Registrant The information
required is incorporated herein by reference to the material responsive to such
item in the Corporation's Proxy Statement for the Annual Meeting of Stockholders
to be held on May 22, 1997.
Item 11. Executive Compensation
The information required is incorporated herein by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management The
information required is incorporated herein by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Item 13. Certain Relationships and Related Transactions The information required
is incorporated herein by reference to the material responsive to such item in
the Corporation's Proxy Statement.
Part IV
Item 14. 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)(i)Certificate of Designation Establishing the Series C and Fixing the
Powers, Designations, Preferences and Relative, Participating, Optional
and Other Special Rights, and the Qualifications, Limitations and
Restrictions,of the 8% Noncumulative Perpetual Preferred Stock,Series C.
(11) Statement regarding computation of per share earnings. The required
information is included on page 25.
(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,
1996.
(21) Subsidiaries of the registrant. The required information is included
on page 3.
(24) Power of Attorney is located on the signature page.
(27) Financial Data Schedule.
(c) No reports on Form 8-K were filed during the quarter ended December 31,
1996.
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 Chief Financial Officer
and and
Chief Executive Officer Principal Accounting Officer
Date: March 26, 1997 Date: March 26, 1997
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 26, 1997
Douglas E. Anderson Chairperson of the Board
/s/ Barbara Bell Director, March 26, 1997
Barbara Bell
/s/ Leon Ewing Director March 26, 1997
Leon Ewing
/s/ Eugene Giscombe Director March 26, 1997
Eugene Giscombe
/s/ Norman Jeffries Director March 26, 1997
Norman Jeffries
/s/ Louis E. Prezeau Director, March 26, 1997
Louis E. Prezeau President and Chief
Executive Officer
/s/ Lemar C. Whigham Director March 26, 1997
Lemar C. Whigham