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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from to
Commission file number 0-11535
CITY NATIONAL BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2434751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Broad Street, 07102
Newark, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (973) 624-0865
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class
Common stock, par value $10 per share
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 15, 1998 was approximately $1,312,440.
There were 114,141 shares of common stock outstanding at March 15, 1998.
Documents incorporated by reference:
Certain portions of the definitive Proxy Statement for the 1998 Annual Meeting
of shareholders to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A are incorporated herein by reference in Part III.
1
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, 1997, CNBC
had consolidated total assets of $138.9 million, total deposits of $119.7
million and stockholders' equity of $10 million. Its only subsidiary is City
National Bank of New Jersey (the "Bank" or "CNB"), a nationally chartered
commercial bank which commenced operations on June 11, 1973. CNB has one
subsidiary, City National Investments, Inc., an investment company which holds,
maintains and manages investment assets for CNB.
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 businesses and
individuals located within urban areas in 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.
2
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.
3
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, 1997, CNBC and its subsidiary had 63 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, until 1999, at
which time 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 matter to a vote of security holders
Submission of matters to a vote of security holders
During the fourth quarter of 1997, there were no matters submitted to
stockholders for a vote.
Part II
Item 5. Market for the Registrants's Common Equity and relates stockholders
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 1997.
At March 2, 1998, the Corporation had 1,928 common stockholders of record.
On May 2, 1997, the Corporation paid a cash dividend of $1.50 per share to
stockholders of record on April 2, 1997. Whether cash dividends on the common
stock will be paid in the future depends upon various factors, including the
earnings and financial condition of the Bank and the Corporation at the time.
Additionally, federal and state laws and regulations contain restrictions on the
ability of the Bank and the Corporation to pay dividends.
Form 10-K
The annual report filed with the Securities and Exchange Commission on Form 10-K
is available without charge upon written request to City National Bancshares
Corporation, Raul L. Oseguera, Vice President, Stockholder Relations, 900 Broad
Street, Newark, New Jersey, 07102.
Transfer Agent
First City Transfer Company
P.O. Box 170
Iselin, New Jersey 08830
4
Item 6. Selected Financial Data
Five-Year Summary
Dollars in thousands, except per share data 1997 1996 1995 1994 (1) 1993
=================================================================================================================================
Year-end Balance Sheet data:
Total assets $138,868 $134,951 $114,410 $111,062 $74,786
Total loans 56,947 57,128 44,739 25,563 23,659
Reserve for possible loan losses 825 750 650 625 700
Investment securities 62,360 60,863 55,103 53,751 39,193
Total deposits 119,717 115,854 100,889 103,941 64,435
Long-term debt 3,749 1,749 1,749 249 249
Stockholders' equity 10,032 8,287 6,896 5,588 4,562
=================================================================================================================================
Income Statement data:
Interest income $ 9,571 $ 9,034 $ 7,470 $ 5,596 $ 4,509
Interest expense 4,330 3,802 2,829 2,068 1,469
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,241 5,232 4,641 3,528 3,040
Provision (credit) for possible loan losses 159 91 486 (1,464) (23)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision (credit)
for possible loan losses 5,082 5,141 4,155 4,992 3,063
Noninterest income 1,199 1,147 1,363 1,375 898
Noninterest expense 4,630 4,839 4,245 3,645 3,019
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense and cumulative
effect of accounting change 1,651 1,449 1,273 2,722 942
Income tax expense 582 504 471 998 168
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change and extraordinary item 1,069 945 802 1,724 774
Cumulative effect of accounting change - - - - 206
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,069 $ 945 $ 802 $ 1,724 $ 980
=================================================================================================================================
(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 $ 8.98 $ 8.31 $ 7.22 $ 15.51 $ 7.88
Cumulative effect of accounting change and
extraordinary item - - - - 2.09
Net income per basic share 8.98 8.31 7.22 15.51 9.97
Net income per diluted share 8.11 7.51 6.51 13.90 8.86
Book value 74.34 66.23 62.05 50.28 41.05
Dividends 1.50 1.35 1.25 1.00 N/A
Basic average number of common shares
outstanding 114,141 113,498 111,141 111,141 98,267
Diluted average number of common shares
outstanding 127,991 127,348 124,991 124,991 112,117
Number of common shares outstanding at year-end 114,141 114,141 111,141 111,141 111,141
Financial ratios:
Return on average assets .78% .71% .72% 1.66% 1.20%
Return on average common equity 13.05 13.19 12.71 30.24 25.22
Stockholders' equity as a percentage of total assets 7.22 6.14 6.03 5.03 6.10
Dividend payout ratio 20.30 16.51 17.46 6.45 N/A
5
Item 7. Management's discussion and analysis of financial condition and results
of operation
Earnings summary
Net income in 1997 increased $124,000, or 13.1%, to $1,069,000 compared to
$945,000 in 1996. Related earnings per common share on a diluted basis rose to
$8.11 from $7.51. Returns on average common equity and average assets were
13.05% and .78% in 1997 and 13.19% and .71% in 1996.
The primary reason for the improved earnings performance was a 1996 third
quarter assessment of $100,000 paid to the FDIC representing the Bank's share of
replenishing the Savings Association Insurance Fund ("SAIF"), for the purchase
in 1994 of a branch of a failed thrift institution that was SAIF-insured that
did not recur in 1997.
Excluding this assessment, net of tax, earnings from operations rose $58,000 in
1997, up 5.7% from $1,011,000 in 1996 to $1,069,000 in 1997.
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 was $5.3
million in 1997 and in 1996, while the related net interest margin decreased to
4.13% from 4.26%. While average interest earning assets rose 3.1% in 1997, the
higher earnings generated from this growth was offset by the decrease in net
interest margin resulting from higher rates paid on funding sources.
Interest income on a FTE basis was $9.6 million in 1997, an increase of
$541,000, or 5.9% compared to 1996. This increase was due primarily to the
higher level of average interest earning assets, which generated an additional
$406,000. Most of the increase in interest earnings assets occurred in the loan
portfolio, which averaged $57.8 million in 1997 compared to $53.5 million in
1996, an increase of 8%. The average yield on interest earning assets rose 20
basis points to 7.50% in 1997, compared to 7.30% in 1996.
Interest expense was $4.3 million in 1997, an increase of $528,000, or 13.9%
from 1996. This increase resulted primarily from higher average rates paid on
interest bearing liabilities, which rose to 3.92% in 1997 compared to 3.51% in
1996, an increase of 41 basis points. Almost all this increase came from higher
average rates paid on time deposits, which rose to 4.57% in 1997 compared to
$4.16% in 1996, an increase of 41 basis points. This growth increase was
attributable to higher balances of certificates of deposit of $100,000 or more,
reflecting the Bank's growing relationship with local municipalities.
Investments
Total investment securities averaged $61.7 million in 1997, a slight increase
from $60.8 million 1996. The activity in the portfolio resulted primarily from
the reinvestment of maturity and call proceeds.
The investment securities available for sale ("AFS") portfolio changed
nominally, from $31 million at December 31, 1996 to $32.7 million a year later,
while the related gross unrealized loss decreased from $108,000 to $14,000,
representing less than .5% of the AFS portfolio's book value at both dates.
The investment securities held to maturity ("HTM") portfolio of $29.7 million at
December 31, 1997 was virtually unchanged from a year earlier.
At December 31, 1997, the Bank held five structured notes with total book and
related market values of $4,250,000 and $4,112,000, reflecting $138,000 of
unrealized depreciation, while a year earlier the structured note portfolio had
a book value of $6,227,000 and related market value of $6,084,000, reflecting a
gross unrealized loss of $143,000. These structured notes consisted of
dual-index and deleveraged notes. The dual index notes are all indexed to a
combination of long and short-term rates, while the deleveraged notes are
indexed to the ten-year Treasury. Accordingly, the value of these securities
could fluctuate depending on interest rate movements. The $1.5 million of dual
index notes mature in 1998, while the $2,749,000 of deleveraged notes mature in
2000.
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.
Finally, at December 31, 1997, the Bank held callable U.S. Government agency
notes with a carrying value of $12.7 million, all which were included in the HTM
portfolio. These notes are callable at various dates from 1998 through 2008.
6
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, 1997 is presented
below. Maturities of mortgaged-backed securities included with U.S. Government
agencies are based on the maturity of the final scheduled payment. Such
securities, which comprise most of the balances shown as maturing beyond five
years, generally amortize on a monthly basis and are subject to prepayment.
Taking into account such contractual amortization and expected prepayments, a
significant amount of principal reduction on the aforementioned securities will
occur within three years:
Investment Securities Available for Sale
Maturing After Maturing After
Maturing One Year But Five Years But
Within Within Within Maturing After
One Year Five Years Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
=================================================================================================================================
U.S. Treasury securities $ 2,751 6.57% $ 2,012 5.80% $ - - % $ - - % $ 4,763 6.24%
U.S. Government agencies 2,321 4.54 3,843 6.20 3,256 7.06 14,868 6.70 24,288 6.46
Obligations of state
political and subdivisions(1) - - - - - - 2,251 7.55 2,251 7.55
Other - - - - 262 7.57 - - 262 7.57
- ---------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $ 5,072 5.64% $ 5,855 6.06% $ 3,518 7.10% $17,119 6.81% $31,564 6.52%
=================================================================================================================================
(1) Includes $250,000 of nontax-exempt securities with a 7.60% yield.
Investment Securities Held to Maturity
Maturing After Maturing After
Maturing One Year But Five Years But
Within Within Within Maturing After
One Year Five Years Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
=================================================================================================================================
U.S. Government agencies $ 1,000 7.04% $10,956 6.14% $12,713 6.72% $ 2,461 5.90% $27,130 6.42%
Obligations of state and
political subdivisions 120 7.96 2,416 6.86 - - - - 2,536 6.91
- ---------------------------------------------------------------------------------------------------------------------------------
Total amortized cost $ 1,120 7.14% $13,372 6.27% $12,713 6.72% $ 2,461 5.90% $29,666 6.46%
=================================================================================================================================
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, 1997. Average yields on tax-exempt
obligations of state and political subdivisions have been computed on a fully
taxable equivalent basis, using the statutory Federal income tax rate of 34%.
The average yield on the AFS portfolio increased from 6.20% in 1996 to 6.52% in
1997 , while the yield on the HTM portfolio rose from 6.36% in 1996 to 6.46% in
1997, reflecting higher yields on securities purchased.
7
Consolidated Average Balance Sheet with Related Interest and Rates
1997 1996
=================================================================================================================================
Average Average Average Average
Tax equivalent basisdollars in thousands Balance Interest Rate Balance Interest Rate
=================================================================================================================================
Assets
Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell $ 8,073 $ 439 5.43% $ 6,053 $ 317 5.23%
Other short-term investments 742 39 5.32 3,996 215 5.37
Interest-bearing deposits with banks 59 3 5.14 104 5 5.16
Investment securities:
Taxable 1 59,008 3,718 6.30 58,270 3,577 6.14
Tax-exempt 2,722 189 6.95 2,536 176 6.92
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 61,730 3,907 6.33 60,806 3,753 6.17
- ---------------------------------------------------------------------------------------------------------------------------------
Loans 2,3:
Commercial 19,391 1,660 8.56 20,031 1,642 8.20
Real estate 37,684 3,514 9.32 33,104 3,116 9.42
Installment 729 73 9.98 388 46 11.85
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 57,804 5,247 9.08 53,523 4,804 8.98
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 128,408 9,635 7.50 124,484 9,094 7.30
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest earning assets:
Cash and due from banks 3,855 4,065
Gross unrealized loss on investment
securities available for sale (83) (164)
Reserve for possible loan losses (806) (724)
Other assets 6,413 4,733
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest earning assets 9,379 7,912
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $137,787 $132,396
=================================================================================================================================
Liabilities and stockholders' equity
Interest bearing liabilities:
Savings deposits 4 $ 31,732 $ 666 2.10 $ 36,427 $ 750 2.06
Time deposits 5 71,343 3,261 4.57 66,420 2,764 4.16
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 103,075 3,927 3.81 102,847 3,514 3.42
Short-term borrowings 3,809 202 5.30 3,620 189 5.21
Long-term debt 3,453 201 5.83 1,749 99 5.69
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 110,337 4,330 3.92 108,216 3,802 3.51
- ---------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing liabilities:
Demand deposits 16,294 14,960
Other liabilities 2,150 1,443
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest bearing liabilities 18,444 16,403
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 9,006 7,777
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $137,787 $132,396
=================================================================================================================================
Net interest income (tax equivalent basis) 5,305 3.58 5,292 3.79
Tax equivalent basis adjustments 6 (64) (60)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 5,241 $ 5,232
=================================================================================================================================
Average rate paid to fund interest earning assets 3.37 3.06
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income as a percentage of
interest earning assets (tax equivalent basis) 4.13% 4.26%
=================================================================================================================================
1 Includes investment securities available for sale and held to maturity
2 Includes nonperforming loans 3 Includes loan fees of $123,000 and $200,000 in 1997 and 1996, respectively
4 Includes noninterest bearing deposits maintained by a state governmental agency of $469,000 in 1997 and 1996
5 Includes noninterest bearing deposits maintained by corporations and U.S. governmental agencies of $10,635,000 in 1997 and
$12,522,000 in 1996
6 The tax equivalent adjustment was computed assuming a 34% statutory federal income tax rate in 1997 and 1996
8
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.
1997 Net Interest Income Increase 1996 Net Interest Income Increase
(Decrease) from 1996 due to (Decrease) from 1995 due to
In thousands Volume Rate Total Volume Rate Total
=================================================================================================================================
Interest income
Loans:
Commercial $ (52) $ 70 $ 18 $ 457 $ (17) $ 440
Real estate 431 (33) 398 797 (46) 751
Installment 40 (13) 27 2 4 6
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 419 24 443 1,256 (59) 1,197
Taxable investment securities 45 96 141 178 130 308
Tax-exempt investment securities 13 1 14 5 - 5
Federal funds sold and securities
purchased under agreements to resell 106 15 121 62 (24) 38
Other short-term investments (175) (1) (176) 38 (15) 23
Interest-bearing deposits with banks (2) - (2) (4) (1) (5)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 406 135 541 1,535 31 1,566
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense
Savings deposits 97 (13) 84 8 (33) (25)
Time deposits (205) (292) (497) (751) (85) (836)
Short-term borrowings (10) (3) (13) (47) 14 (33)
Long -term debt (97) (5) (102) (120) 41 (79)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense (215) (313) (528) (910) (63) (973)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 191 $ (178) $ 13 $ 625 $ (32) $ 593
=================================================================================================================================
Loans
Total loans averaged $57.8 million in 1997 compared to $53.5 million in 1996, an
increase of 8.0%, while total loans declined slightly at December 31, 1997 to
$56.9 million from a year earlier. The increase in average loans resulted from
greater commercial loan growth and the reduction in loans at year-end was due to
the paydown of syndicated line draw-downs. These lines had draw downs during
1997 and paid off prior to year-end.
Loans originated for sale declined to $1.6 million in 1997 from $3.8 million in
1996, while loans sold decreased to $1.2 million in 1997 from $4.3 million in
1996. Gains and commissions on loan sales declined from $170,000 in 1996 to
$57,000 in 1997.
At December 31, 1997, loans to churches totalled $7.5 million, representing
13.2% of total loans outstanding and are included with real estate loans.
Management does not believe that this loan concentration exposes the Corporation
to any unusual degree of risk.
The Bank generally secures its loans by obtaining primarily first liens on real
estate, both residential and commercial, and does virtually no asset-based
financing. Without additional side collateral, the Bank generally requires
maximum loan-to-value ratios of 70% for loan transactions secured by commercial
real estate.
The Bank's primary market area consists of northern New Jersey, particularly
within the Newark area. Although Newark is undergoing a major renovation, the
city continues to experience a high rate of unemployment. The overall
unemployment rate in the State of New Jersey was 5.1% at the end of 1997
compared to a nationwide rate of 4.9%.
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 1998.
Management is unaware of any significant potential problem loans at December 31,
1997.
9
Maturities and interest sensitivities of loans
Information pertaining to maturities and the sensitivity to changes in interest
rates of loans at December 31, 1997 is presented below.
One Year
Due in One Through Due After
In thousands Year or Less Five Years Five Years Total
==============================================================================
Commercial $ 4,012 $ 5,941 $ 9,035 $ 18,988
Real estate:
Construction 604 - - 604
Mortgage 1,498 7,263 27,844 36,605
Installment 57 450 243 750
- -------------------------------------------------------------------------------
Total $ 6,171 $ 13,654 $ 37,122 $ 56,947
===============================================================================
Loans at fixed
interest rates $ 2,386 $ 6,533 $ 7,276 $ 16,195
Loans at variable
Interest rates 3,785 7,121 29,846 40,752
- -------------------------------------------------------------------------------
Total $ 6,171 $ 13,654 $ 37,122 $ 56,947
===============================================================================
Summary of loan loss experience
Changes in the reserve for possible loan losses are summarized below.
Dollars in thousands 1997 1996
===============================================================
Balance, January 1 $ 750 $ 650
- ---------------------------------------------------------------
Charge-offs:
Commercial loans 31 25
Real estate loans 108 65
Installment loans 19 8
- ----------------------------------------------------------------
Total 158 98
- ----------------------------------------------------------------
Recoveries:
Commercial loans 57 20
Real estate loans 5 81
Installment loans 12 6
- ----------------------------------------------------------------
Total 74 107
- ----------------------------------------------------------------
Net (charge-offs) recoveries (84) 9
Provision for possible loan
losses charged to operations 159 91
- -----------------------------------------------------------------
Balance, December 31 $ 825 $ 750
=================================================================
Net charge-offs (recoveries) as a
percentage of average loans .15% (.02)%
Reserve for possible loan losses as
a percentage of loans 1.45 1.31
Reserve for possible loan losses as
a percentage of nonperforming loans 59.10 70.89
=================================================================
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.
Net charge-offs comprised .15% of total loans in 1997 while there was a net
recovery in 1996. The reserve for possible loan losses was 1.45% of total loans
at December 31, 1997 compared to 1.31% at December 31, 1996.
10
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:
1997 1996
=================================================================
Percentage Percentage
of Loan of Loan
Dollars in thousands Amount Category Amount Category
=================================================================
Commercial $ 348 1.85% $ 250 1.27%
Real estate 382 1.01 376 1.00
Installment 12 1.62 12 2.71
Unallocated 83 - 112 -
- -----------------------------------------------------------------
Total $ 825 1.45% $ 750 1.31%
=================================================================
Nonperforming assets
Information pertaining to nonperforming assets at December 31 is summarized
below:
In thousands 1997 1996
=================================================================
Nonperforming loans
Commercial $ 614 $ 437
Real estate 781 617
Installment 1 4
- -----------------------------------------------------------------
Total nonperforming loans 1,396 1,058
Other real estate owned 415 672
- -----------------------------------------------------------------
Total $1,811 $1,730
=================================================================
The increase in nonperforming loans in 1997 resulted primarily from the addition
of a commercial loan that is 70% guaranteed by the Small Business Administration
and a residential mortgage loan that management considers well-secured.
Total risk elements includes a restructured loan to a commercial borrower
totalling $1.3 million, along with a $100,000 working capital loan to the same
borrower. The $1.3 million commercial mortgage loan is currently performing in
accordance with its modified terms while the working capital loan is currently
performing in accordance with its original terms (See Note 6).
Deposits
Total deposits rose from $115.9 million at December 31, 1996 to $119.7 million a
year later, while average deposits rose 1.3%, from $117.8 million in 1996 to
$119.4 million in 1997. While total deposits did not change significantly from
1996 to 1997, the deposit components experienced larger fluctuations,
particularly at year-end. December 31, 1997 included an $8 million nonrecurring
demand deposit from a U.S. Government agency which was withdrawn on January 2,
1998.
Savings accounts declined during 1997 while time deposits rose due to the
transfer of municipal transaction account balances into longer term deposit
instruments. As a result, the average rate paid on interest bearing deposits
rose from 3.42% in 1996 to 3.81% in 1997.
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, 1997.
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 withdrawal
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. At December 31, 1997, such balances totalled $469,000 and
$10,635,000, respectively.
11
Short-term borrowings
Average short-term borrowings rose 5.2% in 1997 because of higher U.S. Treasury
tax and loan note option account balances. The average rate paid for short-term
borrowings increased nine basis points from 5.21% in 1996 to 5.30% in 1997.
Long-term debt
Long-term debt rose from $1,749,000 at December 31, 1996 to $3,749,000 a year
later due to $2 million of Federal Home Loan Bank advances incurred in February,
1997. The average rate paid on long-term debt rose from 5.69% in 1996 to 5.83%
in 1997.
Other operating income
Other operating income increased 4.5%, from $1,147,000 in 1996 to $1,199,000 in
1997. The primary reasons for the increase were higher loan syndication fees,
which rose from $238,000 in 1996 to $283,000 in 1997 and higher earnings from
increased cash surrender value of corporate owned life insurance, which rose
from $3,000 in 1996 to $72,000 in 1997. These increases were partially offset by
lower gains and commissions on loan sales. The syndication fees represent
compensation from large corporations that utilize the Bank to syndicate lines of
credit to other small banks.
Other operating expenses
Other operating expenses, which include expenses other than interest, income
taxes and the provision for possible loan losses, totalled $4.6 million in 1997,
a 4.3% decrease compared to 1996. The primary reason for the decrease was the
nonrecurring $100,000 FDIC SAIF assessment imposed in 1996.
Salaries and other employee benefits remained virtually unchanged in 1997, as
did occupancy and equipment expense.
Other expenses were lower by $199,000 , or 13.2% in 1997 due primarily to the
aforementioned nonrecurring $100,000 FDIC SAIF assessment. Also contributing to
the reduction was lower marketing expense, which declined from $99,000 in 1996
to $38,000 in 1997.
Income tax expense
Income tax expense as a percentage of pre-tax income was 35.3% in 1997 compared
to 34.8% in 1996.
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.
The major contribution during 1997 from operating activities to the
Corporation's liquidity came from net income while a decrease in accrued
expenses and other liabilities described in Note 10 to the Financial Statements
was the primary use of cash for operating activities.
Net cash used in investing activities was primarily the result of the purchase
of investment securities available for sale, which totalled $42.6 million, while
sources of cash provided by investing activities were derived primarily from
proceeds from maturities, principal payments and early redemptions of investment
securities available for sale, amounting to $41 million.
The primary sources of funds from financing activities resulted from an increase
in deposits of $3.9 million along with the sale of $2 million of preferred
stock, while a $962,000 decrease in short-term borrowings comprised the largest
use of funds.
Effects of inflation
Inflation, as measured by the CPI, declined to 2% in 1997 compared to 2.8% in
1996 and 2.8% in 1995.
12
The asset and liability structure of the Corporation and subsidiary bank differ
from that of an industrial company since its assets and liabilities fluctuate
over time based upon monetary policies and changes in interest rates. The growth
in earning assets, regardless of the effects of inflation, will increase net
income if the Corporation is able to maintain a consistent interest spread
between earning assets and supporting liabilities. In an inflationary period,
the purchasing power of these net monetary assets necessarily decreases.
However, changes in interest rates may have a more significant impact on the
Corporation's performance than inflation. While interest rates are affected by
inflation, they do not necessarily move in the same direction, or in the same
magnitude as the prices of other goods and services.
The impact of inflation on the future operations of the Corporation should not
be viewed without consideration of other financial and economic indicators, as
well as historical financial statements and the preceding discussion regarding
the Corporation's liquidity and asset and liability management.
Interest rate sensitivity
The management of interest rate risk is also important to the profitability of
the Corporation. Interest rate risk arises when an earning asset matures or when
its interest rate changes in a time period different from that of a supporting
interest bearing liability, or when an interest bearing liability matures or
when its interest rate changes in a time period different from that of an
earning asset that it supports. While the Corporation does not match specific
assets and liabilities, total earning assets and interest bearing liabilities
are grouped to determine the overall interest rate risk within a number of
specific time frames.
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
interest sensitive gap. At any given point in time, the Corporation may be in an
asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities or in a liability-sensitive position, whereby its
interest-sensitive liabilities exceed its interest-sensitive assets, depending
on management's judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which
details the repricing differences for assets and liabilities for given periods.
The primary limitation of this analysis is that it is a static (i.e., as of a
specific point in time) measurement which does not capture risk that varies
nonproportionally with changes in interest rates. Because of this limitation,
the Corporation uses a simulation model as its primary method of measuring
interest rate risk. This model, because of its dynamic nature, forecasts the
effects of different patterns of rate movements on the Corporation's mix of
interest sensitive assets and liabilities.
13
The following table presents the Corporation's interest rate sensitivity
position at December 31, 1997 categorized by anticipated repricing frequency.
Interest Rate 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
Interest bearing deposits with banks $ 40 $ - $ - $ 40 $ - $ 40
Investment securities 18,173 2,361 4,547 25,081 37,292 62,373
Loans 15,883 4,915 8,497 29,295 27,652 56,947
- ---------------------------------------------------------------------------------------------------------------------------------
Total 34,096 7,276 13,044 54,416 64,944 119,360
- ---------------------------------------------------------------------------------------------------------------------------------
Sources of funds supporting interest-earning assets
Savings deposits (1) 8,597 - - 8,597 16,352 24,949
Time deposits 42,719 7,952 3,841 54,512 15,467 69,979
Short-term borrowings 4,213 - - 4,213 - 4,213
Long-term debt - - - - 3,749 3,749
Noninterest bearing sources - - - - 16,470 16,470
- ---------------------------------------------------------------------------------------------------------------------------------
Total 55,529 7,952 3,841 67,322 52,038 119,360
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive gap (21,433) (676) 9,203 (12,906)
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitivity gap $ (21,433) $ (22,109) $ (12,906) $ (12,906)
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive assets to interest
sensitive liabilities .61:1 91:1 3.39:1 .81:1
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive assets
to interest sensitive liabilities .61:1 . 65:1 .82:1 .81:1
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-sensitivity gap as a percentage of
total assets (15.43)% (.49)% 6.63 % (9.29)%
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitivity gap as a percentage
of total assets (15.43)% (15.92)% (9.29)% (9.29)%
=================================================================================================================================
(1) Based on historical experience, management has classified passbook and statement savings accounts as noninterest sensitive
At December 31, 1997, the Corporation had a negative cumulative one-year gap of
$12.9 million, representing 9.29% of total assets and a ratio of .81:1.
Utilizing the dynamic simulation model, management believes that this amount
would not result in a significant change in net interest income should interest
rates rise or fall up to 200 basis points, which is the maximum change that
management uses to measure the Corporation's exposure to interest rate risk.
14
The following table presents the financial instruments that are sensitive to
changes in interest rates, categorized by expected maturity, and the
instruments' fair values at December 31, 1997. Market risk sensitive instruments
are generally defined as on-and-off balance sheet financial instruments.
Interest Rate Sensitivity Analysis
Expected Maturity
=================================================================================================================================
Average
Interest Total Fair
In thousands Rate (1) 1998 1999 2000 2001 2002 Thereafter Balance Value
=================================================================================================================================
Interest sensitive assets
Interest bearing deposits
with banks 4.75% $ 40 $ - $ - $ - $ - $ - $ 40 $ 40
Investment securities:
U.S. Treasury securities 6.24 2,753 1,509 501 - - - 4,763 4,784
Obligations of U.S.
government agencies 6.46 21,519 4,423 8,879 1,012 1,457 14,129 51,419 51,348
Obligations of state and
political subdivisions 7.21 121 102 354 1,148 401 2,661 4,787 4,792
Other debt securities 7.66 - - - - - 262 262 262
Equity securities - - - - - - 1,143 1,143 1,146
Loans net of unearned income:
Commercial 8.45 14,694 754 1,309 1,181 941 109 18,988 20,447
Mortgage 9.03 13,563 5,546 7,031 2,091 4,323 4,655 37,209 38,202
Consumer 10.17 231 164 93 60 35 167 750 783
Loans held for sale 9.00 807 - - - - - 807 807
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive
assests 7.64% $53,728 $12,498 $18,167 $ 5,492 $ 7,157 $23,126 $120,168 $122,611
=================================================================================================================================
Interest sensitive liabilities
Deposits:
SuperNOW and money
market accounts 2.22% $ 8,597 $ - $ - $ - $ - $ - $ 8,597 $ 8,597
Regular savings 2.25 - - - - - 16,352 16,352 16,352
Time 4.71 63,239 4,089 669 250 234 1,498 69,979 70,027
Short-term borrowings 5.57 4,213 - - - - - 4,213 4,213
Long-term debt 5.80 - - - - 2,000 1,749 3,749 3,726
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest sensitive
liabilities 4.19% $ 76,049 $ 4,089 $ 669 $ 250 $ 2,234 $ 19,599 $102,890 $102,915
=================================================================================================================================
(1) Tax equivalent basisexcludes equity securities
Expected maturities consist of contractual maturities adjusted for principal
payments. The Corporation uses certain assumptions to estimate fair values and
expected maturities. The actual maturities of these instruments could vary
substantially if future prepayments differ from estimated experience.
15
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 1997 1996 1997 1996
===========================================================================
Total stockholders' equity $10,032 $ 8,287 $10,628 $9,726
Net unrealized loss on investment
securities available for sale 38 111 45 111
Disallowed intangibles (56) (66) (56) (66)
- ---------------------------------------------------------------------------
Tier 1 capital 10,014 8,332 10,617 9,771
- ---------------------------------------------------------------------------
Qualifying long-term debt 1,749 1,749 249 249
Reserve for possible loan losses 781 734 773 734
- ---------------------------------------------------------------------------
Tier 2 capital 2,530 2,483 1,022 983
- ---------------------------------------------------------------------------
Total capital $12,544 $10,815 $11,639 $10,754
===========================================================================
Risk-adjusted assets $62,491 $58,681 $61,824 $58,681
Total assets 138,868 134,951 137,985 134,951
- ---------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 capital to risk-
adjusted assets 16.02% 14.20% 17.17% 16.65%
Regulatory minimum 4.00 4.00 4.00 4.00
Total capital to risk-
adjusted assets 20.07 18.43 18.83 18.33
Regulatory minimum 8.00 8.00 8.00 8.00
Leverage ratio 7.21 5.93 7.69 7.01
Total stockholders' equity to
total assets 7.22 6.14 7.90 7.21
===========================================================================
Results of operations - 1996 compared with 1995
Net income in 1996 increased $143,000, or 17.8%, to $945,000 compared to
$802,000 in 1995. Related earnings per common share on a diluted basis rose to
$7.51 form $6.51.
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 branch of a failed thrift
institution 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 to $1,006,000 in 1996, up 35.2% from $755,000 in 1995.
The primary reason for the improved earnings performance was an increase in net
interest income, which rose 12.7% compared to 1995, partially offset by 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.
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 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.
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 proceeds received from the deposit assumption and were invested in
U.S. Government agency securities.
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 acquisition.
16
Other operating income decreased 15.8% to $1,147,000 in 1996 from $1,363,000 in
1995 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 service charges in 1995.
These reductions were partially offset by higher agency fees, which rose 45.1%,
to $235,000 in 1996 from $162,000 in 1995. These fees represent compensation
from large corporations that utilize the Bank to syndicate lines of credit.
Other operating expenses totalled $4.8 million in 1996, a 14% increase compared
to 1995. The primary reasons for the increase in overall operating expenses were
the branch acquisition along with costs attributable to the renovation of the
main office.
Occupancy and equipment expense rose $271,000, or 63.5% from 1995 to 1996 due to
higher depreciation expense arising from the renovations of the Bank's main
office.
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 as a percentage of pretax income was 35.3%, up slightly, from
34.8% in 1995.
Year 2000
During 1997, the Corporation established an overall plan to address
system-related Year 2000 issues. The plan calls for either system modifications
to , or replacement of, existing business systems applications. A majority of
the systems are provided and maintained by outside vendors with whom management
is coordinating the Year 2000 efforts. The cost of this Year 2000 compliance
program related to system modifications is not expected to be material to the
Corporation's earnings in 1998 or thereafter. The Corporation currently
anticipates that substantially all of the work under this program, including the
testing of critical systems, will be initially completed by the end of 1998,
with further testing to be performed during 1999.
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, 1997
and 1996, 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, 1997. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform thee audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Corporation and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick. LLP
February 11. 1998
17
Item 8. Financial Statements and Supplementary Data
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
=======================
Dollars in thousands, except per share data .......... 1997 1996
======== ========
Assets
Cash and due from banks (Note 2) ..................... $ 13,260 $ 2,767
Federal funds sold (Note 3) .......................... -- 8,900
Interest-bearing deposits with banks ................. 40 74
Investment securities available for sale (Note 4) .... 32,694 30,997
Investment securities held to maturity
(Market value of $29,638 in 1997 and $29,517
in 1996) (Note 5) .................................. 29,666 29,866
Loans held for sale (Note 1) ......................... 807 291
Loans (Note 6) ....................................... 56,947 57,128
Less: Reserve for possible loan losses (Note 7) ...... 825 750
-------- --------
Net loans ............................................ 56,122 56,378
-------- --------
Premises and equipment (Note 8) ...................... 3,192 3,331
Accrued interest receivable .......................... 1,112 1,078
Other real estate owned .............................. 385 672
Other assets (Note 15) .............................. 1,590 597
-------- --------
Total assets ......................................... $138,868 $134,951
======== ========
Liabilities and Stockholders' Equity
Deposits: (Notes 2, 4, 5, and 9)
Demand ............................................. $ 24,789 $ 13,699
Savings ............................................ 24,949 37,527
Time ............................................... 69,979 64,628
-------- --------
Total deposits ....................................... 119,717 115,854
Short-term borrowings (Notes 6 and 11) ............... 4,213 5,175
Accrued expenses and other liabilities (Note 10) ..... 1,157 3,886
Long-term debt (Note 12) ............................. 3,749 1,749
-------- --------
Total liabilities .................................... 128,836 126,664
Commitments and contingencies (Note 21)
Stockholders' equity (Note17):
Preferred stock, no par value: Authorized
100,000 shares (Note 16);
Series A , issued and outstanding 8 shares
in 1997 and 1996 .................................. 200 200
Series B , issued and outstanding 20 shares
in 1997 and 1996 .................................. 500 500
Series C , issued and outstanding 108 shares
in 1997 and 1996 .................................. 27 27
Series D , issued and outstanding 3,280
shares in 1997 .................................... 820 --
Common stock, par value $10: Authorized
400,000 shares; 114,980 shares issued and
114,141 outstanding in 1997 and 1996 .............. 1,150 1,150
Surplus ............................................ 901 901
Retained earnings .................................. 6,497 5,645
Less:
Net unrealized loss on investment
securities available for sale ................... 38 111
Treasury stock, at cost - 839 shares ............. 25 25
-------- --------
Total stockholders' equity ........................... 10,032 8,287
-------- --------
Total liabilities and stockholders' equity ........... $138,868 $134,951
======== ========
See accompanying notes to consolidated financial statements.
18
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Income
Year Ended December 31,
===================================
Dollars in thousands,
except per share data ................... 1997 1996 1995
======== ======== ========
Interest income
Interest and fees on loans .............. $ 5,247 $ 4,804 $ 3,607
Interest on Federal funds sold and
securities purchased under
agreements to resell .................. 439 317 279
Interest on other short-term
investments ........................... 39 215 192
Interest on deposits with banks ......... 3 5 10
Interest and dividends on
investment securities:
Taxable ............................... 3,718 3,577 3,269
Tax-exempt ............................ 125 116 113
-------- -------- --------
Total interest income ................... 9,571 9,034 7,470
-------- -------- --------
Interest expense
Interest on deposits (Note 9) ........... 3,927 3,514 2,653
Interest on short-term borrowings ....... 202 189 156
Interest on long-term debt .............. 201 99 20
-------- -------- --------
Total interest expense .................. 4,330 3,802 2,829
-------- -------- --------
Net interest income ..................... 5,241 5,232 4,641
Provision for possible loan
losses (Note 7) ....................... 159 91 486
-------- -------- --------
Net interest income after provision
for possible loan losses .............. 5,082 5,141 4,155
-------- -------- --------
Other operating income
Service charges on deposit accounts ..... 604 592 711
Other income (Notes 13 and 15) .......... 577 548 642
Net gains on sales of investment
securities (Notes 4 and 5) ............ 18 7 10
-------- -------- --------
Total other operating income ............ 1,199 1,147 1,363
-------- -------- --------
Other operating expenses
Salaries and other employee
benefits (Note 15) .................... 2,615 2,628 2,455
Occupancy expense (Note 8) .............. 319 289 153
Equipment expense (Note 8) .............. 382 409 274
Other expenses (Note 13) ................ 1,314 1,513 1,363
-------- -------- --------
Total other operating expenses .......... 4,630 4,839 4,245
-------- -------- --------
Income before income tax expense ........ 1,651 1,449 1,273
Income tax expense (Note 14) ............ 582 504 471
-------- -------- --------
Net income .............................. $ 1,069 $ 945 $ 802
======== ======== ========
Net income per common
share (Note 18)
Basic ................................... $ 8.98 $ 8.31 $ 7.22
Diluted ................................. 8.11 7.51 6.51
======== ======== ========
Basic average common shares
outstanding ........................... 114,141 113,498 111,141
Diluted average common
shares outstanding .................... 127,991 127,348 124,991
======== ======== ========
See accompanying notes to consolidated financial statements.
19
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes
in Stockholders' Equity Net Unrealized
Gain (Loss) on
Investment Securities
Common Preferred Retained Available Treasury
Dollars in thousands Stock Surplus Stock Earnings for Sale Stock Total
===================================================================================================================================
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
Net income ........................................ -- -- -- 1,069 -- -- 1,069
Proceeds from issuance of preferred stock ......... -- -- 820 -- -- -- 820
Change in net unrealized loss on investment
securities available for sale ................... -- -- -- -- 73 -- 73
Dividends paid on common stock .................... -- -- -- (173) -- -- (173)
Dividends paid on preferred stock ................. -- -- -- (44) -- -- (44)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1997 ........................ $ 1,150 $ 901 $ 1,547 $ 6,497 $ (38) $ (25) $ 10,032
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
20
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Cash Flows Year Ended December 31,
===================================
In thousands 1997 1996 1995
================================================================================
Operating activities
Net income ................................. $ 1,069 $ 945 $ 802
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization ............ 367 339 191
Provision for possible loan losses ...... 159 91 486
Accretion of discount, net of premium
amortization on investment securities .. 12 (15) 151
Net gains on sales and calls of investment
securities ............................. (18) (7) (10)
Gains and commissions on loans held for
sale ................................... (57) (170) (122)
(Increase) decrease in accrued interest
receivable ............................... (33) (123) 194
Deferred income tax benefit ............... (104) (53) (203)
(Increase) decrease in other assets ........ (1,143) (4) 984
Decrease in other real estate owned ........ 336 -- 95
(Decrease) increase in accrued expenses
and other liabilities .................... (2,525) 2,702 (150)
-------- -------- --------
Net cash (used in) provided by
operating activities ..................... (1,937) 3,705 2,418
-------- -------- --------
Investing activities
Loans originated for sale .................. (1,611) (3,776) (4,594)
Proceeds from sales of loans held for sale . 1,152 4,210 4,631
Decrease (increase) in loans ............... 48 (8,805) (8,159)
Purchase of loans in conjunction with
branch acquisitions ...................... -- (4,035) (11,479)
Decrease (increase) in interest-bearing
deposits with banks ...................... 34 247 (321)
Proceeds from maturities of investment
securities available for sale,
including sales, principal payments
and early redemptions .................... 41,011 20,917 1,524
Proceeds from maturities of investment
securities held to maturity, including
principal payments and early redemptions . 3,718 4,643 11,127
Purchases of investment securities
available for sale ....................... (42,570) (21,221) (2,745)
Purchases of investment securities held
to maturity .............................. (3,529) (10,025) (10,669)
Purchases of premises and equipment ........ (227) (1,382) (739)
-------- -------- --------
Net cash used in investing activities ...... (1,974) (19,227) (21,424)
-------- -------- --------
Financing activities
Deposits assumed in branch acquisitions .... -- 7,661 --
Increase (decrease) in deposits ............ 3,863 7,304 (3,052)
(Decrease) increase in short-term
borrowings ............................... (962) 1,514 3,661
Proceeds from issuance of long-term debt ... 2,000 -- 1,500
Proceeds from issuance of common stock ..... -- 45 --
Proceeds from issuance of preferred stock .. 820 527 200
Dividends paid on preferred stock .......... (44) (2) --
Dividends paid on common stock ............. (173) (154) (140)
-------- -------- --------
Net cash provided by financing activities .. 5,504 16,895 2,169
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents ......................... 1,593 1,373 (16,837)
Cash and cash equivalents at beginning
of year .................................. 11,667 10,294 27,131
-------- -------- --------
Cash and cash equivalents at end of year ... $ 13,260 $ 11,667 $ 10,294
======== ======== ========
Cash paid during the year:
Interest ................................... $ 4,321 $ 3,960 $ 2,719
Income taxes ............................... 538 335 991
Supplemental schedule for noncash investing activities:
Real estate acquired in settlement
of loans ................................. 49 460 212
Transfers of investment securities
held to maturity to investment
securities available for sale ............ -- -- 21,836
See accompanying notes to consolidated financial statements.
21
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 a member of Federal Home Loan Bank of New York "FHLB", is required
to hold shares of capital stock of the FHLB based on a specified formula. The
FHLB stock is carried at cost.
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.
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. 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
Loans are stated at the principal amounts outstanding, net of unearned discount
and deferred loan fees. Interest income is accrued as earned, based upon the
principal amounts outstanding. Loan origination fees and certain direct loan
origination costs, as well as unearned discount, are deferred and recognized
over the life of the loan revised for loan prepayments, as an adjustment to the
loan's yield. Recognition of interest on the accrual method is generally
discontinued when a loan contractually becomes 90 days or more past due or a
reasonable doubt exists as to the collectibility of the loan, unless such loans
are well-secured and in the process of collection. At the time a loan is placed
on a nonaccrual status, previously accrued and uncollected interest is generally
reversed against interest income in the current period. Interest on such loans,
if appropriate, is recognized as income when payments are received. A loan is
returned to an accrual status when it is current as to principal and interest
and its future collectibility is expected.
22
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 during 1997 or 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 three to 39 years, computed using the
straight-line method. Expenditures for maintenance and repairs are charged to
operations as incurred, while major replacements and improvements are
capitalized. The net asset values of assets retired or disposed of are removed
from the asset accounts and any related gains or losses are included in
operations.
Other real estate owned
Other real estate owned ("OREO") acquired through foreclosure or deed in lieu of
foreclosure is carried at the lower of cost or fair value less estimated cost to
sell, net of a valuation allowance. When a property is acquired, the excess of
the loan balance over the estimated fair value is charged to the reserve for
possible loan losses. Operating results, including any future writedowns of
OREO, rental income and operating expenses, are included in "Other expenses".
A reserve for OREO has been established through charges to OREO expense to
maintain properties at the lower of cost or fair value less estimated cost to
sell.
Core deposit premiums
The premium paid for the acquisition of deposits in connection with the purchase
of a branch office is amortized on an accelerated basis over the ten-year
estimated useful life of the assumed deposit base.
Income taxes
Federal income taxes are based on currently reported income and expense after
the elimination of income which is exempt from Federal income tax.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Such temporary
differences include depreciation and the provision for possible loan losses.
Net income per common share
The Corporation adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 128, "Earnings per share" on December 31,
1997. SFAS 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures.
23
Basic income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. On a diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of the convertible subordinate
debentures from the date of issue.
Recent accounting pronouncement
In June 1997, the FASB issued SFAS No. 130. "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting and display of comprehensive income
an its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The adoption of SFAS No. 130
is not expected to materially affect the financial statements
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 proforma a net income and proforma 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 proforma disclosure provisions of SFAS 123 stock
based-compensation as applicable.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements in order to conform with the 1997 presentation.
Note 2 Cash and due from banks
The Bank is required to maintain a reserve balance with the Federal Reserve Bank
based primarily on deposit levels. These reserve balances averaged $662,000 in
1997 and $1,028,000 in 1996.
Cash and due from banks and demand deposits at December 31, 1997 included an $8
million nonrecurring deposit made by an agency of the U.S Government which was
withdrawn on January 2, 1998. The source of this deposit was a check drawn on a
financial institution that was located out of the Bank's Federal Reserve
district.
Note 3 Federal funds sold and securities purchased under agreements to resell
Federal funds sold averaged $7.8 million during 1997 and $6.0 million in 1996,
while the maximum balance outstanding at any month-end during 1997 and 1996 was
$7.3 million and $11.6 million, respectively. During 1997 and 1996, securities
purchased under agreements to resell averaged $27,000 and $41,000 respectively.
There were no such transactions outstanding at any month-end. 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
1997 In thousands Cost Gains Losses Value
======================================================================
U.S. Treasury securities
and obligations of U.S.
government agencies $10,432 $ 75 $ 56 $10,450
Obligations of states and
political subdivisions 2,251 11 13 2,249
Other securities:
Mortgage-backed
securities 18,620 144 178 18,587
Other debt securities 262 - - 262
Equity securities 1,143 3 - 1,146
- ----------------------------------------------------------------------
Total $32,708 $ 233 $ 247 $32,694
======================================================================
24
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
======================================================================
At December 31, 1997, the Corporation held structured notes with a total
amortized cost of $1,500,000 and a related market value of $1,445,000,
reflecting gross unrealized depreciation of $55,000.
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. The Corporation also held
structured notes in the held to maturity portfolio at December 31, 1997 and
December 31, 1996.
The amortized cost and the market values of investments in debt securities
available for sale presented below as of December 31, 1997 are distributed by
contractual maturity, including mortgage-backed securities, which may have
shorter estimated lives as a result of prepayments of the underlying mortgages.
Amortized Market
In thousands Cost Value
=======================================================================
Due within one year:
U.S. Treasury securities and obligations
of U.S. Government agencies $ 4,251 $ 4,199
Mortgage-backed securities 821 828
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. Government agencies 4,513 4,536
Mortgage-backed securities 1,343 1,368
Due after five years but within ten years:
Mortgage-backed securities 3,256 3,297
Other debt securities 262 262
Due after ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies 1,668 1,715
Mortgage-backed securities 13,200 13,094
Obligations of state and political
subdivisions 2,251 2,249
- -----------------------------------------------------------------------
Total debt securities 31,565 31,548
Equity securities 1,143 1,146
- -----------------------------------------------------------------------
Total $32,708 $32,694
=======================================================================
Sales of investment securities available for sale totalled $3.7 million in 1997,
while there were no such sales during 1996. $2.6 million of these securities
were called prior to maturity during 1997, while $1 million was called prior to
maturity during 1996.
Interest and dividends on investment securities available for sale was as
follows:
In thousands 1997 1996 1995
=================================================================
Taxable $ 1,999 $ 1,949 $ 675
Tax-exempt 9 - -
- -----------------------------------------------------------------
Total $ 2,008 $ 1,949 $ 675
=================================================================
Investment securities available for sale having an amortized cost of $27,467,000
were pledged to secure public funds at December 31, 1997.
25
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
1997 In thousands Value Gains Losses Value
======================================================================
U.S. Treasury securities
and obligations of U.S.
Government agencies $16,835 $ 84 $ 101 $16,818
Obligations of state and
political subdivisions 2,536 16 9 2,543
Other securities:
Mortgage-backed 10,295 61 79 10,277
- ----------------------------------------------------------------------
Total $29,666 $ 161 $ 189 $29,638
======================================================================
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
=======================================================================
At December 31, 1997, the Corporation held structured notes with a total
amortized cost of $2,750,000 and a related market value of $2,667,000,
reflecting gross unrealized depreciation of $83,000. Comparable amounts as of a
year earlier were $2,750,000, $2,660,000 and $90,000, respectively.
The book value and the market value of investment securities held to maturity
presented below as of December 31, 1997 are distributed by contractual maturity,
including mortgage-backed securities, which may have shorter estimated lives as
a result of prepayments of the underlying mortgages.
Book Market
In thousands Value Value
====================================================================
Due within one year
U.S. Treasury and obligations of
U.S. Government agencies $ 1,000 $ 999
Obligations of state and political
subdivisions 120 120
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. Government agencies 5,688 5,668
Mortgage-backed securities 5,268 5,308
Obligations of state and political
subdivisions 2,416 2,423
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies 9,648 9,651
Mortgage-backed securities 3,065 3,079
Due after ten years:
U.S. Treasury securities and obligations
of U.S. Government agencies 499 500
Mortgage-backed securities 1,962 1,890
- --------------------------------------------------------------------
Total $29,666 $29,638
====================================================================
There were no sales of securities held to maturity in 1997 or 1996, while $3
million of securities were called prior to maturity during 1997 and $2,988,000
of securities were called during 1996, resulting in net gains of $7,000 in 1996.
There were no related resulting gains or losses in 1997.
Interest and dividends on investment securities held to maturity was as follows:
In thousands 1997 1996 1995
================================================================
Taxable $ 1,719 $ 1,628 $ 2,594
Tax-exempt 116 116 113
- ----------------------------------------------------------------
Total $ 1,835 $ 1,744 $ 2,707
================================================================
Investment securities held to maturity having a book value of $18,725,000 were
pledged to secure public funds at December 31, 1997.
26
Note 6 Loans
Loans, net of unearned discount and net deferred origination fees and costs at
December 31, were as follows:
In thousands 1997 1996
=================================================================
Commercial $ 18,988 $ 19,634
Real estate 37,521 37,448
Installment 750 443
- -----------------------------------------------------------------
Total loans 57,259 57,525
Less: Unearned income 312 397
- -----------------------------------------------------------------
Loans $ 56,947 $ 57,128
=================================================================
Loans guaranteed by the Small Business Administration totalling $4,560,000 were
pledged as collateral for borrowings under a note issued to the U.S. Treasury
Department at December 31, 1997.
Nonperforming loans include loans which are contractually past due 90 days or
more for which interest income is still being accrued and nonaccrual loans.
At December 31, nonperforming loans and troubled debt restructurings were as
follows:
In thousands 1997 1996
==================================================================
Nonaccrual loans $ 1,166 $ 1,025
Loans with interest or principal 90
days or more past due and still accruing 230 33
- ------------------------------------------------------------------
Total nonperforming loans 1,396 1,058
Troubled debt restructurings 1,261 -
- ------------------------------------------------------------------
Total nonperforming loans
and troubled debt restructurings $2,657 $1,058
==================================================================
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 1997 1996 1995
==================================================================
Interest income foregone $ (67) $ (61) $ (52)
Interest income received 101 106 55
- ------------------------------------------------------------------
$ 34 $ 45 $ 3
==================================================================
Troubled debt restructurings includes two loans to one commercial borrower
totalling $1.3 million. A $1 million construction loan was originated in August,
1996 and subsequently increased by $200,000. Payments remained current through
June, 1997 when construction was completed and the loan was converted to a
permanent commercial mortgage, at which time principal paydowns were scheduled
to commence. Prior to becoming 90 days past due, the terms of the loan were
modified to continue interest only payments for a specified period of time. The
loan is secured by a leasehold mortgage on the financed property and the
borrower's principals have provided joint and several personal guarantees. In
addition, a $100,000 working capital loan secured by receivables was originated
in July, 1997.
The construction loan is currently performing in accordance with the modified
terms while the working capital loan is currently performing in accordance with
its original terms. Management believes that both of these loans are adequately
secured and fully collectible.
At December 31, 1997, there were no commitments to lend additional funds to
borrowers for loans that were on nonaccrual or contractually past due in excess
of 90 days and still accruing interest, or to borrowers whose loans have been
restructured. A majority of the Bank's loan portfolio is concentrated in first
mortgage loans to borrowers in northern New Jersey, particularly within the
Newark area. Its borrowers' abilities to repay their obligations are dependent
upon various factors including the borrowers' income, net worth, cash flows
generated by the underlying collateral, the value of the underlying collateral
and priority of the Bank's lien on the related property. Such factors are
dependent upon various economic conditions and individual circumstances beyond
the Bank's control. Accordingly, the Bank may be subject to risk of credit
losses.
27
Note 7 Reserve for possible loan losses
Transactions in the reserve for possible loan losses are summarized as follows:
In thousands 1997 1996 1995
================================================================
Balance, January 1 $ 750 $ 650 $ 625
Provision for possible loan
losses 159 91 486
Recoveries of loans previously
charged off 74 107 98
- -----------------------------------------------------------------
983 848 1,209
Less: Charge-offs 158 98 559
- -----------------------------------------------------------------
Balance, December 31 $ 825 $ 750 $ 650
=================================================================
Note 8 Premises and equipment
A summary of premises and equipment at December 31 follows:
In thousands 1997 1996
- -----------------------------------------------------------------
Land $ 274 $ 274
Premises 1,035 1,035
Furniture and equipment 1,778 1,677
Building improvements 1,900 1,773
- ------------------------------------------------------------------
Total cost 4,987 4,759
Less: Accumulated depreciation
and amortization 1,795 1,428
- ------------------------------------------------------------------
Net book value $3,192 $3,331
- ------------------------------------------------------------------
Depreciation and amortization expense charged to operations amounted to
$367,000, $339,000, and $191,000 in 1997, 1996, and 1995, respectively.
Note 9 Deposits
Deposits at December 31 are presented below.
In thousands 1997 1996
==================================================================
Noninterest bearing
Demand $ 24,789 $ 13,699
Savings 469 469
Time 10,635 12,522
- ------------------------------------------------------------------
Total noninterest bearing deposits 35,893 26,690
- ------------------------------------------------------------------
Interest bearing
Savings 24,480 37,058
Time 59,344 52,106
- ------------------------------------------------------------------
Total interest bearing deposits 83,824 89,164
- ------------------------------------------------------------------
Total deposits $119,717 $115,854
==================================================================
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 1997 1996
==================================================================
Three months or less $ 40,701 $ 25,967
Over three months but within six months 5,315 15,023
Over six months but within twelve months 2,956 2,557
Over twelve months 2,037 3,943
- ------------------------------------------------------------------
Total deposits $ 51,009 $ 47,490
==================================================================
Interest expense on certificates of deposits of $100,000 or more was $2,369,000,
$1,850,000 and $895,000 in 1997, 1996 and 1995, 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 item was
subsequently repaid.
28
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
==============================================================================
1997
Federal funds purchased and
securities sold under
repurchase agreements $ 800 6.75% $ 92 5.47% $ 800
Demand note issued
to the U.S. Treasury 3,413 5.27 3,717 5.30 8,000
- ------------------------------------------------------------------------------
Total $ 4,213 5.57% $ 3,809 5.32% $ 8,800
=============================================================================
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
==============================================================================
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 $4,620,000, along with loans guaranteed by the Small
Business Administration totalling $4,560,000.
Note 12 Long-term debt
Long-term debt at December 31 is summarized as follows:
In thousands 1997 1996
================================================================
FHLB convertible advance, 5.93% due
February 24, 2002 $2,000 $ -
5.25% capital note, due December 28, 2005 1,500 1,500
8.00% mandatory convertible debentures,
due July 1, 2003 249 249
- ----------------------------------------------------------------
Total $3,749 $1,749
================================================================
Interest is payable quarterly on the FHLB advance. The advance is callable on
February 20, 2000 and on every interest payment date thereafter. The borrowing
is secured by obligations of U.S. Government agencies.
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.
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.
29
Note 13 Other operating income and expenses
The following table presents the major items of other operating income and
expenses:
In thousands 1997 1996 1995
================================================================
Other operating income
Income from loans purchased from
Resolution Trust Corporation prior
to loan closing $ - $ - $ 198
Agency fees on commercial loans 253 221 158
Other operating expenses
FDIC deposit insurance - 141 168
Stationery and supplies expense 88 141 115
Data processing 125 157 115
=================================================================
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 1997 1996 1995
=================================================================
Current
Federal $ 581 $ 476 $ 571
State 113 81 103
- -----------------------------------------------------------------
Total current income tax expense 694 557 674
- -----------------------------------------------------------------
Deferred
Federal (90) (45) (172)
State (22) (8) (31)
- -----------------------------------------------------------------
Total deferred income tax
(benefit) expense (112) (53) (203)
- -----------------------------------------------------------------
Total income tax expense $ 582 $ 504 $ 471
=================================================================
A reconciliation between income tax expense and the total expected federal
income tax computed by multiplying pre-tax accounting income by the statutory
federal income tax rate is as follows:
In thousands 1997 1996 1995
================================================================
Federal income tax at statutory rate $ 561 $ 493 $ 433
Increase (decrease) in income tax
expense resulting from:
State income taxes, net of federal
benefit 60 48 48
Tax-exempt income (43) (39) (34)
Life insurance (15) (10) (7)
Change in valuation allowance (7) - -
Other, net 26 12 31
- ----------------------------------------------------------------
Total income tax expense $ 582 $ 504 $ 471
================================================================
30
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 1997 1996
================================================================
Deferred tax assets
Unrealized loss on investment securities
available for sale $ 6 $ 44
Reserve for other real estate owned 12 -
Deferred compensation 60 31
Other 32 25
- ----------------------------------------------------------------
Total deferred tax assets 110 100
Less: Valuation allowance - 7
- ----------------------------------------------------------------
Deferred tax asset 110 93
- ----------------------------------------------------------------
Deferred tax liabilities
Reserve for possible loan losses 243 307
Premises and equipment 20 13
Investment securities held to maturity 3 3
- ----------------------------------------------------------------
Deferred tax liability 266 323
- ----------------------------------------------------------------
Net deferred tax liability $(156) $(230)
================================================================
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 total deferred tax
asset. Accordingly, the valuation allowance, which amounted to $7,000 at
December 31, 1996 was eliminated in 1997.
Note 15 Benefit plans
Savings plan
The Bank maintains an employee savings plan under section 401(k) of the Internal
Revenue Code covering all employees with at least six months of service.
Participants are allowed to make contributions to the plan by salary reduction,
up to 15% of total compensation. The Bank provides matching contributions of 25%
of the first 4% of basic participant salaries along with a 1% discretionary
contribution, subject to a vesting schedule. Contribution expense amounted to
$49,000 in 1997, $55,000 in 1996, and $36,000 in 1995.
Bonus plan
The Bank awards profit sharing bonuses to its officers and employees based on
the achievement of certain performance objectives. Bonuses charged to operating
expense in 1997, 1996 and 1995 amounted to $119,000 $90,000, and $119,000,
respectively.
Nonqualified benefit plans
During 1997, the Bank established a supplemental executive retirement plan
("SERP"), which provides a post employment supplemental retirement benefit to
certain key executive officers. SERP expense was $26,000 in 1997. The Bank also
has a director retirement plan ("DRIP"). DRIP expense was $19,000 in 1997 and
$10,000 in 1996.
Benefits under both plans will be funded through a bank-owned life insurance
policy, the cash surrender value of which is included in "Other assets" and
totalled $1.3 million and $330,000 at December 31, 1997 and 1996, respectively.
In addition, expenses for both plans along with the expense related to carrying
the policy itself are offset by increases in the cash surrender value of the
policy. Such increases are included in "Other income" and totalled $72,000 in
1997 and $3,000 in 1996, while the related life insurance expense was $28,000 in
1997 and $7,000 in 1996.
Stock options
During 1997, the Corporation issued 5,700 stock options at an exercise price of
$20, which represented the fair market value of the stock on the date of the
grant. The Corporation did not issue any stock options in 1996 or 1995. Under
Accounting Principles Board Opinion No. 25, compensation cost for the stock
options is not recognized because the exercise price of the stock options
equaled the market price of the underlying stock on the date of the grant. Had
compensation expense been recorded for stock options granted as determined under
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 123, net income would have been reduced by $2,000 in 1997, which would not
have affected the reported basic or diluted earnings per share.
The fair value of the option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 8.75%, expected volatility of 15%, risk-free interest rate of 6% and
estimated option life of three years. The fair value of the options was $1.08
per share. The options vest equally over three years.
31
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 preferred stock may have different stated or
liquidation values as well as different rates. Dividends are paid annually.
Set forth below is a summary of the Corporation's preferred stock issued and
outstanding.
Date Dividend Stated Number December 31,
Issued Rate Value of Shares 1997 1996
====================================================================
Series A 12/96 6.00% $25,000 8 $200,000 $200,000
Series B 3/96 8.00 25,000 20 500,000 500,000
Series C 2/96 8.00 250 108 27,000 27,000
Series D 6/97 6.50 250 3,280 820,000 -
- --------------------------------------------------------------------
$1,547,000 $727,000
====================================================================
Note 17 Restrictions on subsidiary bank dividends
Subject to applicable law, the Board of Directors of the Bank and of the
Corporation may provide for the payment of dividends when it is determined that
dividend payments are appropriate, taking into account factors including net
income, capital requirements, financial condition, alternative investment
options, tax implications, prevailing economic conditions, industry practices,
and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory
limitation on the amount of dividends it may pay to CNBC, CNB's sole
stockholder. Prior approval of the Office of the Comptroller of the Currency
("OCC") is required if the total dividends declared by the Bank in any calendar
year exceeds net profit, as defined, for that year combined with the retained
net profits from the preceding two calendar years.
Under this limitation, the Bank could declare dividends in 1998 without prior
OCC approval of up to $1,641,000 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 presents the computation of net income per common share.
In thousands, except per share data 1997 1996 1995
=================================================================
Net income $ 1,069 $ 945 $ 802
Dividends paid on preferred stock (46) (2) -
- -----------------------------------------------------------------
Net income applicable to basic common
shares 1,023 943 802
Interest expense on convertible
subordinated debentures, net of income
taxes 13 13 13
- -----------------------------------------------------------------
Net income applicable to diluted common
shares $ 1,036 $ 956 $ 815
=================================================================
Number of average common shares
Basic 114,141 113,498 111,141
- -----------------------------------------------------------------
Diluted:
Average common shares outstanding 114,141 113,498 111,141
Average common shares converted from
convertible subordinate debentures 13,850 13,850 13,850
- -----------------------------------------------------------------
127,991 127,348 124,991
=================================================================
Net income per common share
Basic $ 8.98 $ 8.31 $ 7.22
Diluted 8.11 7.51 6.51
=================================================================
The stock options outstanding are not included as common stock equivalents in
the diluted net income per share calculation because they are not dilutive.
Note 19 Related party transactions
Certain directors of the Corporation and its subsidiary, including organizations
in which they are officers or have significant ownership, were customers of, and
had other transactions with the Bank in the ordinary course of business during
1997 and 1996. 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.
32
Total loans to the aforementioned individuals and organizations amounted to
$336,000 and $352,000 at December 31, 1997 and 1996, respectively. The highest
amount of such indebtedness during 1997 was $357,000 and in 1996 amounted to
$375,000. During 1997, $16,000 of new loans were made and paydowns totalled
$32,000.
Note 20 Fair value of financial instruments
The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair value estimates are made at a specific
point in time based on the type of financial instrument and relevant market
information.
Because no quoted market price exists for a significant portion of the
Corporation's financial instruments, the fair values of such financial
instruments are derived based on the amount and timing of future cash flows,
estimated discount rates, as well as management's best judgment with respect to
current economic conditions. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values
of those financial instruments and should not be interpreted as an estimate of
the fair market value of the Corporation taken as a whole. The disclosures do
not address the value of recognized and unrecognized nonfinancial assets and
liabilities or the value of future anticipated business. In addition, tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates.
The following methods and assumptions were used to estimate the fair values of
significant financial instruments at December 31, 1997 and 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 are reported at their fair values based on quoted market
prices.
Loans
Fair values were estimated for performing loans by discounting the future cash
flows using market discount rates that reflect the credit and interest-rate risk
inherent in the loans. Fair value for significant nonperforming loans was based
on recent external appraisals of collateral securing such loans. If such
appraisals were not available, estimated cash flows were discounted employing a
rate incorporating the risk associated with such cash flows.
Deposit liabilities
The fair values of demand deposits, savings deposits and money market accounts
were the amounts payable on demand at December 31, 1997 and 1996. 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, 1997 and 1996.
33
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
1997 1996
- ---------------------------------------------------------------------------
Carrying Fair Carrying Fair
In thousands Value Value Value Value
===========================================================================
Financial assets
Cash and other short-term
investments $ 13,300 $ 13,300 $ 11,741 $ 11,741
Investment securities AFS 32,694 32,694 30,997 30,997
Investment securities HTM 29,666 29,638 29,866 29,517
Loans 56,122 58,607 56,378 57,368
Loans held for sale 807 807 291 291
Financial liabilities
Deposits $119,717 $117,965 $115,854 $115,804
Short-term borrowings 4,213 4,213 5,175 5,175
Long-term debt 3,749 3,726 1,749 1,634
===========================================================================
Note 21 Commitments and contingencies
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements will not be materially affected by the outcome of any pending legal
proceedings.
Note 22 Financial instruments with off-balance sheet risk
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, commitments to extend standby
letters of credit, and could involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the consolidated financial
statements.
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 31,1997 and 1996 the Bank had mortgage commitments of $7,187,000 and
$3,183,000, unused corporate lines of credit of $23,100,000 and $13,200,000, and
$257,000 and $1,543,000 of other loan commitments, respectively.
The aforementioned commitments and credit lines are made at both fixed and
floating rates of interest based on the Bank's prime lending rate.
34
Note 23 Parent Company Information
Condensed financial statements of the parent company only are presented below.
Condensed Balance Sheet
December 31,
In thousands 1997 1996
================================================================
Assets
Cash and cash equivalents $ 21 $ 26
Investment securities held to maturity 773 -
Investment securities available for sale 100 -
Investment in subsidiary 10,627 9,726
Due from subsidiary 249 249
Other assets 20 45
- -----------------------------------------------------------------
Total assets $11,790 $10,046
=================================================================
Liabilities and stockholders' equity
Other liabilities $ 9 $ 10
Long-term debt 1,749 1,749
- -----------------------------------------------------------------
Total liabilities 1,758 1,759
Stockholders' equity 10,032 8,287
- -----------------------------------------------------------------
Total liabilities and stockholders' equity $11,790 $10,046
=================================================================
Condensed Statement of Income
Year Ended December 31,
In thousands 1997 1996 1995
=================================================================
Income
Interest income $ 29 $ - $ -
Dividends from subsidiary 271 194 141
Interest from subsidiary 20 20 20
- -----------------------------------------------------------------
Total income 320 214 161
- -----------------------------------------------------------------
Expenses
Interest expense 99 99 20
Other operating expenses 1 7 -
Income tax benefit (12) (34) -
- -----------------------------------------------------------------
Total expenses 88 72 20
- -----------------------------------------------------------------
Income before equity in undistributed
net income of subsidiary 232 142 141
Equity in undistributed income
of subsidiary 837 803 661
- -----------------------------------------------------------------
Net income $ 1,069 $ 945 $ 802
=================================================================
35
Condensed Statement of Cash Flows
Year Ended December 31,
- -----------------------------------------------------------------
In thousands 1997 1996 1995
=================================================================
Operating activities
Net income $ 1,069 $ 945 $ 802
Adjustments to reconcile net income
to cash used in operating activities:
Equity in undistributed net income
of subsidiary (837) (803) (661)
Decrease (increase) in other assets 25 (34) (1)
Decrease in other liabilities (1) - -
- -----------------------------------------------------------------
Net cash from operating activities 256 108 140
- -----------------------------------------------------------------
Investing activities
Purchase of investment securities
available for sale (764) - -
Purchase of investment securities
held to maturity (100) - -
Capital contribution to subsidiary - (500) (1,700)
- ------------------------------------------------------------------
Net cash used in investing activities (864) (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 820 527 200
Dividends paid (217) (156) (140)
- ------------------------------------------------------------------
Net cash from financing activities 603 416 1,560
- ------------------------------------------------------------------
(Decrease) increase in cash and
cash equivalents (5) 24 -
Cash and cash equivalents at
beginning of year 26 4 4
- ------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 21 $ 28 $ 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, 1997, the Bank was required to
maintain (i) a minimum leverage ratio of Tier 1 capital to total average assets
of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-adjusted
assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized bank. Such actions could have a direct material
effect on such bank's financial statements. The regulations establish a
framework for the classification of banks into five categories:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Generally, a bank is
considered well-capitalized if it has a leverage capital ratio of at least 5.0%,
a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FDIC about capital components, risk
adjustments and other factors.
Management believes that, as of December 31, 1997, 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.
36
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1997 and 1996, 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, 1997
Leverage (Tier 1)
capital $10,617 7.90% $5,375 4.00% $6,719 5.00%
Risk-based capital:
Tier 1 10,617 17.17 2,473 4.00 3,709 6.00
Total 11,639 18.83 4,846 8.00 6,182 10.00
December 31, 1996
Leverage (Tier 1)
capital 9,771 7.01 5,578 4.00 6,972 5.00
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
==============================================================================
Note 25 Summary of quarterly financial information (unaudited)
1997
- ------------------------------------------------------------------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
==================================================================
Interest income $2,301 $2,432 $2,424 $2,414
Interest expense 1,005 1,126 1,120 1,079
- ------------------------------------------------------------------
Net interest income 1,296 1,306 1,304 1,335
Provision (credit) for
possible loan losses 27 23 (7) 116
Net gains (losses) on sales of
investment securities 21 19 (21) (1)
Other operating income 301 288 273 319
Other operating expenses 1,194 1,195 1,163 1,078
- -------------------------------------------------------------------
Income before income
tax expense 397 395 400 459
Income tax expense 144 143 145 150
- -------------------------------------------------------------------
Net income $ 253 $ 252 $ 255 $ 309
===================================================================
Net income per share
(basic) $ 1.83 $ 2.21 $ 2.22 $ 2.72
===================================================================
Net income per share
(diluted) $ 1.66 $ 1.99 $ 2.00 $ 2.46
===================================================================
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 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
tax expense 418 450 227 354
Income tax expense 146 157 82 119
- -------------------------------------------------------------------
Net income $ 272 $ 293 $ 145 $ 235
===================================================================
Net income per share
(basic) $ 2.37 $ 2.55 $ 1.25 $ 2.14
===================================================================
Net income per share
(diluted) $ 2.10 $ 2.27 $ 1.12 $ 2.02
===================================================================
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure There were no changes in or disagreements with accounts during 1997.
37
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 21, 1998.
Item 11. Executive Compensation
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required is incorporated herein by by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following exhibits are incorporated herein by reference or are annexed to
this Annual Report:
(a) The required financial statements and the related independent auditor's
report are included in Item 8.
(b) The required exhibits are included as follows:
(3)(a) The Corporation's Restated Articles of Incorporation
(incorporated herein by reference to Exhibit (3)(d) of the
Corporation's Current Report on Form 8-K dated July 28, 1992).
(3)(b) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series A (incorporated herein by reference to
Exhibit (3)(b) of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995).
(3)(c) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series B (incorporated herein by reference to
Exhibit (3)(c) of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995).
(3)(d) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series C (incorporated herein by reference to
Exhibit (3(i) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996).
(3)(e) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series D (incorporated herein by reference to
Exhibit filed with the Corporation's current report on Form
10-K dated July 10, 1997).
(3)(f) The amended By-Laws of the Corporation (incorporated herein by
reference to Exhibit (3)(c) of the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1991).
(4)(a) The Debenture Agreements between the Corporation and its
Noteholders (incorporated herein by reference to Exhibit
(4)(a) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993).
(4)(b) Note Agreement dated December 28, 1995 by and between the
Corporation and the Prudential Foundation (incorporated herein
by reference to Exhibit (4)(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995).
(10)(a) The Employees' Profit Sharing Plan of City National Bank of
New Jersey (incorporated herein by reference to Exhibit (10)
of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the bank and
Louis E. Prezeau dated May 24, 1997 (incorporated herein by
reference to Exhibit 10 to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997).
38
(10)(d) Lease and Option Agreement dated May 6, 1994 by and between
the Resolution Trust Corporation and City National Bank of New
Jersey (incorporated herein by reference to Exhibit (10)(d) to
the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995).
(10)(p) Asset Purchase and Sale Agreement between the Bank and Carver
Federal Savings Bank dated as of January 26, 1998.
(11) Statement regarding computation of per share earnings. The
required information is included on page 24.
(12) Ratios have been computed using the average daily balances of
the respective asset, liability and stockholders' equity
accounts.
(13) Annual Report to security holders for the fiscal year ended
December 31, 1997.
(21) Subsidiaries of the registrant. The required information is
included on page 1.
(24) Power of Attorney is located on the signature page.
(27) Financial Data Schedule.
(c) No reports on Form 8-K were filed during the quarter ended December 31,
1997.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, City National Bancshares Corporation has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized:
CITY NATIONAL BANCSHARES CORPORATION
By: /s/ Louis E. Prezeau By: /s/ Edward R. Wright
---------------------- --------------------
Louis E. Prezeau Edward R. Wright
President and Chief Chief Financial Officer
Executive Officer and Principal Accounting Officer
Date: March 26, 1998 Date: March 26, 1998
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, 1998
- --------------------------
Douglas E. Anderson
/s/ Barbara Bell Coleman Director March 26, 1998
- --------------------------
Barbara Bell Coleman
/s/ Leon Ewing Director March 26, 1998
- --------------------------
Leon Ewing
/s/ Eugene Giscombe Director, March 26, 1998
- -------------------------- Chairperson of the Board
Eugene Giscombe
/s/ Norman Jeffries Director March 26, 1998
- --------------------------
Norman Jeffries
/s/ Louis E. Prezeau Director, March 26, 1998
- -------------------------- President and Chief
Louis E. Prezeau Executive Officer
/s/ Lemar C. Whigham Director March 26, 1998
- --------------------------
Lemar C. Whigham